Notes to the consolidated
financial statements

In this section

1 Business segments

The Group has merged its Construction and Infrastructure Services segments, which are now reported in the new Construction & Infrastructure segment. The comparative result for the year to 31 December 2009 has been restated. Revenue is generated from each of the Group’s operating segments as follows:

  • Construction & Infrastructure: offers a national service for design, construction and infrastructure to public and private clients;
  • Affordable Housing: development and construction of social and open market affordable housing, and planned and response maintenance of social housing;
  • Fit Out: undertakes refurbishment and fit out projects in the offices, education, retail, hotel and leisure sectors;
  • Urban Regeneration: development through partnership agreements of large-scale mixed use urban regeneration projects with a view to letting and/or sale;
  • Investments: facilitates project finance and provides investment management expertise to the Group’s PPP/PFI activities and investment portfolio; and
  • Group Activities: represents costs and income arising from corporate activities which cannot be allocated to the operating segments. These include costs for central activities such as treasury management, corporate tax coordination, insurance management, pension administration and company secretarial and legal services.

For management purposes, the Group is organised into four operating divisions: Construction & Infrastructure, Affordable Housing, Fit Out, Urban Regeneration and one specialist unit, Investments. Group Activities includes activities of the parent Company, Morgan Sindall Group plc. The divisions and the specialist unit are the basis on which the Group reports its segment information. Segment information about the Group’s continuing operations is presented below:

2010

  Construction &
Infrastructure
£m		 Affordable
Housing
£m		 Fit Out
£m		 Urban
Regeneration
£m		 Investments
£m		 Group
Activities £m		 £m Eliminations
£m		 Total
£m
Revenue: external 1,249.8 387.3 415.1 45.8 3.9 – 2,101.9 – 2,101.9
Revenue: inter-segment 49.6 2.2 3.5 – – – 55.3 (55.3) –
Operating profit/(loss)
before amortisation and
non-recurring items		 26.9 16.3 14.8 2.5 (4.1) (4.1) 52.3 – 52.3
Share of results of associates
and joint ventures after tax		 – (0.2) – (0.5) 0.8 – 0.1 – 0.1
Profit/(loss) from operations
before amortisation and
non-recurring items		 26.9 16.1 14.8 2.0 (3.3) (4.1) 52.4 – 52.4
Amortisation of intangible
assets (note 9)		 (0.5) (0.3) – (4.7) – – (5.5) – (5.5)
Non-recurring items (note 2) (3.2) (3.9) – 2.0 – – (5.1) – (5.1)
Profit/(loss) from operations 23.2 11.9 14.8 (0.7) (3.3) (4.1) 41.8 – 41.8
Net finance income             (1.1)   (1.1)
Profit before income tax expense             40.7   40.7

2009 (restated)

  Construction &
Infrastructure
£m		 Affordable
Housing
£m		 Fit Out
£m		 Urban
Regeneration
£m		 Investments
£m		 Group
Activities £m		 £m Eliminations
£m		 Total
£m
Revenue: external 1,513.2 373.8 291.2 31.9 3.4 – 2,213.5 – 2,213.5
Revenue: inter-segment 13.1 – – – 6.1 – 19.2 (19.2) –
Operating profit/(loss)
before amortisation		 30.1 14.9 13.8 0.6 (3.0) (6.0) 50.4 – 50.4
Share of results of associates
and joint ventures after tax		 – – – 0.1 – – 0.1 – 0.1
Profit/(loss) from operations
before amortisation		 30.1 14.9 13.8 0.7 (3.0) (6.0) 50.5 – 50.5
Amortisation of intangible
assets (note 9)		 (1.5) – – (5.3) – – (6.8) – (6.8)
Profit/(loss) from operations 28.6 14.9 13.8 (4.6) (3.0) (6.0) 43.7 – 43.7
Net finance income             1.0   1.0
Profit before income tax expense             44.7   44.7

Balance sheet analysis of business segments:

2010

  Construction &
Infrastructure
£m		 Affordable
Housing
£m		 Fit Out
£m		 Urban
Regeneration
£m		 Investments
£m		 Group
Activities £m		 Total
£m
Goodwill 151.1 45.7 – 16.4 – – 213.2
Other intangible assets 0.1 4.4 – 12.1 – – 16.6
Equity accounted joint ventures – – – 28.3 17.1 – 45.4
Other assets 418.8 229.0 118.9 21.7 0.5 (42.3) 746.6
Total assets 570.0 279.1 118.9 78.5 17.6 (42.3) 1,021.8
Total liabilities (449.7) (189.3) (99.1) (13.6) (19.6) (28.8) (800.1)
Other information:              
Amortisation of intangible assets (note 9) 0.5 0.3 – 4.7 – – 5.5
Depreciation (note 10) 6.7 0.3 1.0 0.2 0.1 0.5 8.8
Property, plant and equipment additions (note 10) 3.9 0.2 0.2 – – 0.2 4.5

2009 (restated)

  Construction &
Infrastructure
£m		 Affordable
Housing
£m		 Fit Out
£m		 Urban
Regeneration
£m		 Investments
£m		 Group
Activities £m		 Total
£m
Goodwill 151.2 16.5 – 16.7 – – 184.4
Other intangible assets 0.5 – – 16.1 – – 16.6
Equity accounted joint ventures – 0.1 – 35.2 14.9 – 50.2
Other assets 372.4 168.7 73.1 14.7 3.8 7.0 639.7
Total assets 524.1 185.3 73.1 82.7 18.7 7.0 890.9
Total liabilities (321.9) (131.0) (44.0) (39.8) (18.4) (126.5) (681.6)
Other information:              
Amortisation of intangible assets (note 9) 1.5 – – 5.3 – – 6.8
Depreciation (note 10) 7.2 0.2 1.1 0.3 0.2 0.3 9.3
Property, plant and equipment additions (note 10) 7.9 0.1 0.1 0.2 – 0.2 8.5

Significantly, all of the Group’s operations are carried out in the UK.

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2 Profit for the year

Profit for the year is stated after charging/(crediting):

  2010
£m		 2009
£m
Non-recurring items (see below) 5.1 –
Depreciation of property, plant and equipment (note 10) 8.8 9.3
Gain on disposal of property, plant and equipment (0.5) (0.4)
Staff costs (note 4) 368.4 389.8
Amortisation of intangible assets (note 9) 5.5 6.8
Write downs in work in progress recognised as an expense – 1.0
(Write back)/impairment of trade receivables (note 29) (0.6) 0.6
Auditors’ remuneration for audit and other services (see below) 1.1 1.0

A more detailed analysis of non-recurring items is provided below:

  2010
£m		 2009
£m
Acquisition related costs 3.9 –
Integration costs 3.2 –
One off gain from a bargain purchase (2.0) –
Total non-recurring items 5.1 –
Total non-recurring items post income tax 4.0 –

A more detailed analysis of auditors’ remuneration is provided below:

  2010
£m		 2009
£m
Fees payable to the Company’s auditors for the audit of the Company’s annual report and accounts 0.1 0.1
Fees payable to the Company’s auditors and their associates for other services to the Group    
The audit of the Company’s subsidiaries and joint ventures pursuant to legislation 0.9 0.8
Total audit fees 1.0 0.9
Services to joint ventures relating to tax 0.1 0.1
Total non-audit fees 0.1 0.1
Total auditors’ remuneration 1.1 1.0

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3 Employees

The average monthly number of people employed by the Group during the year was:

  2010
No.		 2009
No.
Construction & Infrastructure 4,807 5,989
Affordable Housing 2,204 1,324
Fit Out 549 569
Urban Regeneration 50 49
Investments 33 24
Group Activities 19 22
  7,662 7,977

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4 Staff costs

  2010
£m		 2009
£m
Wages and salaries 324.3 342.8
Social security costs 34.6 37.6
Other pension costs 9.5 9.4
  368.4 389.8

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5 Finance income and costs

  2010
£m		 2009
£m
Interest income on bank deposits 0.2 1.8
Other interest income 0.2 0.2
Interest receivable from joint ventures 1.3 1.3
Finance income 1.7 3.3
Interest payable on bank overdrafts and borrowings – (1.7)
Interest payable on finance leases (0.5) (0.5)
Loan arrangement and commitment fees (1.7) –
Interest payable to joint ventures – –
Other interest payable (0.6) (0.1)
Finance costs (2.8) (2.3)
Net finance (costs)/income (1.1) 1.0

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6 Income tax expense

  2010
£m		 2009
£m
Current tax expense:    
UK corporation tax 11.7 12.2
Adjustment in respect of prior years (1.4) (1.1)
  10.3 11.1
Deferred tax expense:    
Current year 0.1 0.8
Adjustment in respect of prior years 0.5 (0.1)
  0.6 0.7
Income tax expense for the year 10.9 11.8

Corporation tax is calculated at 28.0% (2009: 28.0%) of the estimated assessable profit for the year.

The total tax charge for the year of £10.9m is lower (2009: lower) than the standard rate of corporation tax in the UK of 28.0% (2009: 28.0%). The difference can be reconciled as follows:

  2010
£m		 2009
£m
Current tax expense:    
Profit before tax 40.7 44.7
Income tax expense at UK corporation tax rate 11.4 12.5
     
Tax effect of:    
Share of net profit of equity accounted joint ventures – –
Expenses that are not deductible in determining taxable profits 0.8 0.8
Adjustments in respect of prior years (0.9) (1.2)
Effect of expected forthcoming change in tax rates upon closing deferred tax balance 0.1 –
Other (0.5) (0.3)
Income tax expense for the year 10.9 11.8
Effective tax rate for the year 26.8% 26.4%
Effective tax rate for the year ignoring prior year adjustments 29.0% 29.1%

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7 Dividends

Amounts recognised as distributions to equity holders in the period:

  2010
£m		 2009
£m
Second interim dividend for the year ended 31 December 2009 of 30.0p
(2008: final dividend 30.0p) per share		 12.7 12.7
Interim dividend for the year ended 31 December 2010 of 12.0p
(2009: 12.0p) per share		 5.1 5.0
  17.8 17.7
Proposed final dividend for the year ended 31 December 2010
of 30.0p (2009: second interim dividend of 30.0p) per share		 12.8 12.7

The proposed final dividend is subject to approval by shareholders at the annual general meeting and has not been included as a liability in these financial statements. The proposed final dividend will be paid on 16 May 2011 to shareholders on the register at 26 April 2011. The ex-dividend date will be 20 April 2011.

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8 Earnings per share

There are no discontinued operations in either the current or prior year.

The calculation of the basic and diluted earnings per share is based on the following data:

Earnings 2010
£m		 2009
£m
Earnings before tax 40.7 44.7
Deduct tax expense per the income statement (10.9) (11.8)
Non-controlling interests 0.1 0.1
Earnings for the purposes of basic and dilutive earnings per share being
net profit attributable to owners of the Company		 29.9 33.0
Add back:
amortisation expense (see notes 2 and 9)		 5.5 6.8
non-recurring items (note 2) 4.0 –
Earnings for the purposes of adjusted basic and dilutive earnings per share being net profit attributable
to owners of the Company adjusted for amortisation expense and non-recurring items		 39.4 39.8
Number of shares 2010
No. ’000s		 2009
No. ’000s
Weighted average number of ordinary shares for the purposes
of basic earnings per share		 42,391 42,281
Effect of dilutive potential ordinary shares:    
Share options 93 92
Conditional shares not vested 389 332
Weighted average number of ordinary shares for the purposes
of diluted earnings per share		 42,873 42,705

The average market value of the Company’s shares for the purpose of calculating the dilutive effect of share options and long-term incentive plan shares was based on quoted market prices for the period that the options were outstanding. The weighted average share price for the period was £5.93 (2009: £6.11).

Earnings per share as calculated in accordance with IAS 33, ‘Earnings per Share’ are disclosed below:

  2010 2009
Basic earnings per share 70.5p 77.9p
Diluted earnings per share 69.7p 77.1p

Earnings per share adjusted for amortisation expense and non-recurring items:

  2010 2009
Basic earnings per share adjusted for amortisation expense and non-recurring items 92.9p 93.9p
Diluted earnings per share adjusted for amortisation expense and non-recurring items 91.9p 93.0p

A total of 2,246,025 share options that could potentially dilute earnings per share in the future were excluded from the above calculations because they were anti-dilutive at 31 December 2010 (2009: 2,820,160).

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9 Goodwill and other intangible assets

  Other intangible assets    
  Secured
customer
contracts
£m		 Other
contracts
and related
relationships
£m		 Software
£m		 Non-compete
agreement
£m		 Total other
intangible
assets
£m		 Goodwill
£m
Cost or valuation
Balance at 1 January 2009 4.2 26.9 0.9 5.0 37.0 192.3
Additions in the year (note 25) – – – – – 1.1
Balance at 31 December 2009 4.2 26.9 0.9 5.0 37.0 193.4
Balance at 1 January 2010 4.2 26.9 0.9 5.0 37.0 193.4
Additions in the year (note 25) – 5.8 – 0.8 6.6 29.1
Disposals during the year (note 25) – (2.0) – – (2.0) (0.3)
Balance at 31 December 2010 4.2 30.7 0.9 5.8 41.6 222.2
Accumulated amortisation
Balance at 1 January 2009 (2.9) (7.6) (0.7) (2.4) (13.6) (9.0)
Amortisation charge for the year (1.0) (3.9) (0.2) (1.7) (6.8) –
Balance at 31 December 2009 (3.9) (11.5) (0.9) (4.1) (20.4) (9.0)
Balance at 1 January 2010 (3.9) (11.5) (0.9) (4.1) (20.4) (9.0)
Amortisation charge for the year (0.3) (4.1) – (1.1) (5.5) –
Disposals during the year – 0.9 – – 0.9 –
Balance at 31 December 2010 (4.2) (14.7) (0.9) (5.2) (25.0) (9.0)
Carrying amount
Carrying amount at 31 December 2010 – 16.0 – 0.6 16.6 213.2
Carrying amount at 31 December 2009 0.3 15.4 – 0.9 16.6 184.4

Other contracts and related relationships arise from valuing the relationship with a number of clients where there is a secured pipeline of work or historic experience of a relationship and the real prospective opportunity of repeat work. Following a review of estimated useful lives, other contracts and related relationships will be fully amortised by 2019.

Software was fully amortised by 31 December 2009 and secured customer contracts were fully amortised by 31 December 2010.

The non-compete agreement acquired in 2007 expired in July 2010. The Group acquired a non-compete agreement with a cost of £0.8m as a result of the acquisition of Powerminster Gleeson Services Limited on 30 June 2010 (note 25). This is of three years duration and is being amortised on a straight-line basis.

Goodwill represents the value of people, track record and expertise acquired within acquisitions that are not capable of being individually identified and separately recognised.

Segmentation of goodwill and other intangible assets is disclosed in note 1.

Note 25 provides further details in respect of the fair value of intangible assets identified on acquisition and for the determination of goodwill arising on acquisition. Amortisation charges in respect of intangible assets with a finite life are recorded within administration expenses in the income statement. The amortisation rates are given in the significant accounting policies.

In testing goodwill and other intangible assets for impairment, the carrying value of goodwill and other intangible assets in each cash-generating unit has been compared against value in use. Value in use has been determined by using forecast pre-tax cash flows from Board approved budgets for the next three years and extrapolating future growth and applying risk-adjusted discount rates that are specific to the cash-generating unit in question.

Cash flows beyond three years have been extrapolated using an estimated growth rate of 2.50% (2009: 2.25%) which is equal to the HM Treasury’s November 2010 forecast for the UK economy: a comparison of independent forecasts for GDP. The risk-adjusted nominal discount rates used are 12% (2009: 12%) for Construction & Infrastructure, 13% (2009: 13%) for Affordable Housing and 15% (2009: 15%) for Urban Regeneration. The directors have reviewed the rates used and believe they are still appropriate.

The key assumptions in forecasting pre-tax cash flows relate to future budgeted revenue, margin likely to be achieved and, likely rates of long-term growth by market sector. Budgeted revenue and margin are based on views on past performance, secured workload and workload likely to be achievable in the short to medium-term, given trends in the relevant market sector as well as macroeconomic factors. In carrying out this exercise, no impairment of goodwill or other intangible assets has been identified.

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10 Property, plant and equipment

  Owned plant,
machinery and
equipment
£m		 Leased plant,
machinery and
equipment
£m		 Freehold
property
and land
£m		 Leased
property
£m		 Total
£m
Cost or valuation
Balance at 1 January 2009 38.7 13.5 2.8 7.8 62.8
Additions in the year 5.7 2.0 – 0.8 8.5
Transfers 1.2 (1.2) – – –
Disposals during the year (1.6) (1.1) (0.4) – (3.1)
Balance at 31 December 2009 44.0 13.2 2.4 8.6 68.2
Balance at 1 January 2010 44.0 13.2 2.4 8.6 68.2
Additions in the year 2.8 0.7 – 1.0 4.5
Additions through acquisitions 1.4 – – – 1.4
Transfers 0.8 (0.8) – – –
Disposals during the year (2.7) (0.3) – (0.2) (3.2)
Balance at 31 December 2010 46.3 12.8 2.4 9.4 70.9
Accumulated depreciation
Balance at 1 January 2009 (22.8) (3.9) – (3.4) (30.1)
Depreciation charge for the year (6.4) (1.7) – (1.2) (9.3)
Transfers (1.1) 1.1 – – –
Disposals during the year 1.5 1.0 – – 2.5
Balance at 31 December 2009 (28.8) (3.5) – (4.6) (36.9)
Balance at 1 January 2010 (28.8) (3.5) – (4.6) (36.9)
Depreciation charge for the year (5.9) (1.5) – (1.4) (8.8)
Transfers (0.6) 0.6 – – –
Disposals during the year 2.2 0.2 – 0.2 2.6
Balance at 31 December 2010 (33.1) (4.2) – (5.8) (43.1)
Net book value
Net book value at 31 December 2010 13.2 8.6 2.4 3.6 27.8
Net book value at 31 December 2009 15.2 9.7 2.4 4.0 31.3

Within the carrying value of property, plant and equipment, there are no assets under construction (2009: £nil).

Contractual commitments for the acquisition of property, plant and equipment are £0.1m (2009: £0.8m).

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11 Investment property

Valuation 2010
£m		 2009
£m
At 1 January 1.8 –
Additions in the year 2.5 1.8
Revaluation in the year – –
At 31 December 4.3 1.8

Investment properties comprise certain residential properties constructed by the Group as part of larger mixed tenure projects for rental to social or private residential clients.

The fair value of the Group’s investment property at 31 December 2010 is based on a valuation carried out at that date by the directors. The valuation, which conforms to International Valuation Standards, was determined by reference to market evidence of transaction proceeds for similar properties.

The property rental income earned by the Group from its investment property, all of which is leased out under operating leases, amounted to £0.1m (2009: £nil). Direct operating expenses arising on the investment property in the period amounted to £0.1m (2009: £nil).

Properties were transferred from inventories to investment properties late in 2009 and hence there was no material rental income or direct operating expense during the preceding year.

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12 Investments in equity accounted joint ventures

The Group has the following interests in significant joint ventures:

Access for Wigan (Holdings) Limited 50% share

Access for Wigan (Holdings) Limited is developing the Wigan Life Centre.

Ashton Moss Developments Limited 50% share

Ashton Moss Developments Limited has developed a mixed use site in Manchester.

Blue Light Holdings Limited 50% share

Blue Light Holdings Limited is a joint venture with Barclays Capital set up to hold the investment in a joint venture with Carden Croft for the Dorset Emergency Services PFI scheme.

Bromley Park Limited 50% share

Bromley Park Limited has developed a site for housing in Kent acquired from the Ministry of Defence.

Claymore Roads (Holdings) Limited 50% share

Claymore Roads (Holdings) Limited is responsible for the upgrade and operation of the A92 between Dundee and Arbroath in Scotland.

Community Solutions Investment Partners Limited (previously called Community Solutions for Primary Care (Holdings) Limited) 50% share

Community Solutions Investment Partners Limited carries out strategic development and regeneration projects in the health sector.

English Cities Fund 12.5% equity participation

ECf is a limited partnership with English Partnerships and Legal & General to develop mixed use regeneration schemes in assisted areas. Joint control is exercised through the board of the general partner at which each partner is represented by two directors and no decision can be taken without the agreement of a director representing each partner.

Hull Esteem Consortium PSP Limited 33⅓% share

Hull Esteem Consortium PSP Limited is the private sector investor in the Hull BSF scheme currently building two schools and with a pipeline of a further 15.

ISIS Waterside Regeneration 25% equity participation

ISIS Waterside Regeneration is a limited partnership between British Waterways and Warp 4 Limited Partnership (itself a joint venture between Morley Fund Management and Muse Developments) to undertake regeneration of waterside sites. Joint control is exercised through the board of the general partner at which each of British Waterways and Warp 4 Limited Partnership is represented by three directors and no decision can be taken without the agreement of a director representing each partner.

Lewisham Gateway Developments Limited 50% share

Lewisham Gateway Developments Limited is redeveloping a mixed use site comprising retail, office, hotel, residential, education, health and leisure space.

Lingley Mere Business Park Development Company Limited 50% share

Lingley Mere Business Park Development Company Limited is developing new office space and ancillary facilities at Warrington in Cheshire.

Morgan-Vinci Limited 50% share

Morgan-Vinci Limited is responsible for the construction and operation of the Newport Southern Distributor Road.

North Shore Development Partnership Limited 50% share

North Shore Development Partnership Limited is creating a high quality extension to Stockton-on-Tees’ town centre in partnership with Tees Valley Regeneration, Stockton Council and English Partnerships.

On 24 January 2011, this joint venture became a wholly owned subsidiary of the Group.

Renaissance Miles Platting Limited 33⅓% share

Renaissance Miles Platting Limited is a joint venture with IIC Miles Platting Equity Limited and Adactus Housing Association to refurbish existing homes and build new homes on a mixed tenure development under a PFI arrangement for Manchester City Council.

St Andrews Brae Developments Limited 50% share

St Andrews Brae Developments Limited is securing planning permission for residential development.

Taycare Health (Holdings) Limited 50% share

Taycare Health (Holdings) Limited is invested 50% in a Non Profit Distributing project to develop two mental health hospitals for Tayside Health Board.

The Compendium Group Limited 50% share

The Compendium Group Limited is a company formed to carry out strategic development and regeneration projects of a primarily residential nature.

In the course of the year, the Group acquired full control of three joint ventures in which it previously had a 50% interest (note 25).

Investments in equity accounted joint ventures are as follows:

  2010
£m		 2009
£m
At 1 January 50.2 53.0
Equity accounted share of net profits for the year 0.1 0.1
Increase in investment 4.3 4.2
Disposals (5.8) –
Dividends received (2.0) (7.7)
Movement on cash flow hedges (1.4) 0.6
At 31 December 45.4 50.2

The increase in investments in joint ventures during the year was mainly due to equity and loan investment in Hull Esteem Consortium PSP Limited and loan investment in Community Solutions Investment Partners Limited.

Of the dividends received in the year, £0.8m (2009: £2.2m) were paid in cash and £1.2m (2009: £5.5m) through settlement of amounts owing to joint ventures.

Financial information related to equity accounted joint ventures:

  2010
£m		 2009
£m
Non-current assets (100%) 296.8 340.7
Current assets (100%) 376.9 306.3
Current liabilities (100%) (92.3) (100.6)
Non-current liabilities (100%) (458.4) (436.6)
Net assets reported by equity accounted joint ventures (100%) 123.0 109.8
Revenue (100%) 148.9 104.4
Expenses (100%) (148.5) (106.6)
Net profit/(loss) (100%) 0.4 (2.2)

Results of equity accounted joint ventures:

  2010
£m		 2009
£m
Group share of profit before tax 0.6 0.2
Group share of income tax expense (0.5) (0.1)
Group share of profit after tax 0.1 0.1

Commitments in respect of interests in joint ventures:

  2010
£m		 2009
£m
Commitment to provide further equity to Urban Regeneration joint ventures 0.8 1.6
Commitment to provide further equity and subordinated debt to PFI/PPP joint ventures 12.0 7.1
  12.8 8.7

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13 Shared equity loan receivables

  2010
£m		 2009
£m
Balance at 1 January 9.0 –
Additions arising from the sale of properties 4.0 8.9
Additions through acquisitions (note 25) 0.6 –
Movement in fair value 0.3 0.1
Repayment – –
Balance at 31 December 13.9 9.0

The Group has elected to recognise the shared equity loan receivables at fair value through profit or loss under IAS 39. This is an irrevocable election and results in all movements in the fair value of the loans being recognised in profit or loss.

All of the shared equity loan receivables are secured by way of a second charge over the property. During the year, there were no defaults on any of the shared equity loans (2009: £nil) and there were a very small number of voluntary repayments of shared equity loan receivables in the year (2009: £nil). All repayments were at values at or above the values held in the accounts. The Group’s maximum credit exposure is limited to the carrying value of the shared equity loan receivables granted.

Basis of valuation and assumptions made

Because it is impracticable to obtain regular market valuations on a property-by-property basis and there is no directly observable fair value for individual loans arising from the sale of specific properties under the scheme, the Group has developed a model for determining the fair value of the portfolio of loans based on region specific property prices, expected property price increases, expected loan defaults and a discount factor which reflects the interest rate expected on an instrument of similar risk and duration in the market. Details of the key assumptions made in this valuation are as follows:

  2010 2009
Assumption    
Period over which shared equity loan receivables are discounted 7 years 7 years
Weighted average annual property price increase assumed 3.8% 3.8%
Nominal discount rate applied to initial shared equity receivable 6.6% 6.6%
Rate of default assumed in valuation of shared equity loan portfolio 0.0% 0.0%

At 31 December 2010, a total of 462 (2009: 302) properties had been sold under the shared equity scheme for which a loan was outstanding at the year end.

At 31 December 2010, the weighted average shared equity loan contribution (being the Group’s weighted average loan as a proportion of the selling price of a property) was 25% (2009: 25%). The maximum loan contribution by the Group under the shared equity scheme is 25% (2009: 25%).

The fair value measurement for shared equity loan receivables is classified as Level 3 as defined by IFRS 7 ‘Financial Instruments: Disclosures’.

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14 Inventories

  2010
£m		 2009
£m
Raw materials 2.2 3.5
Work in progress 138.9 137.7
  141.1 141.2

Work in progress comprises land and housing, commercial and mixed developments in the course of construction.

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15 Trade and other receivables

  2010
£m		 2009
£m
Trade receivables (note 29) 209.7 123.0
Provision for impairment losses (note 29) (2.0) (2.9)
  207.7 120.1
Amounts owed by joint ventures (note 28) 9.8 3.1
Deferred tax asset (note 20) – –
Prepayments and accrued income 5.5 8.2
Other receivables 6.2 10.9
  229.2 142.3

The directors consider that the carrying amount of trade and other receivables approximates to their fair value.

The average credit period on revenue is 23 days (2009: 18 days). No interest is charged on the trade receivables outstanding balance. Trade receivables overdue are provided for based on estimated irrecoverable amounts.

Included in the Group’s trade receivable balance are debtors with a carrying amount of £50.4m (2009: £32.7m) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the Group considers that the amounts are still recoverable. The average age of these receivables is 32 days (2009: 121 days).

The Group’s exposure to credit risks and impairment losses related to trade and other receivables are disclosed in note 29, Financial Instruments.

In determining the recoverability of trade receivables, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and spread across the Group’s operating segments. Accordingly, the directors believe that there is no further credit provision required in excess of the provision for impairment losses. No collateral is held by the Group as security.

Within the provision for impairment losses, there are no specific trade receivables (2009: £nil) from debtors which have been placed into liquidation or administration.

At the reporting date, there were no trade and other receivables which have had renegotiated terms that would otherwise have been past due.

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16 Construction contracts

  2010
£m		 2009
£m
Amounts due from construction contract customers 178.4 192.5
Amounts due to construction contract customers (70.7) (49.0)
Carrying amount at the end of the year 107.7 143.5
Contract costs incurred plus recognised profits less recognised losses to date 7,497.7 9,607.7
Less: progress billings (7,390.0) (9,464.2)
  107.7 143.5

Contract costs incurred plus recognised profits less recognised losses to date and progress billings include contract activity which the Group has not recognised in the income statement as it occurred prior to acquisition.

Amounts recoverable on construction contracts are stated at cost plus the profit attributable to that contract, less any impairment losses. Progress payments for construction contracts are deducted from amounts recoverable. Amounts due to construction contract customers represent amounts received in excess of revenue recognised on construction contracts.

At 31 December 2010, retentions held by customers for contract work amounted to £57.2m (2009: £62.0m).

None of the Group’s amounts due from construction contract customers’ balances is past due at the reporting date (2009: £nil). The Group does not hold any collateral over these balances.

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17 Trade and other payables

  2010
£m		 2009
£m
Trade payables (note 29) 149.9 145.9
Amounts owed to joint ventures (note 28) 0.8 0.8
Other tax and social security 20.4 21.2
Accruals and deferred income 480.7 396.2
Other payables 15.4 12.2
  667.2 576.3

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

The directors consider that the carrying amount of trade payables approximates to their fair value. The average credit period taken for trade purchases is 25 days (2009: 23 days). No interest was incurred on outstanding balances. The Group has financial risk management policies in place to ensure that all payables are paid when due except in cases of genuine dispute.

Non-current liabilities include trade and other payables of £nil (2009: £0.1m) that fall due between two and five years.

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18 Finance lease liabilities

  Minimum lease
payments		 Capital element
of lease payments
  2010
£m		 2009
£m		 2010
£m		 2009
£m
Amounts payable under finance leases:        
Within one year 2.1 2.2 1.7 1.8
In the second to fifth years inclusive 5.0 5.5 4.2 4.6
After five years 1.9 2.8 1.8 2.5
  9.0 10.5 7.7 8.9
Less: future finance charges (1.3) (1.6) n/a n/a
Present value of lease obligations 7.7 8.9 7.7 8.9
Current lease liability     1.7 1.8
Non-current lease liability     6.0 7.1
      7.7 8.9

It is the Group’s policy to lease certain of its property, plant and equipment under finance leases. The average lease term is six years (2009: five years). For the year ended 31 December 2010, the average effective borrowing rate was 5% (2009: 6%). Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.

All lease obligations are denominated in sterling. The fair value of the Group’s lease obligations approximates to their carrying amount. The Group’s obligations under finance leases are secured on the assets to which the leases relate.

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19 Retirement benefit schemes

Defined contribution plans

(i) The Morgan Sindall Retirement Benefits Plan

The Morgan Sindall Retirement Benefits Plan (‘the Plan’) was established on 31 May 1995 and currently operates on defined contribution principles for employees of the Group. The assets of the Plan are held separately from those of the Group in funds under the control of the Trustees of the Plan. The total cost charged to the income statement of £9.2m (2009: £9.2m) represents contributions payable to the defined contribution section of the Plan by the Group.

As at 31 December 2010, contributions of £1.0m (2009: £0.7m) were due in respect of December’s contribution not paid over to the Plan. The Company, with the consent of the Trustees, can decide how to use monies held in a defined contribution general account.

(ii) Local Government Pension Schemes

The Group makes contributions on defined contribution principles to a number of Local Government Pension Schemes for employees who transferred from Connaught Partnerships Limited. The assets of these plans are held separately from those of the Group under the control of the Trustees of the plans. The total cost charged to the income statement of £0.1m (2009: £nil) represents contributions payable to these plans by the Group.

Defined benefit plan

The Plan includes a defined benefit section comprising liabilities and transfers of funds representing the accrued benefit rights of active and deferred members and pensioners of pension plans of companies which are now part of the Group. These include salary related benefits for members in respect of benefits accrued before 31 May 1995 (and benefits transferred in from The Snape Group Limited Retirement Benefits Scheme include accruals up to 1 August 1997). No further defined benefit membership rights can accrue after those dates.

The most recent valuation of the Plan assets and the present value of the defined benefit liabilities was prepared at 31 December 2010. The present value of the defined benefit liabilities, the related current service cost and past service cost were measured using the projected unit credit method.

Key assumptions used: 2010
%		 2009
%
Discount rate 5.4 5.6
Expected return on the Plan assets 4.8 4.9
Expected rate of salary increases 4.6 4.8
Future pension increases(1) 3.5 3.5
Inflation increases 3.6 3.8

(1) depending on their date of joining, members receive fixed pension increases of 3.0% or 3.5%.

Life expectancy

For the disclosures as at 31 December 2010, the S1NXA series of tables (31 December 2009, the PXA92 series of tables) from the Continuous Mortality Investigation were adopted appropriate to members’ actual years of birth and with a 95% scaling factor for males and 100% for females. Medium cohort projections with a minimum underpin of 1.5% were adopted for future improvements in life expectancy.

The average life expectancy in years of a pensioner retiring at age 65 on the balance sheet date is as follows:

  2010 2009
Male 87.1 87.0
Female 89.6 89.9

The average life expectancy in years of a pensioner retiring at age 65, twenty years after the balance sheet date is as follows:

  2010 2009
Male 90.0 88.1
Female 92.5 90.9

An increase of one year to the average life expectancy at 65 would increase the present value of the Plan liabilities by around 3.0%. If such an assumption had been adopted as at 31 December 2010, the present value of the Plan liabilities would have increased to £8.8m (2009: increase of 3.0% with the present value of the Plan liabilities increasing from £8.9m to £9.2m).

The amount included in the balance sheet arising from the Group’s liabilities in respect of the Plan is as follows:

  2010
£m		 2009
£m
Present value of the Plan liabilities (8.5) (8.9)
Fair value of the Plan assets 6.6 5.7
Deficit in the Plan liability recognised in the balance sheet (1.9) (3.2)

Amounts recognised in the income statement in respect of the Plan are as follows:

  2010
£m		 2009
£m
Interest cost (0.5) (0.5)
Expected return on the Plan assets 0.3 0.3
Net periodic cost (0.2) (0.2)

The charge for the year has been included in administrative expenses. Actuarial gains and losses have been reported in the consolidated statement of comprehensive income. The actual return on the Plan assets was a gain of £0.2m (2009: £0.4m).

Movements in the present value of the Plan liabilities were as follows:

  2010
£m		 2009
£m
Liabilities at 1 January (8.9) (8.0)
Interest cost (0.5) (0.5)
Actuarial gain/(loss) 0.6 (0.8)
Benefits paid 0.3 0.4
Liabilities at 31 December (8.5) (8.9)

The liabilities in respect of pensions in payment account for around 35% of the total liabilities (2009: 16%). The average term to retirement is 7.5 years for active members (i.e. members who are still employed by the Group and whose past service benefits are linked to their final salary but are no longer accruing final salary benefits) (2009: six years) and 6.4 years (2009: three years) for deferred members.

Movements in the value of the Plan assets were as follows:

  2010
£m		 2009
£m
Assets at 1 January 5.7 5.0
Expected return on the Plan assets 0.3 0.2
Actuarial gains 0.2 0.2
Contributions from sponsoring company 0.7 0.7
Benefits paid (0.3) (0.4)
Assets at 31 December 6.6 5.7

The effect of a 1% movement in the key financial assumptions is set out below:

  Increase
of 1%
£m		 Decrease
of 1%
£m
Discount rate
Effect on interest cost – –
Effect on the defined benefit obligation (1.4) 1.7
Inflation rate
Effect on interest cost – –
Effect on the defined benefit obligation 0.4 (0.4)
Expected rate of return on assets
Effect on the expected return on the Plan assets – –

The sensitivities to the interest cost and expected return on assets shown above relate to the calendar year ending 31 December 2010. The sensitivities to the defined benefit obligation relate to the liability as at 31 December 2009.

  2010
£m		 2009
£m
Actuarial (gain)/loss recognised in the consolidated statement of comprehensive income (0.8) 0.6
Cumulative actuarial loss recognised in the statement of comprehensive income 3.0 3.8

The Plan assets and the expected rate of return at the balance sheet date were as follows:

  Fair value of assets Expected return
  2010
£m		 2009
£m		 2010
%		 2009
%
Fixed interest gilts 3.3 3.2 4.2 4.4
Corporate bonds 3.3 2.5 5.4 5.6
  6.6 5.7    

The expected return on the Plan assets is determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity reflect long-term real rates of return expected in the respective markets.

The history of experience adjustments is as follows:

  2010
£m		 2009
£m		 2008
£m		 2007
£m		 2006
£m
Present value of the Plan liabilities (8.5) (8.9) (8.0) (8.0) (7.3)
Fair value of the Plan assets 6.6 5.7 5.0 4.7 4.8
Deficit in the Plan (1.9) (3.2) (3.0) (3.3) (2.5)
Experience adjustments on the Plan liabilities:          
Amount 0.6 (0.8) 0.2 (0.4) 0.7
Percentage of the Plan liabilities 6.7% 8.9% (1.9%) 4.4% (9.2%)
Experience adjustments on the Plan assets:          
Amount 0.3 0.2 (0.3) (0.5) –
Percentage of the Plan assets 3.6% 2.6% (6.6%) (11.0%) 0.4%

The amount of contributions expected to be paid to the Plan during 2011 is £0.7m (2010: £0.7m).

Gloucestershire County Council Local Government Pension Scheme

The Group has a liability to this defined benefit scheme for former Gloucestershire County Council employees who transferred to the Group under TUPE arrangements. The amount of any liability to fund any deficit on the termination of the Contractor Admission Agreement is capped at £0.8m. This liability is not included in any of the disclosures above.

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20 Deferred tax

  Non-current
asset
amortisation
£m		 Short-term
timing
differences
£m		 Retirement
benefit
obligation
£m		 Share-based
payments
£m		 Total
£m
At 1 January 2009 1.5 1.0 0.8 0.4 3.7
Credit/(charge) to income 0.2 (0.4) 0.1 (0.6) (0.7)
Credit to equity – – – 0.8 0.8
At 31 December 2009 1.7 0.6 0.9 0.6 3.8
At 1 January 2010 1.7 0.6 0.9 0.6 3.8
Credit/(charge) to income 0.2 (0.7) (0.1) 0.1 (0.5)
(Charge)/credit to equity – – (0.3) 0.6 0.3
Acquisition of subsidiary (0.3) – – – (0.3)
Effect of change in tax rate:
Income statement (0.1) – – – (0.1)
At 31 December 2010 1.5 (0.1) 0.5 1.3 3.2

The UK Corporation tax rate is set to reduce to 27% in April 2011, affecting the closing deferred tax balance as shown above. Further reductions in the corporation tax rate to 24% are expected but not yet legislated.

Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset) for financial reporting purposes:

  2010
£m		 2009
£m
Deferred tax within non-current assets 3.2 3.8

At 31 December 2010, the Group had unused tax losses of £0.6m (2009: £0.6m) available for offset against future profits. No deferred tax asset has been recognised in respect of such losses due to the unpredictability of future profit streams against which these losses may be utilised. Losses may be carried forward indefinitely.

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21 Provisions

Current liabilities

  Contract
provisions
£m		 Employee
provisions
£m		 Total
£m
At 1 January 2009 – – –
Utilised – – –
Additions – – –
Released – – –
At 31 December 2009 – – –
At 1 January 2010 – – –
Utilised (7.5) (12.3) (19.8)
Additions through acquisitions (note 25) 11.1 15.3 26.4
Released – – –
At 31 December 2010 3.6 3.0 6.6

The contract provisions were established on acquisition to reflect the fair value of novated contracts. Employee provisions relate to redundancy and other costs associated with contracts that did not novate.

Non-current liabilities

  Employee
provisions
£m		 Insurance
provisions
£m		 Other
£m		 Total
£m
At 1 January 2009 1.8 8.8 7.7 18.3
Utilised (0.1) (2.4) (2.6) (5.1)
Additions – 3.6 – 3.6
Released – – – –
At 31 December 2009 1.7 10.0 5.1 16.8
At 1 January 2010 1.7 10.0 5.1 16.8
Utilised (2.0) (1.7) (2.5) (6.2)
Additions 1.8 3.0 1.8 6.6
Released (0.8) – (1.0) (1.8)
At 31 December 2010 0.7 11.3 3.4 15.4

Employee provisions comprise obligations to former employees other than retirement or post-retirement obligations. Insurance provisions include £1.9m (2009: £1.8m) held in the Group’s captive insurance company, Newman Insurance Company Limited and comprise the Group’s self insurance of certain risks. Other provisions include onerous lease commitments and legal claims.

The majority of the provisions are expected to be utilised within five years.

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22 Operating lease commitments

  2010
£m		 2009
£m
Minimum lease payments under operating leases recognised as an expense for the year 17.2 17.5

At 31 December 2010, the Group had outstanding commitments for minimum lease payments under non-cancellable operating leases which fall due as follows:

  2010 2009
  Land and
buildings
£m		 Other
£m		 Total
%		 Land and
buildings
£m		 Other
£m		 Total
%
Within one year 6.9 2.7 9.6 8.1 3.7 11.8
Within two to five years 17.5 2.8 20.3 18.3 4.9 23.2
After five years 5.2 – 5.2 4.6 – 4.6
At 31 December 29.6 5.5 35.1 31.0 8.6 39.6

Operating lease payments represent rentals payable by the Group for certain properties and other items. Leases are negotiated for an average term of three years (2009: five years) and rentals are fixed for an average of two years (2009: four years).

The total of future minimum sublease payments expected to be received under non-cancellable subleases at 31 December 2010 is £0.9m (2009: £1.2m).

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23 Contingent liabilities

Group banking facilities and surety bond facilities are supported by cross guarantees given by the Company and participating companies in the Group. There are contingent liabilities in respect of surety bond facilities, guarantees and claims under contracting and other arrangements, including joint arrangements and joint ventures entered into in the normal course of business.

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24 Share capital

  2010 Expected return
  No. ’000s £’000s No. ’000s £’000s
Issued and fully paid:        
At the beginning of the year 43,160 2,158 43,004 2,150
Exercise of share options 28 1 156 8
At the end of the year 43,188 2,159 43,160 2,158

The Company has one class of ordinary shares of 5p each (‘shares’) which carries no rights to fixed income. All ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets.

No member shall, however, be entitled to vote at any general meeting in respect of any share held by him if any call or other sum then payable by him in respect of that share remains unpaid or if a member has been served with a restriction notice (as defined in the Articles) after failure to provide the Company with information concerning interests in those shares required to be provided under the Companies Act 2006.

Shares

The shares of the Company issued during the year are shown below. Details of employee share option schemes referred to are given below and in note 27.

27,870 shares were issued in respect of options exercised under the Company’s 1995 Scheme for a total consideration of £1,394 (2009: 156,561 shares for a total consideration of £74,078). All options exercised under the 1995 Scheme during the year were settled on a net basis.

No shares were issued in respect of the ESOP 2007, the Save As You Earn scheme or the 2005 Plan (2009: nil).

Share options

The Company has four share option schemes:

  • The Morgan Sindall 1995 Executive Share Option Scheme (‘the 1995 Scheme’) which received shareholders’ approval on 24 May 1995. The period for the granting of options under the 1995 Scheme expired in May 2005. Options under the 1995 Scheme are exercisable between five and seven years from the date of grant of the options.
  • The Morgan Sindall Employee Share Option Plan 2007 (‘the ESOP 2007’) received approval from the Board on 7 June 2007. The ESOP 2007 did not require shareholder approval because all options granted and to be granted under it will be settled with market purchased shares. Options granted under the ESOP 2007 are exercisable between three and ten years from the date of grant. The period for granting options under the ESOP 2007 expires on 6 June 2017.
  • The Morgan Sindall Executive Remuneration Plan 2005 (‘the 2005 Plan’), details of which are disclosed in the directors’ remuneration report.
  • The Morgan Sindall Savings Related Share Option scheme (‘the SAYE scheme’). The SAYE scheme was approved by shareholders on 22 April 2008 and by HMRC on 9 May 2008. No options were granted during the year (2009: nil). The options are exercisable after three years (for six months) from the date of grant. The period for granting options under the SAYE scheme expires on 21 April 2018. Further details of the SAYE scheme are given in note 27.

Own shares

Own shares at cost represent 781,444 (2009: 797,034) shares in the Company held in the Morgan Sindall Employee Benefit Trust (‘the Trust’) in connection with the ESOP 2007 and certain share incentive schemes as detailed in the remuneration report. The trustees of the Trust purchase the Company’s shares in the open market with financing provided by the Company on the basis of regular reviews of the share liabilities of the relevant schemes. A total of 781,444 (2009: 797,034) shares were unallocated at the year end and dividends on these shares have been waived. The cost of shares expected to be awarded is charged over the three year period to which the award relates. Based on the Company’s share price at 31 December 2010 of £7.05 (2009: £6.00), the market value of the shares was £5,509,180 (2009: £4,782,204).

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25 Acquisitions of subsidiaries

Acquisition of Powerminster Gleeson Services Limited

On 30 June 2010, the Group acquired 100% of the issued ordinary share capital of Powerminster Gleeson Services Limited. The company subsequently changed its name to Lovell Powerminster Limited. Details of the net assets acquired and goodwill arising are as follows:

  £m
Total purchase consideration: cash 6.6
Net liabilities acquired (0.1)
Goodwill (note 9) 6.7

Goodwill arising on this acquisition represents the value of people, track record and expertise acquired within acquisitions that are not capable of being individually identified and separately recognised.

  Acquiree’s
carrying
amount
£m		 Fair value
adjustments
£m		 Fair value
£m
Intangible fixed asset – 0.8 0.8
Tangible fixed asset 1.4 – 1.4
Trade receivables 3.4 – 3.4
Trade creditors and accruals (2.7) (4.5) (7.2)
Cash 1.8 – 1.8
Deferred tax (0.3) – (0.3)
Net liabilities acquired 3.6 (3.7) (0.1)
 
Purchase consideration settled in cash 6.6
Cash and cash equivalents acquired (1.8)
Cash outflow on acquisition 4.8

The acquired business contributed £7.1m of revenue in the period from 30 June 2010 to 31 December 2010. Due to the fact that the business has been integrated into the existing Affordable Housing division, it is impracticable to disclose the amount of operating profit that is included in the Group’s results or for the full year.

Acquisition of the business, obligations and certain assets from the administrators of Connaught Partnerships Limited

On 9 September 2010, the Group acquired the business, obligations and certain assets from the administrators of Connaught Partnerships Limited (‘Connaught’). Details of the assets acquired and provisional goodwill arising are as follows:

  £m
Total purchase consideration: cash 28.0
Net assets acquired 5.6
Goodwill (note 9) 22.4

Goodwill arising on this acquisition represents the value of people, track record, expertise and opportunity to access new markets acquired within acquisitions that are not capable of being individually identified and separately recognised.

  Acquiree’s
carrying
amount
£m		 Provisional
fair value
adjustments
£m		 Provisional
fair value
£m
Intangible fixed asset – 4.0 4.0
Trade receivables and amounts on construction contracts recorded by Connaught 72.4 (44.4) 28.0
Provisions (note 21) – (26.4) (26.4)
Net assets acquired 72.4 (66.8) 5.6
 
Purchase consideration settled in cash 28.0
Cash and cash equivalents acquired –
Cash outflow on acquisition 28.0

Provisional fair value adjustments on trade receivables and amounts due from construction contract customers recorded by Connaught include correction of errors and adjustments to reflect the anticipated amount likely to be recovered.

The acquired business contributed £20.9m of revenue in the period from 9 September 2010 to 31 December 2010. Due to the fact that the business has been integrated into the existing Affordable Housing division, it is impracticable to disclose the amount of operating profit that is included in the Group’s results or for the full year.

The above acquisitions were made in order to create a full service social housing business covering new build, open market and social housing and planned and response maintenance.

The fair value of the acquired assets and liabilities are provisional due to the inherent uncertainty relating to asset realisations and quantification of provisions.

Acquisition of partner interests in Urban Regeneration joint ventures

In the course of the year, the Group acquired full control of three legal entities in which it previously had 50% shareholdings. Two of the acquisitions were acquired at fair value and one was negotiated at a price which was less than fair value.

Details of the assets acquired and the gain arising are as follows:

  £m
Purchase consideration:
Cash paid 0.1
Fair value non-cash consideration 2.8
Total purchase consideration 2.9
Net assets acquired 5.2
(2.3)
Goodwill on original shareholdings 0.3
One off gain from a bargain purchase (2.0)

The gain has arisen because the assets were acquired at their respective equity cost rather than their value after applying equity accounting principles.

  Acquiree’s
carrying
amount
£m		 Fair value
adjustments
£m		 Fair value
£m
Intangible fixed assets 1.1 0.7 1.8
Shared equity loan receivables 0.6 – 0.6
Inventories 12.7 – 12.7
Trade receivables 1.5 – 1.5
Trade creditors and accruals (13.0) – (13.0)
Cash and cash equivalents 2.2 – 2.2
Corporation tax (0.6) – (0.6)
Net assets acquired 4.5 0.7 5.2
 
Purchase consideration settled in cash 0.1
Repayment of loans in cash 4.5
 
4.6
Cash and cash equivalents acquired (2.2)
Cash outflow on acquisition 2.4

The acquired businesses contributed £24.6m of revenue and an operating profit of £5.2m before tax in the periods from acquisition to 31 December 2010. If the acquisitions had been completed on 1 January 2010, the total revenue from the acquired businesses would have been £24.6m.

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26 Cash flows from operating activities

  Notes 2010
£m		 2009
£m
Profit from operations for the year   41.8 43.7
Adjusted for:      
Amortisation of fixed life intangible assets 2 5.5 6.8
Share of net profit of equity accounted joint ventures 12 (0.1) (0.1)
Depreciation of property, plant and equipment 2 8.8 9.3
Expense in respect of share options   0.7 1.0
Defined benefit obligation payment 19 (0.7) (0.7)
Defined benefit obligation charge 19 0.2 0.3
Net gain from bargain purchase of subsidiary previously held as equity interest 25 (2.0) –
Gain on disposal of property, plant and equipment   (0.5) (0.4)
Increase in shared equity loan receivables 13 (4.3) (9.0)
Write downs in work in progress recognised as an expense   – 1.0
Decrease in provisions 21 (1.4) (1.5)
Operating cash flows before movements in working capital   48.0 50.4
Decrease in inventories   12.8 29.1
(Increase)/decrease in receivables   (66.8) 62.3
Increase/(decrease) in payables and short-term provisions   107.7 (122.7)
Movements in working capital   53.7 (31.3)
Cash generated from operations   101.7 19.1
Income taxes (paid)/received   (6.4) 7.7
Interest paid   (2.2) (1.8)
Net cash inflow from operating activities   93.1 25.0

Additions to leased property, plant and equipment during the year amounting to £0.7m (2009: £2.0m) and additions to leasehold property amounting to £nil (2009: £0.2m) were financed by new finance leases. Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other short-term, highly liquid investments with a maturity of three months or less.

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27 Share-based payments

The Company’s 2005 Plan and the ESOP 2007 provide for a grant price equal to the average of the middle market price of the Company’s shares at close of business on the five dealing days preceding the date of grant. The Company’s 1995 Scheme provides for the average quoted middle market price of the Company’s shares on the three dealing days preceding the date of grant. Details of the 1995 Scheme and the ESOP 2007 option vesting periods are given in note 24 and the vesting periods for options and share awards granted under the 2005 Plan are given in the remuneration report.

Under the SAYE scheme, employees are granted an option to purchase shares at up to 20% less than the market price at grant in three years’ time, depending on their entering into a contract to make monthly contributions into a savings account over the relevant period. These funds are used to fund the option exercise price. The scheme is open to all employees with six months’ continuous service at the invitation date. No performance criteria are applied to the exercise of SAYE options.

The weighted average share price at the date of exercise for share options exercised during the year was £6.47 (2009: £5.82). The options outstanding at 31 December 2010 had a weighted average exercise price of £7.12 (2009: £7.76) and, a weighted average remaining contractual life of 1.2 years (2009: 1.6 years). In 2010, options under the ESOP 2007 were granted on 17 March and 24 May and the estimated fair value of the options granted on those dates was £0.1m (2009: £0.2m). Options and share awards under the 2005 Plan were granted on 17 March 2010. The estimated fair value of the options granted on those dates was £0.6m (2009: £0.5m) and the estimated fair value of the share awards granted on those dates was £1.0m (2009: £1.1m). There were no options granted under the SAYE scheme in 2010 (2009: nil).

A modified Black-Scholes model has been used to value the options and awards set out below. None of the options or awards granted was subject to a share price related performance condition.

  Mar 10 May 10
2007 ESOP options
Number of options granted 63,000 50,000
Weighted average fair value at date of grant per option £1.00 £0.88
Weighted average share price at date of grant £5.52 £5.26
Weighted average exercise price £5.55 £5.29
Expected term (from date of grant)(2) 6 years 6 years
Expected volatility(3) 40.00% 40.00%
Expected dividend yield(4) 7.60% 8.00%
Risk-free rate 3.00% 2.40%
  Options
Mar 10		 Share
awards
Mar 10(5)
2005 Plan shares and options
Number of options/shares granted(1) 630,776 181,062
Weighted average fair value at date of grant (per option/share) £1.00 £5.52
Weighted average share price at date of grant £5.52 £5.52
Weighted average exercise price £5.55 n/a
Expected term (from date of grant)(2) 6 years 3 years
Expected volatility(3) 40.00% 51.00%
Expected dividend yield(4) 7.60% 0.00%
Risk-free rate 3.00% 2.60%

(1) In March 2010, 630,776 options and 181,062 share awards were granted to executives of the Group under the 2005 Plan.

(2) Adjusted from maximum term, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, vesting conditions and behavioural considerations.

(3) Assumed to be equal to historic volatility of the Company’s share price over the period prior to grant equal in length to the expected term.

(4) Set as equal to dividend yield prevailing at date of grant with the exception of share awards granted to executives of the Group, which are subject to performance conditions.

(5) At the end of the vesting period, award holders may receive the value of any dividends paid during the vesting period in respect of their vested shares. Consequently, the fair value is not discounted for value lost in respect of dividends.

The Group recognised total remuneration expenses of £0.7m and £1.0m related to equity-settled share-based payment transactions in 2010 and 2009 respectively.

The following tables provide a summary of the options granted under the Group’s employee share option schemes during the current and comparative year.

2010

                    Balance at end of year  
  Grant
date		 Exercise
date on
or after		 Expiry
date		 Exercise
price
£		 Balance
at the
beginning
of year
No.		 Options
granted
No.		 Options
lapsed
No.		 Options
forfeited
No.		 Options
exercised
No.		 In issue
No.		 Exercisable
No.		 Proceeds
received £
(net of
settlements)
1995 Scheme  
  25 Feb 04 25 Feb 09 24 Feb 11 4.20 90,000 – 2,130 – 27,870 10,000 10,000 1,394
  14 Sep 04 14 Sep 09 13 Sep 11 4.38 60,000 – – – – 60,000 60,000 –
2007 Scheme  
  13 Aug 07 13 Aug 10 12 Aug 17 16.76 23,000 – – – – 23,000 23,000 –
  24 Sep 07 24 Sep 10 23 Sep 17 15.81 37,000 – – – – 37,000 37,000 –
  20 Dec 07 20 Dec 10 19 Dec 17 10.51 100,000 – 6,000 – – 94,000 94,000 –
  15 Apr 08 15 Apr 11 14 Apr 18 10.03 50,000 – – – – 50,000 – –
  27 May 08 27 May 11 26 May 18 9.92 50,000 – – – – 50,000 – –
  28 Oct 08 28 Oct 11 27 Oct 18 4.36 42,500 – – – – 42,500 – –
  26 Nov 08 26 Nov 11 25 Nov 18 4.75 25,000 – – – – 25,000 – –
  3 Mar 09 3 Mar 12 2 Mar 19 5.35 94,000 – – – – 94,000 – –
  28 May 09 28 May 12 27 May 19 6.36 90,000 – – – – 90,000 – –
  17 Mar 10 17 Mar 13 16 Mar 20 5.55 – 63,000 – – – 63,000 – –
  24 May 10 24 May 13 23 May 20 5.29 – 50,000 – – – 50,000 – –
2005 Plan  
  20 May 05 20 May 08 19 May 15 7.24 318,024 – – – – 318,024 318,024 –
  5 Apr 06 5 Apr 09 4 Apr 16 12.59 246,624 – 17,872 – – 228,752 228,752 –
  6 Mar 07 6 Mar 10 5 Mar 17 12.15 258,024 – 258,024 – – – – –
  9 Apr 08 9 Apr 11 8 Apr 18 10.39 342,066 – 32,484 – – 309,582 – –
  16 Jun 08 16 Jun 11 15 Jun 18 7.42 25,048 – – – – 25,048 – –
  30 Mar 09 30 Mar 12 29 Mar 19 5.80 503,018 – – – – 503,018 – –
  17 Mar 10 17 Mar 13 16 Mar 20 5.55 – 630,776 – – – 630,776 – –
2008
SAYE Scheme		  
  1 Jul 08 1 Sep 11 28 Feb 12 7.02 1,280,380 – – 259,761 – 1,020,619 19,819 –
Total – – – – 3,634,684 743,776 366,510 259,761 27,870 3,724,319 790,595 1,394

2009

                    Balance at end of year  
  Grant
date		 Exercise
date on
or after		 Expiry
date		 Exercise
price
£		 Balance
at the
beginning
of year
No.		 Options
granted
No.		 Options
lapsed
No.		 Options
forfeited
No.		 Options
exercised
No.		 In issue
No.		 Exercisable
No.		 Proceeds
received £
(net of
settlements)
1995 Scheme                        
  29 Oct 02 29 Oct 07 28 Oct 09 2.70 246,000 – 93,354 – 152,646 – – 73,882
  25 Feb 04 25 Feb 09 24 Feb 11 4.20 100,000 – 6,085 – 3,915 90,000 90,000 196
  14 Sep 04 14 Sep 09 13 Sep 11 4.38 60,000 – – – – 60,000 60,000 –
2007 Scheme                        
  13 Aug 07 13 Aug 10 12 Aug 17 16.76 23,000 – – – – 23,000 – –
  24 Sep 07 24 Sep 10 23 Sep 17 15.81 41,000 – – 4,000 – 37,000 – –
  20 Dec 07 20 Dec 10 19 Dec 17 10.51 100,000 – – – – 100,000 – –
  15 Apr 08 15 Apr 11 14 Apr 18 10.03 55,000 – – 5,000 – 50,000 – –
  27 May 08 27 May 11 26 May 18 9.92 55,000 – – 5,000 – 50,000 – –
  28 Oct 08 28 Oct 11 27 Oct 18 4.36 42,500 – – – – 42,500 – –
  26 Nov 08 26 Nov 11 25 Nov 18 4.75 25,000 – – – – 25,000 – –
  3 Mar 09 3 Mar 12 2 Mar 19 5.35 – 94,000 – – – 94,000 – –
  28 May 09 28 May 12 27 May 19 6.36 – 90,000 – – – 90,000 – –
2005 Plan                        
  20 May 05 20 May 08 19 May 15 7.24 318,024 – – – – 318,024 318,024 –
  5 Apr 06 5 Apr 09 4 Apr 16 12.59 258,532 – – 11,914 – 246,618 246,624 –
  6 Mar 07 6 Mar 10 5 Mar 17 12.15 271,357 – – 13,333 – 258,024 – –
  9 Apr 08 9 Apr 11 8 Apr 18 10.39 342,066 – – – – 342,066 – –
  16 Jun 08 16 Jun 11 15 Jun 18 7.42 25,048 – – – – 25,048 – –
  30 Mar 09 30 Mar 12 29 Mar 19 5.80 – 503,018 – – – 503,018 – –
2008
SAYE Scheme		                        
  1 Jul 08 1 Sep 11 28 Feb 12 7.02 1,549,831 – – 269,451 – 1,280,380 20,726 –
Total         3,512,358 687,018 99,439 308,698 156,561 3,634,678 735,374 74,078

Cash-settled share-based payments

The Group grants to certain employees share appreciation rights (‘phantoms’) that require the Group to pay the intrinsic value of the phantoms to the employee at the date of exercise. As cash-settled share-based payment awards, the phantoms are revalued at the end of each reporting year. There were no phantoms granted during the year (2009: nil). Phantoms are exercisable between three and eight years from the date of grant of the phantom. The total intrinsic value at 31 December 2010 was £nil (2009: £nil). The Group had recorded liabilities of £0.1m at 31 December 2010 in respect of phantoms (2009: £0.1m).

At the reporting date, the fair value and number of phantom awards outstanding was:

Date of grant Exercise
price
£		 Balance
at the
beginning
of year
No.		 Phantom
options
lapsed
No.		 Phantom
options
exercised
No.		 Balance at
end of
the year
No.		 Fair value
per award
£
17 Aug 2005 6.65 68,000 – – 68,000 0.78
11 Oct 2005 8.49 51,000 – – 51,000 0.25
5 Dec 2005 8.31 60,000 – – 60,000 0.28
5 Apr 2006 12.59 50,000 – – 50,000 0.01
5 Apr 2006(1) 12.59 50,000 – – 50,000 0.01
18 May 2006 11.09 30,000 – – 30,000 0.04
10 Aug 2006 10.86 10,000 – – 10,000 0.05
  9.67(2) 319,000 – – 319,000 0.27(2)

(1) This grant is subject to a performance condition. To the extent that this condition is not expected to be satisfied and the options are expected to lapse, the income statement charge is adjusted. Similar adjustment is made in the event of a bad leaver.

(2)Weighted average.

The market price of a share on 31 December 2010 was £7.05 (2009: £6.00).

The fair value of the phantoms was determined by the use of a modified Black-Scholes model using the assumptions noted in the table below:

  31 Dec 2010 31 Dec 2009
Expected term (from date of grant)(1) 4.6 – 5.6 years 4.6 – 5.6 years
Expected remaining term 1 year 1 – 1.6 years
Share price at valuation date £7.05 £6.00
Expected volatility of return(2) 29% 43% – 60%
Expected dividend yield(3) 6.0% 7.0%
Risk-free rate 0.7% 2.2%

(1) Adjusted from maximum term, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, vesting conditions and behavioural considerations.

(2) Assumed to be equal to historic volatility of the Company’s share price over the year prior to grant equal in length to the expected term.

(3) Set as equal to dividend yield prevailing at date of grant.

The Group recorded a credit to profit of £nil during the year in respect of phantoms (2009: £nil credit).

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28 Related parties

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures are disclosed below.

Trading transactions

During the year, Group companies entered into transactions to provide construction and property development services with related parties, all of which were joint ventures, not members of the Group. Transactions and amounts owed at the year end are as follows:

  Provision of goods
and services		 Amounts owed by/(to)
related parties
  2010
£m		 2009
£m		 2010
£m		 2009
£m
Morgan-Vinci Limited – 0.1 – –
Community Solutions Investment Partners Limited 19.5 12.9 0.5 1.4
Renaissance Miles Platting Limited 0.1 0.1 – –
Blue Light Holdings Limited 0.3 15.0 0.1 0.2
Ashton Moss Developments Limited – – (0.2) (0.2)
Bromley Park Limited – – (0.6) (0.6)
Chatham Place (Building 1) Limited 0.1 0.4 n/a –
ECf (General Partner) Limited 1.7 1.4 – 0.6
Eurocentral Partnership Limited 1.9 – n/a 0.2
Lewisham Gateway Developments Limited – – 0.2 0.2
Lingley Mere Business Park Development Company Limited – 0.3 – –
North Shore Development Partnership Limited – – 0.1 0.1
Ician Developments Limited – – n/a 0.4
The Compendium Group Limited 0.5 1.4 0.1 –
Access for Wigan (Holdings) Limited 0.1 – – –
Hull Esteem Consortium PSP Limited 50.2 – 4.8 –
St Andrews Brae Developments Limited 4.0 – 4.0 –
Taycare Health (Holdings) Limited 1.8 – – –
  80.2 31.6 9.0 2.3
  Amounts owed by/(to)
related parties
  2010
£m		 2009
£m
Amounts owed by related parties 9.8 3.1
Amounts owed to related parties (0.8) (0.8)
  9.0 2.3

All transactions with related parties were made on an arm’s length basis.

The amounts outstanding are unsecured and will be settled in cash. Other than construction related performance guarantees given in the ordinary course of business, no guarantees have been given to or received from related parties. No provisions have been made for doubtful debts in respect of amounts owed by related parties. All amounts owed to or owing by related parties are non-interest bearing.

Remuneration of key management personnel

The remuneration of the directors, who are key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 ‘Related Party Disclosures’. Further information about the remuneration of individual directors is provided in the audited part of the remuneration report.

  2010
£m		 2009
£m
Emoluments 3.3 2.2
Social security contributions 0.3 0.3
Other long-term benefits 0.1 0.2
Share option exercises – –
Post-employment benefits 0.2 0.4
  3.9 3.1

Directors’ transactions

In the course of the year, Eurocentral Partnership Limited (a wholly owned subsidiary of the Group) sold some land and buildings to a syndicate of investors on arm’s length terms. The Group retained a small minority investment in this syndicate. Senior employees and directors of Muse Developments Limited, together with John Morgan (£269k) and Paul Smith (£163k), purchased part of the investment in the syndicate in cash. The transaction was carried out on an arm’s length basis and on the same commercial terms as those offered to the other investors in the syndicate. There are no amounts outstanding.

There have been no other related party transactions with any director either during the year or in the subsequent period to 4 March 2011.

Directors’ material interests in contracts with the Company

No director held any material interest in any contract with the Company or any Group company in the year or in the subsequent period to 4 March 2011.

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29 Financial instruments

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, demand deposits and other short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. The carrying amount of these assets approximates to their fair value.

Included within cash and cash equivalents is £26.7m (2009: £23.8m) which is the Group’s share of cash held within jointly controlled operations.

General risk management principles

The Board has overall responsibility for the establishment and oversight of the Group’s risk management framework. A formal risk assessment and management framework for assessing, monitoring and managing the strategic operational and financial risks of the Group is in place to ensure appropriate risk management of its operations. Internal control and risk management systems are embedded in the operations of the divisions.

The key business risks identified are discussed in detail in the business review (key risks) and the corporate governance statement.

Financial risks and management

The Group has exposure to a variety of financial risks through the conduct of its operations. Risk management is governed by the Group’s operational policies, which are subject to periodic review by the Group’s internal audit team and twice yearly review by management. The policies include written principles for the Group’s risk management as well as specific policies, guidelines and authorisation procedures in respect of specific risk mitigation techniques such as the use of derivative financial instruments. The Group does not enter into derivative financial instruments for speculative purposes.

The following represent the key financial risks resulting from the Group’s use of financial instruments:

  • credit risk
  • liquidity risk
  • market risk

(a) Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and results primarily from the Group’s trade receivables and amounts due from construction contract customers.

Amounts due from construction contract customers and trade receivables

The Group’s primary exposure to credit risk arises from the potential for non-payment or default from construction contract debtors and trade receivables. The degree to which the Group is exposed to this credit risk depends on the individual characteristics of the contract counterparty and the nature of the project. The Group’s credit risk is also influenced by general macroeconomic conditions. The Group primarily operates in one geographical segment, being the UK. The Group does not have any significant concentration risk in respect of amounts due from construction contract customers or trade receivable balances at the reporting date with receivables spread across a wide range of customers. Due to the nature of the Group’s operations, it is normal practice for customers to hold retentions in respect of contracts completed. Retentions held by customers at 31 December 2010 were £57.2m (2009: £62.0m).

The Group manages its exposure to credit risk through the application of its credit risk management policies which specify the minimum requirements in respect of the creditworthiness of potential customers, assessed through reports from credit agencies, and the timing and extent of progress payments in respect of contracts.

The risk management policies of the Group also specify procedures in respect of obtaining parent company guarantees or, in certain circumstances, use of escrow accounts which, in the event of default, mean that the Group may have a secure claim. The Group does not require collateral in respect of amounts due from construction contract customers or trade receivables.

The Group manages the collection of retentions through its post-completion project monitoring procedures and ongoing contact with customers to ensure that potential issues that could lead to the non-payment of retentions are identified and addressed promptly. The Group assesses amounts due from construction contract customers and trade receivable balances for impairment and establishes a provision for impairment losses that represents its estimate of incurred losses.

The ageing of trade receivables at the reporting date was as follows:

  2010 2009
  Gross trade
receivables
£m		 Provision for
impairment
losses
£m		 Gross trade
receivables
£m		 Provision for
impairment
losses
£m
Not past due 157.7 0.4 88.9 1.5
Past due 1 to 30 days 15.3 0.1 13.1 –
Past due 31 to 120 days 16.8 0.1 10.4 –
Past due 121 to 365 days 10.2 0.5 4.4 0.2
Greater than one year 9.7 0.9 6.2 1.2
  209.7 2.0 123.0 2.9

The movement in the provision for impairment losses on trade receivables during the year was as follows:

  2010
£m		 2009
£m
Balance at beginning of the year 2.9 2.7
Amounts written off during the year (0.2) (0.2)
Amounts recovered during the year (0.1) (0.2)
(Decrease)/increase in provision recognised in the income statement (0.6) 0.6
Balance at 31 December 2.0 2.9

(b) Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as and when they fall due. The ultimate responsibility for liquidity risk rests with the Board.

The Group aims to manage liquidity by ensuring that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stress conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group actively manages its liquidity profile whilst ensuring that the return achieved on cash and investments is maximised. The Group had no drawn down debt facilities as at 31 December 2010 (2009: £nil).

As discussed below under capital management, the Group does not have any derivative or non-derivative financial liabilities with the exception of finance lease liabilities, trade and other payables, current tax liabilities and retirement benefit obligations. Current tax liabilities and trade and other payables are generally non-interest bearing and, therefore, have no weighted average effective interest rates. Retirement benefit obligations are measured at the net of the present value of retirement benefit obligations and the fair value of the Plan assets. Finance lease liabilities are carried at the present value of the minimum lease payments. An analysis of the maturity profile for finance lease liabilities is contained in note 18.

The Group reports cash balances daily and invests surplus cash to maximise income whilst preserving credit quality. The Group prepares weekly short-term and monthly long-term cash forecasts, which are used to assess the Group’s expected cash performance and compare with the facilities available to the Group and the Group’s covenants.

In addition to its cash balances, the Group has £100m of committed loan facilities available until mid-2012.

Key risks to liquidity and cash balances are a downturn in contracting volumes, a decrease in the value of open market sales, deterioration in credit terms obtainable in the market from suppliers and subcontractors, a downturn in the profitability of work, delayed receipt of cash from customers and the risk that major clients or suppliers suffer financial distress leading to non-payment of debts or costly and time consuming reallocation and rescheduling of work. Certain measures and KPIs are continually monitored throughout the Group and used to quickly identify issues as they arise, enabling the Group to address them promptly.

Key amongst these are continual monitoring of the forward order book, including the status of orders and likely timescales for realisation so that contracting volumes are well understood; monitoring of overhead levels to ensure they remain appropriate to contracting volumes, weekly monitoring of open market house sales volumes and prices; continual monitoring of working capital exceptions (overdue debts and conversion of work performed into certificates and invoices); continual review of levels of current and forecast profitability on contracts; review of client and supplier credit references; and approval of credit terms with clients and suppliers to ensure they are appropriate.

The ageing of trade payables at the reporting date was as follows:

  2010
£m		 2009
£m
Not past due 123.9 128.4
Past due 1 to 30 days 12.0 6.6
Past due 31 to 120 days 7.4 7.5
Past due 121 to 365 days 6.6 3.4
Greater than one year – 0.1
  149.9 146.0

(c) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates or equity prices, will affect the Group’s income or the carrying amount of its holdings of financial instruments. The objective of market risk management is to achieve a level of market risk that is within acceptable parameters as set out in the Group risk management framework.

Interest rate risk

The Group is not exposed to significant interest rate risk as it does not have significant interest bearing liabilities and its only interest bearing asset is cash invested on a short-term basis.

Certain of the Group’s equity accounted joint ventures enter into interest rate swaps to manage their exposure to interest rate risk arising on floating rate bank borrowings.

The Group’s share of joint ventures’ interest rate and Retail Prices Index swap contracts with nominal values of £129.0m (2009: £80.8m) have fixed interest payments at an average rate of 4.83% (2009: 5.01%) for periods up until 2041.

The Group’s share of the fair value of swaps entered into at 31 December 2010 by joint ventures is estimated at a £3.1m liability (2009: £1.7m liability). These amounts are based on market values of equivalent instruments at the balance sheet date. All interest rate swaps are designated as hedging instruments and are effective as cash flow hedges. The fair value thereof has been taken to the hedging reserve.

Currency risk

The majority of the Group’s operations are carried out in the UK and the Group has an insignificant level of exposure to currency risk on sales and purchases. Given the insignificant exposure to foreign currency movements, the Group’s policy is not to hedge foreign currency transactions unless they are material, at which point derivative financial instruments are entered into so as to hedge forecast or actual foreign currency exposures.

Capital management

The Board aims to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business.

The capital structure of the Group consists of cash and cash equivalents and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings as disclosed in note 24 and the consolidated statement of changes in equity. The cash and cash equivalents are supplemented by the £100m of bank facilities which are committed until mid-2012.

The Group dividend policy is stated in the business review (financial review).

The Board aims to achieve a suitable balance between higher returns that may be possible through borrowing and the stability afforded by a sound capital position.

There were no changes in the Group’s approach to capital management during the year and the Group is not subject to any capital requirements imposed by regulatory authorities.

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30 Subsequent events

There were no significant subsequent events that affected the financial statements of the Group.

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