J. Smart & Co. Contractors PLC
Annual Report 2019

Plain-text annual report

J. SMART & CO. (CONTRACTORS) PLC ANNUAL REPORT AND STATEMENT OF ACCOUNTS TO 31s t JULY 2019 J. Smart & Co. (Contractors) PLC DIRECTORS DaviD W Smart, Chairman and Joint Managing Director John r Smart, Joint Managing Director alaSDair h roSS Patricia Sweeney COMPANY SECRETARY Patricia Sweeney REGISTERED OFFICE 28 cramonD roaD South, eDinburgh, eh4 6ab SUBSIDIARY COMPANIES mcGowan anD comPany (contractorS) limiteD cramonD real eState comPany limiteD thomaS menzieS (builDerS) limiteD concrete ProDuctS (KirKcalDy) limiteD c. & w. aSSetS limiteD Smart ServiceD officeS limiteD REGISTRARS AND TRANSFER OFFICE equiniti limiteD, 34 South gyle creScent, South gyle buSineSS ParK, eDinburgh, eh12 9eb BANKERS banK of ScotlanD, 75 george Street, eDinburgh, eh2 3ew AUDITOR french Duncan lLP, chartereD accountantS, 133 finnieSton Street, glaSgow, g3 8hb SOLICITORS anDerSon Strathern llP, 1 rutlanD court, eDinburgh, eh3 8ey 1 J. Smart & Co. (Contractors) PLC NOTICE IS HEREBY GIVEN that the ANNUAL GENERAL MEETING of the Company will be held at the Registered Office, 28 Cramond Road South, Edinburgh on 19th December 2019 at 12 noon, for the following purposes: 1. To receive and consider the Statement of Accounts for the year ended 31st July 2019 and the Report of the Directors and the Independent Auditor’s Report. 2. To approve the Directors’ Remuneration Report for the financial year ended 31st July 2019 as set out on pages 22 to 27 in the Annual Report. 3. To declare a Final Dividend of 2.24p per share. 4. To re-elect Patricia Sweeney as a Director, who retires in accordance with provision B.7.1 of the UK Corporate Governance Code. 5. To re-elect French Duncan LLP as Auditor. 6. To authorise the Directors to determine the remuneration of the Auditor. 7. To authorise the Company, via a special resolution, for the purposes of section 701 of the Companies Act 2006 to make market purchases (as defined in section 693(4) of the Companies Act 2006) of its ordinary shares of 2p each (ordinary shares) provided that: (a) the Company does not purchase under this authority more than 10% of the nominal value of the Company’s issued share capital at the date of this notice; the minimum price which the Company may pay for each ordinary share is 2p (exclusive of expenses); and the maximum price which the Company may pay for each ordinary share is the higher of: (i) 105% (exclusive of expenses) of the average market value of the Company’s equity shares for the five business days prior to the day the purchase is made according to the Daily Official List of the London Stock Exchange; and the higher of the price of the last independent trade and the highest current independent bid for an ordinary share on the trading venue where the purchase is carried out. (b) (c) (ii) This authority is to apply until the end of the next Annual General Meeting (or, if earlier, until the close of business on 11th February 2021) but the Company may enter into a contract to purchase ordinary shares which will or may be completed or executed wholly or partly after this authority ends, the Company may purchase these ordinary shares pursuant to any contract as if the authority had not ended. Under this authority any shares purchased by the Company will be cancelled. 8. To transact any other business of an Annual General Meeting. Explanatory notes providing information in relation to each of the proposed resolutions in this Notice of Meeting can be found on the Company’s website www.jsmart.co.uk. A member entitled to attend and vote at this Meeting is entitled to appoint one or more proxies to attend and vote on a poll instead of him/her. A proxy need not be a member. Forms of proxy, if used, must be lodged with the Registrars of the Company at least 48 hours before the time fixed for the Meeting. Forms of proxy may also be lodged electronically by submitting a duly completed scanned copy of the proxy card to proxyvotes@equiniti.com. You may not use the electronic address provided either in this Notice of Meeting or any related documents (including the Form of Proxy) to communicate with the Company for any purpose other than that expressly stated. In accordance with section 311A of the Companies Act 2006, the contents of this Notice of Meeting, details of the total number of shares in respect of which members are entitled to exercise voting rights at the Annual General Meeting and, if applicable, any members’ statements, members’ resolutions or members’ matters of business received by the Company after the date of this Notice will be available on the Company’s website. 2 J. Smart & Co. (Contractors) PLC Pursuant to section 319A of the Companies Act 2006, the Company must cause to be answered at the Annual General Meeting any question relating to the business being dealt with at the Annual General Meeting which is put by a member attending the meeting, except in certain circumstances, including if it is undesirable in the interests of the Company or the good order of the Meeting that the question be answered or if to do so would involve the disclosure of confidential information. BY ORDER OF THE BOARD OF DIRECTORS Patricia Sweeney Company Secretary 28 Cramond Road South, Edinburgh EH4 6AB 19th November 2019 3 J. Smart & Co. (Contractors) PLC CHAIRMAN’S REVIEW ACCOUNTS Headline Group profit for the year before tax, including an unrealised surplus in revalued property and a minor deficit in revalued available for sale financial assets, was £6,643,000 compared with £5,357,000 last year after accounting for the prior year adjustment resulting from implementation of IFRS 9. Underlying profit before tax for the year of £2,600,000 was unexpectedly marginally more than last year’s figure of £2,392,000 (including £460,000 profit from property sales in a joint venture company and a prior year adjustment increasing the profit by £104,000). As before, our view is that discounting the increase in the revaluation of the commercial property portfolio and adjusting for the revaluation movement on available for sale financial assets provides a truer reflection of Group performance. The Board is recommending a Final Dividend of 2.24p making a total of 3.19p which compares with 3.16p for the previous year. After waivers by members holding almost 60% of the shares, the Final Dividend will cost the Company no more than £390,000. TRADING ACTIVITIES Group construction activities including private residential sales on continuing operations increased by 56%. Own work capitalised decreased by 92% and headline Group profit on continuing operations increased by 25%. Underlying Group profit on continuing operations increased by 13%. As reported in post balance sheet events in the last Annual Report and in my Statement in the last Interim Report, due to a substantial loss in that financial year and losses in previous years, the decision was taken to cease trading in the subsidiary company, Concrete Products (Kirkcaldy) Limited, based at Hayfield Industrial Estate, Kirkcaldy. Trading has now ceased and the majority of the company assets have now been sold. The demolition of the production buildings has now commenced and post demolition the property assets will be transferred to our commercial property subsidiary company, C. & W. Assets Limited. The remaining property and yard space will be used by other group companies, mainly for storage purposes. The loss for Concrete Products (Kirkcaldy) Limited stated in these accounts reflects the majority of the final cost of cessation. Turnover in contracting was more than last year but the loss was increased. The build contract for the Affordable Housing at the mixed development at West Bowling Green Street continues and will be finished prior to the end of 2019. The social housing build contract at Ferrymuir is progressing and is due to complete after the end of the current financial year. The first private residential sales completed in the year under review at West Bowling Green Street. Sales will continue in the current financial year with the overall development due to complete prior to the end of the current financial year. Interest in the commercial property units at West Bowling Green Street is positive, with potential sales due this financial year. Occupancy levels in our industrial and office portfolio have improved. The total rent roll from our commercial property portfolio has increased by 15% since the last financial year end. Interest in our industrial estates remains robust, with continued rental growth through lettings of new stock and re-lettings/ rent review settlements of existing stock. The first unit at Gartcosh through our joint venture company, Gartcosh Estates LLP, has now been completed and interest is promising. Due to the strong performance of the first two phases at our industrial development at West Edinburgh Business Park, South Gyle we commenced the third and final phase of development, after the end of the last financial year. Similarly at Inchwood Park, Bathgate the third and final phase of this development may commence this financial year. The first unit at our industrial development at Bellshill has now been successfully let. Lettings of the office stock were encouraging this year. Bridgeside House in Edinburgh is now 100% let after lying mainly vacant for a number of years. A public sector related tenant let the majority of this building. Our office building at Links Place, Leith, Edinburgh has seen a number of lettings with occupancy up to just over 80% by the end of the financial year. As this building was sitting at less than 50% occupied only a few years ago, tribute must be paid to the staff involved with this successful turnaround. 4 J. Smart & Co. (Contractors) PLC CHAIRMAN’S REVIEW (continued) FUTURE PROSPECTS Work in hand in contracting is less than last year. Potential site acquisitions and tender work in the Housing Association sector continue to be progressed, but there will probably be no new contracting work this financial year. This will influence the year end figures due to reduced turnover, which will impact on the recovery of fixed overhead costs. As mentioned above, private housing sales will continue this financial year at West Bowling Green Street and reservations to date have remained steady. In relation to site acquisitions/future development we currently have either legal agreements in place on potential sites or sites within our control that would provide a total of approximately 200 private residential sale units. Due to the, frequently prolonged, planning and building control processes, it is unlikely that development will commence on any of these sites in the current financial year. Property valuation levels have improved again and we expect lettings to continue this financial year. It remains to be seen how the continuing political uncertainty will affect the confidence of house purchasers and commercial property occupiers. At this stage it is difficult to make an informed forecast for the outcome of the current year. However, due to the lull in contracting work and new private housing work this financial year, it seems unlikely that the underlying profit will improve 19th November 2019 DaviD W Smart Chairman 4 5 J. Smart & Co. (Contractors) PLC REPORT OF THE DIRECTORS 31st JULY 2019 The Directors present their Annual Report and the audited financial statements of the Group for the year ended 31st July 2019. STRATEGIC REPORT The Companies Act 2006 requires the Directors to prepare a Strategic Report which presents a fair review of the business during the year to 31st July 2019 and of the position of the Group at the end of the financial year. The Strategic Report also includes a description of the principal risks and uncertainties faced by the Group. The Strategic Report can be found on pages 11 to 16 and is incorporated into the Report of the Directors by reference. CORPORATE GOVERNANCE The Company is required, as a premium listed company on the London Stock Exchange, to prepare a report on Corporate Governance in accordance with the Financial Reporting Council’s UK Corporate Governance Code (the Code). The information required by the Code and also the Disclosure and Transparency Rules and the Listing Rules can be found on pages 18 to 21 and is incorporated into the Report of the Directors by reference. RESULTS AND DIVIDENDS The profit of the Group after tax for the year ended 31st July 2019 amounted to £6,236,000 (2018, £4,942,000 restated). During the year the Company paid on 28th December 2018 a final dividend for the year to 31st July 2018 of 2.21p per share (2018, 2.17p) and paid on 3rd June 2019 an interim dividend for the year to 31st July 2019 of 0.95p per share (2018, 0.95p). The Directors recommend a proposed final dividend for the year of 2.24p per share, making a total for the year of 3.19p. This final dividend is subject to approval by the shareholders at the Annual General Meeting in December 2019 and has not been included as a liability in these financial accounts. If this dividend is approved it will be paid to the members on the share register of the Company at the close of business on 6th December 2019. Dividend warrants will be posted on 30th December 2019. DIRECTORS The following were Directors of the Company during the financial year ended 31st July 2019: − − − − David W Smart John R Smart Alasdair H Ross Patricia Sweeney Details of the Directors are given on page 17. 6 J. Smart & Co. (Contractors) PLC REPORT OF THE DIRECTORS (continued) 31st JULY 2019 APPOINTMENT AND REPLACEMENT OF DIRECTORS The Company’s Articles of Association (the Company’s Articles) give the Directors the power to appoint or remove any Director. Initial appointments must be approved by the Board of Directors but anyone so appointed must be re-elected by ordinary resolution at the next Annual General Meeting of the Company. In accordance with the Company’s Articles, Directors are not required to retire by rotation, however, in accordance with provision B.7.1 of the UK Corporate Governance Code, with the exception of the Chairman, all Directors must retire and offer themselves for re-election at the Annual General Meeting at least every three years. DIRECTORS’ INTERESTS Details of Directors’ interests in the ordinary share capital of the Company are given in the Directors’ Remuneration Report. There have been no changes in Directors’ interests between 31st July 2019 and 25th October 2019. Other than the original employment contract received on joining the company, no Director has been issued with a Director’s Service Contract on appointment as a director. No Director has a material interest in any contract to which the Company or any Subsidiary Company was a party to during the year. DIRECTORS’ POWERS The Company’s Articles state that the Directors may exercise all of the powers of the Company which also includes the right of the Directors to buy back the Company’s shares based on the authority given by the shareholders following the passing of a special resolution at the Company’s 2018 Annual General Meeting. INDEMNIFICATION OF DIRECTORS In accordance with the Company’s Articles and to the extent permitted by law, Directors are granted an indemnity by the Company in respect of liabilities incurred as a result of their office. The Directors are also indemnified against the cost of defending any proceedings whether criminal or civil in which judgement is given in favour of the Director or in which the Director is acquitted or the charge is found not proven. The Company has maintained Directors’ and Officers’ liability insurance cover throughout the financial year. 7 J. Smart & Co. (Contractors) PLC REPORT OF THE DIRECTORS (continued) 31st JULY 2019 CAPITAL MANAGEMENT AND SHAREHOLDER INFORMATION The capital structure of the Company consists of issued share capital, reserves and retained earnings represented predominantly by investment properties, working capital and cash. The Company’s issued ordinary share capital as at 31st July 2019 comprises a single class of ordinary share of 2p each. Details of the issued share capital are shown in note 25 to the Accounts. At the Annual General Meeting in 2018 the Company was authorised by the shareholders to purchase, in the market, up to 10% of the Company’s issued share capital, as permitted under the Company’s Articles. The purpose of the market purchase is to enhance the earnings per share and/or the equity shareholders’ funds per share. The Directors are seeking renewal of this authority at the 2019 Annual General Meeting. During the year the Company made market purchases of 713,000 ordinary shares of 2p under the existing authority, for a total consideration of £806,000. The shares purchased were subsequently cancelled, and represented less than 2% of the Company’s issued share capital at the start of the financial year. All members who hold ordinary shares are entitled to attend and vote at a General Meeting. On a show of hands at a General Meeting every member present in person and every duly appointed proxy shall have one vote and on a poll, every member present in person or by proxy shall have one vote for every ordinary share held or represented. The Company is not aware of any agreements between shareholders that may result in restrictions on voting rights of shareholders. Rights attached to ordinary shares may only be varied by special resolution at a General Meeting. There are no specific restrictions on the transfer of securities in the Company, other than those imposed by prevailing legislation and the requirements of the Listing Rules in respect of Company Directors. The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities. Details of substantial shareholders can be found in the Company’s Corporate Governance Report. ARTICLES OF ASSOCIATION The Company’s Articles can only be amended by a special resolution at a General Meeting. No amendments are proposed to be made to the existing Company Articles at the 2019 Annual General Meeting. CHANGE OF CONTROL The Company is not party to any significant agreements which take effect, alter or terminate upon change of control of the Company following a takeover bid. The Company does not have any agreements with any Director or employee that would provide compensation for loss of office or employment, whether through resignation, purported redundancy or otherwise resulting from a takeover bid. POLITICAL DONATIONS AND POLITICAL EXPENDITURE It is the policy of the Group not to make donations for political purposes to EU Political Parties or incur EU Political Expenditure and accordingly neither the Company nor its Subsidiaries made donations or incurred such expenditure in the year. 8 9 J. Smart & Co. (Contractors) PLC REPORT OF THE DIRECTORS (continued) 31st JULY 2019 GREENHOUSE GAS EMISSIONS The Companies Act 2006 (Strategic Report and Directors’ Report) Regulation 2013 requires all quoted companies to report the greenhouse gas emissions for which they are responsible and on any environmental matters which are material to the company’s operations. Carbon emissions and energy use: Emissions from: Combustion of fuel and operation of facilities Electricity, heat, steam and cooling purchased for own use . Total emissions . . . . . . . . . . Group’s chosen intensity measurement: Emissions reported above normalised to per full time equivalent employee Emissions reported above normalised to per £million of revenues . 2019 Tonnes of CO2e 2018 Tonnes of CO2e 1,111 196 1,307 6.314 78.357 1,587 179 1,766 8.531 165.744 Overall the total greenhouse gas emissions of the Group have decreased in the year mainly due to the nature of the construction work undertaken in the year offset by the reduction in vacant properties in the Group’s investment property portfolio. The increase in construction revenue due to the accounting for private house sales in the current year has caused the intensity measurement of emissions reported per £million of revenues to decrease significantly from that of the previous year. As there has been no change in the number of full time equivalent employees between this year and the previous year the reduced total emissions has decreased for that reporting intensity measurement. We have reported on all the emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013. These sources fall within our Statement of Accounts. We do not have responsibility for any emission sources that are not included in our Statement of Accounts. Our greenhouse gas emissions have been calculated using the GHG Protocol Corporate Accounting and Reporting Standard (revised edition), data gathered to fulfil our requirements under these Regulations, and emission factors from the UK Government’s GHG Conversion Factors for Company Reporting 2018 and 2019. Emissions are calculated on the location based methodology. WASTE MANAGEMENT We manage waste in accordance with the waste hierarchy and ensure compliance with all applicable environmental legislation across all our operations. Construction waste is managed through site waste management plans which ensure waste arising is minimised, reused or recycled. Waste reduction is considered at the building design stage and any waste arising in construction is segregated either on site or off site. Where possible, waste is reused on site and waste to landfill is minimised with preference given to recycling or energy recovery. Training is provided to all staff and subcontractors and waste champions are assigned to each site to ensure compliance with our waste policies and procedures. GOING CONCERN The Group’s business activities, performance and principal risks and uncertainties are set out in the Strategic Report. The Group has adequate financial resources and is not reliant on external funding, and 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 financial resources to allow the Company and Group to continue in operational existence for a period of at least twelve months from the date of approval of the financial statements and therefore considers the adoption of the going concern basis as appropriate for the preparation of the Annual Report and Statement of Accounts. 8 9 J. Smart & Co. (Contractors) PLC REPORT OF THE DIRECTORS (continued) 31st JULY 2019 FUTURE DEVELOPMENTS It is not anticipated that the activities of the Company and its Subsidiaries, as described in the Strategic Report, will substantially change in the immediate future. POST BALANCE SHEET EVENTS There have been no events occuring after the Balance Sheet date that the Directors consider should be brought to the attention of the shareholders. AUDITOR The Company’s auditor, French Duncan LLP, has expressed willingness to continue in office. Resolutions to re-appoint them as the Company’s auditor and to authorise the Directors to determine their remuneration will be proposed at the Company’s forthcoming Annual General Meeting. CAUTIONARY STATEMENT The Chairman’s Review on pages 4 and 5 and the Strategic Report on pages 11 to 16 have been prepared to provide additional information to members of the Company to assess the Group’s strategy and the potential for the strategy to succeed. It should not be relied on by any other party or for any other purpose. This Annual Report and Statement of Accounts contain certain forward-looking statements relating to operations, performance and financial status. By their nature, such statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors, including both economic and business risk factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this Report. STATEMENT OF DISCLOSURE TO AUDITOR The Directors who held office at the date of approval of the Report of the Directors, 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 of the Directors has taken all 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. 19th November 2019 BY ORDER OF THE BOARD OF DIRECTORS Patricia Sweeney Company Secretary 10 J. Smart & Co. (Contractors) PLC STRATEGIC REPORT 31st JULY 2019 The Directors present their Strategic Report of the Group for the year ended 31st July 2019. The purpose of the Strategic Report is to provide the members of the Company with information to allow them to assess how the Directors have performed their duty to promote the success of the Company and Group. OUR BUSINESS MODEL, STRATEGY AND OBJECTIVES The Company was established in 1947 and was listed on the London Stock Exchange in 1965. The principal activities of the Group are building and civil engineering contracting, residential development for sale, the development of industrial and commercial property for lease and the provision of serviced office spaces. All the construction work involved in these activities is carried out by the Company and its Subsidiaries. Sub-contracting is kept to a minimum. The main area of operations is the central belt of Scotland. The main construction activity undertaken by the Group is that of social housing for several housing associations and registered social landlords predominately in the Edinburgh area and construction of our own private housing for sale which is undertaken by the Company, J. Smart & Co. (Contractors) PLC. The Group has a portfolio of self-financed industrial and commercial properties which are owned and managed by subsidiary company, C. & W. Assets Limited. The investment properties are located throughout the central belt of Scotland but primarily in the Edinburgh area, this being the area of the country we are familiar with and understand. Our portfolio currently extends to more than 1,000,000 square feet. The Group has five other subsidiaries. Thomas Menzies (Builders) Limited carries out small to medium sized building and civil engineering work for a variety of clients. McGowan and Company (Contractors) Limited provides plumbing support to the main construction companies. Concrete Products (Kirkcaldy) Limited manufactured hydraulically pressed concrete products sold to the trade. On 9th November 2018 the Parent Company Directors took the decision, following the period of Collective Consultation, that Concrete Products (Kirkcaldy) Limited should cease to trade with immediate effect. Details of the impact of this discontinued activity on this and the prior year accounts are given in note 10. Cramond Real Estate Company Limited, is the investment holding company of the Group and holds the Group’s equity investments and monies on bank deposits. Smart Serviced Offices Limited which trades as Foxglove Offices provides serviced office and co-working spaces in Leith. The Group also has interests in a number of Joint Venture Companies which were established for purposes of property development. The Group operates out of premises in Edinburgh and Kirkcaldy, with the centralised administration and finance function being at the head office in Edinburgh. Full support is given by the company Directors and the finance staff to all Group companies based at the two locations. We maintain a core employee base which is beneficial to the growth and success of the Group due to the fact that they have the expertise to ensure the construction activities of the Group are efficiently run, achieve high level of quality of work and retain control over operations. Employees who manage the Group’s investment property portfolio are fully aware of current market conditions and ensure that there is appropriate marketing of the Group’s investment property portfolio. We employ our own maintenance team thereby ensuring that our investment property portfolio is always in good condition and ready for let. Our objectives are to identify and exploit promising business opportunities as they arise to the benefit of the Group, its shareholders and employees without over extending Group resources. While endeavouring to complete all our operations as efficiently and to as high a standard as possible we do not set ourselves general performance yardsticks or volumetric targets. 10 11 J. Smart & Co. (Contractors) PLC STRATEGIC REPORT (continued) 31st JULY 2019 OUR BUSINESS MODEL, STRATEGY AND OBJECTIVES (continued) To achieve these objectives our strategy is to continue to maintain and develop the relationships we have with social housing providers and develop relationships with new and existing partners to establish new areas of construction opportunities, retain our core workforce and only use specialist subcontractors with proven track records in the Group to ensure work quality. We will continue to build both our residential properties and investment property portfolio within the central belt of Scotland, being the area of the country with which we are familiar. We will build up our resources to ensure the Group has sufficient current working capital facilities and financing for future commercial and private residential developments. In achieving our objectives we aim to generate value by creating long term and sustainable returns for our shareholders by growing our income and profits and increasing the value of our investment portfolio and the net assets of the Group. PERFORMANCE REVIEW Construction activities Continuing Operations Revenue Operating loss . . . . . . . . . . . . . . . . . . . . . . 2019 £000) 16,182) (2,084) 2018 £000 10,402) (1,389) Turnover for the year has increased from that of the previous year and this is due to revenue from the sale of properties at our private housing development at West Bowling Green Street, Edinburgh. We commenced work on a new social housing contract at Ferrymuir and we continue to work on the Affordable Housing at the development at West Bowling Green Street. We had no significant work in the year on our own industrial or commercial properties, although we commenced the final phase of our industrial development at West Edinburgh Business Park. Despite the increased turnover the Company continues to suffer an operating loss on its construction activities which is mainly due to increased costs of materials and the recoverability of fixed overheads. The Directors continue to monitor the progress of construction contracts with regards to costs incurred and the profitability thereof. They also monitor the fixed overheads of the Group to ensure they are as minimal as possible. Investment activities Income from investment properties . . Net surplus on valuation of investment properties . Operating profit from investment properties . . . . . . . . . . . Income from available for sale financial assets . Profit on sale of available for sale financial assets . . Net (deficit)/surplus on valuation of available for sale financial assets . . . . . Share of profits in Joint Ventures . . . . . . 12 2019 £000 7,560) 4,052) 9,051) 2018 Restated (Note 1 and 10) £000 6,344) 2,859) 6,417) 53) 26) (9) 48) 43) 2) 106) 463) . . . . . . . . . . . . . . . . . . . . . J. Smart & Co. (Contractors) PLC STRATEGIC REPORT (continued) 31st JULY 2019 PERFORMANCE REVIEW (continued) Investment activities (continued) Income from the Group’s investment properties continues to increase due to lettings to new tenants in both our industrial and commercial properties and re-lettings and rent reviews to existing tenants. Overall income has increased by 19% of which 15% is due to rental income. The increase in occupancy levels has resulted in a significant increase of 35% in service charges and insurance receivable. There were no additions to the Group’s investment property portfolio in the year, although the third and final phase of our industrial development at West Edinburgh Business Park commenced in the year. This phase will be completed in the current financial year. There were no disposals from the portfolio in the year. There has been another significant increase in the property valuations this year. As from 1st August 2018 IFRS 9: Financial Instruments became effective for the Group and this has resulted in any surplus or deficit on the Group’s available for sale financial assets now having to be accounted for through the Income Statement as opposed being accounted for directly to equity. This adoption resulted in the figures for 2018 having to be restated to show this change in accounting policy, full details of which are given in note 1 to the Accounts. During the year the Group increased the portfolio of available for sale financial assets at a cost of £380,000, some of the portfolio was sold in the year and this generated a profit on sale of £26,000. The Group’s share of profits in Joint Ventures is significantly reduced this year but this is due to the fact that in the previous year one of the Joint Venture companies made a considerable profit on the sale of its entire stock of residential properties. Group results and financial position Profit before tax Net bank position Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 £000 6,643 12,887 100,282 . . . 2018 Restated (Note 1) £000 5,357 11,776 96,593 The Group has again reported a profit before tax for the year and again this is higher than that of the previous year. Once again, the profit has been earned by the investment activities of the Group, the increase in which has covered the increased loss on the Group’s construction activities. Our net bank position, which comprises of monies held on deposit, cash and cash equivalents and the netting of our bank overdraft, has only improved slightly this year. There has been, however, a significant increase in the cash flows from operating activities which is mainly due to the fact that we have started to generate revenues from our private housing development albeit that we are still self funding the cost of this development and the increase in the rental income from our investment activities. Cash flows from investing activities have decreased significantly but the majority of the cash inflow in the previous year was due to moving of monies held on deposits to cash and cash equivalent which did not have an impact on the Group’s overall net bank position. The Group continues to be net debt free. The Group’s net assets are impacted by the profit earned in the year, decrease in the Group’s retirement benefit surplus which was mainly due to the actuarial loss recognised in the year, net of the shares bought back in the year and the dividends paid to shareholders. 13 J. Smart & Co. (Contractors) PLC STRATEGIC REPORT (continued) 31st JULY 2019 FINANCIAL INSTRUMENTS The Group’s financial instruments consist of bank balances and cash, available for sale financial assets, trade receivables and trade payables. The main purpose of the financial instruments are to provide working capital for the Group’s continuing activities and provide funding for future activities whether in construction or investment. Given the nature of the Group’s financial instruments the main risk associated with these is credit risk, however this is minimised due to the fact that exposure is spread over a number of counterparties and customers. The Group is not exposed to interest rate risk as it does not have any net debt but it does suffer from fallen interest rates on the amount we can earn on monies on deposit. TOTAL DIVIDEND The Directors are recommending a final dividend of 2.24p per share which taken with the interim dividend of 0.95p already paid in the year gives a total dividend for the year of 3.19p (2018, 3.16p), being an increase of 1% on the dividend rate for 2018. GREENHOUSE GAS EMISSIONS The Group is required to report the greenhouse gas emissions for which it is responsible and on any environmental matters which are material to the Group’s operations. Details of our emissions for the year to 31st July 2019 are set out in the Report of the Directors on page 9. PRINCIPAL RISKS AND UNCERTAINTIES The principal risks and uncertainties faced by the Group and the mitigating factors taken by the Group against these risks are detailed below. The principal risks noted below are not all of the risks faced by the Group but are those risks which the Group perceives as those which could have a significant impact on the Group’s performance and future prospects. Area of principal risk or uncertainty and impact By focusing external construction activities in the social housing sector, which is a competitive market, failure to win new contracts would impact on our volume of work and therefore the workforce required by the Group. availability Decline in home buyer confidence and affordable mortgages resulting in stalling of private house sales. of Mitigating actions and controls • Maintain long term relationships with social housing providers, resulting from high standards of service, quality and post construction care thus giving the Group an advantage over other builders when contracts are awarded on criteria other than cost only. • Identify potential build sites or include the provider within private housing developments in relation to the element of affordable housing required. • When workload is reduced workforce can be diverted to the Group’s own commercial and private residential developments. • Continue to acquire land for development for either private housing developments or for resale to social housing providers as part of a construction contract. • Develop new areas of construction activities. • Develop new joint venture opportunities. • Building developments in popular residential areas. • Building high quality specification homes with attention to detail which sets them apart from other new build homes and therefore attractive to buyers. • Building a range of homes within a development thus providing choice to buyers. • Providing sales incentives. • Consider letting of homes at market rates until the market improves. 14 J. Smart & Co. (Contractors) PLC STRATEGIC REPORT (continued) 31st JULY 2019 PRINCIPAL RISKS AND UNCERTAINTIES (continued) Area of principal risk or uncertainty and impact Social housing sector and in general is highly the housing market competitive with tight margins. Reduction in rental demand for investment properties may result in a fall in property valuations. Reduction in demand for UK real estate from investors may result in a fall in valuations within our investment property portfolio, this could result in delays in investment decisions which could impact on our activities. Political events and policies result in uncertainty until final decisions have been made and the impact of decisions are known, this could result in delays in investment decisions which could impact on our activities. Reduction of financial resources. Mitigating actions and controls • We are an ‘all trades’ contractor who employs our own personnel in all basic building trades who are supervised by site agents who are long serving employees of the Group, who have been promoted through their trades, thus ensuring control of labour costs on contracts. • We have invested heavily in plant and the maintenance thereof and therefore limit our costs on contracts by utilising own plant as opposed to incurring higher costs of hiring plant. • Subcontractors employed by the Group are specialists in their fields and in the main subcontractors have previously been used by the Group therefore quality of work and reliability is known. No labour only subcontractors are employed. • In house architectural technicians and surveyors provide pre-contract design advice to resolve potential technical problems with the build and therefore potential costs. • Only commence speculative developments after careful assessment of the market. • Restricting our operations to the central belt of Scotland being the area of the country with which we are familiar. • Continually maintain and refurbish existing properties to retain existing tenants and attract new tenants. • Provide necessary financial incentives to retain existing tenants at end of current leases and attract new tenants. • The Directors regularly review the property market to ascertain if changes in the overall market present specific risks or opportunities to the Group. • Restricting our operations to the central belt of Scotland being the area of the country with which we are familiar. • Before any decisions are taken by the Directors in any area of the Group’s activities the level of uncertainty and range of potential outcomes arising from political events and policies are considered. • Ensure resources are not over committed and only undertake commercial and private housing developments after due consideration of the financial impact on the Group financial resources. • Build up resources to ensure the Group has sufficient finance for working capital requirements and financing of commercial and private housing developments. • Spread cash reserves over several banks taking account of the strength of the bank and interest rates attainable. • Invest resources in equities also taking account of the security of the investment and the yields attainable. 15 14 J. Smart & Co. (Contractors) PLC STRATEGIC REPORT (continued) 31st JULY 2019 VIABILITY STATEMENT The Directors have assessed the viability of the Group over a three year period to July 2022, taking account of the Group’s current financial strength, business model and strategy. The Directors have also taken account of the principal risks and uncertainties facing the Group and the actions being taken to mitigate these risks as described above. The assessment period of three years has been chosen as the Directors consider this period to be appropriate as it fits well with the Group’s development and investment property cycles. The Group’s financial planning process consists of cash flow projections based on the current financial position and assumptions on future developments and investment property acquisitions and disposals. As the Group is net debt free the Directors are assessing the cash impact of their assumptions of future activity to ensure that this position is maintained. The Directors vary their assumptions in terms of economic, investment and other factors to different scenarios to assess the impact on the Group’s cash position. Even with these sensitivities applied the Group is net debt free. Based on this assessment the Directors have a reasonable expectation that the Group will continue in operation and meet its liabilities as they fall due over the period to July 2022. EMPLOYEES The Group recognises the contribution of the staff to the success of the Group. The Group operates with a core employee base who in the main have been with the Group for a considerable length of time and have gained a significant knowledge of the sectors the Group operates in and of the companies within the Group. Where appropriate the Group promotes from within whether that be the Directors, staff or site employees. The Group recognises the importance of retaining its core staff to ensure its future success. The Group does not have a specific Human Rights policy but it does have policies on recruitment and retention of employees and communication with employees which are aimed at ensuring employees are fairly treated during their employment with the Group. The Group is committed to providing equal opportunities in recruitment and employment, full and fair consideration is given to all applicants for employment and to all existing employees for promotion. Where employees become disabled during their employment and are unable to fulfil current duties they are offered suitable alternative employment within the Group, if feasible. It is the Group’s policy that there should be effective communication with employees at all levels, on matters which affect their current jobs or future prospects and all Directors and senior staff members make themselves available to all staff to discuss any matters of concern. In achieving this policy, the Directors are aware of the need to take account of the practical and commercial considerations of the Group, and the needs of the employees. A breakdown by gender of Directors, senior managers and all employees is given below: Directors Senior Managers Total Employees Male 3 1 191 Female 1 1 16 19th November 2019 16 BY ORDER OF THE BOARD OF DIRECTORS Patricia Sweeney Company Secretary J. Smart & Co. (Contractors) PLC DIRECTORS David W Smart, Chairman and Joint Managing Director Aged 46 Joined the Company in 1998 Appointed Director in 2010 Appointed Chairman and Joint Managing Director in 2017 John R Smart, Joint Managing Director Aged 49 Joined the Company in 2002 Appointed Director in 2013 Appointed Joint Managing Director in 2017 Alasdair H Ross Aged 57 Joined the Company in 1989 Appointed Director in 2012 Patricia Sweeney Aged 50 Joined the Company in 2011 Appointed Director in 2017 17 J. Smart & Co. (Contractors) PLC CORPORATE GOVERNANCE 31st JULY 2019 STATEMENT OF COMPLIANCE This statement details how your Company has applied the main and supporting principles of corporate governance as set out in the Financial Reporting Council’s UK Corporate Governance Code issued in April 2016 (the Code). A copy of the Code can be found on the Financial Reporting Council’s website, www.frc.org.uk. The Board of Directors (the Board) is committed to the principles of openness, integrity and accountability in dealing with the Company’s affairs and believes it has always acted with probity in the best interests of the Company, its employees and shareholders without recourse to guidance or instruction from others and fully intends to continue to do so in the future. The Board recognises that as it has no non-executive Directors on the Board, no Nomination, Remuneration or Audit Committees have been established and therefore the Company has not complied with any of the principles of the Code relating to non-executive directors or the establishment and operations of these committees. Also, the Board recognises that it has not fully complied with other principles of the Code relating to the division of responsibilities and evaluation of the Board as a whole and the Directors individually. Details and explanations for all principles not complied with are given below. THE BOARD The Company is led by the Board which comprises the executive management of the Company, being the Chairman who is one of the two Joint Managing Directors and two other executive Directors, and thus maintains full control of the Company, sets the strategic aims of the Company and ensures the Company has adequate financial and human resources to meet its objectives. All the Directors worked for the Company prior to their appointments as Director and therefore have the appropriate skills, experience and knowledge of the Company to ensure that the Board discharges its duties and responsibilities effectively. Decisions are taken by the Board quickly and effectively following ad hoc consultation among the Directors concerned when any matter arises. Your Board takes the view that this direct and flexible approach is preferable to the more cumbersome procedures prevalent in larger organisations and has made a considerable contribution to your Company’s continuing success and ensures that this approach best serves the interests of the Company and its shareholders. The Board held 4 formal Board Meetings in the year, which were attended by all Directors. During the year the Directors also met regularly on an ad hoc basis to undertake the executive management of the Company and take decisions on all material matters quickly and effectively thus exercising full direction and control of the Company. Given the way in which the Board and Company operates there is no requirement for a formal schedule of matters reserved for the Board’s decision. The Chairman of the Company is also one of the Joint Managing Directors. Bearing in mind the size of the Company, the Board sees no value in splitting the role of the Chairman and Managing Director, a policy which has served your Company well over many years. The Chairman is responsible for the leadership of the Board, ensuring that all the Directors receive accurate, timely and clear information on issues arising at formal and ad hoc Board meetings, setting Board agendas and ensuring adequate time is given to discussion of the agenda points. The members of the Board have complete freedom to seek independent professional advice, at the Company’s expense, when they feel it is appropriate to do so. All Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. All Directors openly express their views and make a valuable contribution to the running of the Company. Information regarding the Directors’ interests in ordinary shares of the Company is given in the Directors’ Remuneration Report. The Chairman is also responsible for ensuring effective communication with shareholders and ensuring that their views and concerns are brought to the attention of the Board. 18 19 J. Smart & Co. (Contractors) PLC CORPORATE GOVERNANCE (continued) 31st JULY 2019 THE BOARD (continued) The Board considers that increasing the manning level of the Board by 50% by the appointment of two non-executive Directors would increase costs and impose an additional administrative burden for no discernible benefit and, accordingly, would serve no useful purpose. As a result of not appointing non-executive Directors, the Company has not established Nomination, Remuneration or Audit Committees or identified an independent Director. As the Company does not have a Nomination Committee, nominations for appointment of new Directors to the Board are submitted by the Chairman for approval by the other members of the Board. As all the Directors of the Company were long-serving employees of the Company at the date of appointment this ensures that the skills, experience and knowledge are retained in the Company and onto the Board. Due regard is taken of the benefits of diversity, including gender on the Board when appointments are made. No formal tailored induction upon joining the Board is considered necessary. As the Directors are all full-time employees of the Company they are fully committed to the Company and are able to allocate sufficient time to the Company in discharging their duties and responsibilities effectively. The Directors are encouraged by the Board to receive any training they consider necessary to ensure they remain up-to-date with their skills, knowledge and familiarity of the Company’s business and they remain aware of the risks associated with the Company and are also aware of regulatory, legal, financial and other developments to enable them to fulfil their role effectively. There is no formal system of performance evaluation of the Board or the Directors individually given the manner in which the Board operates on a day to day basis. The Company’s Articles of Association do not require that Directors retire by rotation, however, in accordance with provision B.7.1 of the Code all Directors, with the exception of the Chairman, seek re-election at intervals of no more than three years at the Annual General Meeting. Also in accordance with provision B.7.1 of the Code all new Directors are subject to re-election at the first Annual General Meeting following their appointment. As the Company does not have a Remuneration Committee, the Chairman is responsible for fixing the remuneration packages of the Directors which are based on their performance and the scope of their duties and responsibilities. No Director has a service contract with the Company other than their initial employment contract and accordingly periods of notice and termination payments are structured in accordance with Employment Law. There is no scheme in place for a Director to receive entitlement to share options nor are there any long term incentive schemes. Full details of the Company’s remuneration policy are given in the Directors’ Remuneration Report. FINANCIAL AND BUSINESS REPORTING The Directors have sole responsibility for the preparation of the Annual Report and Statement of Accounts which taken as a whole is fair, balanced and understandable and provides the information necessary for the shareholders to assess the Company’s performance, business model and strategy. The Directors are also solely responsible for the preparation of the Interim Report and other price-sensitive public reports in a fair, balanced and understandable manner. The basis on which the Company creates and preserves value over the long term is described in the business model within the Strategic Report. In order to ensure that the Company and Group have adequate resources to ensure the continuing operations of the Company and Group for the foreseeable future the Directors consider current and future trading, investment property acquisitions and cash requirements. The Directors take account of prevailing market conditions in all areas of the Group’s activities and use their knowledge and experience relating to the Group’s investment property portfolio. The Directors’ opinion is that the Company and Group have adequate financial resources to allow the Company and Group to continue in operational existence for a period of at least twelve months from the date of approval of the financial statements and therefore considers the adoption of the going concern basis as appropriate for the preparation of the Accounts. The Statement of Directors’ Responsibilities is set out on page 28. 18 19 J. Smart & Co. (Contractors) PLC CORPORATE GOVERNANCE (continued) 31st JULY 2019 RISK MANAGEMENT AND INTERNAL CONTROL The Board is responsible for and annually reviews the Group’s system of internal controls in relation to financial, operational, compliance and risk management to ensure their continued effectiveness. The systems adopted by the Board are designed to manage the risk of failure to achieve the Company’s business objectives as opposed to eliminate them as any system of control can only provide reasonable but not absolute assurance against material misstatement or loss. The Board, in accordance with the Code, has reviewed the effectiveness of the internal controls from the commencement of the accounting period to the date of approval of the Annual Report and Statement of Accounts. No significant failings or weaknesses have been identified in that period. There has also been a continual process of identification by the Directors of key areas of risk within the Group and appropriate action taken to mitigate and monitor such risks. The Directors confirm that they have carried out a robust assessment of the principal risks facing the Group, as detailed in the Strategic Report, including those which threaten the business model, future performance, solvency and liquidity of the Group. The main features of the Group’s internal control and risk management systems in relation to the financial reporting process are: – contracts, development projects, land purchases and acquisition of property, plant and equipment are proceeded with after due consideration by the Directors; monthly reports are prepared for each contract and development project for review by the Directors; subsidiary Company reports are prepared for consideration by the Directors; and treasury operations are carried out in accordance with policies and procedures already approved by the Board. − − − AUDIT As the Company does not have an Audit Committee, it is the responsibility of the Chairman and Company Secretary on a continuing basis to consider how the financial reporting and internal control principles apply to the Company, to maintain an appropriate relationship with the Group’s Auditor and to review the scope and results of the audit and its cost effectiveness. The Board is responsible for setting the remuneration of the Auditor. Currently there are no proposals to undertake a retendering of the Company’s external audit function. The Company’s external auditor has held office since 1975 and there has been no audit tender since that appointment. The Board continues to assess the independence and effectiveness of the external audit function to ensure the integrity of the audit role provided by the current external auditor on behalf of the shareholders. The Board also takes into account the external auditor’s own policies and procedures regarding their integrity and independence including their procedures for rotation of audit partner and senior staff and the professional standards they have to adhere to. At this time the Board has concluded that there is no requirement to place the external audit function out to tender. Mandatory rotation of the external auditor has become effective for all public limited companies following implementation of an EU ruling which has become part of Companies Act 2006 via Statutory Instrument: The Statutory Auditors and Third Country Auditors Regulations 2016. Given that our current external auditor has held office for over 20 years we will be required to appoint a new external auditor for the audit of the Group’s accounts for the year ending 31st July 2021. In order to ensure the continued independence and objectivity of the Group’s Auditor, the Board has established policies regarding the provision of non-audit services by the Auditor. In some cases, the nature of the non-audit advice may make it more timely and cost effective to select the Group’s Auditor, who already have a good understanding of the Group. In other circumstances the decisions on the allocation of work are made on the basis of competence and cost effectiveness. The Board has considered and for the time being has concluded that an internal audit function is not necessary. The Board will continue to review the need for such a function. As such there is no internal audit of the risks identified by the Board and the controls established by the Board to mitigate and monitor these risks. 20 J. Smart & Co. (Contractors) PLC CORPORATE GOVERNANCE (continued) 31st JULY 2019 SIGNIFICANT JUDGEMENTS, KEY ASSUMPTIONS AND ESTIMATES Given that there is no Audit Committee, it is the responsibility of the Board as a whole to consider areas of the financial statements where there are significant areas of judgement regarding estimates and assumptions, which in turn have a significant effect on the amounts recognised in the financial statements. In respect of the 2019 financial statements these areas were: − Investment Property Valuations – the valuation of the investment property portfolio is completed by the Directors. The valuation of the property portfolio is inherently subjective and requires significant judgements and assumptions to be made. The Directors appoint external valuers to value a sample of properties in the portfolio to provide a sense check on their valuation. The valuations are discussed with the Auditor. Long Term Contract Valuations and Provisions – the Directors consider contract performance to ensure appropriate revenue recognition. Future revenue and contract performance are considered and loss provisions determined where necessary. Both costs and revenues may require to be revised as future events unfold and uncertainties are resolved which would have a direct impact on overall performance of these contracts. Retirement Benefit Surplus – the valuation of the retirement benefit obligation is dependent upon a series of assumptions which are determined after the Directors take expert advice from the Group’s Actuary. Changes in these assumptions could have a material affect on the surplus disclosed in the financial statements. − − The Board discusses fully all issues relevant to the above areas and obtains where possible information and advice from external experts and our external Auditor and only when fully satisfied with the amounts associated with each area are they incorporated into the financial statements. RELATIONS WITH SHAREHOLDERS The Board has in the past and will in the future continue to enter into dialogue with the shareholders wherever possible. The Chairman is responsible for ensuring that the views and concerns of the shareholders are communicated to the Board. The Chairman is also responsible for discussing governance and strategy matters with the shareholders. As the Company has no non-executive Directors there is no opportunity for shareholders to meet with these Directors. All shareholders have an opportunity at the Annual General Meeting to participate in questions and answers with the Board on matters relating to the Company. At the Annual General Meeting separate resolutions will be proposed on each substantially separate issue and the number of proxy votes received for, against, and withheld for each resolution will be announced. SUBSTANTIAL SHAREHOLDERS As at 31st July 2019 and 25th October 2019, excluding holdings of Directors, the Company has been notified of the following holdings of substantial voting rights in respect of the issued share capital of the Company: As at 31st July 2019 Octet Investments Limited . A J Whitehead Number 1,872,400 2,292,745 % 4.33 5.30 . . . . . . . . . . . . . As at 25th October 2019 Octet Investments Limited . A J Whitehead . . . . . . . . . . . . . 1,872,400 2,311,495 4.34 5.36 19th November 2019 BY ORDER OF THE BOARD OF DIRECTORS Patricia Sweeney Company Secretary 20 21 J. Smart & Co. (Contractors) PLC DIRECTORS’ REMUNERATION REPORT 31st JULY 2019 ANNUAL STATEMENT On behalf of the Board of Directors, I present the Directors’ Remuneration Report for the year ended 31st July 2019. In addition to this statement the Report includes two other parts being the Policy Report and the Annual Report on Remuneration, which have been prepared in accordance with the provisions of the Companies Act 2006 and Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The Report also meets the requirements of the UK Listing Authority’s Listing Rules and the Disclosure and Transparency Rules. The Policy Report has been developed taking account of the principles of the UK Corporate Governance Code 2016. The shareholders approved the Policy at the 2017 Annual General Meeting and the policy was effective for three years from that date. The Annual Report on Remuneration will be subject to a vote at the 2019 Annual General Meeting. Our Auditor is required to report to the shareholders on certain information contained in the Annual Report on Remuneration and that it has been prepared in accordance with the Act and the Regulations. The information to be audited is appropriately marked. There have been no substantial changes to Executive Directors’ remuneration in the year. Our policy continues to be to provide remuneration packages that will retain and motivate the Directors to sustain the long term growth and value of the Company. 19th November 2019 THE POLICY REPORT DaviD w Smart Chairman As stated in the Corporate Governance Statement the Company does not appoint non-executive Directors and therefore the Company does not have a Remuneration Committee to set the Executive Directors’ Remuneration Policy. The Chairman fulfils the function of the Remuneration Committee. The Company’s remuneration policy is to provide remuneration packages that will retain and motivate the Directors to sustain the long term growth and value of the Company and is based on the scope of their duties and responsibilities. The Directors are not entitled to any performance related remuneration, long term incentive schemes or share options. The remuneration of the Directors is not performance related therefore no element of their remuneration is based on performance measures. The policy table below summarises the main components of Directors’ Remuneration: ELEMENT PURPOSE AND STRATEGY OPERATION BASE SALARY To pay a fair salary commensurate with the individual’s role, responsibilities and experience. Reviewed annually in July taking account of the individual’s role and experience and the salary increases of employees throughout the Group as a whole. No maximum level is set. 22 J. Smart & Co. (Contractors) PLC DIRECTORS’ REMUNERATION REPORT (continued) 31st JULY 2019 ELEMENT PURPOSE AND STRATEGY OPERATION BENEFITS To provide support to enable the Directors to carry out their duties effectively. PENSION To provide appropriate levels of retirement benefits. Benefits include cash in lieu of a company car and private medical insurance. No maximum level is set as the costs of providing benefits fluctuate over time; however the costs are monitored to ensure they remain reasonable. Depending on when a Director first became an employee of the Company will determine whether they are members of the Company’s Defined Benefit Pension Scheme or Defined Contribution Scheme. Company contributions to the Defined Benefit Scheme are currently 31.9% of base salary. Contribution levels are set in agreement between the scheme trustees and the Company and can therefore vary from time to time. Company contributions to the Defined Contribution Scheme are currently a minimum of 10% of base salary. The Chairman retains the right to make minor amendments to the above policy, to take account of regulatory, tax, legislative or administrative changes without obtaining shareholder approval for these amendments. No share options or long term incentive schemes are operated by the Company. Directors are entitled to claim relevant expenses incurred by them in respect of their duties. There are no provisions for the recovery of sums paid to Directors or the withholding of the payment of any sums to Directors. As all remuneration of Directors is fixed remuneration there is no need to illustrate, via a bar chart, the expected values of proposed remuneration as it does not contain any elements based on performance and therefore is not subject to change based on either the Company’s or Director’s performance. APPROACH TO RECRUITMENT OF DIRECTORS The Company’s approach to appointing new Executive Directors is to appoint from within the Company. As such the remuneration of the Director has already been set by the Company and the package held by the employee prior to appointment as a Director will remain in place. Consideration will be made of the increased duties and responsibilities that will apply post appointment as a Director and revision to their base salary may be made to reflect this. SERVICE CONTRACTS AND POLICY ON CESSATION No Director has a service contract with the Company, other than their initial employment contract and therefore periods of notice and termination payments are structured in accordance with current Employment Law. CONSIDERATION OF EMPLOYMENT CONDITIONS ELSEWHERE IN COMPANY The Chairman when considering the remuneration of the Executive Directors takes into account the remuneration of employees across the Group as a whole. However, the Chairman does not consult directly with employees on the remuneration of the Executive Directors but is mindful of salary increases which are applied across the Group as a whole. 23 J. Smart & Co. (Contractors) PLC DIRECTORS’ REMUNERATION REPORT (continued) 31st JULY 2019 CONSIDERATION OF SHAREHOLDER VIEWS The Chairman considers all views and concerns he receives from shareholders especially at the Annual General Meeting when shareholders have the opportunity to ask questions of the Board on all matters relating to the Company including Directors’ Remuneration, or at any other time throughout the year. Although no direct communication was held by the Chairman with major shareholders prior to shaping the Remuneration Policy he believes that it is a responsible approach to remuneration and its policies in the past and for the future as evidenced by the level of approval of the 2018 Directors’ Remuneration Report at the 2018 Annual General Meeting, details of which are given in the Annual Report on Remuneration below. ANNUAL REPORT ON REMUNERATION The following provides details of how the remuneration policy was implemented in the year to 31st July 2019. Single Total Figure of Remuneration for Executive Directors (Audited Information) The following table presents the single figure for the total remuneration of each Executive Director for the year ended 31st July 2019 and the prior year: Salary £000 Taxable Benefits £000 90 . . . . 6 . . . . 6 . . . . 96 . . . . 96 . . . . 53 . . . . 88 . . . . . . . . . . . . . . . . 113 110 113 110 113 110 113 110 10 10 10 10 10 10 10 10 Pension £000 Total £000 541 177 341 154 13 13 561 331 13 13 136 133 179 153 136 133 David W Smart 2019 2018 . . John R Smart . 2019 . 2018 . . . . Alasdair H Ross 90 2019 2018 . . . . Patricia Sweeney 2019 2018 . . . . 1. Pension value represents the cash value of pension accrued over one year multiplied by 20 in line with new regulations with allowance for inflation and employee contributions. 24 J. Smart & Co. (Contractors) PLC DIRECTORS’ REMUNERATION REPORT (continued) 31st JULY 2019 DIRECTORS’ PENSION ENTITLEMENTS (AUDITED INFORMATION) David W Smart and Alasdair H Ross are members of the Company’s Defined Benefit Pension Scheme whilst John R Smart and Patricia Sweeney are members of the Company’s Group Personal Pension Plan. The Company’s Defined Benefit Pension Scheme was closed to new members in 2003. The normal date of retirement based on the scheme rules is 65 and there is no automatic entitlement to early retirement. Contributions by the employer under the scheme are 31.9% of pensionable salary. Accrued pension as at 31 July 2019 £000 39 49 Accrued pension as at 31 July 2018 £000 35 45 David W Smart Alasdair H Ross . . . . . . . . . . . . . . SCHEME INTEREST AWARDS (AUDITED INFORMATION) There were no scheme interests awarded in the year. PAYMENTS TO PAST DIRECTORS (AUDITED INFORMATION) No payments were made to past Directors in the year. PAYMENTS FOR LOSS OF OFFICE (AUDITED INFORMATION) No payments for loss of office were made to Directors in the year. STATEMENT OF DIRECTORS’ SHAREHOLDING AND SHARE INTERESTS (AUDITED INFORMATION) The Company has no policy that Directors are required to own shares in the Company, although all Directors are currently shareholders of the Company. The interests of the Directors in the ordinary shares of the Company, including beneficial interests, are shown in the table below: Beneficial holdings (including interests of the Director’s connected persons) 31 July 2019 31 July 2018 . David W Smart John R Smart . Alasdair H Ross . Patricia Sweeney . . . . . . . . . . . . . . . . . 12,268,500 12,268,500 100,000 50,000 12,268,500 12,268,500 100,000 50,000 There have been no changes in any Directors’ beneficial holdings between the year end and 25th October 2019. 24 25 J. Smart & Co. (Contractors) PLC DIRECTORS’ REMUNERATION REPORT (continued) 31st JULY 2019 PERFORMANCE GRAPH The graph below shows a comparison of the total shareholder return for the Company’s shares for each of the last five financial years against the total shareholder return for the companies comprised in the FTSE EPRA/NAREIT UK index which the Company deems to be the most relevant to the Company as it includes companies in the same sector as the Company. The graph compares the value of £100 invested in J. Smart & Co. (Contractors) PLC, including re-invested dividends. Total Shareholder Return over the last five financial years £ 200 150 100 50 0 J Smart & Co (Contractors) PLC FTSE EPRA / NAREIT UK Index 2014 2015 2016 2017 2018 2019 GROUP CHIEF EXECUTIVE OFFICER’S TOTAL REMUNERATION The following table details the Chief Executive Officer’s single figure of remuneration over the last five financial years: 2019 £000 177 86 David W Smart John M Smart 2018 £000 154 115 2017 £000 148 115 2016 £000 166 119 2015 £000 165 133 GROUP CHIEF EXECUTIVE OFFICER’S CHANGE IN REMUNERATION The following table compares the change in remuneration of the Group Chief Executive Officer and that of the remuneration of the Group’s salaried employees. This group of employees was chosen as it represents the most comparable group. Base salary Taxable benefits . . . . . . . . . 3 % 3 % 5 % 4 % CEO % change 2018-2019 Other employees % change 2018-2019 26 J. Smart & Co. (Contractors) PLC DIRECTORS’ REMUNERATION REPORT (continued) 31st JULY 2019 RELATIVE IMPORTANCE OF SPEND ON PAY The following table compares the total spend on remuneration of all employees of the Group, including Executive Directors, and the total amounts paid in distributions to shareholders for the years to 31st July 2019 and 31st July 2018: 2019 £000 2018 £000 Difference in Difference as a percentage % spend £000 Remuneration of employees Total distributions paid (being dividends and share buy backs) . . . . . . 9,600 1,619 9,090 (510) 2,299 (680) (16) (30) IMPLEMENTATION OF EXECUTIVE DIRECTOR REMUNERATION POLICY FOR 2020 After taking into consideration Group employees’ salary increases for the year to 31st July 2020, an increase of 3% of base salary was awarded to all Directors. Base salary from 1st July 2019 £ David W Smart John R Smart Alasdair H Ross Patricia Sweeney . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,625 115,625 115,625 115,625 Base salary from 1st July 2018 £ 112,250 112,250 112,250 112,250 CONSIDERATIONS BY THE DIRECTORS OF MATTERS RELATING TO DIRECTORS’ REMUNERATION The Chairman is responsible for determining Directors’ Remuneration. No advice was sought in the year in considering Directors’ Remuneration. SUMMARY OF SHAREHOLDER VOTING AT THE 2018 ANNUAL GENERAL MEETING The 2018 Directors’ Remuneration Report was put to the shareholders for their approval at the 2018 Annual General Meeting. The resolution was passed on a show of hands. Details of the proxy votes lodged, including those at the discretion of the Chairman, are as follows: . . . . For . . Against Total votes cast (excluding votes withheld) Votes withheld . . Total votes cast (including votes withheld) . . . . . . . . . . . . . . . . . . . . . . . . Total number of votes 27,569,104 – 27,569,104 6,500 27,575,604 . . . . . % of votes cast 100 – 100 Votes withheld are not included in the proxy figures as they are not recognised as a vote in law. 19th November 2019 27 BY ORDER OF THE BOARD OF DIRECTORS Patricia Sweeney Company Secretary J. Smart & Co. (Contractors) PLC STATEMENT OF DIRECTORS’ RESPONSIBILITIES 31st JULY 2019 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND STATEMENT OF ACCOUNTS The Directors are responsible for preparing the Annual Report and the Group and Parent Company’s Statement of Accounts in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by the EU) and applicable law 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 Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent 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 IFRS 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 Parent Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Parent Company and enable them to ensure that its financial statements comply with Companies Act 2006. They have 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 the Report of the Directors, Strategic Report, Corporate Governance Statement and Directors’ Remuneration Report that complies 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. DIRECTORS’ RESPONSIBILITY STATEMENT Each of the Directors confirms to the best of their knowledge: − the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; the Report of the Directors and the Strategic Report include a fair review of the development and performance of the business and the position of the Company and undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and the Annual Report and Statement of Accounts taken as a whole are fair, balanced and understandable and provide the information necessary for the shareholders to assess the Group’s business model, performance and strategy. − − 19th November 2019 BY ORDER OF THE BOARD OF DIRECTORS Patricia Sweeney Company Secretary 28 29 J. Smart & Co. (Contractors) PLC INDEPENDENT AUDITOR’S REPORT 31st JULY 2019 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF J. SMART & CO. (CONTRACTORS) PLC OPINION We have audited the financial statements of J. Smart & Co. (Contractors) PLC for the year ended 31st July 2019 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated and Company Statement of Changes in Equity, the Consolidated and Company Statement of Financial Position, the Consolidated and Company Statement of Cash Flows and notes to the accounts, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as adopted by the European Union (IFRS as adopted by EU) and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. 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 31st July 2019 and of the Group’s profit for the year then ended; the Group financial statements have been properly prepared in accordance with IFRS as adopted by the EU; the Parent Company financial statements have been properly prepared in accordance with IFRS 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 and, as regards the Group financial statements, Article 4 of the IAS Regulations. • • • BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING CONCERN AND VIABILITY STATEMENT We have nothing to report in respect of the following information in the Annual Report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: • the disclosures in the Annual Report set out on pages 14 and 15 that describe the principal risks and explain how they are being managed or mitigated; the Directors’ confirmation set out on page 20 in the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; the Directors’ statement, set out on page 9 in the financial statements, about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the Directors’ identification of any material uncertainties to the Group and the Parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • • • whether the Directors’ statement relating to going concern required under the Listing Rules in accordance with • Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or the Directors’ explanation set out on page 16 in the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. 28 29 J. Smart & Co. (Contractors) PLC INDEPENDENT AUDITOR’S REPORT (continued) 31st JULY 2019 CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING CONCERN AND VIABILITY STATEMENT (continued) However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and Company’s ability to continue as a going concern. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. VALUATION OF THE INVESTMENT PROPERTY PORTFOLIO As described in note 1 Accounting Policies and Estimation Techniques and note 15 Investment Properties the Group carries investment properties at the Directors’ estimate of fair value. As at 31st July 2019 the Group held investment properties of £73,874,000. Judgement is required by the Directors in terms of the assessment of the individual nature of each property, its location, expected future rental income, tenure and tenancy profiles, prevailing market yields and comparable market conditions. The valuation of investment properties requires significant judgement by management. Any input inaccuracies or unreasonable bases used in these assumptions could result in a material misstatement in the financial statements. How we addressed the key audit matter To obtain assurance over management’s assumptions applied in calculating the fair value of investment properties we completed the following audit procedures among others: • testing the integrity of the information used by the Directors in completing the valuation including agreement on a sample basis back to underlying leases; • meeting with the Directors to challenge the valuation process, the performance of the portfolio and the significant • assumptions and critical judgement areas, including future income and yields; and reviewing the results of a valuation completed by a third party valuer of a sample of the property portfolio, comparing this to the Directors’ valuation and discussing the results with the Directors. Based on our procedures, we noted no material exceptions and considered management’s key assumptions to be within reasonable ranges. CONTRACT ACCOUNTING ESTIMATES As described in note 1 Accounting Policies and Estimation Techniques, note 19 Contract Balances and note 22 Trade and Other Payables the Group carries amounts recoverable on contracts of £549,000 and contract loss provisions of £246,000. Judgement is required in preparing suitable estimates of the forecast costs and revenue on contracts. The Directors take into account the estimated costs to complete and the percentage stage of completion of current contracts when determining the recognition of profit or the requirement for a loss provision. An error in the contract outcome could result in a material variance in the amount of profit or loss recognised to date and therefore also in the current period. 30 J. Smart & Co. (Contractors) PLC INDEPENDENT AUDITOR’S REPORT (continued) 31st JULY 2019 KEY AUDIT MATTERS (continued) CONTRACT ACCOUNTING ESTIMATES (continued) How we addressed the key audit matter substantive testing of contract revenues, contract costs and private housing sales; To obtain assurance over management’s assumptions in calculating contract outcomes we completed the following audit procedures among others: • • meeting with the Directors to challenge forecast revenues and costs to complete in relation to private housing sales; • meeting with the Directors to challenge key judgements inherent in the forecast costs to complete that are crucial in determining revenue and margin to be recognised and the identification of loss making contracts and the quantum of loss provisions; and performing site visits and reviewing contract terms for key contracts. • Overall based on these procedures, we are satisfied that contract balances are appropriately stated and that revenue and contract results have been recorded appropriately. PENSION SCHEME VALUATION As described in note 1 Accounting Policies and Estimation Techniques and note 29 Retirement Benefit Obligations the Group has a defined benefit pension plan in the UK. At 31st July 2019, the Group recorded a net retirement benefit asset of £2,899,000, comprising scheme assets of £41,541,000 and scheme liabilities of £38,642,000. The pension valuation is dependent on market conditions and key assumptions made, in particular, relating to investment returns, discount rate, inflation expectations and life expectancy assumptions. The setting of these assumptions is complex and requires the exercise of significant management judgement with the support of third party actuaries. Any unreasonable bases used in these assumptions could result in a material misstatement in the financial statements, refer to sensitivity analysis in note 29. How we addressed the key audit matter To obtain assurance over managements judgements in the determination of the pension scheme surplus we completed the following audit procedures among others: • we reviewed the key assumptions with management; • we reviewed the key assumptions with the actuary; • we benchmarked key assumptions against available empirical data; • we reviewed the Directors assessment as to the recoverability of the pension surplus; and • we also reviewed the disclosure of the pension scheme assumptions in the financial statements. Based on our procedures, we noted no material exceptions and considered management’s key assumptions to be within reasonable ranges. OUR APPLICATION OF MATERIALITY We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements on our audit and on the financial statements. For the purposes of determining whether the financial statements are free from material misstatement we define materiality as the magnitude of misstatements that makes it probable that the economic decisions of a reasonably knowledgeable person relying on the financial statements would be changed or influenced. The materiality for the Group financial statements as a whole was set at £888,000. This has been determined with reference to a benchmark of Group total assets (of which it represents 0.75%) which we consider to be one of the principal considerations for members of the Company in assessing the financial position of the Group. We also considered the overall property portfolio valuation and the extent and significance of the construction business in concluding on the appropriate level of materiality. 30 31 J. Smart & Co. (Contractors) PLC INDEPENDENT AUDITOR’S REPORT (continued) 31st JULY 2019 OUR APPLICATION OF MATERIALITY (continued) We agreed with the Board of Directors to report to it all corrected and uncorrected misstatements we identified through our audit with a value in excess of £44,000, in addition to other audit misstatements below that threshold that we believe warranted reporting on qualitative grounds. There were no misstatements identified during the course of our audit that were individually, or in aggregate, considered to be material in terms of their absolute monetary value or on qualitative grounds. AN OVERVIEW OF THE SCOPE OF OUR AUDIT The Group financial statements are a consolidation of the seven trading entities including the parent entity and the Group’s four joint ventures. Except for one of the joint ventures all entities were audited to their own individual materiality levels. In establishing the overall approach to the Group audit, we obtained an understanding of the Group and its environment, including group-wide controls, and assessed the risks of material misstatement at the Group level. This assessment determined the type of audit work required to enable us to conclude whether sufficient audit evidence had been obtained as a basis for our opinion on the Group financial statements. There were no changes in the scope of our audit during the year. Our audit work at Group level on the three areas highlighted in the key audit matters is described above. In addition we assessed that the main risk from either fraud or irregularity with respect to the Group financial statements was the possibility of management override of controls. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. OTHER INFORMATION The other information comprises the information included in the Annual Report set out on pages 4 to 77 other than the financial statements and our Auditor’s report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. 32 J. Smart & Co. (Contractors) PLC INDEPENDENT AUDITOR’S REPORT (continued) 31st JULY 2019 OTHER INFORMATION (continued) In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable - the statement given by the Directors on page 28 that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s business model, performance and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit committee reporting - the explanation set out on page 20 as to why the Annual Report does not include a section describing the work of the audit committee is materially inconsistent with our knowledge obtained in the audit; or • Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ statement, set out on page 18 to 21, required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • The information given in the Report of the Directors’ and the Strategic Report for the financial year for which the financial statements are prepared is consistent with the financial statements and those reports have been prepared in accordance with applicable legal requirements. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION In the light of the knowledge and understanding of the Group and the Parent company and its environment obtained in the course of the audit, we have not identified material misstatements in: • The Report of the Directors’ or the Strategic Report; or • The information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 of the FCA Rules. We have nothing to report in respect of the following matters in relation to which 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 and the part of the Directors’ Remuneration Report to be audited 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. • 33 J. Smart & Co. (Contractors) PLC INDEPENDENT AUDITOR’S REPORT (continued) 31st JULY 2019 RESPONSIBILITIES OF DIRECTORS As explained more fully in the Statement of Directors’ Responsibilities set out on page 28 the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located in the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. USE OF THIS REPORT This report is made solely to the Company’s shareholders, 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 shareholders 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 shareholders as a body, for our audit work, for this report, or for the opinions we have formed. OTHER MATTERS WHICH WE ARE REQUIRED TO ADDRESS We were appointed by the Directors to audit the financial statements for the year ending 31st July 1975 and subsequent financial periods. The period of total uninterrupted engagement is 45 years, covering the years ending 31st July 1975 to 31st July 2019. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company and we remain independent of the Group and the Parent company in conducting our audit. 133 Finnieston Street Glasgow G3 8HB 19th November 2019 antony J Sinclair Senior Statutory Auditor for and on behalf of FRENCH DUNCAN LLP Statutory Auditor and Chartered Accountants 34 J. Smart & Co. (Contractors) PLC CONSOLIDATED INCOME STATEMENT for the year ended 31st JULY 2019 CONTINUING OPERATIONS . Group construction activities Less: Own construction work capitalised . REVENUE Cost of sales GROSS PROFIT . . . . . . Other operating income . Net operating expenses . . . . . . . . . . . . . . . . . . OPERATING PROFIT BEFORE NET SURPLUS ON VALUATION OF INVESTMENT PROPERTIES . Net surplus on valuation of investment properties . . . . . OPERATING PROFIT . Share of profits in Joint Ventures Income from available for sale financial assets Profit on sale of available for sale financial assets Net (deficit) / surplus on valuation of available for . sale financial assets . Finance income . . . . . . . PROFIT BEFORE TAX Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . PROFIT FOR THE YEAR FROM CONTINUING OPERATIONS DISCONTINUED OPERATIONS Loss for the year from discontinued operations . . . . . . . . . . . . . . . . . . . . PROFIT FOR YEAR ATTRIBUTABLE TO EQUITY SHAREHOLDERS EARNINGS/(LOSS) PER SHARE From continuing operations – basic and diluted From discontinued operations – basic and diluted . . . . From continuing and discontinued operations – basic and diluted 34 35 Notes 2019 £000 2018 Restated (Note 1 and 10) £000 16,182 (147) 10,402 (1,847) 16,035 (14,416) 8,555 (6,209) 1,619 2,346 7,560 (6,264) 6,344 (6,521) 2,915 2,169) 4,052) 2,859) 6,967 5,028) 463 43 2 48 53 26 3 4 15 6 16 7 4(9) (106) 185 180 8 7,270 5,822 9 (529) (500) 6,741 5,322 10 (505) (380) 11 6,236 4,942 13 15.47p 11.96p 13 (1.16)p (0.85)p 13 14.31p 11.11p . . . . . . . . . . . . . . . . . . . . . . . J. Smart & Co. (Contractors) PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31st JULY 2019 PROFIT FOR THE YEAR . . . . . . . 6,236 4,942 Notes 2019 £000 2018 Restated (Note 1) £000 OTHER COMPREHENSIVE (LOSS)/INCOME Items that will not be subsequently reclassified to Income Statement: Actuarial (loss)/gain recognised in defined benefit pension scheme . Deferred taxation on actuarial loss/(gain) . . . (1,118) . 24 190) 29 (111) (19) TOTAL ITEMS THAT WILL NOT BE SUBSEQUENTLY RECLASSIFIED TO INCOME STATEMENT . . TOTAL OTHER COMPREHENSIVE (LOSS)/INCOME . . . . TOTAL COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX ATTRIBUTABLE TO EQUITY SHAREHOLDERS . . . . . . . (928) 92) (928) 92) 5,308 5,034) 5,308 5,034) 36 J. Smart & Co. (Contractors) PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY as at 31st JULY 2019 Capital Capital Retained Share Redemption Fair Value Earnings Total Reserve Reserve Restated Restated Restated (Note 1) (Note 1) (Note 1) £000 £000 £000 £000 £000 . . . . . . 896 112 – – 9 92,841 93,858 (9) 9) –) 896 112 – 92,850 93,858 – – – 4,942 4,942 – – –) 92) 92) – – –) 5,034) 5,034) At 1st August 2017 (as previously reported) Effect of transition to IFRS 9 At 1st August 2017 (Restated) . . . . . . Profit for the year Other comprehensive income TOTAL COMPREHENSIVE INCOME FOR THE YEAR . . . . . . TRANSACTIONS WITH OWNERS, RECORDED DIRECTLY IN EQUITY . Shares purchased and cancelled Transfer to Capital Redemption Reserve . Dividends (16) – – . . . . . – – (892) (908) 16 – (16) – – – (1,391) (1,391) TOTAL TRANSACTIONS WITH OWNERS . (16) 16 –) (2,299) (2,299) At 31st July 2018 (Restated) . Profit for the year Other comprehensive loss . . . . . . . TOTAL COMPREHENSIVE INCOME FOR THE YEAR 880 128 ) – 95,585 96,593 – – – 6,236 6,236 – –) – (928) (928) – –) – 5,308 5,308 2,436 TRANSACTIONS WITH OWNERS, RECORDED DIRECTLY IN EQUITY Shares purchased and cancelled . Transfer to Capital Redemption Reserve . Dividends (14) – . . . . . – – – – (792) (806) 14 – (14) – (813) (813) –) 3,064 TOTAL TRANSACTIONS WITH OWNERS . (14) 14 – (1,619) (1,619) At 31st July 2019 . . . . 866 142)) – 99,274 100,282 37 J. Smart & Co. (Contractors) PLC COMPANY STATEMENT OF CHANGES IN EQUITY as at 31st JULY 2019 Capital Share Redemption Reserve £000 Capital £000 Retained Earnings £000 Total £000 896 112 9,818 10,826 At 1st August 2017 . Profit for the year Other comprehensive income . . . . . . . . . . – – – – TOTAL COMPREHENSIVE INCOME FOR THE YEAR – – TRANSACTIONS WITH OWNERS, RECORDED DIRECTLY IN EQUITY . Shares purchased and cancelled Transfer to Capital Redemption Reserve . Dividends – . . . (16) . . . – – 16 – 1,376) 92) 1,468) 1,376) 92) 1,468) (892) (16) (1,391) (908) – (1,391) TOTAL TRANSACTIONS WITH OWNERS . . (16) 16 (2,299) (2,299) At 31st July 2018 . . Loss for the year . . Other comprehensive loss . . . . . 880 128 8,987 9,995 . . . . – – – – (1,404) (928) (1,404) (928) TOTAL COMPREHENSIVE LOSS FOR THE YEAR – – ( 2 ,332) (2,332) TRANSACTIONS WITH OWNERS, RECORDED DIRECTLY IN EQUITY Shares purchased and cancelled . Transfer to Capital Redemption Reserve . Dividends (14) – – . . . . . . – 14 – (792) (14) (813) (806) – (813) TOTAL TRANSACTIONS WITH OWNERS . . (14) 14 (1,619) (1,619) At 31st July 2019 . . . . . 866 142 5,036 6,044 38 39 J. Smart & Co. (Contractors) PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31st JULY 2019 Notes 2019 . NON-CURRENT ASSETS Property, plant and equipment . . Investment properties Investments in Joint Ventures . Available for sale financial assets . Trade and other receivables . Retirement benefit surplus . . Deferred tax assets CURRENT ASSETS . Inventories Contract assets . Trade and other receivables Monies held on deposit Cash and cash equivalents . . TOTAL ASSETS . . NON-CURRENT LIABILITIES . Deferred tax liabilities CURRENT LIABILITIES Trade and other payables Corporation tax liability . Bank overdraft TOTAL LIABILITIES NET ASSETS . . . EQUITY Called up share capital Capital redemption reserve Retained earnings . . TOTAL EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 15 16 17 20 29 24 18 19 20 21 21 24 22 25 . . . . . . . . . . . . . . . . . . . . . . . 2018 Restated (Note 1) £000 1,308 69,532 925 1,099 – 4,205 94 £000 1,304 73,874 914 1,309 250 2,899 101 80,651 77,163 8,643 549 2,835 48 25,699 8,807 770 3,770 48 23,586 37,774 36,981 118,425 114,144 1,735 1,995 3,394 154 12,860 3,580 118 11,858 16,408 15,556 18,143 17,551 100,282 96,593 866 142 99,274 880 128 95,585 100,282 96,593 The financial statements on pages 35 to 77 were approved by the Board of Directors and authorised for issue on 19th November 2019 and were signed on its behalf by: DaviD w Smart Director Company Number SC025130 John r Smart Director 38 39 J. Smart & Co. (Contractors) PLC COMPANY STATEMENT OF FINANCIAL POSITION as at 31st JULY 2019 NON-CURRENT ASSETS Property, plant and equipment . . Investments in Subsidiaries and Joint Ventures . Trade and other receivables . Retirement benefit surplus . . . . . CURRENT ASSETS . Inventories Contract assets . Trade and other receivables Current tax asset . Cash and cash equivalents . . . TOTAL ASSETS . . NON-CURRENT LIABILITIES . Deferred tax liabilities CURRENT LIABILITIES Trade and other payables . Bank overdraft TOTAL LIABILITIES NET ASSETS . . . EQUITY Called up share capital Capital redemption reserve Retained earnings . . TOTAL EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes 14 16 20 29 18 19 20 21 24 22 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 £000 587 1,565 250 2,899 5,301 8,569 408 2,103 607 – 11,687 2018 £000 638 1,565 – 4,205 6,408 8,649 659 3,662 481 – 13,451 16,988 19,859 518 741 1,765 8,661 10,426 2,411 6,712 9,123 10,944 9,864 6,044 9,995 866 142 5,036 880 128 8,987 6,044 9,995 The financial statements on pages 35 to 77 were approved by the Board of Directors and authorised for issue on 19th November 2019 and were signed on its behalf by: DaviD w Smart Director Company Number SC025130 John r Smart Director 40 41 J. Smart & Co. (Contractors) PLC CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31st JULY 2019 CASH FLOWS FROM OPERATING ACTIVITIES Tax paid . . . . . . NET CASH FLOWS FROM OPERATING ACTIVITIES . . . . . . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES . Additions to property, plant and equipment . Additions to investment properties Expenditure on own work capitalised - investment properties . . . Sale of property, plant and equipment . . . Cost of investment in Joint Ventures . . . . Purchase of available for sale financial assets . Proceeds of sale of available for sale financial assets . . . Decrease in monies held on deposit . . Interest received . . . Dividend received from Joint Ventures . . . . . . NET CASH FLOWS FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Purchase of own shares . . Dividends paid . . . . . . . NET CASH FLOWS FROM FINANCING ACTIVITIES . . . . INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR . . . . . . Notes 2019 £000 2018 Restated (Note 1 and 10) £000 . 26 (a) (3,762) (3,449) . . . . . . . . . . . . . . . . . (448) (442) 3,314) (3,891) (424) (143) (147) 193 –) (380) (87187) –) 71 59 (454) (27) (1,847) 93 (857) –) 9 2,488) 80 700 (584) 185) (806) (813) (908) (1,391) (1,619) (2,299) 1,111) (6,005) . 26 (b) 11,728 17,733 CASH AND CASH EQUIVALENTS AT END OF YEAR . . . 26 (b) 12,839 11,728 40 41 J. Smart & Co. (Contractors) PLC COMPANY STATEMENT OF CASH FLOWS for the year ended 31st JULY 2019 CASH FLOWS FROM OPERATING ACTIVITIES Tax received . . . . . . NET CASH FLOWS FROM OPERATING ACTIVITIES . . . CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment Sale of property, plant and equipment . . Cost of investment in Joint Ventures Interest received . . Dividend received from subsidiaries and Joint Ventures . . . . . . . . . . NET CASH FLOWS FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Purchase of own shares . . Dividends paid . . . . . . . NET CASH FLOWS FROM FINANCING ACTIVITIES DECREASE IN CASH AND CASH EQUIVALENTS . . . . . CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR . Notes 2019) £000) 2018) £000) . 27 (a) (432) (6,226) . . . . . . . . . . . . 142) 252) (290) (5,974) (148) 48 –) 1 59) (88) 20) (857) 4) 2,700) (40) 1,779) (806) (813) (908) (1,391) (1,619) (2,299) (1,949) (6,494) . 27 (b) (6,712) (218) . 27 (b) (8,661) (6,712) . . . . . . . . . . . . . . . 42 43 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS 31st JULY 2019 1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES GENERAL INFORMATION J. Smart & Co. (Contractors) PLC which is the ultimate Parent Company of the J. Smart & Co. (Contractors) PLC Group is a public limited company registered in Scotland, incorporated in the United Kingdom and listed on the London Stock Exchange. STATEMENT OF COMPLIANCE The accounts are prepared in accordance with International Financial Reporting Standards (IFRS) and the International Financial Reporting Interpretations Committee (IFRIC) Interpretations endorsed by European Union (EU) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. STANDARDS, AMENDMENTS TO STANDARDS AND INTERPRETATIONS EFFECTIVE IN THE YEAR TO 31st JULY 2019 The following new standards and amendments to standards and interpretations relevant to the Group have been issued by the International Accounting Standards Board and are mandatory for the first time for the financial year to 31st July 2019 but had no material impact on the financial statements: • IFRS 9: Financial Instruments. • IFRS 15: Revenue from Contracts with Customers. • IAS 40 (amended): Investment Properties. IFRS 9: Financial Instruments became effective as from 1st August 2018. This standard changes the accounting for revaluation surpluses or deficits on available for sale financial assets. Previously these surpluses or deficits were accounted for in the Consolidated Statement of Comprehensive Income together with the taxation impact of these surpluses or deficits. Under IFRS 9 these surpluses or deficits are accounted for in the Consolidated Income Statement together with the taxation impact. There is no impact on the valuation of the available for sale financial assets or the deferred tax provision in relation to their valuation in the Consolidated Statement of Financial Position. Within the Equity section of the Consolidated Statement of Financial Position the Fair value reserve no longer exists as the fair value movement is included in Retained earnings. The application of IFRS 9: Financial Instruments has been applied retrospectively and accordingly the comparative figures have been restated for the year to 31st July 2018. The table on the following page details the impact of the application of IFRS 9: Financial Instruments on the Consolidated Income Statement and the Consolidated Statement of Comprehensive Income for the year to 31st July 2018: 42 43 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES (continued) STANDARDS, AMENDMENTS TO STANDARDS AND INTERPRETATIONS EFFECTIVE IN THE YEAR TO 31st JULY 2019 (continued) CONSOLIDATED INCOME STATEMENT PROFIT BEFORE TAX (as previously reported) Impact of net surplus on valuation of available for sale financial assets TAX (as previously reported) Impact of deferred tax adjustment on fair value reserve PROFIT ATTRIBUTABLE TO EQUITY SHAREHOLDERS - REVISED Impact on profit attributable to equity shareholders TOTAL COMPREHENSIVE INCOME FOR THE PERIOD (as previously reported) Impact on profit for the period – increase (as above) Other comprehensive income relating to fair value of available for sale financial assets – no longer accounted for in Statement of Comprehensive Income TOTAL COMPREHENSIVE INCOME FOR THE PERIOD PROFIT ATTRIBUTABLE TO EQUITY SHAREHOLDERS Year ended 31st July 2018 £000 5,253 104 5,357 (402) (13) (415) 4,942 91 5,034 91 5,125 (91) 5,034 5,034 IFRS 15: Revenue from Contracts with Customers became effective from 1st August 2018. It replaces IAS 11: Construction Contracts and IAS 18: Revenue and sets out the criteria for revenue recognition with regards to performance obligations. As stated in the Group’s 2018 Annual Report and Statement of Accounts the implementation of this standard has not had a material impact on the revenue or cash flows reported by the Group for the year to 31st July 2019. In respect of construction contracts this standard has no impact on revenue from customers. The standard allows for the recognition of revenue over time for the performance obligation based on stage of completion of the contracts which is in line with the Group’s policy. The recognition of revenue from private house sales or sales of land was not impacted by the new standard as this revenue is recognised on completion of the performance obligation of the supply of the housing or the land. This standard does not apply to rental income from our investment properties but does apply to service charge income and other property related income and income from sale of investment properties. The new standard does not impact on the Group’s current policy of recognition of these income types. IAS 40 (amended): Investment Properties became effective from 1st August 2018. The amendment to this standard relating to the transfer of properties to and from Investment Properties has no impact on the Group’s financial statements for the year. NEW STANDARDS, AMENDMENTS TO STANDARDS AND INTERPRETATIONS NOT YET APPLIED The following new standards, amendments to standards and interpretations relevant to the Group have been issued by the International Accounting Standards Board but are not yet effective for the Group at the date of these financial statements, and have not been adopted early: 44 45 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES (continued) NEW STANDARDS, AMENDMENTS TO STANDARDS AND INTERPRETATIONS NOT YET APPLIED (continued) • • • IFRS 16: Leases (effective in the year ending 31st July 2020). IAS 1 (amended): Presentation of Financial Statements (effective in the year ending 31st July 2021). IAS 8 (amended): Accounting Policies, Changes in Accounting Estimates and Errors (effective in the year ending 31st July 2021). IFRS 16: Leases replaces IAS 17: Leases and requires the Group to incorporate a right of use assets and a corresponding lease liability in the Statement of Financial Position for those assets held under leases for which the new standard applies. This standard will impact on ground leases on which the Group has built investment properties and which the rents payable to the lessor under the leases are not contingent on the rents received by the Group from tenants. The standard requires the current operating lease charges, which are disclosed in Operating Profit to be replaced by a depreciation on the right of use asset. As our leases relate to land there will be no depreciation charge but there will be an impact relating to the revaluation movement on the land. There will also be interest costs in relation to the lease liability which will be recognised in Finance Costs. Based on the information currently available to the Directors it is anticipated that the value of the right of use asset and the lease liability which will be brought into the accounts will be in line with the discounted current future minimum lease payments and will be £205,000. There will be no impact on the Group’s cash flows. The Directors do not consider that the application of IAS 1 (amended): Presentation of Financial Statements and IAS 8 (amended): Accounting Policies, Changes in Accounting Estimates and Errors will have a material impact on the financial statements. BASIS OF PREPARATION The accounts have been prepared on a going concern basis and under the historical cost convention except where the measurement of balances at fair value is required as noted below for investment properties, available for sale financial assets and assets held by the defined benefit pension scheme. The accounting policies set out below have been consistently applied to all periods presented in these accounts. The preparation of financial statements requires management to make estimates and assumptions concerning the future that may affect the application of accounting policies and the reported amounts of assets and liabilities and income and expenses. Management believes that the estimates and assumptions used in the preparation of these accounts are reasonable. However, actual outcomes may differ from those anticipated. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS INVESTMENT PROPERTIES Investment properties are revalued annually by the Directors in accordance with the RICS Valuation Standards. The valuations are subjective due to, among other factors, the individual nature of the property, its location and the expected future rental income. As a result, the valuation of the Group’s investment property portfolio incorporated into the financial statements is subject to a degree of uncertainty and is made on the basis of assumptions which may prove to be inaccurate, particularly in periods of volatility or low transaction flow in the property market. The assumptions used by the Directors are market standard assumptions in accordance with the RICS Valuation Standards and include matters such as tenure and tenancy details, ground conditions of the properties and their structural conditions, prevailing market yields and comparable market conditions. If any of the assumptions used by the Directors prove to be incorrect this could result in the valuation of the Group’s investment property portfolio differing from the valuation incorporated into the financial statements and the difference could have a material effect on the financial statements. LONG TERM CONTRACT PROVISIONS Judgement is required in the area of provisions for losses on long term contracts. The Directors take into account the estimated costs to complete and the percentage stage of completion of current contracts when determining the provision for losses. The Directors consider adequate, but not excessive provisions have been made in this respect. 44 45 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES (continued) CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) RETIREMENT BENEFIT OBLIGATION The valuation of the retirement benefit obligation is dependent upon a series of assumptions, mainly discount rates, mortality rates, investment returns, salary inflation and the rate of pension increases, which are determined after taking expert advice from the Group’s Actuary. If different assumptions were used then this could materially affect the results disclosed in the financial statements. These are set out in note 29 to the Accounts. BASIS OF CONSOLIDATION The Group accounts consolidate the accounts of J. Smart & Co. (Contractors) PLC and all of its Subsidiaries made up to 31st July each year. Subsidiaries are entities controlled by the Company. Control is assumed where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Intra-group balances and any income or expenses arising from intra-group transactions are eliminated in preparing the Group accounts. No Income Statement is presented for the Parent Company as provided by section 408 of the Companies Act 2006. BUSINESS COMBINATIONS AND GOODWILL Subsidiaries acquired in the year are accounted for using the acquisition method of accounting. Identifiable assets acquired and liabilities assumed are measured at their fair values at the acquisition date. The consideration transferred for the acquisition is the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. INVESTMENT IN JOINT VENTURES Joint Ventures are those entities over which the Company has a 50% holding and exercises joint control under a contractual arrangement. The results of Joint Venture undertakings are accounted for using the equity method of accounting. Under this method the investment is initially recorded at cost and is subsequently adjusted to reflect the Group’s share of the net profit or loss in the Joint Venture. The Accounts of the Group’s Joint Ventures have been prepared in accordance with UK GAAP. The Group’s interest in the assets and liabilities of the Joint Ventures have only been restated in accordance with International Financial Reporting Standards where such restatement is considered material to an understanding of the Group’s interest. CAPITAL MANAGEMENT Group objectives in managing capital are to safeguard the interests of the Group to operate as a net debt free going concern, of its employees to maintain wherever possible security of employment, remuneration and retirement provisions and of its shareholders to maintain continuity of dividends and stability of share price. The capital structure of the Group consists of issued share capital, reserves and retained earnings represented predominantly by investment properties, working capital and cash. These assets are purchased, managed and maintained by the Group’s management and employees, advised where appropriate by independent outside professionals. Refer to pages 14 and 15 of this report for details of relevant risk factors and management measures. The Group has sufficient cash reserves and readily realisable assets available to meet its foreseeable commitments. INVESTMENT PROPERTIES Investment properties are properties, either owned by the Group or where the Group is a lessee under a finance lease, which are held for long term rental income or for capital appreciation or both. Also, properties held under operating leases are accounted for as investment properties when the rest of the definition of an investment property is met. Investment properties, whether completed or under development, are initially recognised at cost and revalued at the Balance Sheet date to fair value as determined by the Directors in accordance with the RICS Valuation Standards. 46 47 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES (continued) INVESTMENT PROPERTIES (continued) Gains or losses arising from the changes in fair value are included in the Income Statement in the year in which they arise. In accordance with IAS 40: Investment Property, as the Group uses the fair value model, no depreciation is provided in respect of investment properties including integral plant. Additions to investment properties consist of costs of a capital nature and, in the case of investment properties under development, includes certain internal staff and associated costs directly attributable to the management of the developments under construction. PROPERTY, PLANT AND EQUIPMENT Items of property, plant and equipment are stated at cost less accumulated depreciation. Subsequent costs are included in the asset’s carrying value or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of them can be measured reliably. All other repairs and maintenance expenditure is charged to the Income Statement as incurred. DEPRECIATION Depreciation is provided on all items of property, plant and equipment, other than investment properties and freehold land, at rates calculated to write off the cost of each asset over its expected useful life, as follows: Freehold buildings Plant and machinery Office furniture and fittings Motor vehicles - over 40 to 66 years - 25% to 33 1⁄3% reducing balance - 20% to 33 1⁄3% reducing balance - 33 1⁄3% reducing balance IMPAIRMENT REVIEWS PROPERTY, PLANT AND EQUIPMENT Individual assets are grouped for impairment assessment purposes at the lowest level at which there are identifiable cash inflows independent of the cash inflows of other groups of assets. The Group assesses at each Balance Sheet date whether there is an indication that an asset may be impaired. If an indication exists the Group makes an estimate of the recoverable amount of each asset group, being the higher of its fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. An impairment loss is recognised where the recoverable amount is lower than the carrying value of assets. If there is an indication that previously recognised impairment losses may have decreased or no longer exist, a reversal of the loss may be made. The carrying amount of the asset is increased to its recoverable amount only up to the carrying amount that would have resulted, net of depreciation, had no impairment loss been recognised for the asset in prior years. Impairment losses and any subsequent reversals are recognised in the Income Statement. INVENTORIES AND WORK IN PROGRESS Inventories are valued at the lower of cost and net realisable value. Where necessary, provision is made to reduce cost to no more than net realisable value after having regard to the nature, condition, and sales value of inventory. Land held for development is included at the lower of cost and net realisable value. Work in progress is valued at the lower of cost and net realisable value. Cost includes materials, on a first-in first-out basis and direct labour plus attributable overheads based on normal operating activity, where applicable. Net realisable value is the estimated selling price less anticipated disposal costs. 46 47 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES (continued) LONG TERM CONTRACTS Amounts due from customers for construction contracts which have not yet been invoiced are disclosed as Contract Assets and are stated at cost as defined above, plus attributable profit to the extent that this is reasonably certain after making provision for maintenance costs, less any losses incurred or foreseen in bringing contracts to completion, and less amounts received as progress payments. For any contracts where receipts exceed the book value of work done, the excess is included in trade and other payables as payments on account. INCOME TAX The charge for current UK corporation tax is based on results for the year as adjusted for items that are non- assessable or disallowed and any adjustments for tax payable in respect of previous years. It is calculated using rates that have been enacted or substantially enacted at the Balance Sheet date. DEFERRED TAXATION Deferred tax is provided using the liability method in respect of temporary differences between the carrying value of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax is provided on all temporary differences. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amounts of its assets and liabilities for Investment Properties that are measured at fair value. Deferred tax is determined using tax rates that have been enacted or substantially enacted by the Balance Sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. It is recognised in the Income Statement except when it relates to items credited or charged directly to Equity, in which case the deferred tax is also dealt with in Equity. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. PENSIONS The Group operates a defined benefit pension scheme, which was closed to new members during the year to 31st July 2003 and which requires contributions to be made to an administered fund. The obligations of the scheme represent benefits accruing to employees and are measured at discounted present value while scheme assets are measured at their fair value. The discount rate used is the yield on AA credit rated corporate bonds that have maturity dates approximating to the terms of the Group’s obligations. The calculation is performed by a qualified actuary using the projected unit credit method. The operating and financial costs of such plans are recognised separately in the Income Statement, service costs are spread systematically over the working lives of the employees concerned and financing costs are recognised in the year in which they arise. Actuarial gains and losses are recognised immediately in the Consolidated Statement of Comprehensive Income. The Group also operates a defined contribution Group Personal Pension Plan for eligible employees. The plan is externally administered and professionally managed. Contributions payable are expensed to the Income Statement as incurred. LEASES Leases are classified according to the substance of the transaction. A lease that transfers substantially all the risks and rewards of ownership to the lessee is classified as a finance lease. All other leases are classified as operating leases. 48 49 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES (continued) LEASES (continued) GROUP AS A LESSEE In accordance with IAS 40: Investment Property, leases of investment property are assessed on a property by property basis. Where future rentals are material, the properties are capitalised and treated as finance leases in accordance with IAS 17: Leases, otherwise properties are classified as operating leases and rentals payable are charged to the Income Statement on a straight line basis over the term of the lease. Other leases are classified as operating leases and rentals payable are charged to the Income Statement on a straight line basis over the term of the lease. GROUP AS A LESSOR Properties leased out under operating leases are included in investment property, with rental income recognised on a straight line basis over the lease term. REVENUE In the current year, the Group adopted IFRS 15: Revenue from Contracts with Customers. This new standard establishes a five step model to determine the amount and timing of revenue recognition. The adoption has not had a significant impact on the revenue recognition policy of the Group. Revenue is recognised by the Group from long and short term construction contracts, sale of private residential housing and from sale of manufactured concrete products. Revenue from long term construction contracts is based on the stage of completion of the contract at the balance sheet date. The stage of completion is based on valuations agreed with third party surveyors. Invoices are raised to customers based on these agreed valuations. The Group uses the output method to recognise revenue where it is recognised over time. Prior to raising invoices, the Group will recognise a contract asset for work performed, only when the invoice is raised will the contract asset be reclassified to trade receivables. When it is probable that the total costs of construction will exceed the total contract revenue, the expected loss is recognised immediately in the Income Statement. When it is probable that total revenue will exceed the total costs of construction the anticipated profit will only be accounted for when the profit is reasonably certain. This policy requires judgement to be made on the anticipated costs to complete and the Group has in place procedures to ensure that the evaluation of the total costs of the contract and its revenues is based on reliable estimates. Construction contracts consist of the structure being built and all associated external and internal services. Contracts for construction are typically accounted for as one performance obligation. Modification to contracts are assessed on a case by case basis but are generally modifications of the existing performance obligation and are therefore accounted for under the existing obligation. The value of construction work undertaken by the Group for its investment properties is excluded from revenue. Revenue from sale of private residential housing is recognised at the point in time when there is legal completion of the sale and the transfer of title. Revenue is recognised at the fair value of the consideration received. Revenue for the sale of manufactured concrete products is recognised at the point in time when the goods are transferred to the customer. The Group has no obligations for returns or warranties. Rental income from investment properties leased out under an operating lease is recognised in the Income Statement on a straight line basis over the term of the lease and is disclosed under Other operating income. Revenue for service charges and insurance receivable for the year in relation to the Group’s investment properties are based on annual invoices to tenants and are also disclosed under Other operating income in the Income Statement. All revenue is stated net of Value Added Tax. All invoices raised are due for payment no later than 30 days from date of invoice, therefore the Group does not adjust transaction prices for the time value of money. 48 49 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES (continued) FINANCIAL INSTRUMENTS Financial assets and financial liabilities are recognised in the Group’s Statement of Financial Position when the Group becomes a party to the contractual provision of the instrument. The principal treasury objective is to provide sufficient liquidity to meet operational cash requirements. The Group operates controlled treasury policies which are monitored by the Board to ensure that the needs of the Group are met as they arise. AVAILABLE FOR SALE FINANCIAL ASSETS Available for sale financial assets represent investments in quoted shares which are recognised at fair value at the year end. The movement in fair value is accounted for in the Consolidated Income Statement. TRADE AND OTHER RECEIVABLES Trade and other receivables are recognised at invoiced value less provisions for impairment. A provision for impairment of trade receivables is established where there is objective evidence that the Group will not be able to collect all amounts due according to the terms of the receivables concerned. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash in hand, deposits with banks and other short-term highly liquid investments with original maturities of three months or less. For the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. MONIES HELD ON DEPOSIT Monies held on deposit with original maturity dates exceeding three months are disclosed separately in the Statement of Financial Position. As these monies originated from investing activities any movements in the year on these monies are disclosed under Investing Activities in the Statement of Cash Flows. TRADE AND OTHER PAYABLES Trade and other payables are non-interest bearing and are recognised at invoiced amount. 50 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 1. ACCOUNTING POLICIES AND ESTIMATION TECHNIQUES (continued) MEASUREMENT OF FAIR VALUES A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which a change has occurred. Further information about the assumptions made in measuring fair values is included in the following notes: • Note 15 – Investment Properties; • Note 17 – Available for Sale Financial Assets; • Note 23 – Financial Instruments; • Note 29 – Retirement Benefit Obligations. DIVIDENDS Final Dividends are recognised as a liability in the year in which they are approved by the Company’s shareholders. Interim Dividends are recognised when they are paid. 50 51 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 2. SEGMENTAL INFORMATION IFRS 8: Operating Segments requires operating segments to be identified on the basis of internal reporting about components of the Group that are regularly reviewed by the chief operating decision maker to allow the allocation of resources to the segments and to assess their performance. The chief operating decision maker has been identified as the Board of Directors. All revenue arises from activities within the UK and therefore the Board of Directors does not consider the business from a geographical perspective. The operating segments are based on activity and performance of an operating segment is based on a measure of operating results. External Revenue Internal Revenue Total Revenue Operating Profit / (Loss) 2019 Construction activities - continuing operations Construction activities - discontinued operations Investment activities - continuing operations Investment activities - discontinued operations 2018 Construction activities - continuing operations Construction activities - discontinued operations Investment activities - continuing operations Investment activities - discontinued operations . . . . . . . . . . . . . . . . £000) £000) 2019) 2018 Restated (Note 1) £000) £000) £000) 16,035) 147) 16,182) (2,084) 645) 7,560) –) –) 645) (627) 7,560) (9,051) –) –) –) 6) –) 6) –) –) 24,246) 147) 24,393) 6,340) –) 8,555) 2,100) 6,344) 1,847) 10,402) –) –) 2,100) 6,344) –) –) –) (1,389) (465) 6,417) 8) –) 8) –) –) 17,007) 1,847) 18,854) . OPERATING PROFIT . Share of results of Joint Ventures Finance and investment income . Finance and investment costs . . . . . . . . PROFIT ON ORDINARY ACTIVITIES BEFORE TAX . . . . . . . . . . . . . . . . . . . . . . . . . –) 6,340 48 264 (9) 6,643) 4,563) 4,563) 463) 331) –) 5,357) Internal revenue relates to own work capitalised, all other internal transactions are eliminated on consolidation. The Group had sales from construction activities from two customers amounting to £4,010,000 (2018, sales from construction activities from two customers amounting to £2,600,000). 52 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 2. SEGMENTAL INFORMATION (continued) OTHER SEGMENTAL INFORMATION Non-Current Asset Additions Depreciation Impairment £000 £000 £000 2019 Construction activities - continuing operations . 260) 320 –) Construction activities - discontinued operations . Investment activities . Joint Ventures . –) 8 –) . 454) 48) – . –) –) –) . . . . . . . Allocation of corporation tax debtor . . . . . . . 2018 Construction activities - continuing operations . 302) 346 –) Construction activities - discontinued operations . Investment activities . Joint Ventures . 36) 50 116) . 1,990) 31) – . –) –) –) . . . . . . . Allocation of corporation tax debtor . . . . . . . Segment Segment Assets Liabilities £000 11,577) £000 18,227) 161) 99,995) 914) 119,297) (872) 500) 6,938) –) 19,015) (872) 118,425) 18,143) 20,672) 10,299) 689) 92,487) 925) 114,773) (629) 542) 7,339) –) 18,180) (629) 114,144) 17,551) 3. REVENUE The Group derives its revenue from contracts with customers for the transfer of goods over time in relation to construction contracts and also at point in time in relation to housing sales and sale of concrete products. This is consistent with the revenue information that is disclosed for Construction Activities segment under IFRS 8: Operating Segments. Construction contracts are generally for social housing or industrial and commercial properties. The Group provides a complete service including architectural and surveyor services from the pre-contract design through to completion. Disaggregation of Revenue Continuing operations: . Social housing . Civil engineering . Industrial . . General construction . Private house sales Discontinued operations: . Concrete products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019) £000) 4,610) 4,388) 1,193) 144) 5,700) 16,035) 2018) £000 3,525) 4,598) 278) 154) –) 8,555) 645) 2,100) 10,655) 16,680) The transaction price allocated to unsatisfied performance obligations at 31st July 2019 are as set out below. As permitted under the transitional provisions of IFRS 15: Revenue from Contracts with Customers, the transaction price allocated to unsatisfied performance obligations as at 31st July 2018 is not disclosed. . Social housing . . Civil engineering . Industrial . . Private house sales 3,996) 4,598) 278) –) 4,290) 980) 143) 11,251) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Directors expect that 84% of the transaction price allocated to the unsatisfied contracts as at 31st July 2019 will be recognised as revenue in the year to 31st July 2020. 53 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 4. OTHER OPERATING INCOME Rental income Service charges and insurance receivable Sundry income . . . . . . . Direct property costs Net rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019) £000) 2018) Restated (Note 1 and 10) £000 6,673) 757) 130) 5,783) 561) –) 7,560) 6,344) (2,362) (2,624) 5,198) 3,720) Direct property costs included £466,000 (2018, £960,000) in respect of investment properties that did not generate rental income in the year. 5. STAFF COSTS AND DIRECTORS’ REMUNERATION 2018) 2017) Staff costs during the year amounted to: Wages, salaries and short term benefits. . . Social security costs . Post-employment benefits . . . . . . . . Continuing operations . Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The average weekly number of employees during the year was made up as follows: Construction and related services. Office and management . . Continuing operations . Discontinued operations . . Directors’ remuneration: – Salaries and short term benefits . – Post-employment benefits . Continuing operations Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,589) 817) 1,194) 7,348) 813) 929) 9,600) 9,090) 9,169) 431) 8,323) 767) 9,600) 9,090) No.) No.) 182) 25) 182) 25) 207) 207) 192) 15) 183) 24) 207) 207) £000) 492) 99) £000) 480) 83) 591) 563) 591) –) 563) –) 591) 563) David W Smart and Alasdair H Ross are members of the Group’s defined benefit pension scheme. John R Smart and Patricia Sweeney are members of the Group’s defined contribution Group Personal Pension Plan. Key management is comprised solely of the Directors of the Company. Full details of Directors’ remuneration is given in the Directors’ Remuneration Report on pages 22 to 27. 54 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 6. OPERATING PROFIT 2018) 2019) Restated (Note 1 and 10) £000) £000) This is stated after charging/(crediting): Cost of inventories recognised as an expense . . . . Staff costs (per note 5) . . . . Hire of plant and machinery . . . Ground rents . . . . Depreciation of owned assets . Profit on disposal of property, plant and equipment Auditor remuneration and expenses – audit services . . . . . . . . . . . . . . . . . . . . . . . . . The audit fees for the Parent Company are £42,000 (2018, £50,000). 7. INCOME FROM INVESTMENTS Dividend income from available for sale financial assets . 8. FINANCE INCOME . ) Income: Interest on short term deposits . . . Other interest . . Net interest income on retirement benefit obligations . . . . . 9. TAXATION UK Corporation Tax Current tax on income for the year Corporation tax (over)/under provided in previous years . . . Deferred taxation (note 24) . . Current Tax Reconciliation Profit on ordinary activities before tax . . Share of profits of Joint Ventures . . . . . . . . . . . . . Current tax at 19.00% (2018, 19.00%) . Effects of: Expenses not deductible for tax purposes Non taxable income including revaluation surplus Effect of change in tax rate . Adjustments to corporation tax charge in respect of prior years Adjustments to deferred tax charge in respect of prior years . Deferred tax not recognised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) . . . . . . . . . . 5,138) 9,169) 489) 110) 368) (17) 94) –) 8,323) 523) 96) 376) (53) 102) ) 53) 43 70) 1) 114) 185) 76) 4) 100) 180) ) Restated (Note 1 and 10) 632) (11) 457) 3) 621) 460) (92) 40) 529) 500) 7,270) (48) 5,822) (463) 7,222) 5,359) 1,372) 1,018) 3) (798) 3) (11) (16) (24) 16) (537) –) 3) –) –) 529) 500) 54 55 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 9. TAXATION (continued) The Finance (No.2) Act 2015, which received Royal Assent on 18th November 2015, reduced the UK corporation tax rate to 19% for financial years commencing 1st April 2017 to 1st April 2019 and to 18% for financial years commencing 1st April 2020. The Finance Act 2016, which received Royal Assent on 15th September 2016, reduced the rate to 17% for financial years commencing 1st April 2020. The effective corporation tax rate is 19.00% (2018, 19.00%) being the average rate applicable over the period. Deferred tax provisions have been calculated using the 17% rate. In addition to amounts charged to the Income Statement, a deferred tax credit of £190,000 (2018, charge £19,000) relating to actuarial losses on the defined benefit pension scheme has been recognised directly to Equity. The value of the deferred tax asset in respect of capital losses not recognised in the financial statements amounted to £16,000 (2018, £522,000). There are no income tax consequences attached to dividends paid or proposed by the Company to its shareholders. 10. DISCONTINUED OPERATIONS On 9th November 2018 the Group Directors took the decision that the subsidiary company, Concrete Products (Kirkcaldy) Limited should cease trading. The results of the discontinued operation, which have been included in the profit for the year, were as follows: Revenue Cost of sales . . . . Gross (Loss)/Profit Other operating income Net operating expenses . Loss Before Tax . Taxation Corporation tax . . Deferred tax . . . . . . . . . . . . . . . . . . . . . . . . Net loss attributable to discontinued operations (attributable to owners of the Company) . . . . . . . . . The operating loss is stated after charging/(crediting): . Cost of inventories recognised as an expense . . . Write down of inventories . . Staff costs (per note 5) . . . Hire of plant and machinery . . Depreciation of owned assets . Impairment of owned assets . . Profit on disposal of property, plant and equipment . Auditor remuneration and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019) £000) 5,645) (817) 2018) £000 2,100) (1,909) (172) 191) 5,6) 8) (461) (664) (627) (465) 5,137) (15) 122) 62) 23) 85) (505) (380) 5,664) 5,–) 5,431) 5,4) 5,8) 5,–) 5,(124) 8) 1,466) 121) 767) 14) 51) 116) (6) 11) During the year, Concrete Products (Kirkcaldy) Limited had cash outflows of £76,000 (2018, £139,000) in relation to Operating activities and contributed £138,000 (2018, outflow £26,000) in respect of Investing activities. 56 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 11. PROFIT FOR THE FINANCIAL YEAR CONTINUED AND DISCONTINUED OPERATIONS Dealt with in the accounts of the Parent Company . Retained by Subsidiary and Joint Venture Companies . . . . . . . . )2019) £000) 2018) Restated (Note 1) £000) (1,404) 7,640) (1,376) 3,566 6,236) 4,942) The Group uses underlying profit before tax as an alternative performance measure, which is the profit before tax excluding net surplus or deficit on valuation of investment properties and available for sale financial assets accounted for through the Income Statement. As the net surplus or deficit on valuation of investment properties and available for sale financial assets can fluctuate from year to year and is not a realised surplus or deficit by excluding this amount a truer reflection of actual Group performance is obtained. Analysis of this alternative performance measure is as follows: . . Profit before tax Surplus on valuation of investment properties . Deficit/(surplus) on valuation of available for sale financial assets . . . . . . . . 12. DIVIDENDS . 2017 Final Dividend of 2.17p per share, 2018 Interim Dividend of 0.95p per share . 2018 Final Dividend of 2.21p per share, after waivers . 2019 Interim Dividend of 0.95p per share . . . . . . . . . . . . . . . . . . . . . . . . . 6,643) (4,052) 9) (5,357) ((2,859) (106) 2,600) 2,392) ) –) –) 402) 411) 968) 423) –) –) 813) 1,391) The Board is proposing a Final Dividend of 2.24p per share (2018, 2.21p) which, after waivers, will cost the Company no more than £390,000. The proposed Final Dividend is subject to approval by the shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. 57 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 13. EARNINGS/(LOSS) PER SHARE CONTINUING OPERATIONS Profit attributable to Equity shareholders £000 Basic Earnings per share . . . DISCONTINUED OPERATIONS Loss attributable to Equity shareholders . Basic Loss per share . . £000 . CONTINUING AND DISCONTINUED OPERATIONS Profit attributable to Equity shareholders £000 Basic Earnings per share . . . 2019) Restated (Note 1) 2018) . . 6,741) 15.47p 5,322) 11.96p (505) . . (1.16)p (380) (0.85)p 6,236) . . 14.31p 4,942) 11.11p . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share are calculated by dividing the profit attributable to equity shareholders by the weighted average number of shares in issue during the year. The weighted average number of shares for the year to 31st July 2019 amounted to 43,580,000 (2018, 44,495,000). There is no difference between basic and diluted earnings per share. 58 59 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 14. PROPERTY, PLANT AND EQUIPMENT (a) GROUP Land and buildings Freehold £000 Plant,) equipment) and vehicles) £000) Total) £000) 896 – – 5,954) 424) (1,572) 6,850) 424 (1,572) 896 4,806) 5,702) 619 16 – 635 4,923) 360) (1,520) 5,542) 376) (1,520) 3,763) 4,398) 261 1,043) 1,304) 896 – – 5,935) 454) (435) 6,831) 454) (435) 896 5,954) 6,850) 572 19 28 – 4,828) 408) 88) (401) 5,400) 427) 116) (401) 619 4,923) 5,542) 277 1,031) 1,308) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost: At 1st August 2018 Additions Disposals . . At 31st July 2019 . . . . Depreciation: At 1st August 2018 . Provided during year . . Disposals . At 31st July 2019 Net book value: At 31st July 2019 Cost: At 1st August 2017 Additions Disposals . . At 31st July 2018 . . . . . . Depreciation: . At 1st August 2017 Provided during year . . . Disposals Impairment . . At 31st July 2018 Net book value: At 31st July 2018 . . Included within Freehold Land and Buildings is land costing £13,000 (2018, £13,000) which is not depreciated. 58 59 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 14. PROPERTY, PLANT AND EQUIPMENT (continued) (b) COMPANY Land and) buildings) Plant,) equipment) Freehold) and vehicles) £000) £000) Total) £000) . . . . . . . . . . . . . . . . . . . . . . . . . . . 361) –) –) 2,694) 148) (225) 3,055) 148) (225) 361) 2,617) 2,978) 125) 5) –) 2,292) 156) (187) 2,417) 161) (187) 130) 2,261) 2,391) 231) 356) 587) . . . 361) –) –) 2,746) 88) (140) 3,107) 88) (140) . . . . . . 361) 2,694) 3,055) 120) 5) –) 2,244) 177) (129) 2,364) 182) (129) 125) 2,292) 2,417) 236) 402) 638) Cost: At 1st August 2018 Additions Disposals . . At 31st July 2019 . . . . Depreciation: At 1st August 2018 . Provided during year . . Disposals . At 31st July 2019 ) Net book value: At 31st July 2019 Cost: At 1st August 2017 Additions Disposals . . At 31st July 2018 . . . . . Depreciation: At 1st August 2017 . Provided during year . . Disposals . At 31st July 2018 Net book value: At 31st July 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 15. INVESTMENT PROPERTIES Cost or valuation: . At 1st August 2018 Additions . Surplus on valuation . At 31st July 2019 . Cost or valuation: . At 1st August 2017 Additions . Surplus on valuation . . At 31st July 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land and) buildings) Freehold) £000) Land and) buildings) Leasehold) £000) Total £000) 58,423) 55) 3,565) 11,109) 235) 487) 69,532) 290) 4,052) 62,043) 11,831) 73,874) 55,444) 958) 2,021) 9,355) 916) 838) 64,799) 1,874) 2,859) 58,423) 11,109) 69,532) Valuation Process The Group’s investment properties are valued by David W Smart, MRICS, who is a Director of the Parent Company, on the basis of fair value, in accordance with the RICS Valuation – Global Standards 2017, incorporating the International Valuations Standards, and RICS Professional Standards UK January 2014 (revised April 2015). As in previous years, external valuers have reviewed a sample of the Group’s investment properties and provided a report to the Group detailing the valuations they would have placed on the sample of investment properties reviewed. The valuations prepared by the Director and the external valuers are compared to ensure that there are no material variations between the valuations. Investment properties, excluding ongoing developments, are valued using the investment method of valuation. This approach involves applying capitalisation yields to current and estimated future rental streams and then allowing for voids arising from vacancies and rent free periods and associated running costs. The capitalisation yields and rental values are based on comparable property and leasing transactions in the market, using the valuers’ professional judgment and market observations. Other factors taken into account in the valuations include the tenure of the property, tenancy details and ground and structural conditions. In the case of ongoing developments, the approach applied is the residual method of valuation, which is the same as the investment method, as described above, with a deduction for all costs necessary to complete the development, together with a further allowance for remaining risk. In accordance with IAS 40: Investment Property, net annual surpluses or deficits are taken to the Income Statement and no depreciation is provided in respect of these properties. 60 61 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 15. INVESTMENT PROPERTIES (continued) The Group considers all of its investment properties fall within ‘Level 3’ of the fair value hierarchy as described by IFRS 13: Fair Value Measurement. Level 3 valuations are those using inputs for the asset or liability that are not based on observable market data. The main unobservable inputs relate to estimated rental value and equivalent yield. There have been no transfers of properties in the fair value hierarchy in the financial year. The table below summarises the key unobservable inputs used in the valuation of the Group’s investment properties as at 31st July 2019: Fair Value at 31 July 2019 £000 18,414 55,460 Investment Commercial Industrial Estimated Rental Value £ per sq ft Low Average High 11.00 4.00 15.25 6.75 19.50 9.50 Equivalent Yield % High Low Average 8.1 7.2 9.9 8.2 12.2 9.4 The following table illustrates the impact of changes in the key unobservable inputs (in isolation) on the fair value of the Group’s investment properties as at 31st July 2019: Fair Value at 31 July 2019 £000 18,414 55,460 5% change in estimated rental value Decrease £000 Increase £000 25bps change in equivalent yield Increase £000 Decrease £000 934 2,584 (934) (2,584) 498 1,663 (473) (1,564) Investment Commercial Industrial The Group had obligations of £1,271,000 (2018, £nil) in respect of future developments and repair costs of investment properties at the Balance Sheet date. 16. INVESTMENTS Shares in Subsidiaries at Cost . . Joint Ventures . . Group 2019 £000 2018 £000 Company 2019) £000) 2018) £000) . . . . . . – 914 914 – 925 708) 708) 857) 857 ) 925 1,565) 1,565) 62 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 16. INVESTMENTS (continued) (a) JOINT VENTURES (continued) During the year the Directors reconsidered the nature of the classification of the monies paid in respect of its Joint Venture in Gartcosh Estates LLP in the year to 31st July 2018. The Directors consider these monies to be a cost of investment in the Joint Venture as opposed to a loan to the Joint Venture company and therefore the monies paid of £857,000 are now included within the cost of the investment in Joint Ventures as opposed to a Loan to Joint Venture companies within Trade and Other Receivables receivable after one year. The Directors considered Gartcosh Estates LLP to be a material associate in the year to 31st July 2019 and considered Duff Street Limited a material associate in the year to 31st July 2018. The following table summarises the financial information of both companies for the respective years as included in their own financial statements adjusted for differences in accounting policies. Non-Current assets . . . Current assets Of which are cash and cash equivalents . . . . . . . . . . . . . . . . . Non-Current liabilities Of which are financial liabilities excluding trade and other payables and provisions . . . . . . . Current liabilities Of which are financial liabilities excluding trade and other payables and provisions . . . . . . . Net assets . . Group’s interest in net assets Revenue . . Other Operating Income . . . . Total comprehensive (loss)/income . . . . . . . . . . . . . . . Group’s share of total comprehensive (loss)/income . . Dividend received . . . . . . . . . . . . . . . . . . Gartcosh Estates) Duff Street1 LLP Limited £000) £000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,822) –) 147) 114) 283) 283) (250) (250) –) –) (4) –) (219) –) 1,715) 64) 843) 32) –) 2,800) –) 80) (30) 919) (15) –) (15) 460) (700) (240) The Group accounts for all Joint Ventures using the equity method of accounting. 63 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 16. INVESTMENTS (continued) (a) JOINT VENTURES (continued) The Group’s interests in its other Joint Venture Companies are not considered to be material and the aggregate financial information for these associated companies is as follows: Aggregate carrying amount of individually immaterial associates . Aggregate carrying amount of the Group’s share of: . Profit after tax and total comprehensive income . . . Dividend received . . Total comprehensive income . . . . . . . . . . 2019) £000) 71) 2018) £000) 36) . . 63 3 –) . (59) . 4) 3) . . . . Name of Joint Venture Northrigg Limited Duff Street Limited Invertiel Developments Limited Gartcosh Estates LLP Registered in and Principal Country of Operation Scotland Scotland Scotland Scotland J. Smart & Co. (Contractors) PLC Interest in Joint Venture’s Capital 50% 50% 50% 50% Name of Joint Venture Jointly managed with Issued Share capital Northrigg Limited William Sanderson Duff Street Limited Kiltane Developments Limited Invertiel Developments Limited DKG Estates LLP 2 ordinary £1 shares split equally into A & B shares and ranking equally in all respects 100 ordinary £1 shares split equally into A & B shares and ranking equally in all respects 100 ordinary £1 shares split equally into A & B shares and ranking equally in all respects Issued shares held by J. Smart & Co. (Contractors) PLC 1 A Share 50 A Shares 50 A Shares Gartcosh Estates LLP Fusion Assets Limited Partnership Interest 50 A Shares All of the Joint Venture companies were established for the purposes of property development and all have accounting years ending on 31st July. 64 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 16. INVESTMENTS (continued) (b) SUBSIDIARIES At 1st August 2018 and 31st July 2019 . . . . . . 2019) £000) 708) 2018) £000) 708) At 31st July 2019 the Company held the entire issued share capital of the following companies, all of which are registered in and operate in Scotland: McGowan and Company (Contractors) Limited Plumbing contractors Cramond Real Estate Company Limited Thomas Menzies (Builders) Limited Concrete Products (Kirkcaldy) Limited C. & W. Assets Limited Smart Serviced Offices Limited Investment holding Civil Engineering contractors Non trading Property company Serviced office and co-working space provider 17. AVAILABLE FOR SALE FINANCIAL ASSETS Group 2019) £000) 2018) £000) Listed investments . . . . . . . . . 1,309) 1,099) Fair value movement on shares held at 31st July 2019 before tax amounted to £(9,000) (2018, £106,000). There has been no impairment adjustment on available for sale financial assets in this or the previous year. As the Group’s available for sale financial assets consisted entirely of equities of companies listed on quoted markets then these fall within ‘Level 1’ of the fair value hierarchy as described by IFRS 13: Fair Value Measurement. Level 1 valuations are those using inputs which are quoted prices (unadjusted) in active markets for identical assets or liabilities the Company can access at the year end date. 18. INVENTORIES . . Work in progress . Land held for development Raw materials and consumables . Finished goods . . . . . . . . . . CONTRACTS IN PROGRESS AT THE BALANCE SHEET DATE: Aggregate amount of costs incurred and recognised profits less recognised losses to date . Retentions outstanding . . . Advances received . . . . 64 Net value of contracts in progress . . 2019) £000) 8,193) 354) 96) –) Group Company 2018) £000) 7,641) 972) 115) 79) 2019) £000) 8,193) 354) 22) –) 2018) £000) 7,641) 972) 36) –) 8,643) 8,807) 8,569) 8,649) 6,699) 200) (6,596) 2,545) 3) (2,437) 4,347) 140) (4,289) 144) 3) (147) 303) 111) 198) –) . . . . . . . . 65 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 19. CONTRACT BALANCES The timing of revenue recognition results in amounts due from customers for construction contracts, those which have not yet been invoiced are disclosed as Contract Assets and once invoiced they are disclosed as Trade Receivable (note 20). The Group does not receive deposits or payments in advance for contracts and therefore has no Contract Liabilities to disclose. The Group did not incur costs to obtain contracts. Contract Assets . . . . . . As at 1st August 2018 . Transfers from contract assets recognised at the . beginning of the year to trade receivables Increase related to services provided in the year . . As at 31st July 2019 . . . 20. TRADE AND OTHER RECEIVABLES NON-CURRENT ASSETS: Loan to Joint Venture companies . CURRENT ASSETS: Trade receivables . Amounts owed by Subsidiaries . . Other receivables Prepayments and accrued income Amounts recoverable on contracts Loans to Joint Venture companies . . . . . . . . . . . . . . . . Group Company 2019) £000) 2018) £000) 2019) £000) 2018) £000) 549) 770) 408) 659) 770) 856) 659) 432) (770) 549) 549) (856) 770) (659) 408) (432) 659) 770) 408) 659) 250) –) 250) –) 1,474 – 997 188 – 176 1,913 – 471 238 972 176 305 1,481 9 132 – 176 419 1,900 52 143 972 176 2,835 3,770 2,103 3,662 . . . . . . . . . . . . Trade receivables are shown net of provision for doubtful debts of £3,000 (2018, £23,000). The ageing of past due but not impaired trade debtors is as follows: Less than 30 days 30 to 60 days Greater than 60 days . . . . . . . . . . . . . . . 1,196 266 12 1,191 703 19 305 – – 382 30 7 1,474 1,913 305 419 Trade receivables and amounts recoverable on contracts includes £182,000 (2018, £436,000) in respect of outstanding retentions. The loans to Joint Venture companies (note 16(a)) are repayable on demand, with the exception of the loan to Gartcosh Estates LLP. Given the expected future repayment profile this loan has been disclosed as due after one year. Amounts owed by subsidiaries are repayable on demand and are interest free. The Directors consider that the carrying amount of trade and other receivables approximates to their fair value. 66 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 21. BANK Cash and cash equivalents comprise the following: Group Cash at bank and on hand . Short term deposits . . . . . . . . 2019 £000 12,903 12,796 25,699 2018 £000 11,272 12,314 Company 2019 £000 – – 2018 £000 – – 23,586 – – Monies held on deposit of £48,000 (2018, £48,000) are held in bank accounts which have original maturity dates exceeding three months and therefore do not meet the criteria of cash and cash equivalents as defined in IAS 7: Statement of Cash Flows. The bank has been granted guarantees and letters of offset by each member of the Group in favour of the bank on account of all other members of the Group as a continuing security for all monies, obligations and liabilities owing or incurred to the bank. 22. TRADE AND OTHER PAYABLES . CURRENT LIABILITIES: Trade payables . Amounts owed to Subsidiaries . Other taxes and social security costs Other creditors and accruals . . . . . . . . . . . . . . 1,197 – 509 1,688 3,394 1,124 – 404 2,052 724 – 250 791 739 80 132 1,460 3,580 1,765 2,411 Included in Other creditors and accruals are contract loss provisions. 23. FINANCIAL INSTRUMENTS The Group’s financial instruments comprise of bank balances and cash, available for sale financial assets, trade receivables and trade payables. The amounts presented in relation to trade receivables are net of allowances for doubtful receivables. The carrying amount of these assets approximates to their fair value. CREDIT RISK In relation to the Group’s financial assets, the Group has no significant concentration of credit risk, as exposure is spread over a number of counterparties and customers. There is no significant impairment loss recognised or significant receivables that are past due but not impaired. The Group has assessed that there is no significant credit risk in relation to loans to Joint Venture companies given the underlying value of the assets within these entities. IFRS 7: Financial Instrument Disclosures requires a company to undertake a sensitivity analysis on its financial instruments which are affected by changes in interest rates. The Group financial instruments affected by interest rate fluctuations are bank deposits and bank overdrafts. Based on the Group’s net position at the year end, a 1% increase or decrease in the interest rates would change the Group’s profit before tax by approximately £146,000 and £70,000 respectively (2018, £164,000 and £76,000 respectively). 67 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 24. DEFERRED TAXATION DEFERRED TAX ASSETS GROUP . At 1st August 2017 Credited to Income Statement – continuing operations Credited to Income Statement – discontinued operations . . . . At 31st July 2018 . . . . . Credited to Income Statement – continuing operations Charged to Income Statement – discontinued operations At 31st July 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other £000 58 19 17) 94 24 (17) 101) Deferred tax assets arising in respect of valuation surpluses on Investment Properties of £16,000 (2018, £522,000) have not been recognised because it is not probable that relevant future taxable profits will be available against which the Group can use the benefits therefrom. DEFERRED TAX LIABILITIES GROUP . . . At 1st August 2017 (restated) . Charged to Equity Charged/(credited) to Income Statement – continuing operations . . Credited to Income Statement – discontinued operations . . . . At 31st July 2018 (restated) . . Accelerated Capital Retirement Benefit Value Differences Allowances Obligations £000 £000 £000 £000 52 – 657 . 1,214 – . –) 19 ) – Other Timing Fair Total £000 1,923 19) . 32) 39 ) 13 (25) 59) . (4) –) – (2) (6) . 1,242 715 13 25 1,995 . . . . . . . – (190 )§§§§§§ – Credited to Equity . Credited to Income Statement - continuing operations . (25) (32 )§§§§§§ (8) Credited to Income Statement – discontinued operations . –) –) – (2) . . . . . – (3) (190) (68) (2) At 31st July 2019 . . . . . 1,217 493 5 20 1,735 COMPANY At 1st August 2017 Charged to Equity Charged/(Credited) to Income Statement . . . . . . At 31st July 2018 . . . Credited to Equity Charged/(Credited) to Income Statement . . . At 31st July 2019 . . . Accelerated Retirement Other Capital Benefit Timing Allowances Obligations Differences £000 £000 £000 21 657 41 – (19) – (14) 39) (22) Total £000 719 19) 3) 7 715 19 741 – (190 ) – 3) (32) (4) (190) (33) 10 493 15 518 . . . . . . . . . . . . . . 68 69 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 25. SHARE CAPITAL Issued and fully paid ordinary shares of 2p each . At 1st August 2018 . . Purchased and cancelled . . . . At 31st July 2019 . . . . 2019 2018 Number £000 Number £000 . . . 43,988,000 (713,000) 880 (14) 44,804,000 (816,000) 896 (16) 43,275,000 866 43,988,000 880 During the year to 31st July 2019 the Company purchased for cancellation 713,000 ordinary shares of 2p each with a nominal value of £14,000 for a consideration of £806,000. All shareholders of ordinary shares have a right to receive dividends paid by the Company in accordance with their shareholding. Each shareholder has the right to attend and vote at a General Meeting and each share attracts one vote. There are no restrictions on the distribution of dividends or repayment of capital. 26. NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS (a) RECONCILIATION OF PROFIT BEFORE TAX TO CASH FLOWS FROM OPERATING ACTIVITIES 2019 . . . . . . . . . . . . . . . . . . . . Profit before tax . . Share of profits from Joint Ventures . Depreciation . Impairment of assets . Unrealised valuation surplus on investment properties Unrealised deficit/(surplus) on available for sale financial assets Profit on sale of property, plant and equipment Profit on sale of available for sale financial assets Change in retirement benefits . Interest received . Change in inventories . Change in contract assets Change in receivables – non-current Change in receivables – current . Change in payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . (b) CASH AND CASH EQUIVALENTS FOR STATEMENT OF CASH FLOWS . Cash and cash equivalents . . Bank overdraft . . Net position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 Restated (Note 1) £000 5,357 (463) 427 116 (2,859) (106) (59) (2) (232) (80) (5,926) 86) –) (1,097) (805) £000 6,643 (48) 376 – (4,052) 9) (141) (26) 188) (71) 164) 221) (250) 935) (186) 3,762) (3,449) £000) 25,699 (12,860) 12,839 £000 23,586 (11,858) 11,728 68 (c) ANALYSIS OF NET FUNDS Cash and cash equivalents . Bank overdraft . Net funds . . . . . . . . . . . . . . . . . . . . 69 At 1st August 2018 £000 23,586 (11,858) Cash Flow £000 2,113) (1,002) At 31st July 2019 £000 25,699 (12,860) 11,728 1,111) 12,839 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 27. NOTES TO THE COMPANY STATEMENT OF CASH FLOWS (a) RECONCILIATION OF (LOSS)/PROFIT BEFORE TAX TO CASH FLOWS FROM OPERATING ACTIVITIES . . . . . . . . . (Loss)/profit before tax . Depreciation . . Profit on sale of property, plant and equipment Dividend received from Subsidiaries and Joint Ventures Change in retirement benefits . Interest received . . Change in inventories Change in contract assets Change in receivables – non-current Change in receivables – current . Change in payables CASH FLOWS FROM OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (b) CASH AND CASH EQUIVALENTS FOR STATEMENT OF CASH FLOWS . Cash and cash equivalents . . Bank overdraft . . . . . . . . . . (c) ANALYSIS OF NET FUNDS Cash and cash equivalents . Bank overdraft . . . . . . . . . . . . 2019 £000 2018 £000 (1,705) 161 (10) (59) 188) (1) 80) 251) (250) 1,559) (646) (432) (1,175) 182 (9) (2,700) (232) (4) (6,073) (227) –) (2,289) (627) (6,226) – – (8,661) (6,712) (8,661) (6,712) . . . . . . . . . . . . . . . . . . . . . . . . . . . . At 1st August 2018 £000 . 2,9 – . (6,712) Cash At 31st Flow July 2019 £000 £000 (2,94–) (1,949) – (8,661) (6,712) (1,949) (8,661) 28. FUTURE CAPITAL EXPENDITURE There were no amounts of Capital Expenditure relating to Property, plant and equipment contracted for at 31st July 2019 or 31st July 2018. The Group’s share of Capital Expenditure contracted for by its Joint Ventures as at 31st July 2019 amounted to £nil (2018, £658,000). 70 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 29. RETIREMENT BENEFIT OBLIGATIONS The Group operates a defined benefit pension scheme for certain active and former employees of the Group. The scheme was closed to new members in the year to 31st July 2003. The scheme is subject to the funding legislation outlined in the Pensions Act 2004 together with documents issued by the Pensions Regulator and Guidance Notes adopted by the Financial Reporting Council. The scheme is administered by a separate Board of Trustees which is composed of employer nominated representatives and member nominated Trustees and is a separate legal entity. The assets of the scheme are held separately from the assets of the Group and are administered and managed professionally under the supervision of the Trustees. The Trustees are required by law to act in the best interests of all classes of beneficiaries to the scheme and are responsible for the investment policy and the day-to-day running of the scheme. The Trustees are also responsible for jointly agreeing with the employer the level of contributions due to the Pension scheme. The scheme provides qualifying employees with an annual pension based on final pensionable salary on attainment of a normal retirement age of 65. Active members also benefit from life assurance cover. However the payment of these benefits are at the discretion of the Trustees of the scheme. The pension scheme’s independent qualified Actuary carries out a triennial valuation using the Projected Unit Credit Method to determine the level of the scheme’s surplus or deficit. The last completed triennial valuation was as at 31st October 2015 which revealed a surplus of £2,783,000, representing a funding level of 110%. Following this latest triennial valuation the Group and the scheme Trustees agreed that employer contributions to the scheme as from 31st October 2017 would increase from 27.8% to 31.9% and employee contributions are to remain at 3%. There were no outstanding contributions at the year end. The Group expects to pay a contribution of £533,000 during the financial year to 31st July 2020. ASSUMPTIONS The financial assumptions used to calculate scheme liabilities under IAS 19 (amended): Employee Benefits are: . . . . Valuation method . Discount rate . . . Inflation rate - Retail price index Inflation rate - Consumer price index . . Salary increases . . Pension increases . . . . 2019 Projected Unit 1.8% 3.4% 2.5% 3.4% 1.9% – 3.5% . . . . . . . . . . . . 2018 Projected Unit 2.7% 3.2% 2.3% 3.2% 1.8% – 3.4% 2017 Projected Unit 2.5% 3.2% 2.3% 3.2% 1.8% – 3.4% The mortality assumptions imply the following expectations of years of life from age 65: 2016 21.8 24.0 23.1 25.5 . . . . 2015 21.8 23.7 22.8 24.9 2014 21.9 23.7 23.0 25.0 Man currently aged 65 . Woman currently aged 65 Man currently aged 45 . Woman currently aged 45 . . . . . . . . . . . . . . . . 71 70 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 29. RETIREMENT BENEFIT OBLIGATIONS (continued) SENSITIVITY TO KEY ASSUMPTIONS The scheme exposes the Group to actuarial risks, such as interest rate risk, inflation risk, longevity risk and investment risk. The key assumptions used for IAS 19 are discount rate, inflation rates and mortality. If different assumptions were used then this could materially affect the results disclosed in the financial statements. Movements in the key assumptions would have the following effect on the level of the deficit: Change in assumption Discount rate Inflation rate Mortality rate . Decrease of 0.25% Increase of 0.25% . Increase in life expectancy of 1 year . . . . Increase in scheme liabilities 2018 £000 2019 £000 . . . . . . . . . 1,413 344 1,662 1,078 297 1,193 The sensitivity information has been prepared using the same methodology as the calculation of the current year scheme obligations. BALANCE SHEET DISCLOSURES The investments held by the scheme and the reconciliation of the scheme assets and liabilities to the Balance Sheet were: EQUITIES UK . Overseas Multi-asset diversified funds Absolute return funds . . . . . BONDS Government Corporate OTHER Cash . . . . . . . . . . . . . . Fair value of scheme assets Present value of scheme liabilities . Asset ceiling adjustment . Scheme surplus . Deferred taxation . Net pension scheme surplus . . . . Valuation 2018 £000 13,068 16,605 3,039 890 1,130 2,596 2,754 40,082 (32,497) 7,585 (3,380) 4,205 (715) 3,490 Valuation 2017 £000 10,861 16,012 2,425 946 991 2,924 3,729 37,888 (34,026) 3,862 –) 3,862 (657) 3,205 . . . . . . . . . . . . Valuation 2019 £000 . . . . . . . . . . . . 14,672 15,586 3,500 921 1,332 2,979 2,551 41,541 (38,642) 2,899 –) 2,899 (493) 2,406 72 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 29. RETIREMENT BENEFIT OBLIGATIONS (continued) The assets of the scheme are invested in funds managed by Standard Life Wealth, in direct investments via Rathbone Brothers PLC, in insurance policies with companies belonging to the Royal London Group and in bank accounts. The assets do not include any directly owned ordinary shares issued by J. Smart & Co. (Contractors) PLC. The fair value of the assets of the pension scheme are determined based on publicly available market prices wherever available. 2019 £000 2018 £000 (606) (251) (617) –) (857) (617) 980 (866) 935 (835) 114 100 32,497 857 866 (60) 43 (1,372) (1,479) (543) 4,875) 34,026 617 835 (60) 43 (1,692) (208) (206) (858) 38,642 32,497 The following amounts are incorporated into the financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analysis of amounts charged to operating profit: . Current service cost . Past service cost . . . . . . Total service cost . . . . . . . Analysis of amounts charged to net finance income: Interest income Interest costs . . . . . . . . . . . . . . . . . . . . . . . . . Movement in present value of defined benefit obligations: . . . At 1st August 2018 . . . Service cost . . . Interest cost . . Charges paid . . . Employee contributions . . Benefit payments . . . Actuarial movements due to scheme experiences Actuarial movements due to changes in demographic assumptions . . Actuarial movements due to changes in financial assumptions . . . . . . . . . . . . . . . . . . . . . . . . . At 31st July 2019 . . . . . . . 73 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 29. RETIREMENT BENEFIT OBLIGATIONS (continued) . . . . Movement in fair value of scheme assets: . . At 1st August 2018 . Interest income . . Interest income relating to asset ceiling adjustment . Employer contributions . . Employee contributions . . . Benefits paid Charges paid . . Return on plan assets excluding amount shown in interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At 31st July 2019 . . . . . Movement in scheme surplus: . . . At 1st August 2018 . . . Current service cost . . . Past service cost . Contributions . . . Net finance income included in finance income . Actuarial remeasurement of pension scheme liability . Effect of asset ceiling adjustment . . . . . . . . . . At 31st July 2019 . . . . . . . . . . . . . . . . . . . . . . . 2019 £000 2018 £000 40,082 980 91 555 43 (1,372) (60) 1,222 37,888 935 – 749 43 (1,692) (60) 2,219) 41,541 40,082 4,205 (606) (251) 555 114 (4,589) 3,471) 3,862 (617) –) 749 100 3,491) (3,380) 2,899 4,205 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analysis of the actuarial (loss)/gain included in the statement of comprehensive income: Return on scheme assets excluding amounts shown in interest income Changes in assumptions underlying present value of scheme liabilities Effect of asset ceiling adjustment . . . . . . . . . . . 1,222 2,219) (5,811) 1,272) (3,380) 3,471) At 31st July 2019 . . . . . . . . . (1,118) 111) The asset ceiling adjustment incorporated in the accounts for the year to 31st July 2018 was to reflect the difference between the projected value of future contributions compared with the pure surplus of the scheme, as under IAS 19 (amended): Employee Benefits the maximum surplus that can be recognised is the value of future contributions. This adjustment was reversed in the accounts for the year to 31st July 2019 net of £91,000 relating to interest on the adjustment. History of experience gains and losses: Return on scheme assets Amount (£000) . Percentage of market value of scheme assets Changes in assumptions underlying present value of scheme liabilities . . . . . . . . Amount (£000) . Percentage of market value of scheme liabilities . Total amounts included in Consolidated Statement of Comprehensive Income Amount (£000) . Percentage of market value of scheme liabilities . . . . . . 2019 1,222 2.9% 2018 2017 2016 2015 2,219 2,833) 7.5% 5.5% 1,694 4.9% 802 2.5% (5,811) 15.0% 1,272 473) 1.4% 3.9% (3,950) (1,805) 6.0% 11.4% (1,118) 2.9% 111 0.3% 3,306 (2,256) (1,003) 9.7% 6.5% 3.3% . . . . . . 74 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 29. RETIREMENT BENEFIT OBLIGATIONS (continued) DEFINED CONTRIBUTION SCHEMES In the year to 31st July 2003 the Group commenced operation of a defined contribution Group Personal Pension Plan for eligible employees. The plan is externally administered and managed professionally by AEGON UK. The net contribution to the plan for the year was £246,000 (2018, £235,000). STAKEHOLDER SCHEMES The Group has stakeholder pension arrangements for those employees not eligible for membership of either the Defined Benefit or Defined Contribution schemes. The Group makes contributions to these schemes and has no liability beyond these contributions. The contributions to these schemes in the year amounted to £78,000 (2018, £51,000) and are expensed through the Income Statement as incurred. MULTI EMPLOYER SCHEME The Group was also a member of the multi-employer pension scheme, Plumbing & Mechanical Services (UK) Industry Pension Scheme which closed to future benefit buildup effective 30th June 2019. The Group makes contributions to this scheme which in the year amounted to £14,000 (2018, £17,000) and are expensed through the Income Statement as incurred. No provision has been made for amounts payable by the Group in respect of Section 75 pension liabilities relating to the Group’s participation in this scheme given that, as at the date of these financial statements, any potential liability has not yet been assessed. 30. CONTINGENT LIABILITIES The Company and certain of its Subsidiaries have, in the normal course of business, entered into counter-indemnities in respect of performance bonds relating to their contracts. As at 31st July 2019 these amounted to £319,000. 31. OPERATING LEASE ARRANGEMENTS GROUP – AS LESSEE Future minimum lease payments payable under non-cancellable operating leases: Within one year . . In two – five years exclusively . . After five years . . . . . . . . . . . . . . . . . . . . . . . . 2019 £000 117 317 2018 £000 103 305 1,307 1,288 1,741 1,696 GROUP – AS LESSOR Gross property rental income earned in the year amounted to £6,679,000 (2018, £5,791,000). At the Balance Sheet date, the Group had contracted with its tenants for the following future minimum lease payments: Within one year . . In two – five years exclusively . . After five years . . . . . . . . . . . . . . . 6,201 15,833 10,826 6,088 14,348 9,525 32,860 29,961 . . . . . . . . . 75 74 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 32. RELATED PARTY TRANSACTIONS (a) SUBSIDIARIES Transactions between the Company and its Subsidiaries, which are related parties of the Company, have been eliminated on consolidation. Details of transactions between the Company and Subsidiaries are as follows: SUBSIDIARY 2019 £000 2018 £000 Sale of goods and services 2019 £000 2018 £000 Purchase of goods and services McGowan and Company (Contractors) Limited Cramond Real Estate Company Limited Thomas Menzies (Builders) Limited . Concrete Products (Kirkcaldy) Limited . . C. & W. Assets Limited . . Smart Serviced Offices Limited . . . . . . . . . . . . . . . . . 126 – 125 66 1,188 126 134 – 192 43 2,829 125 488 – 5 14 – – 539 – 32 24 – – During the year the Company received no dividends from subsidiary companies (2018, £2,000,000 from C. & W. Assets Limited). SUBSIDIARY Amounts owed by Subsidiaries Amounts owed to Subsidiaries McGowan and Company (Contractors) Limited Cramond Real Estate Company Limited Thomas Menzies (Builders) Limited . Concrete Products (Kirkcaldy) Limited . . C. & W. Assets Limited . . Smart Serviced Offices Limited . . . . . . . . . . . . . . . . . 49 – 62 76 – – – 17 1,174 1,883 440 770 7– – – – 78 – 2 – – – – – During the year the Company advanced a further £210,000 to its subsidiary Smart Serviced Offices Limited and as at 31st July 2019 the total due from the subsidiary was £650,000. As at 31st July 2019 the Company has provided in full against this debt. No other provision for bad or doubtful debts have been made against any other amounts due from Subsidiary companies. (b) JOINT VENTURE COMPANIES Transactions between the Group and its Joint Venture Companies were the sale of materials and services of £1,155,000 (2018, £151,000), receipt of dividends of £59,000 (2018, £700,000). In the year to 31st July 2018 the Group also received £4,000 for interest on a loan to one of the Joint Venture Companies, this loan was repaid in the year to 31st July 2018 and therefore no further interest is receivable by the Group. The Group was due £nil (2018, £nil) in respect of sale of materials and services from Joint Venture Companies. During the year the Group was repaid £nil (2018, £920,000) of outstanding loans to Joint Venture Companies and advanced £250,000 (2018, £857,000) to Joint Venture Companies. As at 31st July 2019 loans outstanding from Joint Venture Companies amounted to £426,000 (2018, £176,000). The amounts outstanding are unsecured and will be settled for cash. No expense has been recognised in the year for bad or doubtful debts in respect of the amounts owed by Joint Venture Companies. 76 J. Smart & Co. (Contractors) PLC NOTES TO THE ACCOUNTS (continued) 31st JULY 2019 32. RELATED PARTY TRANSACTIONS (continued) (c) DIRECTORS’ INTEREST IN CONTRACTS David W Smart and John R Smart, throughout the year had material beneficial interests in Plean Precast Limited, Sterling Precast Limited and The Roofing and Building Supply Co. Limited, which have interests in continuing contracts for the purchase of materials and services from and for the sale of materials and services to the Group. During the year to 31st July 2019 the Group purchased materials amounting to £157,000 (2018, £241,000) from these companies and sold materials and services amounting to £60,000 (2018, £53,000) to these companies. All transactions were at normal commercial rates. As at 31st July 2019 the Group owed these companies £3,000 (2018, £48,000) and was owed £35,000 (2018, £17,000). (d) DIRECTORS’ REMUNERATION The remuneration of the Directors, who are the only key management of the Company, is set out in note 5 to the Accounts with further information contained in the audited part of the Directors’ Remuneration Report. (e) DIRECTORS’ DIVIDENDS During the year the Directors received dividends from the Company as follows: . David W Smart John R Smart . Alasdair H Ross . Patricia Sweeney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (f) DIRECTORS’ TRANSACTIONS 2019 £000 117 117 3 2 The following Directors received goods and services from Group Companies in the year amounting to: . David W Smart John R Smart . Alasdair H Ross . Patricia Sweeney . 7 6 – – . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 £000 374 374 3 2 3 6 – – All transactions were at normal commercial rates. (g) PENSION SCHEMES Disclosures in relation to the pension schemes are included in note 29 to the Accounts. During the year the Company paid fees and expenses on behalf of the defined benefit pension scheme amounting to £225,000 (2018, £203,000). 77 Printed by Multiprint (Scotland) Limited, Kirkcaldy 78 

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