FIH Group Plc
Annual Report 2014

Plain-text annual report

Financial Highlights FOR THE YEAR ENDED 31 MARCH 2014 ANNUAL REPORT 2014 1 2014 £m 2013 £m Change % Turnover from continuing operations 38.26 35.60 Profit before tax Underlying profit before tax* Diluted earnings per share before goodwill 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. 3.40 3.65 22.0p 11.5p 2.80 285p 7.5 21.7 10.8 3.3 0.0 2.80 3.29 21.3p 11.5p 3.47 -19.3 276p 3.3 Turnover (£m) from continuing operations Underlying profit tax* (£m) 34.11 35.60 38.26 31.84 29.22 3.23 3.29 3.65 2.69 2.73 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Diluted earnings per share (pence) before amortisation and non-trading items Dividends per share (pence) 21.7 20.6 21.3 22.0 9.0 9.5 11.0 11.5 11.5 26.2 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2 Chairman’s Statement 2014 David Hudd Chairman We are pleased to report another good year of progress for the Group, with encouraging revenue and profit growth. The Group achieved a pleasing trading result for the year with underlying pre-tax profits (before amortisation and non-trading items, but including the £0.04 million Group’s share of the joint venture results) up 10.8% to a record £3.65 million (2013: £3.29 million). Diluted earnings per share based upon underlying profits increased by 3.3% to 22.0p from 21.3p. Reported earnings per share were 21.1p (2013: 13.7p). The Directors are pleased to recommend a maintained final dividend of 7.5p, which makes the total dividend for the year 11.5p (2013 11.5p). The Group’s financial position remains strong and after £5 million of capital expenditure of which £2.7million was invested in the Falklands, cash balances at the end of the year were £5.7 million, with residual bank debt which will be repaid this year reduced to £1 million. The excellent track record and cash generative nature of the Group’s three trading businesses mean that the Group has significant untapped borrowing potential sufficient to fund likely investment requirements in the medium term. Operations Thanks to a substantial increase in profits at Momart, Group underlying operating profits before tax (as defined above) increased by 10.0% to £3.85 million from £3.50 million. Momart enjoyed an excellent year with a 53% increase in contribution to £1.8 million as the business benefited from the continued strength of the international art market. A strong roster of exhibitions and a high level of capacity utilisation for gallery services and storage resulted in a record year. The Portsmouth Harbour Ferry Company maintained its profit at just over £1.0 million. Passenger numbers saw a significant improvement on the historic trend, experiencing a much smaller decline of 1.6% compared to the 8.9% decline in the prior year, the impact of which was offset by increased fares. For the first time for three years there was no offshore drilling in Falkland waters. The presence of a drilling rig and associated personnel have provided a substantial stimulus to the economy and generated significant business for the Falkland Islands Company (FIC) in prior years. The absence of drilling particularly impacted wholesale food sales and property rental income but support services maintained its contribution and construction and Falkland 4x4 performed well. There were significant inflationary increases in labour and freight costs which also had an impact. As a result profits decreased to £1.0 million from £1.3 million last year. Falkland Oil and Gas (FOGL) The most significant development for FOGL was the acquisition of Desire Petroleum in December 2013 and the subsequent farm out of two of Desire’s licences to Premier Oil and Rockhopper Exploration. We were supportive of the Desire transaction, which gave FOGL exposure to the North Falklands Basin and the Sea Lion field. Following these developments FOGL is now the largest licence holder in the Falkland Islands and has a net interest of 40,000 sq km. During the year three separate 3D surveys totalling over 12,000 sq km was carried out to the South and East of the Falklands and the interpretation of these results together with existing seismic and drilling data will inform the choice of targets for the next drilling campaign. This is expected to start in the first half of 2015 and will include five wells in which FOGL will have an interest; three in the Sea Lion area and two in the original acreage to the South and East of the Falklands. The market valuation of the Group’s shareholding of 12.83 million shares was virtually unchanged over the year at £3.3 million with the shares at 25.5p at 31 March 2014 (2013: 26.5p). The shareholding now represents 2.4% of the enlarged share capital of FOGL (2013: 4.0%). Over the last decade FOGL, in which we were founding shareholders, has drilled three exploration wells in the Southern and Eastern basins. Although confirming the presence of hydrocarbons, these wells did not reveal their presence in commercial quantities. The 2015 drilling campaign for which FOGL is already funded is FOGL’s most extensive to date and has the potential to transform the value of our holding. In these circumstances your Board currently believes that it is appropriate to retain a significant shareholding until the outcome of the programme is known. Outlook We anticipate an increase in economic activity in the Falklands as the next round of drilling approaches, but it will be the funding of the Sea Lion development which will trigger a step change in activity. Meanwhile we will continue to invest in modernising FIC in readiness for future growth. For the current year, the fishing season started well and we expect further progress from our construction business. At Momart, the pipeline of exhibition work remains strong but we are unlikely to repeat the exceptional result experienced this year. A number of opportunities are being explored to increase the capacity of the business to meet customer demand. For PHFC, there are encouraging signs of an improving trend in demand and the changes agreed with the Ministry of Defence for the reimbursement of travel expenses on the ferry augur well for the future. Good progress is being made with the construction of our new ferry, Harbour Spirit, which we expect to introduce into service early in 2015. In the year to date, the Group’s trading performance is in line with our expectations and we anticipate a satisfactory year. Looking further ahead we continue to believe that we have an outstanding business opportunity in the Falkland Islands. David Hudd Chairman 9 June 2014 FALKLAND ISLANDS HOLDINGS PLC ANNUAL REPORT 2014 3 Managing Director’s Strategic Report BUSINESS REVIEW John Foster Managing Director Group Overview I am pleased to report another year of progress for the Group, with an encouraging 7.5% increase in revenues to £38.3 million (2013: £35.6 million) and a 10.8% increase in underlying pre-tax profits to £3.65 million (2013: £3.29 million). The strong trading performance at Momart more than offset a reduced contribution from the Falklands so that underlying operating profits for the Group (before amortisation and financing costs but including the Group’s £0.04m share of the SAtCO joint venture results) increased by 10% to £3.85 million (2013: £3.50 million). Group Revenue 2014 Momart 48% FIC 41% PHFC 11% Review of Operations Group revenue and operating profits are analysed below: Group revenue Year ended 31 March Falkland Islands Company Portsmouth Harbour Ferry Momart Total 2014 £m 15.88 4.12 18.26 38.26 2013 £m Change % 15.22 4.08 16.30 35.60 4.3 1.2 12.0 7.5 Group underlying operating profit* Year ended 31 March Falkland Islands Company Portsmouth Harbour Ferry Momart Total 2014 £m 1.01 1.01 1.83 3.85 2013 £m 1.33 0.98 1.19 3.50 Change % -23.5 2.9 53.1 10.0 * operating profit is stated before amortisation of intangibles and non–trading items, and includes the Group’s £0.04m share of the SAtCO joint venture profit. Group Revenue 2013 Underlying Operating Profit 2014 FIC 43% Momart 46% PHFC 11% Momart 48% FIC 26% PHFC 26% Underlying Operating Profit 2013 Momart 34% FIC 38% PHFC 28% 4 Managing Director’s Strategic Report BUSINESS REVIEW - CONTINUED Ramform Titan Seismic Vessel, Image @ Copyright PGS Falkland Islands Company (“FIC”) As expected the Falklands had a quieter year with the absence of offshore drilling resulting in a temporary hiatus in the economic growth experienced in recent years. Lower oil exploration demand for rental housing, provisioning, food supplies and agency services led to a downturn in revenues and profits for those activities, whilst in the wider economy, general retail demand softened as linked private sector work contracted. As a consequence, although the Group’s Falklands business retains outstanding growth potential over the medium to long term, in the year just ended FIC profits had decreased to £1.01 million from £1.33 million in the prior year. Oil Developments During the year, Noble Energy and Premier Oil continued to progress their plans for a new round of exploration drilling planned for 2015 in the Northern and Southern basins and in March 2014 a new temporary floating dock arrived in Stanley Harbour to support the offshore programme. In the North Falklands basin, Premier Oil, (“Premier”), the licence holder for the 300mbbl Sea Lion field refined its plans and confirmed the engineering approach for the ultimate commercial production of oil. In February 2014, Premier announced that it was seeking a farm-in partner for Sea Lion and it is now clear that the Sea Lion development will not go ahead without the introduction of a third party who can help with funding, which is estimated at $5.2billion. Meanwhile, Premier has indicated that it is progressing the preparatory work and that contracts to develop the detailed engineering design work necessary for phase 1 of Sea Lion will be placed by mid-2014. This will ensure that once funding is in place, field development can proceed with minimum delay. Significant onshore construction activity and oil related expenditure would then be expected within 2 years with “First Oil” flowing approximately 4 years after final project sanction. The planned drilling programme in both the Northern and Southern basins during 2015 opens up the prospect of further discoveries. This together with the impact of the Sea Lion discovery on the Falklands economy, mean that FIC has good prospects for growth over the medium term. Trading Review FIC has a long established position as a leading local business and the wide range of retail and support services it can offer to Islanders, government and oil companies makes it uniquely placed to benefit from the anticipated growth in the Falklands economy. In the year, further steps were taken in modernising FIC and strengthening local management. In addition the benefits of earlier investment were seen with good growth in both the Company’s automotive business “Falklands 4x4” and in Falklands Building Services (“FBS”). As a result, despite the downturn in retail demand and freight income, overall revenue in FIC increased by £0.66 million (+4.3%) to £15.88 million (2013: £15.22 million). However, increased freight costs and wage inflation of some 5% saw continued pressure on profits. Helped by FBS and strong demand for new 4x4 vehicles, profitability in the second half recovered to be on a par with the prior year, but the slow start to the year meant that overall underlying operating profits were £0.32 million lower at £1.01 million (2013: £1.33 million). FALKLAND ISLANDS HOLDINGS PLC ANNUAL REPORT 2014 5 FIC Operating Results Year ended 31 March 2014 £m 2013 £m Change % Revenues Retail Falklands 4x4 Freight & Port Services Support services FBS (property and construction) 9.26 2.66 1.26 1.30 1.40 9.73 -4.8 1.87 42.3 1.65 -23.5 1.21 6.7 0.76 85.6 Total FIC revenue 15.88 15.22 4.3 FIC underlying operating profit 1.01 1.33 -23.5 Underlying operating profit margin 6.4% 8.7% -26.7 Total retail sales fell by 4.8% to £9.26 million (2013: £9.73 million) which was accounted for by reduced warehouse sales following the departure of the Leiv Eiriksson drilling rig late last year. After a weaker first half, the Company’s core West Store supermarket finished the year with sales only 1.1% lower helped by increased spending from cruise ship passengers, where visitor numbers rose by 34%, and a strengthened BHS clothing offer. In other areas, sales at the waterfront Capstan gift shop were 6% ahead on the prior year, and further progress was seen at the satellite “West Store” at the Mount Pleasant military base. Driven by a more aggressive pricing policy, sales in construction and building materials increased by 18%, although the focus on growing market share did result in some margin erosion. This together with increased freight costs and overheads saw contribution from retailing as a whole decline and was the major factor in the decrease in FIC’s contribution in the year. Falklands 4x4, made good progress benefiting from an increased use of HP financing to stimulate sales. Total vehicle sales increased from 48 to 79 units (+65%) helped by sales to the Falklands Government. At £2.66 million total automotive revenues were at a record level despite the absence of military orders which remain subject to central procurement from UK. Revenues from third party freight and port services fell by 23.5% to £1.26 million (2013: £1.65 million) without the benefit of oil related cargoes, which increased revenues last year. On a positive note Support Services revenues recovered to increase by 6.7% helped by a strong illex squid catch which boosted revenues at FIC’s Fishing Agency, an improved performance from Penguin Travel as cruise ship numbers increased and further progress at FIC’s insurance agency. FBS has been able to establish a unique client offer that finances work in progress for first time buyers during the 3-4 month construction period. In this way FBS has delivered 8 new houses for local buyers and at 31 March 2014 had a record order book for 20 further houses. In addition to house building, FBS also undertook small general construction contracts for the Falkland Islands Government as well as progressing internal construction projects within FIC (which are not included in revenue). At the end of the year FBS had 54 employees compared to 22 in March 2013. Despite a £0.1 million decline in rental income, overall revenues from property and construction increased by 85.6% to £1.4 million. To prepare FIC for the expected future growth in the economy, capital expenditure of £2.7 million was incurred, including £0.7 million spent on investment properties, and FBS: • Completed the construction of four new houses in Hebe Street central Stanley which are all now occupied. • Progressed the expansion and modernisation of office facilities at FIC’s office at Crozier Place including space for external tenants which will be available in late 2014. • Commenced the expansion of DIY/Building Materials retail outlet Homebuilder to the rear of Crozier Place for completion in Autumn 2014. • Commenced the construction of new warehouse/freezer facilities at Airport Road East Stanley which will replace FIC’s aging facilities and make available a prime 2 acre site on the waterfront in central Stanley. FIC‘s property rental portfolio now comprises 36 properties in central Stanley which are available for letting. In the absence of any drilling activity, rental income declined by 25% to £0.2 million in the year to 31 March 2014, rental yields reduced and overall occupancy averaged 82% during the year. FIC Revenues 2014 FIC Revenues 2013 Falklands 4x4 12% Retail 58% Falklands 4x4 17% Falkland Building Services 9% Freight & Port Services 8% Support Services 8% Momart 48% Retail 64% FIC 26% PHFC 26% Falkland Building Services 5% Freight & Port Services 11% Support Services 8% 6 FALKLAND ISLANDS HOLDINGS PLC Managing Director’s Strategic Report BUSINESS REVIEW - CONTINUED During the year the Falkland Islands Government completed its own site surveys and commissioned PWC to advise on the feasibility of financing a new deep water port at the government’s designated site at Port William in Stanley’s outer harbour. However further progress awaits the agreement of commercial terms with port users and FIG support. We have deferred, pending further progress on the Sea Lion development, the construction of 26 apartments on Fitzroy Road and a workers’ camp at Dairy Paddock. In the year, FIC’s construction joint venture, the South Atlantic Construction Company, (“SAtCO”) won its first contracts undertaking infrastructure work for FIG and winning the contract to install a new floating dock in Stanley Harbour that will support Noble Energy’s exploration drilling programme in 2015. Work on the dock commenced in March 2014 and is expected to be ready by mid-2014. Connected with this contract, SAtCO invested £1 million in crane and forklift facilities which are being leased to Noble Energy. In the year to March 2014 SAtCO earned revenues of £1.0 million and produced a profit before tax of £0.1 million. The Group’s share of post-tax results from SAtCO was £0.04 million. All staff were seconded as required from parent companies FIC and Trant Construction and at 31 March 2014 SAtCO had no permanent employees. FIC Key Performance Indicators and Operational Drivers Year ended 31 March 2014 2013 2012 Staff Numbers ( FTE 31 March ) 165 129 Capital Expenditure £’000’s 2,715 1,594 119 632 Retail Sales growth % -4.8% 3.0% -2.8% Number of FIC rental properties Average occupancy during the year Number of vehicles sold Number of 3rd party houses sold IIlex squid catch in tonnes ( 000’s) Cruise ship passengers ( 000’s ) 36 32 33 82% 88% 83% 79 8 48 3 50 0 188.0 58.2 67.3 39.5 29.6 35.2 Spirit of Gosport with HMS Warrior and the Historic Dockyard in the background  ANNUAL REPORT 2014 7 Portsmouth Harbour Ferry Company (“PHFC”) During the period, there was a significant improvement in the underlying trend as passenger numbers fell by 1.6%, compared to the 8.9% decline seen in the prior year. Overall total ferry revenues increased by 1.2% and operating profits, (before pontoon lease finance costs of £0.23 million) increased marginally to £1.01 million (2013: £0.98 million). Ferry fares were increased by an average of 3.3% in June 2013, bringing the total cost of an adult return to £2.90. Discounted fares for regular customers (£1.35 per ferry journey), and lower tariffs for seniors and children (£1.90 return) reinforce the value for money offered by the ferry service compared to bus and car travel. Average fares per passenger journey increased by 3.1% to £1.32 (2013: £1.28). PHFC Operating Results Year ended 31 March Revenues Ferry fares Cruising and Other revenue Total PHFC revenue Underlying PHFC operating profit Underlying operating profit margin Passengers carried (000s) 2013 £m Change % 2014 £m 3.95 0.17 4.12 3.89 0.19 4.08 1.01* 0.98* 24.6% 24.0% 1.5 -5.4 1.2 2.9 2.2 2,986 3,033 -1.6 *Operating profit is shown before charging finance lease interest of £0.23 million (2013: £0.24 million) relating to the new Pontoon. Over the course of the year weekday passenger numbers declined by 2.7% whereas in contrast weekend volumes increased by 1.8%. The further decline in weekday commuter traffic reflected the ongoing economic challenges in the local economy and the impact of changes to the Ministry of Defence’s policy of “Home to Duty” expenses reimbursement which saw a shift from ferry to car travel. However after persistent lobbying, support from the local MP in Gosport and the Secretary of State for Transport, the Ministry of Defence agreed to reverse its decision and from 1 May 2014 will once more reimburse travel to work on the ferry. We anticipate that this will have a positive impact on passenger numbers in 2014-15 which should go some way to offsetting the impact of 1,000 dockyard job losses announced by BAE Systems in 2014. Looking ahead the outlook for passenger growth is positive as the Naval Base expands to support the new Queen Elizabeth class carriers. Ferry reliability was again outstanding with on time departures running at 99.7% (2013: 99.5%). Construction is now well advanced on a third modern ferry vessel, “Harbour Spirit”, which is due to enter service early in 2015. Expenditure incurred in the year on the vessel amounts to £1.8 million and the total cost will be approximately £3.3 million, this will be substantially financed by a 10 year bank loan. With three ferry vessels built since 2001 and an estimated service life of over 30 years, no further significant vessel expenditure is anticipated in the next decade. PHFC Key Performance Indicators and Operational Drivers Year ended 31 March 2014 2013 2012 Staff Numbers (FTE at 31 March) Capital Expenditure £ ‘000’s Ferry Reliability (on time departures) Number of weekday passengers ‘000 37 35 35 1,958 223 5,080 99.7% 99.5% 99.9% 2,169 2,230 2,497 % change on prior year -2.7% -10.7% -1.6% Number of weekend passengers ‘000 817 803 831 % change on prior year 1.8% -3.4% -4.1% Total number of passengers ‘000’s 2,986 3,033 3,328 % change on prior year -1.6% -8.9% -2.1% Revenue growth % 1.2% -1.9% 11.5% Average yield per passenger journey £1.32 £1.28 £1.19 8 FALKLAND ISLANDS HOLDINGS PLC Managing Director’s Strategic Report BUSINESS REVIEW - CONTINUED Houghton Revisited Exhibition at Houghton Hall, Copyright: Georgia Oetker, 2013 Momart Momart, the Group’s art handling and logistics business, again produced a strong trading performance. The growth seen in the first half of the year continued into the second half and total revenue for the year increased by 12.0% to £18.3 million (2013: £16.3 million) while underlying operating profit increased by 53.1% to £1.83 million (2013: £1.19 million). Momart Operating Results Year ended 31 March 2014 £m 2013 £m Change % Revenues Museums and public exhibitions Commercial gallery services Storage 10.86 9.01 20.4 5.57 5.50 1.83 1.79 1.3 2.6 Total Momart revenue 18.26 16.30 12.0 Underlying Momart operating profit Underlying operating profit margin 1.83 1.19 53.1 10.0% 7.3% 36.6 Exhibitions Museum exhibitions enjoyed an exceptional year both in the UK and internationally with overall revenues increasing by 20.4% to a record level of £10.86 million. Momart installed a wide variety of high quality, technically complex exhibitions, drawing on its reputation for client service, problem solving and attention to detail. This record level of activity in exhibitions includes a number of large international projects which are not expected to re-occur in the near term and some touring exhibitions which travelled to multiple locations. In the UK, Momart was involved in the installation of a number of prestigious and popular exhibitions including: Manet: Portraying Life at the Royal Academy, Ellen Gallagher: AxMe at Tate Modern, David Bowie: Is and Masterpieces of Chinese Painting at the V & A, the Portrait of Vienna at the National Gallery, Vikings: Life and Legend at the British Museum and the Houghton Revisited Exhibition at Houghton Hall, which showcased Sir Robert Walpole’s personal art collection, on loan from the Hermitage Museum. Gallery Services Gallery Services revenues were 1.3% ahead of 2013 at £5.57 million. Gross margins improved, helped by the appointment of a new Finance and Commercial Director and as the first benefits were realised from Momart’s recent investment in improved management information systems. The final roll out of this ERP system was completed in March 2014 and further benefits are expected to be generated in the current year. Storage Storage revenues increased by 2.6% and were generated from a broader client base as new commercial relationships were established. With Momart’s existing storage facilities fully utilised plans are being progressed for a significant extension to existing warehouse facilities.  ANNUAL REPORT 2014 9 FOGL Investment Details of the Group’s shareholding in FOGL are set out below: General The year saw Momart generate record levels of revenue and contribution reflecting the strength of its global reputation and its commercial and institutional relationships which have been developed over decades. With the continued strength of the global art market and the increasing importance of London as an international centre, prospects for sustained growth and underlying profits are excellent, although in the short term we do not expect to see a repetition of the exceptional results of 2013-14. Momart Key Performance Indicators and Operational Drivers Cost Book cost per share 31 March Number of shares held FOGL share price (bid price) Market value of holding 2014 12,825,000 25.5p £3.27m £2.6m 20.0p Year ended 31 March 2014 2013 2012 Staff Numbers (FTE 31 March) Capital Expenditure £ ‘000’s Warehouse % fill vs capacity Exhibition Order Book 31 March Internal labour & services charged out Revenues from overseas clients Exhibitions sales growth Gallery Services sales growth Storage sales growth 124.6 119.0 115.9 260 598 524 92.9% 94.2% 95.1% £3.89m £3.83m £4.16m £11.67m £9.02m £8.58m £8.3m £4.6m £5.7m 20.4% 27.8% 5.7% 1.3% (12.7)% 26% 2.6% 10.5% 6.6% Total Sales growth % 12.0% 8.9% 13.5% The market value of the Group’s 2.4% shareholding on 6 June 2014 was £3.30 million. Trading Outlook The Group’s prospects for growth in the medium term remain outstanding. In the Falklands, delays in the development of the Sea Lion oil field have slowed progress but the size of the discovery is such that its future development seems assured. With the added potential of positive results from the 2015 drilling campaign, the prospects for dramatic growth for the Falkland Islands economy over the medium term remain. At PHFC the stabilisation in passenger numbers is encouraging and this should be helped by the recent change in travel policy by the Ministry of Defence and the longer term outlook for growth at the Portsmouth Dockyard. At Momart, although we do not anticipate an immediate repetition of the exceptional performance seen in the year ended 31 March 2014, underlying growth prospects in this high quality business remain good. With bank borrowings reduced to £1.0 million (2013: £2.0 million) and cash on hand of £5.7 million, together with significant further borrowing capacity, the Group has significant capacity to exploit opportunities over the medium term. Momart Revenues 2014 Momart Revenues 2013 Museum and public exhibitions 59% Commercial Gallery Services 31% Museum and public exhibitions 55% Commercial Gallery Services 34% Storage 10% Storage 11% 10 FALKLAND ISLANDS HOLDINGS PLC Managing Director’s Strategic Report FINANCIAL REVIEW Summary Income Statement Year ended 31 March 2014 £m 2013 £m Change % Group revenue 38.26 35.60 7.5 Underlying operating profit* 3.85 3.50 10.0 Net financing costs (0.20) (0.21) (2.8) Underlying profit before tax Less: Fund raising costs Gain on sale of FOGL shares Gain / (loss) on disposal of the PHFC pension scheme Amortisation of intangibles Profit before tax as reported 3.65 3.29 10.8 - - (0.68) 0.77 – – 0.06 (0.18) (135.2) (0.31) (0.40) (22.9) 3.40 2.80 21.7 *Underlying operating profit excludes amortisation and non- trading items but includes £0.04 million of the Group’s share of the results of the SAtCO joint venture. Revenue and Underlying Operating Profit Group revenue rose 7.5% to £38.26 million and Group and underlying operating profit increased 10.0% to £3.85 million in the year ended 31 March 2014. These are discussed in more detail above in the Review of Operations. Non-Trading Items Non-trading items comprise a gain of £0.06 million on the final transfer of the PHFC defined benefit scheme (2013: loss £0.18 million), and a fall in the amortisation charge to £0.31 million on the intangible assets (2013: £0.40 million) due to a review of the useful life of the Momart brand name, which is now expected to have an indefinite useful life, so amortisation ceased on 30 September 2013. The prior year included a further profit of £0.77 million on the sale of FOGL shares and £0.68 million relating to the costs of the £10.0 million fund raising in July 2012. Net Financing Costs The Group’s net financing costs remain little changed with the prior year at £0.20 million, with the fall in interest income on bank deposits following the expenditure in the year, being offset by a decrease in bank interest payable reflecting the £1.0 million reduction in bank loans. Underlying Pre-Tax Profit The Group’s underlying pre-tax profits (“PBT”) grew by £0.36 million (10.8%) to £3.65 million (2013: £3.29 million). Reported Pre-Tax Profit After charging £0.3 million for the amortisation of intangible assets (2013: £0.4 million), and the other non-trading items noted above, reported profit before tax for the Group increased by 21.7% to £3.40 million (2013: £2.8 million). Taxation The Group pays corporation tax on its UK earnings at 23% and on earnings in the Falkland Islands at 26%. The Falklands Islands Company Limited has been granted a foreign branch exemption, and as a result no longer pays UK corporation tax and will gain the full benefit of the tax allowability in the Falkland Islands of expenditure on commercial and industrial buildings. The effective tax rate on underlying profits is 24.7% (2013: 24.2%).  ANNUAL REPORT 2014 11 Earnings Per Share Year ended 31 March % Underlying profit before tax 2014 £m 3.65 2013 £m Change 3.29 10.8 Taxation on underlying profit (0.90) (0.80) 13.2 Underlying profit after tax Diluted average number of shares in issue (thousands) Effective underlying tax rate Diluted EPS on underlying profit 2.75 2.49 10.1 12,461 11,704 24.7% 24.2% 22.0p 21.3p 6.5 2.1 3.3 Fully diluted Earnings per Share (“EPS”) derived from underlying profits, increased by 3.3% to 22.0p (2013: 21.3p), this was after a 6.5% increase in the diluted average number of shares, following the 33% increase in the share capital of the Company in July 2012. Balance Sheet The Group’s Balance Sheet remains strong. Total net assets increased to £35.4 million from £34.3 million in the prior year, despite a £0.1 million fall in the market value of the Group’s investment in FOGL as the share price fell slightly from 26.5 pence to 25.5 pence. Retained earnings after the payment of tax and dividends increased by £0.2 million to £14.8 million (2013: £13.6 million). Bank borrowings were reduced to £1.0 million (2013: £2.0 million) and the Group had cash balances of £5.7 million (2013: £11.4 million). The carrying value of intangible assets was reduced by £0.1 million to £12.2 million (2013: £12.3 million) due to the annual amortisation charge of £0.3 million on the intangible assets arising on the 2008 acquisition of Momart, and a £0.1 million amortisation charge for computer software, offset by a £0.3 million transfer from plant and machinery. The net book value of property, plant and equipment increased by £2.9 million to £16.6 million (2013: £13.7 million) after capital investment of £4.3 million, including £2.1 million in the Falkland Islands. The Group owns investment properties comprising commercial and residential properties in the Falkland Islands held for rental, together with approximately 400 acres in and around Stanley. This includes 18 acres for industrial development, 25 acres of prime mixed-use land and 300 acres which is adjacent to the site proposed for a new port. During the year, the net book value of investment property increased £0.6 million to £3.4 million (2013: £2.8 million) after £0.1 million of depreciation. These properties are all situated in the Falkland Islands, and the £0.7 million additions include £0.2 million for the purchase of a property on Ross Road, Stanley and further development of residential properties to increase the Group’s portfolio. The Group owns 36 investment properties (mainly houses) in Stanley which are held at depreciated cost. The net book value of these properties of £3.4 million has been reviewed by the Directors resident in the Falkland Islands and at 31 March 2014 the fair value of this property portfolio was estimated at £6.3 million (2013: £5.7 million). If oil development proceeds, the value of all these properties is expected to increase significantly. The Group’s 2.4% shareholding in FOGL is described above in the Business Review. Deferred tax assets relating to liabilities decreased to £0.6 million (2013: £0.7 million). These assets now only include the deferred tax on the FIC unfunded scheme calculated by applying the 26% Falklands tax rate. future pension Inventories, which largely represents stock held for resale in the Falkland Islands increased by £1.6 million to £6.7 million at 31 March 2014. The increase largely relates to Falklands Building Services which is experiencing significant growth. Trade and Other Receivables were increased by £0.9 million to £7.0 million as at 31 March 2014 due to the increased activity at Momart. Average debtor days outstanding were 47.0 (2013: 57.1). Outstanding finance lease liabilities totalled £5.2 million (2013: £5.3 million). £4.9 million of the finance leases balance is in respect of the 50 year lease from Gosport Borough Council for the Gosport Pontoon. Corporation tax due for payment within the next 12 months is £0.4 million (2013: £0.4 million). This is lower than the £0.9 million taxation charge on underlying profit, as £0.3 million of the 2014 tax charge has been paid in instalments. Trade and other payables increased from £10.0 million to £11.0 million at 31 March 2014 reflecting increased trading activity. At 31 March 2014 the liability due in respect of the Group’s defined benefit pension schemes was £2.5 million (2013: £2.6 million). The pension scheme in the Falkland Islands, which was closed to new entrants in 1988 and to further accrual in 2007, is unfunded and liabilities are met from operating cash flow. The net deferred tax liabilities, excluding the pension asset at 31 March 2014 at £1.6 million remained in line with the prior year (2013: £1.7 million). £1.4 million of this balance arises on property, plant and equipment, and is principally due to properties in the Falklands, where capital allowances of 10% are available on the majority of the FIC properties. With such assets depreciated over 20-50 years a timing difference arises on which deferred tax is provided. Net assets per share were 285p at 31 March 2014 (2013: 276p). 12 FALKLAND ISLANDS HOLDINGS PLC Managing Director’s Strategic Report FINANCIAL REVIEW - CONTINUED Cash Flows Operating Cash Flow Net cash flow from operating activities decreased from £3.5 million last year to £2.8 million, primarily due to a further increase in working capital as the Falkland Islands prepare for future growth. The Group’s Cash Flow can be summarised as follows: Year ended 31 March 2014 £m 2013 £m Underlying profit before tax Depreciation Amortisation of computer software Net Interest payable EBITDA Share based payments Increase in working capital Tax paid Other Net cash inflow from operating activities Net proceeds of shares issued Sale of 1.2 million FOGL shares Less: Dividends paid Capital expenditure Net bank interest received Disposal of PHFC pension scheme Loan to joint venture Net cash outflow on sale & purchase of treasury shares Loan repayments Increase in hire purchase debtors Financing draw down loans Net (outflow) / inflow from financing and investing activities Net cash (outflow) / inflow Cash balance b/fwd Cash balance c/fwd 3.6 1.1 0.1 0.2 5.0 - (1.7) (0.8) 0.3 2.8 - - (1.4) (5.0) 0.1 - (0.5) (0.1) (1.4) (0.2) - (8.5) (5.7) 11.4 5.7 3.3 1.2 - 0.2 4.7 0.2 (0.5) (0.7) (0.2) 3.5 9.2 1.0 (1.4) (2.4) 0.1 (0.3) - - (1.1) (0.1) 0.1 5.1 8.6 2.8 11.4 Financing Outflows During the year the Group paid dividends of £1.4 million (2013: £1.4million) and made fixed asset investment of £5.0 million of expenditure to strengthen the Group’s operating base, including instalment payments of £1.6 million on the new vessel for Gosport ferry (2013 total expenditure: £2.4 million); £2.7 million was invested in Stanley with £0.7 million of expenditure on investment land and buildings, £0.6 million on plant and machinery, £0.3 million spend refurbishing the Stanley head office and £0.5 million building a new retail warehouse at Airport Road. Scheduled loan repayments of £1.4 million were made, including £0.3 million of payments to Gosport Council on the 50 year pontoon finance lease, £0.1m of repayments on hire purchase leases for trucks at Momart and £1.0 million of bank loan repayments reducing the Group’s bank debt to £1.0 million. Business Drivers All the Group’s businesses are consumer oriented operations and their success is linked to general economic conditions in their markets. Inflation, employment levels, interest rates and government spending programmes all have an effect on disposable incomes and consumer confidence. The Group’s businesses in the Falkland Islands and Gosport are linked to local demand for their goods and services. In addition, demand is boosted by tourist activity which in the Falklands is affected by Argentinian pressure on cruise ship operators. In the Falkland Islands the strength of the economy has been closely linked to the fortunes of the fishing industry which accounts for over 60% of GDP. The variable factors have been the level of squid catches, in particular Illex, which has experienced very large variations, whereas Loligo, which has a substantial Falkland ownership, has had fewer fluctuations. Since the start of drilling in the north Falkland basin in 2010, offshore oil exploration activity has had a significant impact on the economy but will be at lower levels in the current year following the departure of the Leiv Eiriksson exploration rig in December 2012. Drilling activity is expected to resume in 2015. If oil exploration were to stop, this stimulus would cease and economic activity would revert to pre 2010 levels, conversely if hydrocarbon exploitation progresses as expected the positive impact on the Falkland Islands economy will be very significant. For Momart, activity in the art market is correlated to the performance of the wider global economy with increasing influence attributable to emerging economies in the Middle East, China, India and South America. The global art market remains buoyant with the emergence of new buyers, patrons and artists. In the commercial art market, ultra high net worth individuals are a key driver, whereas in the museums sector government funding remains key in addition to corporate sponsorship and revenue raised from public admissions. Pressures on museum budgets in the UK, US and Europe have increased as Government subsidies have been cut and no increase in subsidies is anticipated in the near term. Income generated from cultural exports through touring international exhibitions is an important source of revenue for UK museums and galleries and is likely to continue to grow as new countries seek to display art works.  ANNUAL REPORT 2014 13 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 two thirds of revenues. In addition to sales trends, gross margins by product 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 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 9 June 2014 Risk Factors The PHFC and FIC businesses are sensitive to changes in local economic conditions and employment levels in local government and key local businesses. 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. Maintaining innovation, leadership depends on continued investment and a commitment to customer service. Argentina continues to claim sovereignty of the Falkland Islands. However, the people of the Falkland Islands and their Government have no doubt that the Falkland Islands are British. The British Government has re-affirmed its sovereignty in unequivocal terms and this was reinforced in March 2013 by an overwhelming vote in favour of the Falklands status as a British Overseas Territory by the people of the Falkland Islands. Despite this Argentina has continued to protest its spurious claims and this has made the development of commercial links with other South American countries difficult although the Islands’ key trade and logistic links with the UK are unaffected. Argentina’s military capacity has diminished since the conflict of 1982, whereas the Islands defences are much stronger. Argentina has expressly ruled out military action against the Falklands and the risk of such action is considered to be negligible. Diplomatic efforts by Argentina are likely to continue, but are not expected to have any impact on the status of the Falkland Islands for the foreseeable future. Although there is no other directly competing service to the Portsmouth Harbour Ferry between Gosport and Portsmouth, customers 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 strategic focus. PHFC will continue to work closely with local authorities and other public transport providers to reinforce its advantages as the 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. The other risks faced by Momart are those factors which might impact the global art market. For instance a reduction in the personal wealth of collectors and investors could 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. 14 FALKLAND ISLANDS HOLDINGS PLC Board of Directors and Secretary David Hudd Chairman David joined the Board as Chairman in 2002 and is also 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 and a non-executive director of a number of listed and unlisted companies. He was a founder director of Falkland Oil and Gas Limited and remains a non-executive director of that company. John Foster Managing Director John joined the Board in 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 Non-executive Director Mike joined the Board in 2005, having previously been appointed non-executive Chairman of the Portsmouth Harbour Ferry Company Limited, following the Company’s successful bid. He is also a non-executive director of an investment trust, Amati VCT 2 plc, and Treasurer of the University of Southampton. He is a Chartered Accountant and was a partner of KPMG (and predecessor firms) until 1998. Since then he has been non-executive Chairman of several quoted and unquoted companies. He is Chairman of the Audit Committee and a member of the Remuneration Committee. Jeremy Brade Non-executive Director Jeremy joined the Board in 2009. He is a Director of Harwood Capital Management where he is the senior private equity partner. Jeremy has served on the boards of several private and publicly listed international companies. Formerly Jeremy was a diplomat in the Foreign and Commonwealth Office, and before that an Army officer. He is Chairman of the Remuneration Committee. Edmund Rowland Non-executive Director Edmund was appointed to the Board on 16 April 2013. He currently serves as a Director of Blackfish Capital Management, a specialist asset manager based in London and as an employee of Banque Havilland S.A (London Branch), previously having gained experience in London and Hong Kong, as an analyst and investment manager with BNP Paribas and Blackfish. He has broad experience of principal investing in both equity and credit capital markets, with a focus on special situations. Edmund is a member of the Remuneration Committee. Carol Bishop Company Secretary Carol Bishop joined the Company in December 2011. She is a Chartered Accountant and has previously worked for London Mining plc, an AIM listed company as Group Reporting manager. Prior to this she spent three years at Hanson plc and six years at the Peninsular and Oriental Steam Navigation Company. 15 Directors’ Report The Directors present their annual report and the financial statements for the Company and for the Group for the year ended 31 March 2014. Results and Dividend The Group’s result for the year is set out in the Group Income Statement on page 20. The Group profit for the year after taxation amounted to £2,633,000 (2013: £1,604,000). Basic earnings per share on underlying profits were 22.2p (2013: 21.6p). The Directors recommend a dividend of 7.5p per share (2013: 7.5p) which, if approved by shareholders at the forthcoming Annual General Meeting will be paid on 19 September 2014 to shareholders on the register at close of business on 29 August 2014. With the interim dividend of 4.0p paid in January 2014 (2013: 4.0p) this will take the total dividend for the year to 11.5p per share (2013: 11.5p). The proposed final 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 7.5p per share in respect of the previous year ended 31 March 2013 and an interim dividend of 4.0p per share in respect of the current year. Principal Activities The business of the Group during the year ended 31 March 2014 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 Managing Director’s Strategic Report on pages 3 to 13 and 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 page 17. 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 53 to 57. Share Capital and Substantial Interests In Shares During the year no share capital was issued (2013: 3,119,837 Shares were issued by means of a placing and Open Offer to raise £10.0 million, and 14,219 share options were exercised). Further information about the Company’s share capital is given in note 26 on page 59. Details of the Company’s executive share option scheme and employee ownership plan can be found on page 17 and in note 25 on pages 58 and 59. The Company has been notified of the following interests in 3% or more of the issued ordinary shares of the Company as at 31 March 2014. Blackfish Capital Management Fidelity investments L S Licht Number of shares 2,500,000 892,114 610,000 Percentage of shares in issue net of shares held in Treasury 20.1 7.2 4.9 ANNUAL REPORT 201416 FALKLAND ISLANDS HOLDINGS PLC Directors’ Report CONTINUED Capital Reorganisation Following the shareholder approval, received at the Company’s Annual General Meeting on 20 August 2013, the Company’s share capital underwent a reorganisation, as a result of which the number of shareholders was reduced from 6,324 to 2,294. The existing ordinary shares were consolidated into ordinary shares of £10 each (“Consolidated Shares”), and the Company purchased the fractional entitlements of Small Shareholders (being those with less than 1 Consolidated Share) created by this consolidation, which amounted to 883.81 Consolidated Shares in aggregate. The price paid by the Company for these fractional entitlements was £372.75 per Consolidated Share (equivalent to 372.75p per existing share). Following this purchase by the Company, the Consolidated Shares (including those purchased by the Company) were sub-divided into new ordinary shares of 10p each which were admitted to trading on 21 August 2013. The new ordinary shares representing the fractional entitlements purchased by the Company were taken into Treasury. On 27 August 2013, 70,000 of the shares held in Treasury were sold for 372.5 pence each. Following this sale, the Company holds 18,381 shares in Treasury. There have been no further movements in the Treasury shares since this date. Payments to Suppliers 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 2014 or 31 March 2013. Charitable and Political Donations Charitable donations made by the Group during the year amounted to £23,709 (2013: £19,443), largely to local community charities in Gosport and the Falkland Islands. There were no political donations in the year (2013: nil). 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 auditor is 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 auditor is aware of that information. Auditors KPMG Audit plc resigned as auditor on 2 August 2013. On 14 November 2013 the Directors appointed KPMG LLP as auditor of the company to fill the vacancy. A resolution proposing the re-appointment of KPMG LLP 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 FTI Consulting, 200 Aldersgate, London, EC1A 4HD at 2.00 p.m. on 4 September 2014. 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 2014 and in the preceding year follows: David Hudd John Foster Mike Killingley Jeremy Brade Edmund Rowland Total Salary £’000 Bonuses £’000 125 196 35 30 23 52 84 - - - 2014 Total £’000 177 280 35 30 23 2013 Total £’000 215 278 35 30 - 409 136 545 558 None of the Directors of the Company receive any pension contributions or benefit from any Group pension scheme.  ANNUAL REPORT 2014 17 Directors’ Report CONTINUED The Executive Directors participate in annual performance related bonus arrangements. The Chairman had the potential during the year of earning up to 80% of his salary and the Managing Director up to 65%. The bonuses are subject to the achievements of specified corporate and personal objectives. Directors’ Interests in Shares As at 31 March 2014 and 31 March 2013, the share options of executive Directors may be summarised as follows: Date of grant 10 Feb 2005 14 Jun 2005 7 Aug 2007 15 Jul 2009 13 Aug 2012 Total Number of options D L Hudd Number of options J L Foster Exercise price Exercisable from Expiry date - 49,411 - 43,674 61,881 57,692 14,117 27,517 44,550 76,700 154,966 220,576 £5.20 10 Feb 2008 9 Feb 2015 £4.25 14 Jun 2008 13 Jun 2015 £3.30 £2.90 7 Aug 2010 6 Aug 2017 15 Jul 2012 14 Jul 2019 £4.04 13 Aug 2015 13 Aug 2022 The mid-market price of the Company’s shares on 31 March 2014 was 314.0 pence and the range in the year was 312.5 pence to 385.0 pence. The Remuneration Committee has not yet reached a decision on whether, and if so to what extent, the 20,000 options granted to David Hudd and 20,000 options granted to John Foster on 21 December 2010, should vest. For accounting purposes they have been treated as lapsed in the year to 31 March 2014 and disclosed accordingly in this Annual Report. If the options do vest, wholly or partially, an accounting adjustment, which is not expected to be material, will be made in a future accounting period. The Directors’ options extant at 31 March 2014 totalled 375,542 and represented 3.0% of the Company’s issued share capital. The 399,354 remaining options are held by 51 other employees of the Group including subsidiary directors and senior management. 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 subject to various performance conditions, which have been determined by the remuneration committee after discussion with the Company’s advisors. 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 according to the register kept pursuant to the Companies Act 2006 were as shown below: David Hudd* John Foster* Mike Killingley Jeremy Brade Edmund Rowland Ordinary shares as at 31 March 2014 Ordinary shares as at 31 March 2013 116,199 61,153 30,000 15,000 110,630 25,584 16,000 10,000 **2,500,000 **2,500,000 * The shareholdings above include all Shares held in the Company’s share incentive plan in which the Directors have a beneficial interest. ** Edmund Rowland is a Director of Blackfish Capital Management Limited, the fund manager of Blackfish Capital Alpha Fund SPC – Blackfish Talisman Fund which holds 2,500,000 shares. He does not hold any shares directly in the Company. Share Incentive Plan In November 2012, the Company implemented an HMRC approved Share Incentive Plan (SIP) available to employees of the Group, which enables UK and Falklands staff to acquire shares in the Company through monthly purchases of up to £125 per month or 10% of salary, whichever is lower. For each three shares purchased by the employee, the Company contributes one free matching share. These shares are placed in trust and if they are left in trust for at least five years, they can be removed free of UK income tax and national insurance contributions. During the years ended 31 March 2014 and 2013 the Company purchased £500 of matching shares for Mr D Hudd and Mr J Foster. 18 Directors’ Report CONTINUED 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. As required by the AIM rules of the London Stock Exchange, 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 Parent 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: • select suitable accounting policies and then apply them consistently; • make judgements 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. Under applicable law and regulations the Directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. 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. The Directors confirm, to the best of their knowledge that: • these financial statements, prepared in accordance with IFRS, as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation as a whole; and • the management report, which comprises the Chairman’s Statement and the Managing Director’s Strategic Report, includes a fair review of the development and performance of the business and of the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Approved by the Board and signed on its behalf by: Carol Bishop Company Secretary 9 June 2014 Kenburgh Court 133-137 South Street Bishop’s Stortford Hertfordshire CM23 3HX FALKLAND ISLANDS HOLDINGS PLC19 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 2014 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Company Balance Sheets, the Consolidated and Company Cash Flow Statements, the Consolidated and Company Statements of Changes in Shareholders’ Equity and the related notes. 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 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 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 Financial Reporting Council’s web-site at www.frc.org.uk/auditscopeukprivate. Opinion on Financial Statements In our opinion: • 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 2014 and of the Group’s profit for the year then ended; • 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 • 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 the information given in the Strategic Report and Directors’ Report for the financial year 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: • 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 • the Parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Wayne Cox Senior Statutory Auditor For and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants St Nicholas House Park Row Nottingham NG1 6FQ 9 June 2014 ANNUAL REPORT 201420 FALKLAND ISLANDS HOLDINGS PLC Consolidated Income Statement FOR THE YEAR ENDED 31 MARCH 2014 Before amortisation of intangibles Amortisation of intangibles & non-trading items (Note 5) 2014 £’000 2014 £’000 Before amortisation of intangibles items Amortisation of intangibles & non-trading items (Note 5) 2013 £’000 2013 £’000 Total 2014 £’000 Notes 4 Revenue Cost of sales Gross profit Other administrative expenses Fund raising expenses Gain on sale of FOGL shares 24 11 Net settlement gain /(loss) on the PHFC pension scheme transfer Amortisation of intangible assets 38,263 (22,212) 16,051 (12,235) - - - - - - - - - - 64 38,263 35,596 (22,212) (21,178) 16,051 14,418 (12,235) (10,916) - - 64 - - - - (307) (307) Total 2013 £’000 35,596 (21,178) 14,418 (10,916) (682) 768 - - - - (682) 768 (182) (182) (398) (398) Operating expenses (12,235) (243) (12,478) (10,916) (494) (11,410) Operating profit 3,816 (243) 3,573 3,502 (494) 3,008 Share of results of Joint Venture Profit before net financing costs Finance income Finance expense Net financing costs Profit / (loss) before tax from continuing operations 36 - 36 - - - 3,852 (243) 3,609 3,502 (494) 3,008 220 (425) (205) - - - 220 (425) (205) 257 (468) (211) - - - 257 (468) (211) 3,647 (243) 3,404 3,291 (494) 2,797 Taxation (901) 130 (771) (796) (397) (1,193) 8 9 Profit / (loss) for the year attributable to equity holders of the company 10 Earnings per share 2,746 (113) 2,633 2,495 (891) 1,604 Basic Diluted 22.2p 22.0p 21.3p 21.1p 21.6p 21.3p 13.9p 13.7p  ANNUAL REPORT 2014 21 Consolidated Statement of Comprehensive Income FOR THE YEAR ENDED 31 MARCH 2014 15 Unrealised loss on revaluation of shares held in Falkland Oil and Gas Limited Transfer to the income statement on sale of shares in Falkland Oil and Gas 2014 £’000 (129) 2013 £’000 (4,873) - (521) Items which will ultimately be recycled to the income statement (129) (5,394) 24 24 PHFC remeasurement of the defined benefit liability FIC remeasurement of the defined benefit liability Movement on deferred tax asset relating to pension schemes Effect of tax rate changes on deferred tax asset relating to pension schemes Items which will not ultimately be recycled to the income statement Other comprehensive expense Profit for the year Total comprehensive income/ (expense) - 135 (35) - 100 (29) 2,633 2,604 (77) (173) 61 47 (142) (5,536) 1,604 (3,932) 22 FALKLAND ISLANDS HOLDINGS PLC Consolidated Balance Sheet AT 31 MARCH 2014 Notes 11 12 13 15 16 17 18 19 20 17 21 Non-current assets Intangible assets Property, plant and equipment Investment properties Shares held in Falkland Oil and Gas Limited Investment in Joint Venture Loan to Joint Venture Non-current assets held-for-sale Hire purchase debtors due in more than one year Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Hire purchase debtors due in less than one year Cash and cash equivalents Total current assets TOTAL ASSETS Current liabilities 22 Interest-bearing loans and borrowings Corporation tax payable 23 Trade and other payables Total current liabilities Non-current liabilities 22 24 18 Interest-bearing loans and borrowings Employee benefits 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 reserve Total equity 2014 £’000 2013 £’000 12,238 16,609 3,396 3,270 86 529 - 342 645 12,315 13,725 2,786 3,399 50 - 20 121 671 37,115 33,087 6,692 7,041 503 5,715 19,951 57,066 (1,109) (419) (10,981) (12,509) (5,061) (2,480) (1,639) (9,180) (21,689) 35,377 1,243 17,447 1,162 14,839 686 5,099 6,133 486 11,416 23,134 56,221 (1,149) (364) (10,012) (11,525) (6,139) (2,584) (1,694) (10,417) (21,942) 34,279 1,243 17,447 1,162 13,612 815 35,377 34,279 These financial statements were approved by the Board of Directors on 9 June 2014 and were signed on its behalf by: J L Foster Director Company Balance Sheet AT 31 MARCH 2014 Notes Non-current assets 14 20 18 20 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 22 Interest-bearing loans and borrowings Corporation 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 ANNUAL REPORT 2014 23 2014 £’000 2013 £’000 29,004 1,952 4 29,097 1,709 4 30,960 30,810 19 9,280 9,299 40,259 (785) (48) (578) 21 10,554 10,575 41,385 (800) (51) (461) (1,411) (1,312) - - - (1,411) 38,848 1,243 17,447 6,910 13,248 38,848 (769) (582) (1,351) (2,663) 38,722 1,243 17,447 6,910 13,122 38,722 These financial statements were approved by the Board of Directors on 9 June 2014 and were signed on its behalf by: J L Foster Director Registered company number: 03416346 24 FALKLAND ISLANDS HOLDINGS PLC Consolidated Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2014 Notes 21 Cash flows from operating activities Profit for the year Adjusted for: (i) Non-cash items: Depreciation Depreciation of computer software Amortisation (Profit) / loss on disposal of fixed assets Share of Joint Venture profit Amortisation of loan fees Past service cost of pension scheme Expected return on pension scheme assets Interest cost on pension scheme liabilities Equity-settled share-based payment expenses Non-cash items adjustment (ii) Other items: Bank interest receivable Bank interest payable Finance lease interest Gain on disposal of FOGL shares Fund raising expenses Net settlement (gain)/loss on the transfer of the PHFC pension scheme Corporation and deferred tax expense Other adjustments Operating cash flow before changes in working capital and provisions Increase in trade and other receivables Increase in inventories Increase in trade and other payables Decrease in provisions and employee benefits Changes in working capital and provisions Cash generated from operations Corporation taxes paid Net cash flow from operating activities Purchase of property, plant and equipment Purchase of computer software Proceeds from the disposal of property, plant and equipment Proceeds received from the sale of FOGL shares Cash received / (paid) on transfer of pension scheme Investment in Joint Venture Loans to Joint Venture Interest received Net cash flow from investing activities Cash flow from financing activities Increase in other financial assets Repayment of secured loan Financing loan draw downs Interest paid Proceeds from the issue of ordinary share capital Net cashflows from sale and purchase of Treasury shares Fund raising expenses paid Dividends paid Net cash flow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at start of year Cash and cash equivalents at end of year 2014 £’000 2013 £’000 2,633 1,604 1,116 117 307 (4) (36) 16 45 - 108 43 1,712 (99) 39 262 - - (64) 771 909 5,254 (888) (1,593) 927 (122) (1,676) 3,578 (780) 2,798 (4,933) (41) 21 - 46 - (529) 99 (5,337) (238) (1,396) - (39) - (66) - (1,423) (3,162) (5,701) 11,416 5,715 1,204 - 398 56 16 - (2) 111 134 1,917 (164) 85 - (768) 682 182 1,193 1,210 4,731 (513) (1,108) 1,221 (129) (529) 4,202 (735) 3,467 (2,415) - 17 1,005 (260) (50) - 164 (1,539) (72) (1,135) 122 (85) 9,889 - (620) (1,362) 6,737 8,665 2,751 11,416 Company Cash Flow Statement FOR THE YEAR ENDED 31 MARCH 2014 Notes Cash flows from operating activities Profit / (Loss) for the year Adjusted for: Net financing costs Amortisation of loan fees Equity-settled share-based payment expenses Impairment in Erebus Fund raising expenses Corporation and deferred tax expense Operating profit before changes in working capital Decrease in trade and other receivables Increase (Decrease) in trade and other payables Cash generated from operations Corporation taxes paid Net cash flow from operating activities Cash flow from financing activities Repayment of inter-company borrowing Repayment of secured loan Interest paid Proceeds from the issue of ordinary share capital Net cashflows from sale and purchase of Treasury shares Fund raising expenses paid Dividends paid Net cash flow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at start of year 21 Cash and cash equivalents at end of year ANNUAL REPORT 2014 25 2014 £’000 2013 £’000 1,632 (1,597) 26 16 7 129 - 72 64 16 52 3,766 682 57 1,882 3,040 2 57 4 (50) 1,941 2,994 (75) (23) 1,866 2,971 (825) (800) (26) - (66) - 1,949 (800) (64) 9,889 - (620) (1,423) (1,362) (3,140) 8,992 (1,274) 10,554 11,963 (1,409) 9,280 10,554 26 FALKLAND ISLANDS HOLDINGS PLC Consolidated Statement of Changes in Shareholders’ Equity FOR THE YEAR ENDED 31 MARCH 2014 Notes Reconciliation of movement in capital and reserves - Group Financial assets fair value revaluation reserve £’000 Share premium account £’000 Called up share capital £’000 Other reserves £’000 Retained earnings £’000 Total equity £’000 Balance at 1 April 2012 930 6,209 7,871 1,162 13,316 29,488 Profit for the year Share-based payments granted to employees 26 Share based payments on warrants granted to Banque Havilland SA on Fund raising Dividends Issue of shares Change in fair value of shares in Falkland Oil and Gas Limited Transfer to the income statement on sale of shares in FOGL Remeasurement of the defined benefit liability, net of tax Effect of tax rate changes on deferred tax asset relating to pension schemes - - - - 313 - - - - - - - - - (4,873) (521) - - - - - - 9,576 - - - - - - - - - - - - - 1,604 1,604 134 62 134 62 (1,362) (1,362) - - - (189) 9,889 (4,873) (521) (189) 47 47 Balance at 31 March 2013 1,243 815 17,447 1,162 13,612 34,279 Profit for the year Share based payments granted to employees Net Treasury share movements Dividends Change in fair value of shares in Falkland Oil and Gas Limited Remeasurement of the defined benefit liability, net of tax - - - - - - - - - - (129) - - - - - - - - - - - - - 2,633 2,633 43 43 (126) (126) (1,423) (1,423) - (129) 100 100 Balance at 31 March 2014 1,243 686 17,447 1,162 14,839 35,377  ANNUAL REPORT 2014 27 Company Statement of Changes in Shareholders’ Equity FOR THE YEAR ENDED 31 MARCH 2014 Reconciliation of movement in capital and reserves - Company Balance at 1 April 2012 Profit for the year Share based payments granted to employees Share based payments on warrants granted to Banque Havilland SA on Fund raising Dividends Issue of shares Called up share capital £’000 Share premium account £’000 Other reserves £’000 Retained earnings £’000 Total equity £’000 930 7,871 6,910 15,885 31,596 - - - - - - - - 313 9,576 - - - - - (1,597) (1,597) 134 62 134 62 (1,362) (1,362) - 9,889 Balance at 31 March 2013 1,243 17,447 6,910 13,122 38,722 Profit for the year Share based payments granted to employees Net Treasury share movement Dividends - - - - - - - - - - - - 1,632 1,632 43 (126) 43 (126) (1,423) (1,423) Balance at 31 March 2014 1,243 17,447 6,910 13,248 38,848 A profit of £1,632,000 (2013 loss: £1,597,000) 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 own profit and loss account. 28 Notes to the financial statements 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. 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 Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in the Managing Director’s Strategic Report. 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. After making enquiries the Directors have a reasonable expectation that the Company and Group have adequate facilities 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. 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. Investments in subsidiaries not classified as held-for-sale within the Company balance sheet are stated at cost. Joint Ventures Jointly controlled entities are those entities over whose activities the Group has joint control, established by contractual agreement and requiring the venturers’ unanimous consent for strategic financial and operating decisions. Jointly controlled entities are accounted for using the equity method (equity accounted investees) and are initially recognised at cost. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group’s share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an investee. FALKLAND ISLANDS HOLDINGS PLC29 1 Accounting Policies CONTINUED 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, changes in the fair value of financial instruments and amortisation of intangible assets on acquisition. Such items arise because of their size or nature, and in 2014, comprise: • The net settlement gain on the disposal of the liabilities in the PHFC pension scheme; and • The amortisation of intangible assets. In 2013, these comprised the following: • Expenses incurred on the fund raising; • The gain on the sale of 1,175,000 FOGL shares; • The net settlement loss on the disposal of the liabilities in the PHFC pension scheme; and • The amortisation of intangible assets. In 2013, the total fund raising costs incurred were £807,000, of which £125,000 was accounted for as a deduction from equity (share premium), as these costs were considered to be incremental and directly attributable to the fund raising. The remaining £682,000 of costs were considered by the Directors to be to incurred in generally researching potential sources of finance and being advised on the generic terms on which such a fund raising might be achieved, and were thus not directly attributable and incremental to the equity fund raising. This was on the basis that the Company considered that all or substantially all of the costs would have been incurred had the fundraising not proceeded to completion. It was also considered that this treatment was more open and gave greater prominence to material costs incurred during the year to all readers of the accounts. 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. 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. ANNUAL REPORT 2014 30 Notes to the financial statements CONTINUED 1 Accounting Policies CONTINUED 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. 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. 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 indefinite 6 - 10 years 5 years Computer software 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 seven years. Impairment of non-financial assets At each reporting date the Group assesses whether there is any indication that an asset may be impaired. Goodwill and intangible assets with indefinite lives are tested for impairment annually. 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 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 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. 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 in other comprehensive income and presented in the fair value reserve in equity, except for impairment losses. When these items are derecognised, the cumulative gain or loss previously recognised directly in equity is recycled to profit and loss. Financial instruments classified as available-for-sale are initially recognised at fair value less directly attributable transaction costs. FALKLAND ISLANDS HOLDINGS PLC31 1 Accounting Policies CONTINUED Employee share awards The Group provides benefits to certain employees (including Directors) in the form of share-based payment transactions, whereby the recipient 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 for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of share options that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payments is measured to reflect such conditions and there is no true up for differences between expected and actual outcomes. 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 weighted average 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, which approximates to the point when significant risks and rewards are transferred to the buyer, 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. For fine art exhibition logistical work undertaken, where the costs incurred and the costs to complete the transaction can be measured reliably, the amount of profit attributable to the stage of completion of a contract is recognised on the basis of the incurred percentage of anticipated cost, which in the opinion of the Directors, is the most appropriate proxy for the stage of completion. 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 During the year to 31 March 2013, the Group also operated two pension schemes providing benefits based on final pensionable pay. The scheme in Portsmouth Harbour Ferry Company Limited was transferred to Legal and General in March 2013. Therefore at 31 March 2014 and 31 March 2013, the Group has one remaining pension scheme providing benefits based on final pensionable pay, which is unfunded and closed to future accrual. 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 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 recognised immediately within profit and loss. ANNUAL REPORT 201432 Notes to the financial statements CONTINUED 1 Accounting Policies CONTINUED The net interest cost on the defined benefit liability for the period is determined by applying the discount rate used to measure the defined benefit obligation at the end of the period to the net defined benefit liability at the beginning of the period. It takes into account any changes in the net defined benefit liability during the period as a result of contributions and benefit payments. Remeasurements of the defined benefit liability 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 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 or in other comprehensive income. 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: • Goodwill not deductible for tax purposes; and • Initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profits. • Temporary differences related to investments in subsidiaries, to the extent that it is probable that they will not reverse in the foreseeable future. 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. FALKLAND ISLANDS HOLDINGS PLC ANNUAL REPORT 2014 33 1 Accounting Policies CONTINUED 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. New, amended and revised IFRSs and International Financial Reporting Interpretations Committee pronouncements (“IFRICs”) In the current year, the Group has applied IAS 19 Employee Benefits (as revised in 2011) and the related consequential amendments for the first time. The amendments to IAS 19 Employee Benefits, have resulted in a change in presentation in these financial statements, as the expected return on plan assets and the interest cost on the FIC and PHFC defined benefit obligation are replaced with a “net interest” amount under IAS 19 (as revised in 2011). Other than the minor amendments required by IAS 19 Employee Benefits, there were no amendments or revisions to IFRSs effective for the first time in the year ended 31 March 2014 which had an impact on the consolidated financial statements. The following amendments and revisions to IFRSs which were effective for the first time in the year ended 31 March 2014 did not have any material impact on the consolidated financial statements: Amendments and revisions to IFRSs IFRS 7 Financial Instruments: Disclosures IFRS 13 Fair Value Measurement IAS 19 Employee Benefits (revised) The following IFRSs and amendments and revisions to IFRSs, have been adopted by the EU, and were available for early adoption but have not yet been applied in the preparation of the consolidated financial statements: New IFRSs IFRS 10 Consolidated Financial Statements IFRS 11 Joint Arrangements IFRS 12 Disclosure of Interests in Other Entities IAS 27 Separate Financial Statements IAS 28 Investments in Associates and Joint Ventures Amendments and revisions to IFRSs IAS 32 Financial Instruments: Presentation Various Improvements to IFRSs – minor amendments Effective date (accounting periods commencing on or after): 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 various The Directors do not anticipate that the adoption of these new IFRSs and amendments and revisions to IFRSs will have a material impact on the consolidated financial statements in the period of initial application. 34 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 2 Segmental Information Analysis The Group is organised into three operating segments, and information on these segments is reported to the chief operating decision maker (‘CODM’) for the purposes of resource allocation and assessment of performance. The CODM has been identified as the Board of Directors. The operating segments offer different products and services and are determined by business type: goods and essential services in the Falkland Islands, the provision of ferry services and art logistics and storage. 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.  ANNUAL REPORT 2014 35 2 Segmental Information Analysis CONTINUED 2014 Revenue Segment operating profit before tax & amortisation Net settlement gain on the PHFC pension scheme Amortisation Segment operating profit Share of results of Joint Venture Profit before net financing costs Interest income Interest expense Segment profit before tax Assets and liabilities Segment assets Segment liabilities Segment net assets Other segmental information Capital expenditure: Goods and essential services (Falklands) £’000 15,881 977 - - 977 36 1,013 121 (108) 1,026 Ferry Services (Portsmouth) £’000 Art logistics & storage (UK) £’000 Unallocated £’000 4,124 1,013 - - 1,013 - 18,258 1,826 - (307) 1,519 - 1,013 1,519 - (246) 767 - (29) 1,490 - - 64 - 64 - 64 99 (42) 121 Total £’000 38,263 3,816 64 (307) 3,573 36 3,609 220 (425) 3,404 20,129 14,437 13,492 9,008 (8,950) (6,541) (4,818) (1,380) 11,179 7,896 8,674 7,628 57,066 (21,689) 35,377 Property, plant, equipment 2,057 1,958 Investment properties Computer software Depreciation - property, plant and equipment Depreciation - investment properties Depreciation of computer software Amortisation of intangible assets on acquisition of Momart Underlying profit before tax Segment operating profit Share of results of Joint Venture Profit before net financing costs Interest income Interest expense Underlying profit before tax 658 - 429 48 - - 977 36 1,013 121 (108) 1,026 260 - 41 307 - 117 307 - - 332 - - - 1,013 1,826 - - 1,013 1,826 - (246) - (29) 767 1,797 - - - - - - - - - 99 (42) 57 4,275 658 41 1,068 48 117 307 3,816 36 3,852 220 (425) 3,647 The £9,008,000 (2013: £14,838,000) unallocated assets above include the Group cash balance of £5,715,000 (2013: £11,416,000), and the Group’s investment in Falkland Oil and Gas of £3,270,000 (2013: £3,399,000) together with £23,000 (2013: £23,000) of prepayments held in Falkland Islands Holdings plc. The £1,380,000 (2013: £2,031,000) unallocated liabilities above include the Group’s bank loan of £785,000 (2013: £1,569,000), together with the accruals and tax balances held within Falkland Islands Holdings plc. 36 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 2 Segmental Information Analysis CONTINUED Goods and essential services (Falklands) £’000 Ferry Services (Portsmouth) £’000 Art logistics & storage (UK) £’000 Unallocated £’000 15,222 4,076 16,298 Segment operating profit before tax & amortisation 1,325 984 1,193 2013 Revenue Fund raising costs Gain on sale of 1.175 million FOGL shares Net settlement loss on the PHFC pension scheme Amortisation Segment operating profit Share of results of Joint Venture Profit before net financing costs Interest income Interest expense Segment profit before tax Assets and liabilities Segment assets Segment liabilities Segment net assets Other segmental information Capital expenditure: Property, plant, equipment Investment properties Depreciation - property, plant & equipment Depreciation - investment properties Amortisation Underlying profit before tax - - - - 1,325 - 1,325 91 (118) 1,298 - - - - 984 - 984 2 (263) 723 - - - (398) 795 - 795 - (29) 766 1,332 262 466 23 - 223 - 301 - - 598 - 414 - 398 Segment operating profit 1,325 984 1,193 Share of results of Joint Venture - - - Profit before net financing costs 1,325 984 1,193 Interest income Interest expense Underlying profit before tax 91 (118) 1,298 2 (263) 723 - (29) 1,164 164 (58) 106 - - (682) 768 (182) - (96) - (96) 164 (58) 10 - - - - - - - - Total £’000 35,596 3,502 (682) 768 (182) (398) 3,008 - 3,008 257 (468) 2,797 2,153 262 1,181 23 398 3,502 - 3,502 257 (468) 3,291 15,059 12,792 13,532 14,838 (8,664) (6,650) (4,597) (2,031) 6,395 6,142 8,935 12,807 56,221 (21,942) 34,279  ANNUAL REPORT 2014 37 3 Geographical analysis The tables below analyse revenue and other information by geography: 2014 Revenue (by source) United Kingdom £’000 Falkland Islands £’000 22,382 15,881 Non-current segment assets, excluding deferred tax and financial instruments 23,377 9,823 Capital expenditure 2,259 2,715 2013 Revenue (by source) United Kingdom £’000 Falkland Islands £’000 20,374 15,222 Non-current segment assets, excluding deferred tax and financial instruments 22,199 6,818 Capital expenditure 821 1,594 Total £’000 38,263 33,200 4,974 Total £’000 35,596 29,017 2,415 4 Revenue Sale of goods Rendering of services Total revenue 5 Amortisation of intangible assets and non-trading items Amortisation charge on Momart intangible assets acquired Amortisation charge Profit before tax as reported adjusted for Amortisation Fund raising expenses Gain on sale of FOGL shares Net settlement (gain)/ loss on the PHFC pension scheme Total amortisation and non-trading items Underlying profit before tax 2014 £’000 2013 £’000 12,392 12,345 25,871 23,251 38,263 35,596 2014 £’000 (307) (307) 3,404 307 - - (64) 243 2013 £’000 (398) (398) 2,797 398 682 (768) 182 494 3,647 3,291 Note 9 includes an analysis of the tax charged on the amortisation and non-trading items in the year ended 31 March 2013. 38 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 6 Expenses and auditor’s remuneration Included in profit/loss are the following expenses / (income): Group Company Direct operating expenses arising from investment properties which generated rental income in the period Depreciation Depreciation of computer software Amortisation of intangible assets Foreign currency differences Impairment loss on trade and other receivables Cost of inventories recognised as an expense Operating lease payments 2014 £’000 131 2013 £’000 102 1,116 1,204 117 307 (50) (44) 9,025 822 - 398 (153) 61 8,368 773 Auditor’s 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 Total auditor’s remuneration 2014 £’000 2013 £’000 - - - - - - - - 2014 £’000 29 61 - 90 - - - - - - - - 2013 £’000 28 61 37 126 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. The 2014 auditor’s remuneration for statutory audit services and non-audit services relates solely to amounts paid to KPMG LLP. The 2013 amounts relate solely to amounts paid to KPMG Audit plc. 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 Falkland Islands: in Stanley in UK Art logistics & storage Head office Total average staff numbers Number of employees Group Number of employees Company 2014 38 142 5 121 5 311 2013 38 123 5 116 5 287 2014 2013 - - - - 5 5 - - - - 5 5  ANNUAL REPORT 2014 39 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 Group Company 2014 £’000 10,490 43 910 243 2013 £’000 8,747 134 802 222 2014 £’000 638 7 80 8 Total employment costs 11,686 9,905 733 2013 £’000 583 52 76 8 719 8 Finance income and expense Details of audited Directors’ remuneration are provided in the Directors’ Report, under the heading ‘Details of Directors’ Remuneration and Emoluments and Directors’ interests in shares Bank interest receivable Finance lease interest receivable Net interest income on the PHFC net defined benefit liabilities Total financial income Interest payable on bank loans Net interest cost on the FIC defined benefit pension scheme liabilities Amortisation of loan fees Finance lease interest payable Total financial expense Net financing cost 2014 £’000 99 121 - 220 (39) (108) (16) (262) (425) (205) 2013 £’000 164 91 2 257 (85) (111) (16) (256) (468) (211) 40 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 9 Taxation Recognised in the income statement Current tax expense Current year Adjustments for prior years Current tax expense Deferred tax expense Origination and reversal of temporary differences Reduction in tax rate Adjustments for prior years Deferred tax (credit) / expense Total tax expense Reconciliation of effective tax rate Profit on ordinary activities before tax Tax using the UK corporation tax rate of 23% (2013:24%) Expenses not deductible for tax purposes Deduction in respect of exercised stock options Marginal relief Effect of higher tax rate overseas Reduction in deferred tax rate Income from joint ventures Deferred tax arising on change in tax regime Adjustments to tax charge in respect of previous periods Total tax expense Tax recognised directly in other comprehensive income Deferred tax recognised directly in other comprehensive income Total tax credit recognised directly in other comprehensive income 2014 £’000 801 34 835 47 (136) 25 (64) 771 2014 £’000 3,404 783 78 - - (5) (136) (8) - 59 771 2014 £’000 35 35 2013 £’000 665 (74) 591 620 (60) 42 602 1,193 2013 £’000 2,797 671 53 (6) (1) 4 (60) - 564 (32) 1,193 2013 £’000 (108) (108) Factors affecting the future tax charges Reductions in the UK corporation tax rate from 26% to 24% (effective from 1 April 2012) and to 23% (effective 1 April 2013) were substantively enacted on 26 March 2012 and 3 July 2012 respectively. Further reductions to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. This will reduce the company’s future current tax charge accordingly. The deferred tax liabilities and assets at 31 March 2014 have been calculated based on the rate of 20% substantively enacted at the balance sheet date, with the Falklands tax rate of 26% applied to all Falkland Islands assets and liabilities. It has not yet been possible to quantify the full anticipated effect of the announced reductions, although this will further reduce the Group and Company deferred tax assets and liabilities accordingly. The tax charge in the year to 31 March 2013 on the amortisation and non-trading items of the Group was £397,000. This included the £167,000 deferred tax credit on the amortisation of intangibles and the net settlement loss of the pension scheme, offset against a £564,000 deferred tax charge arising in the year to 31 March 2013 from the temporary differences on commercial industrial buildings in the Falklands. This needed to be provided for following a change in the Group’s tax situation that arose from HMRC’s acceptance of a foreign branch exemption, which in practice meant that it became necessary to account for deferred tax from this date in accordance with Falklands tax law rather than UK tax law. Unlike under UK tax law, Falklands tax law allows capital allowances to be claimed on commercial buildings at 10% on a straight line basis. With such assets depreciated over 20-50 years for accounting purposes, a temporary difference arises, on which deferred tax had to be provided.  ANNUAL REPORT 2014 41 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 in Treasury and 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 in Treasury 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 2014 £’000 2,633 2013 £’000 1,604 2014 Number 2013 Number 12,431,623 11,612,626 (12,764) (37,785) - (38,364) 12,381,074 11,574,262 79,911 129,600 12,460,985 11,703,862 2014 21.3p 21.1p 2013 13.9p 13.7p To provide a comparison of earnings per share on underlying performance, the calculation below sets out basic and diluted earnings per share based on underlying profits. Earnings per share on underlying profit Underlying profit before tax (see note 5) Taxation Underlying profit after tax Effective tax rate Weighted average number of shares in issue excluding Treasury share and the ESOP (from above) Diluted weighted average number of shares Basic earnings per share on underlying profit Diluted earnings per share on underlying profit 2014 £’000 3,647 (901) 2,746 2013 £’000 3,291 (796) 2,495 24.7% 24.2% 12,381,074 11,574,262 12,460,985 11,703,862 22.2p 22.0p 21.6p 21.3p 42 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 11 Intangible assets Group Computer Software £’000 Customer relationships £’000 Brand names £’000 Non-compete Agreements £’000 Goodwill £’000 Total £’000 Cost: At 1 April 2012 at 31 March 2013 Additions Transfer from plant and machinery At 31 March 2014 Accumulated amortisation: At 1 April 2012 Amortisation for the year At 31 March 2013 Depreciation of computer software Amortisation of other intangibles for the year At 31 March 2014 Net book value: At 31 March 2012 At 31 March 2013 At 31 March 2014 - 41 306 347 - - - 117 - 1,882 2,823 72 11,539 16,316 - - - - - - - - 41 306 1,882 2,823 72 11,539 16,663 989 243 1,232 - 236 574 141 715 - 70 57 14 71 - 1 1,983 - 1,983 - - 117 1,468 785 72 1,983 - - 230 893 650 414 2,249 2,108 2,038 15 1 - 9,556 9,556 9,556 3,603 398 4,001 117 307 4,425 12,713 12,315 12,238 Amortisation and impairment charges are recognised in operating expenses in the income statement. Customer relationships - are ongoing relationships, both contractual and otherwise, with customers considered to be of future econimic benefit to the Group with estimated econimic lives of 6-10 years. Non-compete agreements - are contractual binding agreements with senior Momart personel not to compete with the Group for five years in the event of their leaving the Group service. Prior to 1 October 2013, the brand name was amortised over 20 years. If the brand name had continued to be amortised over 20 years, the additional amortisation charged in these accounts would have been £71,000. 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: Balance at 1 April 2012 Balance at 31 March 2013 Balance at 31 March 2014 Arts logistics and storage (UK) £’000 Ferry Services (Portsmouth) £’000 5,577 5,577 5,577 3,979 3,979 3,979 Total £’000 9,556 9,556 9,556 43 11 Intangible assets CONTINUED Impairment The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill and /or indefinite life assets 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 and indefinite life intangibles for each CGU was separately assessed and tested for impairment, with no impairment charges resulting (2013: nil). As part of testing goodwill and indefinite life intangibles for impairment, 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 of as to future performance and relevant external sources of information. Sensitivity analysis as at 31 March 2014 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, the cash flows of the Art Logistics and Storage CGU have been discounted using a pre tax discount rate of 13.7% (2013: 14.1%), and the cash flows of the Ferry Services have been discounted using a pre-tax discount rate of 12.5% (2013: 12.9%). Management have determined that each 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. 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. For both Ferry Services and Art Logistics and Storage, the future cash flows are based on the latest budgets and business plans, which take account of known business conditions, and are therefore consistent with past experience. Other assumptions Other assumptions used within impairment testing models include an estimation of long term effective tax rate for the CGUs. The long-term effective rate of tax assumption 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 (2013: £nil). 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. The key assumptions made in the estimation of future cash flows are the passenger numbers and the average revenue per passenger. 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 (2013: nil). 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. The key assumptions made in the estimation of future cash flows are in relation to revenue. ANNUAL REPORT 201444 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 12 Property, plant and equipment Cost: At 1 April 2012 Additions in year Transfer to investment properties Disposals At 31 March 2013 Additions in year Transfer to computer software Disposals At 31 March 2014 Accumulated depreciation: At 1 April 2012 Charge for the year Transfer to investment properties Disposals At 31 March 2013 Charge for the year Disposals At 31 March 2014 Net book value: At 1 April 2012 At 31 March 2013 At 31 March 2014 Group Freehold land & buildings £’000 Long leasehold land & buildings £’000 Vehicles, plant & equipment £’000 Ships £’000 Total £’000 4,180 6,452 3,332 6,623 20,587 382 (218) 146 - - (149) 201 1,424 - - - (373) 2,153 (218) (522) 4,344 6,449 3,533 7,674 22,000 1,336 166 1,825 - (140) - - - - 948 (306) (155) 4,275 (306) (295) 5,540 6,615 5,358 8,161 25,674 1,779 116 (133) - 1,762 95 (138) 1,719 531 232 - (94) 669 196 - 954 138 - - 4,412 695 - (355) 1,092 4,752 140 - 637 (140) 865 1,232 5,249 2,401 5,921 2,378 2,211 2,582 5,780 2,441 2,922 3,821 5,750 4,126 2,912 7,676 1,181 (133) (449) 8,275 1,068 (278) 9,065 12,911 13,725 16,609 The Company has no tangible fixed assets. At 31 March 2014 the net carrying amount of leased long leasehold land and buildings and vehicles, plant and equipment was £4,683,000 and £302,000 respectively (2013: £4,783,000 and £397,000). During the year to 31 March 2014 the Group acquired no further leased assets. (In the year ended March 2013, £122,000 of leased assets were purchased). At 31 March 2014, the group had entered into contractual commitments for the acquisition of the new vessel for Portsmouth amounting to a further £837,000 (2013: £nil). £1,873,000 has been included in the cost of ships in respect of this vessel which is under construction. £623,000 is included within Freehold properties above in respect of the new warehouse and other developments under construction in the Falklands.  ANNUAL REPORT 2014 45 13 Investment properties At 1 April 2012 Transfer from Freehold land and buildings Transfer from properties held as stock Additions At 31 March 2013 Additions At 31 March 2014 Accumulated depreciation: At 1 April 2012 Charge for the year Transfer from Freehold land and buildings At 31 March 2013 Charge for the year At 31 March 2014 Net book value At 1 April 2012 At 31 March 2013 At 31 March 2014 Residential and commercial property £’000 Group Freehold land £’000 809 163 1,010 262 2,244 658 2,902 75 23 133 231 48 279 734 2,013 2,623 718 55 - - 773 - 773 - - - - - - 718 773 773 Total £’000 1,527 218 1,010 262 3,017 658 3,675 75 23 133 231 48 279 1,452 2,786 3,396 The investment properties comprise residential and commercial property held for rental in the Falkland Islands including 36 residential properties available for rent in and around Central Stanley, and one property, under construction at 31 March 2014. These together with the land have a net book value of £3,396,000 (2013: £2,786,000). Investment properties include 400 acres, including 70 acres of land in Stanley, 58 acres of which have planning permission, and 300 acres of land at Fairy Cove, adjacent to the site of the proposed deep water port at Port William. These investment properties held by FIC have been reviewed by a Director of FIC who is resident in the Falkland Islands and is considered to have the relevant knowledger and experience to undertake the valuation. At 31 March 2014 the fair value of this property portfolio was estimated at £6.3 million (31 March 2013: £5.7 million) including development land valued at £2.2 million (2013: £2.3 million) As oil development proceeds, the value of these properties is expected to increase significantly. The fair value estimate of £6.3 million is a level 3 valuation under IFRS 13 amd equates to the highest and best use as defined by that standard. During the year to 31 March 2014, the Group received rental income of £221,000 (2013: £296,000) on these properties. £199,000 is included within investment properties above in respect of properties under construction in the Falklands. The Company does not own any investment properties. 46 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 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 % 2014 2013 The Falkland Islands Company Limited UK Ordinary shares of £1 100% 100% The Falkland Islands Trading Company Limited UK Ordinary shares of £1 100% 100% Falkland Islands Shipping Limited* Falkland Islands Ordinary shares of £1 100% 100% Erebus Limited* Falkland Islands Ordinary shares of £1 100% 100% Preference shares of £10 100% 100% Paget Limited* Falkland Islands Ordinary shares of £1 100% 100% Preference shares of £1 100% 100% The Portsmouth Harbour Ferry Company Limited Portsea Harbour Company Limited* Clarence Marine Engineering Limited* Gosport Ferry Limited* Momart International Limited Momart Limited* Dadart Limited* UK UK UK UK UK UK UK Ordinary shares of £1 100% 100% Ordinary shares of £1 100% 100% Ordinary shares of £1 100% 100% Ordinary shares of £1 100% 100% Ordinary shares of £1 100% 100% Ordinary shares of £1 100% 100% Ordinary shares of £1 100% 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 Impairment of investment in Erebus Limited Decrease in cost of investment in Momart Cost of share-based payments recognised in subsidiaries Total investment in group undertakings Company 2014 £’000 2013 £’000 29,097 31,488 (129) (2,457) - 36 (16) 82 29,004 29,097 The Company’s investment in Erebus Limited comprises the Group’s shareholding in Falkland Oil and Gas Limited (see Note 15).  ANNUAL REPORT 2014 47 15 Shares held in Falkland Oil and Gas Limited - available-for-sale equity securities Fair value of shares held in Falkland Oil and Gas Limited £’000 Falkland Oil and Gas Limited share price at 31 March Shareholding at 31 March Group interest in Falkland Oil and Gas Limited Historic cost of shareholding to the Group Historic cost per share to the Group 16 Investment in Joint Ventures 2014 3,270 25.5p 2013 3,399 26.5p 12,825,000 12,825,000 2.4% 2,586 20p 4.0% 2,586 20p The Group has one joint venture (South Atlantic Construction Company Limited, “SAtCO” ), which was set up in June 2012 with Trant Construction, to bid for the larger infrastructure contracts which are expected to be generated by oil activity. Both Trant Construction and the Falkland Islands Company contributed £50,000 of share capital. Share in Joint Venture’s balance sheet Fixed assets Current assets Liabilities due in less than one year Liabilities due in greater than one year Group share of net assets Share in Joint Venture’s results Revenue Cost of sales Administrative expenses Operating profit for the year Taxation Group share of results for the year SAtCO had no contingent liabilities or capital commitments as at 31 March 2014 or 31 March 2013. 2014 £’000 2013 £’000 528 293 (192) (543) 86 2014 £’000 559 (505) (4) 50 (14) 36 - 50 - - 50 2013 £’000 - - - - - 48 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 17 Other financial assets Finance lease receivables relate to finance leases on the sale of vehicles and customer goods. No allowances for uncollectable 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 2014 £’000 342 503 845 2013 £’000 121 486 607 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 £84,000 (2013: £59,000). The cost of assets acquired for the purpose of letting under hire purchase agreements by the Group during the year amounted to £868,000 (2013: £635,000). The aggregate rentals receivable during the year in respect of hire purchase agreements were £700,000 (2013: £599,000). Gross investment in hire purchase leases Present value of future lease payments due: within 1 year after more than 1 year within 5 years Group 2014 £’000 930 503 342 845 2013 £’000 666 486 121 607  ANNUAL REPORT 2014 49 18 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Group Assets Liabilities Property, plant & equipment Intangible assets Inventories Other financial liabilities Share-based payments Tax losses 2014 £’000 2013 £’000 - - 62 75 27 60 - - 96 54 45 - Tax assets / liabilities excluding the pension liability 224 195 Tax assets Net deferred tax liability excluding the deffered tax asset on pensions Pension Total net deffered tax liability 2014 £’000 1,373 490 - - - - 1,863 (224) 1,639 (645) 994 2013 £’000 1,254 635 - - - - 1,889 (195) 1,694 (671) 1,023 The deferred tax asset 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 Movement in deferred tax in the year Property, plant & equipment Intangible assets Inventories Other financial liabilities Share-based payments Tax losses Pension Deferred tax movements Company Assets Liabilities 2014 £’000 2013 £’000 2014 £’000 4 4 4 4 - - 2013 £’000 - - Group 1 April 2013 £’000 Recognised in income £’000 Recognised in equity £’000 1,254 635 (96) (54) (45) - (671) 1,023 119 (145) 34 (21) 18 (60) (9) (64) - - - - - 35 35 31 March 2014 £’000 1,373 490 (62) (75) (27) (60) (645) 994 50 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 18 Deferred tax assets and liabilities CONTINUED Unrecognised deferred tax assets Deferred tax assets of £113,000 (2013: £132,000) in respect of capital losses have not been recognised as it is not considered probable 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 & equipment Intangible assets Inventories Other financial liabilities Share-based payments Pension Deferred tax movements Other financial liabilities Deferred tax movements Company 1 April 2013 £’000 Recognised in income £’000 Recognised in equity £’000 31 March 2014 £’000 4 4 - - - - 4 4 Group 1 April 2012 £’000 Recognised in income £’000 Recognised in equity £’000 588 758 (75) (83) (66) (593) 529 666 (123) (21) 29 21 30 602 (108) (108) 31 March 2013 £’000 1,254 635 (96) (54) (45) (671) 1,023 Company 1 April 2012 Recognised in income Recognised in equity 31 March 2013 5 5 (1) (1) - - 4 4  ANNUAL REPORT 2014 51 Group 2014 £’000 852 1,492 4,348 6,692 2013 £’000 202 609 4,288 5,099 Company 2014 £’000 1,952 2013 £’000 1,709 19 Inventories Work-in-progress Goods-in-transit Goods for resale Total inventories Goods-in-transit are retail goods in transit to the Falkland Islands. The Company has no inventories. 20 Trade and other receivables Non-current: Amount owed by subsidiary undertakings Current: Trade and other receivables Prepayments and accrued income Total trade and other receivables 21 Cash and cash equivalents / bank overdrafts Cash and cash equivalents in the balance sheet and cash flow statement Group Company 2014 £’000 5,601 1,440 7,041 2013 £’000 4,960 1,173 6,133 2014 £’000 - 19 19 2013 £’000 - 21 21 Group Company 2014 £’000 2013 £’000 2014 £’000 2013 £’000 5,715 11,416 9,280 10,554 52 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 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: Current portion of secured bank loans Finance lease liabilities Total current interest-bearing loans and borrowings Total interest-bearing loans and borrowings Group Company 2014 £’000 2013 £’000 2014 £’000 2013 £’000 34 5,027 5,061 985 124 1,109 6.170 1,003 5,136 6,139 1,000 149 1,149 7.288 - - - 785 - 785 785 769 - 769 800 - 800 1.569 Finance leases liabilties Future minimum lease payments Interest Present value of minimum lease payments Less than one year 2014 £’000 366 2013 £’000 396 Between one and five years 1,216 1,322 More than five years Total Net debt 10,985 11,245 12,567 12,963 2014 £’000 242 919 6,255 7,416 2013 £’000 247 950 6,481 7,678 2014 £’000 124 297 4,730 5,151 2013 £’000 149 372 4,764 5,285 Total interest-bearing loans and borrowings Group Company 2014 £’000 6,170 2013 £’000 7,288 2014 £’000 785 2013 £’000 1,569 less: cash balances (see note 21) (5,715) (11,416) (9,280) (10,554) Net (cash) / debt 455 (4,128) (8,495) (8,985)  ANNUAL REPORT 2014 53 23 Trade and other payables Non-current: Amount owed to subsidiary undertakings Current: Trade payables Other creditors, including taxation and social security Accruals and deferred income Total trade and other payables 24 Employee benefits: pension plans Company 2014 £’000 - Group Company 2014 £’000 6,817 756 2013 £’000 6,031 825 3,408 3,156 10,981 10,012 2014 £’000 - 172 406 578 2013 £’000 582 2013 £’000 - 58 403 461 The Group operates three defined contribution pension schemes. In addition it also operated two defined benefit pension schemes, both of which have been closed to new members and to future accrual. In March 2013 the Group transferred all liabilities in respect of the Portsmouth Harbour defined benefit scheme to Legal and General. 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 £243,000 (2013: £222,000). The Group anticipates paying contributions amounting to £315,000 during the year ending 31 March 2015. 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: The Falkland Islands Company Limited Scheme Deferred tax Net pension scheme deficit 2014 £’000 2013 £’000 (2,480) (2,584) 645 671 (1,835) (1,913) 54 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 24 Employee benefits: pension plans CONTINUED The 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. Actuarial reports for IAS 19 purposes as at 31 March 2014, 2013, 2012, 2011 and 2010 were prepared 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 Average longevity at age 65 for male current and deferred pensioners (years) at accounting date Average longevity at age 65 for male current and deferred pensioners (years) 20 years after accounting date 2014 2013 2.6% 3.0% 4.3% 3.4% 22.4 24.6 2.6% 3.0% 4.3% 3.4% 22.6 24.8 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. The FIC pension scheme has 20 members (2013: 21) and 3 deferred members (2013: 3) The weighted average duration of the expected benefit payments from the Scheme is around 15 years (2013: 15 years). Sensitivity analysis The calcalation of the defined benefit liability is sensitive to the assumptions set out above. The following table summarises how the impact of the impact of the defined benefit liability at 31 March 2014 would have increased / (decreased) as a result of a change in the respective assumptions by 0.1%, Discount rate +/- 0.1% Increases in deferment (LPI 3%) +/- 0.1% Life expectancy +/- One year 2014 Effect on obligation £’000 38 (8) (100) These sensitivities have been calculated to show the movement in the defined benefit obligation in isolation, and assuming no other changes in market conditions at the accounting date. 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: Present value of scheme liabilities Related deferred tax asset Net pension liability Value at 2014 £’000 (2,480) 645 (1,835) Value at 2013 £’000 Value at 2012 £’000 Value at 2011 £’000 Value at 2010 £’000 (2,584) (2,411) (2,107) (2,013) 671 579 548 558 (1,913) (1,832) (1,559) (1,455)  ANNUAL REPORT 2014 55 24 Employee benefits: pension plans CONTINUED Movement in deficit during the year: Deficit in scheme at beginning of the year Pensions paid Past service cost Other finance cost Remeasurement of the defined benefit liability Deficit in scheme at end of the year Analysis of amounts included in other finance costs: Interest on pension scheme liabilities Analysis of amount recognised in statement of comprehensive income : Experience gains and (losses) arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Remeasurement of the defined benefit liability 2014 £’000 2013 £’000 (2,584) (2,411) 122 (45) (108) 135 111 - (111) (173) (2,480) (2,584) 2014 £’000 (108) 2014 £’000 20 115 135 2013 £’000 (111) 2013 £’000 (34) (139) (173) History of experience gains and losses: 2014 2013 2012 2011 2010 Experience (losses)/gains arising on scheme liabilities: Amount (£’000) 20 (34) (30) (7) 89 Percentage of year end present value of scheme liabilities (0.8%) 1.3% 1.2% 0.3% (4.4%) Total amount recognised in statement of comprehensive income: 135 (173) (289) (82) (195) Amount (£’000) Percentage of year end present value of scheme liabilities (5.4%) 6.7% 12.0% 3.9% 9.7% Payments to pensioners 122 111 98 98 98 56 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 24 Employee benefits: pension plans CONTINUED 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. This scheme was transferred to Legal and General at 7 March 2013. Actuarial reports for IAS 19 purposes for the 7 March date of transfer were prepared by a qualified independent actuary, JLT Benefit Solutions. The major assumptions used in this valuation were: Rate of increase in pensions in payment and deferred pensions Discount rate applied to scheme liabilities Inflation assumption 2014 - - - 2013 3.4% 4.3% 3.4% 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 for the years ending 31 March 2010 to 31 March 2012 were not intended to be realised in the short term and therefore may have been subject to significant change should they have been realised, and the present value of the scheme’s liabilities, which, for the years ended 31 March 2010 to 31 March 2012 were derived from cash flow projections over long periods and thus inherently uncertain, were: Movement in deficit during the year: Projected benefit obligations Opening projected benefit obligations Interest thereon Distributions Remeasurement of the defined benefit liability Liabilities discharged on settlement Projected benefit obligations at 31 March Plan assets Opening plan assets Distributions Contributions Return on assets Remeasurement of the defined benefit asset Assets discharged on settlement Plan assets at 31 March Deficit in scheme at 31 March 2014 £’000 2013 £’000 - - - - - - 2014 £’000 - - - - - - - - (519) (23) 56 (44) 530 - 2013 £’000 460 (56) 316 25 (33) (712) - -  ANNUAL REPORT 2014 57 24 Employee benefits: pension plans CONTINUED Value at 2014 £’000 Value at 2013 £’000 Value at 2012 £’000 Value at 2011 £’000 Value at 2010 £’000 Equities Fixed interest Other Total market value of assets Present value of scheme liabilities Deficit in scheme Related deferred tax asset Net pension liability - - - - - - - - - - - - - - - - 286 145 29 460 (519) (59) 14 (45) 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 amounts included in operating expenses: Net settlement gain /(loss) on the transfer of the PHFC pension scheme Included in other operating expenses Analysis of amount recognised in statement of other comprehensive income: Actual return less expected return on scheme assets Changes in assumptions underlying the present value of scheme liabilities Remeasurement of the defined benefit liability 301 101 30 432 (455) (23) 6 (17) 2014 £’000 - - - 2014 £’000 64 64 2014 £’000 - - - 328 64 18 410 (634) (224) 63 (161) 2013 £’000 25 (23) 2 2013 £’000 (182) (182) 2013 £’000 (33) (44) (77) History of experience gains and losses: 2014 2013 2012 2011 2010 Difference between the expected and actual return on scheme assets: Amount (£’000) Percentage of year end scheme assets 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 scheme liabilities - - - - - - (33) (23) (8) 86 - - - (5.0%) (1.9%) 21.0% - - - - (1) 0.2% (77) (75) (10) (55) - 14.5% 2.2% 8.7% 58 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 25 Employee benefits: share-based payments The following options were outstanding at 31 March 2014: Date of issue Number 10 Feb 05 57,692 14 Jun 05 42,500 14 Jun 05 63,528 7 Aug 07 27,517 4 Dec 07 12,500 3 Apr 08 3,781 8 Apr 09 57,719 15 Jul 09 98,224 9 Dec 09 24,000 21 Dec 10* 44,160 28 Apr 11 6,390 27 Jun 11 18,281 16 Dec 11 140,690 13 Aug 12 138,581 27 Nov 13 29,810 02 Dec 13 9,523 774,896 Exercise price pence Share price at grant date pence Fair value per share pence Total fair value Earliest exercise date Latest exercise date 520.0 425.0 425.0 330.0 319.0 365.0 207.5 290.0 390.0 342.5 313.0 302.5 267.5 404.0 369.0 367.5 520.0 425.0 425.0 332.5 340.0 375.0 207.5 290.0 397.5 337.5 313.0 303.5 261.5 404.0 369.0 367.5 247.0 166.0 214.0 73.0 119.0 131.0 56.0 72.0 145.0 124.0 106.0 94.0 68.0 92.0 109.0 109.0 142,499 10 Feb 08 9 Feb 15 70,550 14 Jun 08 13 Jun 15 135,950 14 Jun 08 13 Jun 15 20,087 14,875 7 Aug 10 6 Aug 17 4 Dec 10 3 Dec 17 4,953 3 Apr 11 8 Apr 12 2 Apr 18 7 Apr 19 15 Jul 12 14 Jul 19 9 Dec 12 8 Dec 19 32,323 70,721 34,800 54,758 21 Dec 13 20 Dec 20 6,773 28 Apr 14 28 Apr 21 17,184 27 Jun 14 27 Jun 21 95,669 16 Dec 14 16 Dec 21 127,495 13 Aug 15 12 Aug 22 32,493 27 Nov 16 26 Nov 23 10,380 02 Dec 16 02 Dec 23 871,510 The total number of options outstanding at 31 March 2014 was 774,896 (2013: 861,344). A reconciliation of the movement in options is shown below. 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 unvested options. Expected volatility is determined by reference to past performance of the Company’s share price. * The Remuneration Committee has not yet reached a decision on whether, and if so to what extent, the 20,000 options granted to David Hudd and 20,000 options granted to John Foster on 21 December 2010, should vest. For accounting purposes they have been treated as lapsed in the year to 31 March 2014 and disclosed accordingly in this Annual Report. If the options do vest, wholly or partially, an accounting adjustment, which is not expected to be material, will be made in a future accounting period. Expected volatility (%) Risk-free interest rate (%) Expected life of options (years) Dividend yield (%) 28 Apr 11 27 Jun 11 16 Dec 11 13 Aug 12 27 Nov 13 02 Dec 13 40 2.94 6.5 2.60 40 2.53 6.5 3.10 39 1.42 6.5 3.60 39 0.97 6.5 2.70 39 2.09 6.5 3.12 39 2.19 6.5 3.13 Share price at grant date (pence) 313.0 303.5 261.5 404.0 369.0 367.5 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.  ANNUAL REPORT 2014 59 25 Employee benefits: share-based payments CONTINUED During the year ended 31 March 2014 28,915 options (2013: 14,219) were exercised over ordinary shares. The number and weighted average exercise prices of share options are as follows: Weighted average exercise price (£) 2014 Number of options 2014 Weighted average exercise price (£) 2013 Outstanding at the beginning of the year Forfeited during the year Exercised during the year Granted during the year Outstanding at the year end Vested options exercisable at the year end 3.43 3.45 2.08 3.69 3.49 3.59 861,344 (96,866) (28,915) 39,333 774,896 431,621 3.28 3.40 2.08 3.99 3.43 3.50 Number of options 2013 730,510 (19,657) (14,219) 164,710 861,344 417,376 26 Capital and reserves Share capital Issued at 1 April Shares issued in fund raising Share options exercised during the year Issued at 31 March - fully paid Allotted, called up and fully paid Ordinary shares of 10p each Ordinary shares of 10p each 2014 2013 12,431,623 9,297,567 - - 3,119,837 14,219 12,431,623 12,431,623 2014 £’000 2013 £’000 1,243 1,243 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. During the year ended 31 March 2013 the Group issued 3,119,837 shares by means of a placing and open offer at 320 pence per share to raise £10.0 million before expenses to provide funds to invest in the Group’s businesses in the Falkland Islands. In addition 14,219 share options were also exercised in the year ended 31 March 2013. On 31 March 2000, an Employee Share Ownership Plan was established. At 31 March 2014 the plan held 28,016 (2013:39,021) ordinary shares at a cost of £55,005 (2013: £76,612). The market value of the shares at 31 March 2014 was £87,970 (2013: £129,745). Shares held in the ESOP receive a nominal 0.01p per share in each dividend payment, as in prior years. For more information on share options please see note 25. The other reserves in the Group comprise largely of merger relief arising in connection with the acquisition of Momart International Limited. These have been offset by a recognised impairment of Momart in the year ended 31 March 2009. 60 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 26 Capital and reserves CONTINUED Warrants issued to Banque Havilland SA In July 2012, 100,000 warrants to subscribe for one ordinary share were granted to Banque Havilland SA, which can be exercised at a price of £5 per share at any date from the date of grant until 31 December 2014. The share based payment charge of £62,000 was calculated using the Black Scholes model with an assumed volatility of 45% and a dividend yield of 2.86%. Dividends The following dividends were recognised in the period: Final: 7.5p (2013 Final: 7.0p) per qualifying ordinary share Interim: 4.0p (2013 Interim: 4.0p) per qualifying ordinary share 2014 £’000 928 495 2013 £’000 866 496 1,423 1,362 After the balance sheet date a final dividend of 7.5p (£929,000) per qualifying ordinary share (2013: 7.5p, £929,000) were proposed by the directors. The dividend has not been provided for. 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. Derivative financial instruments The fair value of derivative financial instruments is determined by their market value at the reporting 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.  ANNUAL REPORT 2014 61 27 Financial instruments CONTINUED The following table shows the carrying value, which is equal to fair value for each category of financial instrument: Available-for-sale financial assets at fair value Financial liabilities at amortised cost Cash and cash equivalents Hire purchase debtors Interest-bearing borrowings at amortised cost Trade and other receivables Group Company 2014 £’000 3,270 2013 £’000 3,399 (10,981) (10,012) 5,715 845 11,416 607 (6,170) (7,288) 5,601 4,960 2014 £’000 - (578) 9,280 - (785) 19 2013 £’000 - (461) 10,554 - (1,569) 21 Available for sale financial assets are valued using a level 1 methodology. All other financial instruments are based on a level 3 methodology. (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. Exposure to credit risk The carrying amount of financial assets, other than available for sale financial assets represents the maximum credit exposure. Therefore, the maximum exposure to credit risk at the balance sheet date was £12,161,000 (2013: £16,983,000) being the total trade receivables, other financial assets and cash and cash equivalents in the balance sheet. The credit risk on cash balances is limited because the couterparties are banks with high credit ratings assigned by international credit-rating agencies. The maximum exposure to credit risk for trade receivables at the balance sheet date by geographic region was: Group Falkland Islands Europe North America United Kingdom Other Trade receivables The Company has no trade debtors. 2014 £’000 1,540 1,254 383 1,966 458 5,601 2013 £’000 1,133 663 562 2,321 281 4,960 62 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 27 Financial instruments CONTINUED 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 2014 £’000 3,751 1,237 385 485 5,858 Impairment 2014 £’000 - - - (257) (257) Net 2014 £’000 3,751 1,237 385 228 Gross 2013 £’000 2,745 1,689 272 656 5,601 5,362 The movement in the allowances for impairment in respect of trade receivables during the year was: Group Balance at 1 April 2013 Impairment loss recognised Impairment loss reverse Utilisation of provision Balance at 31 March 2014 Impairment 2013 £’000 - - - (402) (402) 2014 £’000 402 85 (100) (130) 257 Net 2013 £’000 2,745 1,689 272 254 4,960 2013 £’000 341 61 - - 402 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. (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 £2 million. All payments due during the year with respect to these agreements were met as they fell due. 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.  ANNUAL REPORT 2014 63 27 Financial instruments CONTINUED Liquidity risk - Group The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effects of netting agreements: 2014 Non-derivative financial instruments Carrying amount £’000 Contractual cash flows £’000 1 year or less £’000 1 to 2 years £’000 2 to 5 years £’000 5 years and over £’000 Secured bank loans 1,019 1,045 1,010 Finance leases 5,151 12,567 366 Trade and other payables 10,981 10,981 10,981 17,151 24,593 12,357 35 366 - 401 - - 850 10,985 - - 850 10,985 The contractual cash flows for finance leases in the years ended 31 March 2014 and 31 March 2013 are significantly higher than the liability at the year end, as the finance lease for the Gosport pontoon with Gosport Borough Council is a 50 year finance lease with quarterly payments of £65,000 until June 2061. 2013 Non-derivative financial instruments Carrying amount £’000 Contractual cash flows £’000 1 year or less £’000 1 to 2 years £’000 2 to 5 years £’000 5 years and over £’000 Secured bank loans 2,003 2,071 1,026 1,010 Finance leases 5,285 12,963 396 Trade and other payables 10,012 10,012 10,012 366 - - 11,245 35 956 - 17,300 25,046 11,434 1,376 991 11,245 64 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 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: 2014 Non-derivative financial instruments Secured bank loans Trade and other payables Carrying amount £’000 Contractual cash flows £’000 1 year or less £’000 1 to 2 years £’000 2 to 5 years £’000 5 years and over £’000 785 578 810 578 810 578 1,363 1,388 1,388 - - - - - - - - - 2013 Non-derivative financial instruments Carrying amount £’000 Contractual cash flows £’000 1 year or less £’000 1 to 2 years £’000 2 to 5 years £’000 5 years and over £’000 Secured bank loans 1,569 1,636 Trade and other payables 461 461 826 461 2,030 2,097 1,287 810 - 810 - - - - - - (iv) Market risk Financial risk management Market risk is the risk that changes in market prices, such as foreign exchange, 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. 2014 Cash and cash equivalents Trade payables and other payables Balance sheet exposure Group USD £’000 211 (344) (133) Other £’000 1 (193) (192) EUR £’000 15 (414) (399) Total £’000 227 (951) (724)  ANNUAL REPORT 2014 65 27 Financial instruments CONTINUED 2013 Cash and cash equivalents Debtors Trade payables and other payables Balance sheet exposure The Company has no exposure to foreign currency risk. Sensitivity analysis EUR £’000 32 - (321) (289) Group USD £’000 204 38 (261) (19) Other £’000 7 - (97) (90) Total £’000 243 38 (679) (398) 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 2013. EUR USD Equity Profit or loss 2014 £’000 40 13 2013 £’000 29 2 2014 £’000 40 13 2013 £’000 29 2 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 2014 £’000 845 (5,151) (4,306) 2013 £’000 607 (5,285) (4,678) 2014 £’000 2013 £’000 - - - - - - (1,019) (1,019) (2,003) (2,003) (785) (785) (1,569) (1,569) 66 FALKLAND ISLANDS HOLDINGS PLC Notes to the financial statements CONTINUED 27 Financial instruments CONTINUED The Group has a loan of £0.2 million (2013: £0.4 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 1.1% above the Bank of England base rate, with a minimum base rate of 2.75% The Group has a further loan of £0.8 million (2013: £1.6 million) in respect of the acquisition of Momart International Limited. The loan is repayable over five years from June 2010 and bears interest at 1.5% above the Bank of England base rate. Sensitivity analysis A 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 2013. Equity: Decrease Profit or loss: Decrease Group 2014 £’000 (10) (10) Company 2013 £’000 2014 £’000 (20) (20) (8) (8) 2013 £’000 (16) (16) Market risk - equity price risk 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 shares held in Falkland Oil and Gas Limited (see note 15) Sensitivity analysis The Group’s available-for-sale financial assets comprise its investment in FOGL. During the year ended 31 March 2014 FOGL shares traded on the AIM market of the London Stock Exchange at an average price of 27.14p with a high of 31.25p and a low of 23.75p. 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 £3,046,000 (2013: £3,399,000) and a high of £4,008,000 (2013: £12,665,000). (v) Capital Management The Group’s objectives when managing capital, which comprises equity and reserves at 31 March 2014 of £35,377,000 (2013: £34,279,000) are 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. 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 2014 £’000 720 3,107 7,984 2013 £’000 611 2,975 8,759 11,811 12,345  ANNUAL REPORT 2014 67 28 Operating leases CONTINUED The Group leases three office premises and a number of storage warehouses under operating leases. Office leases typically run for a period of 3-10 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 £822,000 was recognised as an expense in the income statement in respect of operating leases (2013: £773,000). The Company had no operating lease commitments. 29 Capital commitments At the end of the year the Group had capital commitments of £837,000 due to the Boat yard for the new vessel for Gosport Ferry, and a commitment to purchase a new truck for £130,000 at Momart, which have not been provided for in these financial statements. There were no capital commitments at 31 March 2013. 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 21.9% per cent of the voting shares of the Company. The compensation of key management personnel (including Directors) is as follows: Key management emoluments including social security costs Company contributions to defined contribution pension plans Share-related awards Group Company 2014 £’000 1,627 82 35 2013 £’000 1,536 83 155 2014 £’000 575 - - Total key management personnel compensation 1,744 1,774 575 2013 £’000 560 - 127 687 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 are 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. 68 Directors and Corporate Information Solicitors Bircham Dyson Bell LLP 50 Broadway, Westminster, London SW1H 0BL Auditor KPMG Audit LLP St. Nicholas House, Park Row, Nottingham NG1 6FQ Registrar Capita Asset Services The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU Financial PR FTI Consulting 200 Aldersgate London EC1A 4HD Directors David Hudd Chairman John Foster Managing Director Mike Killingley* Jeremy Brade* Edmund Rowland* *Non-executive Directors Company Secretary Carol Bishop Registered Office Kenburgh Court, 133-137 South Street, Bishop’s Stortford, Hertfordshire CM23 3HX T: 01279 461630 F: 01279 461631 E: admin@fihplc.com W: www.fihplc.com Registered number 03416346 Corporate Information Stockbroker and Nominated Adviser W.H. Ireland Limited 24 Martin Lane, London EC4R 0DR The Falkland Islands Company Roger Spink Director and General Manager Telephone: 00 500 27600 Email: info@fic.co.fk www.the-falkland-islands-co.com The Portsmouth Harbour Ferry Company Keith Edwards Director and General Manager Telephone: 02392 524551 Email: admin@gosportferry.co.uk www.gosportferry.co.uk Momart Limited Kenneth Burgon Director Anna Maris Director Peter Brayshaw Commercial and Financial Director Telephone: 020 7426 3000 Email: enquiries@momart.co.uk www.momart.co.uk FALKLAND ISLANDS HOLDINGS PLC 

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