1. ACCOUNTING POLICIES
a) Basis of accounting
The Group's financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union as they apply to the financial statements of the Group for the year ended 31st December 2006 and applied in accordance with the Companies Act 1985. The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31st December 2006 and 31st December 2005.

The accounts were approved by the Directors for issue on 30th March 2007. The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

The key areas where such judgements are made are in the valuation of the investment, development and trading property portfolios and the recognition of development revenues and profits. The recognition of development revenues is described in note 1(c) below. In making its judgement, management has considered the detailed criteria set out in IAS 11 'Construction contracts' and IAS 18 ‘Revenue’. Determining development revenues and profits requires an estimate of development costs, construction progress and letting activity. The accounting policies in respect of the valuation of the property portfolio are set out in note 1(e) and 1(f) below. Key judgements relating to such valuations include estimates of future rental income and yields.

The Group financial statements are presented in Sterling and all values are rounded to the nearest thousand pounds (£'000) except when otherwise stated. IASB and IFRIC have issued new standards and interpretations with an effective date after the date of these financial statements. The standards and interpretations considered to be relevant by the Directors are:
International Accounting Standards (IAS/IFRSs) Effective date
IFRS 7 Financial Instruments: Disclosures 1 January 2007
IFRS 8 Operating Segments 1 January 2009
IAS 1 Amendment – Presentation of Financial Statements: Capital Disclosures 1 January 2007
     
International Financial Reporting Interpretations Committee (IFRIC)  
     
IFRIC 8 Scope of IFRS 2 1 May 2006

The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial statements in the period of initial application.

Upon adoption of IFRS 7, the Group will have to disclose additional information about its financial instruments, their significance and the nature and extent of risks that they give rise to, including the fair value of its financial instruments and its risk exposure in greater detail. There will be no effect on reported income or net assets.

   
b) Basis of consolidation
i) The consolidated financial statements of the Group include the financial statements of Development Securities PLC (‘the Company’), its subsidiaries and the Group’s share of profits and losses and net assets of jointly controlled entities and associated undertakings.

Where necessary, adjustments have been made to the financial statements of subsidiaries, associates and jointly controlled entities to bring the accounting policies used and accounting periods into line with those used by the Group.

Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.
   
ii) The results of subsidiaries acquired during the year are included from the effective date of acquisition, being the date on which the Group obtains control. Business combinations are accounted for under the acquisition method. Any excess of the purchase price of the business combination over the fair value of the assets and liabilities acquired is recognised as goodwill. Any discount received is credited to the income statement in the period of acquisition.
   
c)  Revenue
Revenue, which excludes value added tax, represents:
i) the sales proceeds of trading properties, undeveloped land and building units held as inventory and sold during the year, which are recognised on completion;
ii) rental income is calculated on a straight line basis, and excludes sales of investment properties. Any incentives for lessees to enter into lease agreements are spread evenly over the periods to the earlier of lease expiry and any tenant option to break, where that option is expected to be exercised;
iii) trading income from operating properties is calculated on a straight line basis and comprises licence fee income and revenue from other services provided;
iv) development revenue and profits are recognised in accordance with the terms of development agreements where applicable and in accordance with IAS 11 'Construction contracts' and IAS 18 'Revenue' so as to match the proportion of development work completed. Profits are only recognised where the development is sufficiently complete and the outcome can be determined with reasonable certainty. Full provision is made for foreseeable losses as soon as such losses are identified;
v) project management fee income is recognised on a straight line basis over the term for which project management services are provided as the Group's fair estimate of the value of work completed;
vi) finance income is recognised by reference to the principal outstanding and prevailing interest rate applicable; and
vii) dividend income from investments is recognised when the Group’s right to receive income has been established.
   
d) Associates and jointly controlled entities
An associated company is defined as an undertaking other than a subsidiary or jointly controlled entity in which the Group holds a long-term interest and has the power to exercise significant influence. The Group’s investments in associates are accounted for in the consolidated financial statements using the equity method. The Group’s share of the profits and losses of associated undertakings are shown in the consolidated income statement while the Group’s share of the net assets of associated undertakings is shown in the consolidated balance sheet. The Group does not equity account for further losses from investments in associated companies where the investment is held at nil value after provisions for impairment.

A jointly controlled entity is defined as an undertaking other than a subsidiary or associated undertaking in which the Group has the power to exercise significant influence and which is jointly controlled by two or more venturers under a contractual arrangement. The Group’s share of the post-acquisition results of jointly controlled entities is shown in the consolidated income statement. Investments in jointly controlled entities are included in the consolidated balance sheet at cost plus the appropriate share of post-acquisition results and reserves less provisions for any impairment.
   
e) Investment properties
i) Investment properties are those properties that are held either to earn rental income or for capital appreciation or both. Investment properties may be freehold or leasehold properties. For leasehold properties that are classified as investment properties, the associated leasehold obligations are accounted for as finance lease obligations.
ii) Investment properties are revalued each year on the basis of Market Value, unless the market value cannot be reliably estimated, in which case the assets are carried at cost. Surpluses and deficits arising are recognised in the consolidated income statement for the period.
iii) Profits and losses on disposal of investment properties are calculated by reference to book value and recognised on completion.
iv) Investment properties in the course of development are accounted for as investment properties, where these properties have previously been classified as investment assets.
v) Investment property held for sale is carried at fair value less selling costs.
   
f) Property, plant and equipment
i) Operating properties
Operating properties are those properties classified as owner-occupied and held for business purposes rather than for investment, generating revenue by way of licence fees and ancillary services. These properties are revalued each year by independent, professional valuers on the basis of Existing Use Value. Surpluses and deficits in the period are included in a Revaluation reserve, except where carrying value is below depreciated cost, in which case surpluses and deficits are included in the Consolidated income statement. Depreciation is provided so as to write off the value of the properties, excluding land, over their expected useful lives.
ii) Other property, plant and equipment
Other non-current assets are held at cost less accumulated depreciation and any provision for impairment. Depreciation is provided so as to write off the cost less estimated residual value of the assets over their expected useful lives. The principal annual rates used for this purpose are as follows:
   
  Fixtures and fittings – 10% to 33%
Motor vehicles         – 20%
   
g) Leases
Rental payments under operating leases are charged on a straight-line basis over the term of the lease even if the payments are not made on such a basis.
   
h) Inventory – developments in progress and trading properties
Developments and properties held as trading assets, are valued at the lower of cost and estimated net realisable value. The cost of property developments including net outgoings and attributable interest are accumulated in Inventory, up to the date of completion. Costs arising from development activity are capitalised from commencement of active development until cessation of such activity.
   
i) Taxation
Current tax is the expected tax payable on the taxable income for the year, using tax rates applicable at the balance sheet date, together with any adjustment in respect of previous years.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences or unutilised tax losses can be utilised. Such temporary differences are not recognised if they arise from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantially enacted at the balance sheet date. Income tax relating to items recognised directly in equity is recognised in equity and not in the income statement.
   
j) Financial assets and financial liabilities
  Financial assets and Financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual terms of the instrument.
i) Trade and other receivables are recognised initially at fair value and subsequently at amortised cost. A provision for estimated irrecoverable amounts of trade receivables is established where there is evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables concerned;
ii) Trade and other payables are recognised initially at fair value and thereafter at amortised cost.;
iii) cash and cash equivalents comprise cash balances, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less and no significant risk of changes in value. Bank overdrafts that are repayable on demand and which form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows;
iv) interest bearing loans and borrowings are initially recognised at fair value, net of directly attributable arrangement costs, and subsequently remeasured at amortised cost. Such directly attributable costs are realised in the Income statement at a constant rate on carrying value;
v) the Group recognises the fair value of its derivative financial instruments including interest rate swaps on the Balance sheet and movements on those values within the Income statement; and
vi) where an asset is impaired, an appropriate impairment provision is recognised.
   
k) Borrowing costs
Gross borrowing costs relating to direct expenditure on Investment properties and inventories under development or undergoing major refurbishment are capitalised. The interest capitalised is calculated using the Group’s weighted average cost of borrowings over the period from commencement of the development work until the date of practical completion. The capitalisation of Finance costs is suspended if there are prolonged periods when development activity is interrupted.

All other borrowing costs are recognised in the Group’s Income statement in the period in which they are incurred.
   
l) Pension schemes
  The Group operates a defined contribution scheme. The charge to the Consolidated income statement in the period represents the actual amount paid or payable to the scheme in the period. Differences between contributions payable in the year and contributions paid are shown as either accruals or prepayments in the Consolidated balance sheet.
   
m) Foreign currencies
  Transactions denominated in foreign currencies are translated into Sterling at the rates of exchange ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the rates ruling at that date. Exchange movements are dealt with in the Consolidated income statement.
   
n) Share-based payments
  The cost of granting share options and other share-based remuneration to employees and Directors is recognised through the Consolidated income statement. The Group has used a Black-Scholes option valuation model and the resulting fair value is amortised on a straight-line basis through the Consolidated income statement over the vesting period of the options.
   
o) Dividend distribution
  Dividend distributions to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are declared.
   
p) Definitions
  Dividend distributions to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are declared.
   
p) Definitions
  Operating profit: stated after profit on disposal of investment properties and the revaluation of the property portfolio and before the results of associates, jointly controlled entities, finance income and costs.

IPDIndex and Total Portfolio Return: total return from the investment property portfolio, comprising net rental income or expenditure and capital gains or losses from disposals and revaluation surpluses or deficits, divided by the average capital employed during the financial period, as defined and measured by Investment Property Databank Limited, a company that produces independent benchmarks of property returns.

IPD Initial Yield: annualised current passing rent expressed as a percentage of the property valuation.

Total Shareholder Return: dividends plus annual growth in net assets.

Gearing: expressed as a percentage, is measured as net debt divided by total shareholders’ funds.
   
q) Prior year restatement
  The Directors have made the following revisions to the prior year financial statements in respect of the following items:

Operating properties
Comparative figures for the year-ended 31st December 2005 have been restated to more accurately adopt IFRS requirements in respect of certain leasehold properties. The financial effect at 1st January 2005 is a reduction in the net asset value of Operating properties of £1,348,000, a reduction in Revaluation reserve of £1,659,000 and a revaluation gain of £347,000. For the year ended 31st December 2005, the depreciation charge in respect of Operating properties was reduced by £44,000 and the Revaluation gain reduced by £80,000.

Deferred tax
The Directors have corrected an error in the computation of deferred tax in respect of the revaluation gain of an Operating property. Accordingly, at 31st December 2005, Deferred tax liabilities have been restated and increased by £2,900,000 and Deferred tax assets have been restated and increased by £300,000, with a corresponding net reduction in Retained reserves of £2,600,000. The impact on the deferred tax charge for the year ended 31st December 2005 was a decrease of £300,000.

Other reclassifications
Certain balances have been reclassified at 31st December 2005 to more fully comply with IFRS requirements:

Lease incentives, previously included within Investment property balances, are now separately identified within Prepayments and accrued income. The financial effect is a reduction in Investment properties of £678,000 and an increase in Prepayments and accrued income of £678,000, as set out in notes 11 and 14.

An investment in the loan notes of an associate, amounting to £755,000, previously classified as part of an Investment in the joint venture, was reclassified at 31st December 2005 to Financial assets, as disclosed in note 12(c).

Certain receivables, amounting to £939,000 (2005: £798,000), were reclassified as Non-current assets from Current assets, increasing Noncurrent receivables and decreasing Current receivables by the same amount.

The presentation of the Cash flow statement at 31st December 2005 has been reviewed to conform with the presentation adopted for 31st December 2006.