British Empire Sec (BTEM) - Annual Financial Report RNS Number : 9470Q British Empire Sec & Gen Tst PLC 13 November 2012 BRITISH EMPIRE SECURITIES AND GENERAL TRUST PLC Results for the full year to 30 September 2012 and availability of Annual Report Objective The Company's investment objective is to achieve capital growth through a focused portfolio of investments, particularly in companies whose shares stand at a discount to estimated underlying net asset value. Financial Highlights • Uncertain economic conditions continue to prevail • Net asset value (NAV) on a total return basis increased by 10.3% • Benchmark* Index increased by 13.8% • Total ordinary dividends increased by 11.8% • Special dividend of 3.5p • At the end of the year net liquidity was 19.9% Performance Summary 30 September 2012 30 September 2011 % change Capital Return Net asset value per Share 500.47p 462.51p 8.21 Share price (mid market) 438.30p 422.60p 3.72 Net asset value per Share (total return) 10.25 Indices Morningstar Investment Trust Global Growth Index* 299.68 263.38 13.78 Morgan Stanley Capital International World Index (£ adjusted total return) 2,865.48 2,428.27 18.00 Revenue and Dividends Income £30.87m £25.93m 19.05 Earnings per Share 15.06p 11.50p 30.96 Ordinary Dividends per Share 9.50p 8.50p 11.76 Special Dividend per Share 3.50p 2.00p 75.00 Discount (difference between share price and net asset value) 12.42% 8.63% - Ongoing Charges Ratio (as percentage of average shareholders' funds) Management, marketing and other expenses 0.74% 0.72% - Performance fee 0.00% 0.00% - 2012 Year's Highs/Lows High Low Net asset value per Share 506.60p 440.37p - Share price (mid market) 475.65p 387.05p - * The Morningstar Investment Trust Global Growth Index (total return basis), formerly known as Fundamental Data Global Growth Investment Trust Index, is subject to revision and the figures are as at 26 October 2012. Buy-backs During the year the Company purchased 1,985,104 Ordinary Shares of which, at the year end, 66,000 had been cancelled. The Company did not purchase any of its Equities Index Unsecured Loan Stock 2013 or any of its Debenture Stock 2023 during the year. Chairman's Statement This report covers the period from 1 October 2011 to 30 September 2012. The year under review has again been one in which markets have been difficult for the investment community but the Board is pleased to report that Asset Value Investors have not deviated from their established investment process and style; and in the second half of the year have outperformed the benchmark indices by an encouraging margin. Our European holding company investments contributed 38% of our net total return for the year, despite the value of the euro declining against sterling; and our Asian holding companies a further 38% . The overall total return, after taking into account the currency effect and dividend income, amounted to some £75.9m. For the year under review, the net asset value per share rose by 10.3% on a total return basis. This compares to an increase in our benchmark (the Morningstar Investment Trust Global Growth Index) of 13.8%. While this underperformance is disappointing, there was a marked improvement in the second half of the year, when the Company outperformed the index by over 3%. Most of the investments which we hold stand at discounts to their stated net asset value, and in the year under review, the average see through discount has narrowed from a peak of around 39% to approximately 30%. Our investee companies, on the whole, continued to trade well in difficult economic circumstances which was not always reflected in improving share prices. Nevertheless, improved dividend income generally reflected underlying trading performance. There has again been good income growth over the year of some 19%. We are therefore pleased to be recommending an increased final dividend of 7.5p (2011 6.5p) which, together with the interim dividend of 2.0p (2011 2.0p), would bring total Ordinary dividends for this year to 9.5p, an increase of 11.8% over last year. In addition, to reflect some exceptional dividend receipts, we are again proposing a special dividend; this year of 3.5p and bringing total dividends for the year to 13.0p (2011: 10.5p). At the year end net liquidity amounted to some 20% of the portfolio, reflecting the manager's cautious outlook. Further details of the breakdown of performance and changes in the portfolio are set out in the Investment Manager's Review. The share price increased during the year from 423p to 438p. The share price return of 6.2% (again on a total return basis, including re-invested dividends) was below the net asset value return, because of a widening discount over the year. The level of discount has oscillated between 4.5% and 14% and, at the year end, was 12.4%. Recognising the wider discount the Company has, during the second half of this financial year, bought back a total of 1.985 million shares, at an average discount of 13.8%, adding some 0.8p per share (0.2%) to the net asset value to the benefit of all shareholders. These purchases included 1.2 million shares bought at 412.6p at a discount of circa 14% through the market from Caledonia Investments plc. Reflecting a change in its investment policy, Caledonia, until recently our largest shareholder, has sold its entire holding to a combination of existing and new shareholders. We will continue to take steps, if necessary, to limit the volatility of the discount or premium, as we have done this year. The Board is therefore once again seeking to renew its authorities to buy back and issue shares. The Board, meeting as the Nomination Committee, decided to appoint two new directors, Nigel Rich and Susan Noble, both of whom joined the board in March 2012. Nigel Rich is chairman of Segro plc and a non-executive director of a number of companies. He brings extensive experience of the Far East from his former executive career as managing director of Hong Kong Land and Jardine Matheson. Susan Noble was a director and senior European fund manager at Robert Fleming Asset Management, and latterly head of Global Equities at Goldman Sachs Asset Management; she brings long experience of European Equity Investments. She is a non-executive director of Alliance Trust plc. We welcome both of them to the Board. In line with best practice, all of the directors come up for re-election each year. The Board has completed a further board evaluation, this year internally, and has considered again the directors' qualifications, performance and contribution to the Board. The Board can confirm that they each continue to be effective and to demonstrate commitment to the role. The Board therefore recommends that each should be re-elected with the exception of Rosamund Bloomfield-Smith who has asked not to stand for re-election this year. Rosamund was appointed to the Board in 2003 and has made a substantial contribution to our Board discussions over a long period, and we shall miss her input greatly. We wish her all success in her future activities. Between the year end and 6 November, the latest date for which data is available, the company's net asset value increased by 4.1% compared with a benchmark return of 1.3%. The overall liquidity of the portfolio at the year end of some 20% is at the higher end of the usual range and reflects continuing concern about the growing evidence of slowing economic growth in many parts of the world and continuing political concerns in the USA, China and elsewhere. The solution to the problem of sovereign debt in many countries is far from clear, and the uncertain outlook in China is also unsettling the global investor. That said, the Board believes that your company is well positioned, with good liquidity, to take advantage of any further difficult market conditions, while pursuing its long term policy of investing in quality undervalued assets. Strone Macpherson Chairman 12 November 2012 Investment Manager's Review During the year, the Company's NAV rose by 10.3%, compared with an increase of 13.8% in the benchmark Morningstar Global Growth Index (both on a total return basis). While value investing as a strategy has been out of favour for the last couple of years, we may now be seeing the early signs of a shift in sentiment as evidenced by our outperformance of the index over the second half of the year and after the period end. With the weighted average discount remaining towards the wider end of its historical range, there are good prospects for further discount narrowing and outperformance. After a strong first half showing from global markets there was continued progress in the second half of British Empire's financial year, albeit at a reduced rate. Your Company's performance relative to the benchmark, however, improved in the second half of the year compared with the first half, owing in large part to the narrowing of discounts on many of the Company's investments. The proximate causes for both the equity markets' positive performance and also the narrowing of discounts on our holdings have been policy pronouncements from the European Central Bank and the US Federal Reserve. These policies have eased fears of an imminent collapse, especially in the European banking system, and allowed investors the confidence to extend their investment time horizons. A willingness to invest for the long term is a necessary pre-condition for the outperformance of the value style which we follow at AVI, as patience is often required to gather returns on investments made on the basis of low valuations. Valuations within our portfolio companies still appear to be attractive, with a weighted average discount on our investments of 30%. This is down from 39% one year ago but still wide by historical standards. An increasing proportion of general equity market trading is being conducted through the medium of Exchange Traded Funds (ETFs) and other index-based products. This has meant that markets have awarded increasingly high valuations to large cap stocks vis a vis their less well known peers and this has, in turn, led to a corresponding lack of interest and liquidity in the smaller cap names. At some point in time, the valuation differential between the large cap stable growth stocks and the rest of the market will become so great as to sow the seeds of its own undoing. We believe that investors will realise at some point that they all own the same expensive stocks and look to buy what is today cheap and unloved. The degree to which the equity markets appear to be driven by hopes for further stimulus is concerning. Each round of monetary easing or support is being met by the markets with diminishing returns. At the same time, economic fundamentals have not significantly improved and offer limited support for the equity markets absent artificial stimulus. To the extent that the economy does not pick up, there may be a gap opening up between the level of certain stock market indices (close to an all-time high) and the rather more gloomy economic fundamentals. Our net liquidity has increased to circa 20%. We still believe it is sensible to focus on buying companies on discounts for their long term appreciation potential. In this particularly challenging environment of economic and policy uncertainty we believe a tweaking of our tactics (but not of our overall strategy) to pay more attention to dividends, which are an increasing component of returns, and catalysts is appropriate. In addition to the attractive value in the portfolio, as noted above, British Empire shares have themselves traded on a significant discount at times throughout the year. This has represented an appealing investment opportunity and your Company has bought back 1.985m shares at an average discount of 13.8%. Portfolio Review During the year, your company's NAV increased by 10.3% compared with an increase of 13.8% in the benchmark Morningstar Global Growth Index (both on a total return basis). Whilst it is disappointing to have underperformed the benchmark over the year, it was encouraging that the Company has outperformed the benchmark over the second half of the year by over 3% and we remain confident that the significant value in our portfolio will be realised over time. As far as returns go, two particular factors merit mention this year. First, shareholders will be aware that the dividends which have flowed into the Company's income account in recent years have increased sharply and this dividend income has formed a significant part of the total return during the financial year. This accounted for over a third of total return for the year. Second, on the other side of the ledger, the strength of the Pound against several currencies, but principally the Euro, has had a negative effect on total returns during the year, accounting for a drag of 3% on NAV returns. Weighted Average Discount As ever, this factor remains a major determinant of returns over any given period. It is clear that discounts remain at the wider end of the historic range. The wide discounts and absence of significant narrowing have acted as a headwind to performance in recent years as narrowing discounts can be an important boost to returns. The outperformance of the portfolio over the second half of the year has coincided with a narrowing of the discount from 35% to 30%. European Holding Companies This part of the portfolio contributed 38% of total gains achieved over the financial year. Local currency gains and dividend income were offset by negative foreign exchange translation effects. The Euro was by far the weakest currency in the portfolio against Sterling. 15% of the total portfolio is listed in Nordic countries. There remains a lot of value in European Holding Companies. Weighted average discounts are 33% compared with 38% one year ago. Notable gains were made in Aker, a Norwegian listed company focused on the oil services industry through a 28% stake in Aker Solutions, a major oil services business, and a 49.9% stake in Det Norske, the second largest oil company in Norway. Both of these companies have had a good year. In the case of Aker Solutions a change of management and operational improvements have driven a share price re-rating, whilst at Det Norske being part of the consortium that made a large discovery in the North Sea boosted its share price enormously over the year. Aker holds some other investments in related industries and also has significant net cash on its balance sheet, having made asset disposals early in the year. It trades on a 41% discount and is committed to paying a relatively high dividend yield, currently 5.9%. A share price total return during the year of 66% has been driven by underlying NAV growth rather than discount compression. We consider that there is scope for further growth in the value of its businesses which suggests that the current wide discount level is unjustified. Other strong contributors to performance based in Scandinavia include Investor AB 'A' and Orkla; both of which trade on wide discounts, have attractive dividend yields and strong balance sheets, as well as catalysts for discount narrowing. There were some disappointing performances elsewhere in Europe. For example, CIR SpA in Italy, which we no longer hold, detracted from performance to the tune of £2.8m over the period. This is an example of a company that trades on a very wide discount. However, being based in Italy, it has suffered from negative investor sentiment, as well as a deteriorating operational outlook for some of its businesses. Asian Holding Companies Asian companies have been a source of strong returns for a number of years and once again they contributed significantly. 38% of this year's returns came from this group of companies, with the bulk of these coming from our investments in Jardine Matheson Holdings and Jardine Strategic Holdings. Wheelock & Co was another notable contributor to performance. In recent months its share price appreciated sharply and thus the discount at which it trades narrowed. We used this strength to sell our holding and realise profits. We also took profits on part of our holdings in Swire Pacific and thereby further reduced our exposure to property markets in Hong Kong and China, both of which have been remarkably strong in recent years. We have been adding companies that offer exposure to the Asian domestic consumer. During the year we had a position in Fraser & Neave which was the subject of corporate activity that allowed us to sell our holding for a reasonable profit. Another recent addition is First Pacific, which is a Hong Kong listed holding company that owns stakes in four other listed companies in the Philippines and Indonesia. It is on a 45% discount and management are attempting to narrow the discount by way of share buybacks and generally increasing the investor awareness and understanding of the company. Vivendi Vivendi is the largest single holding in the portfolio. Its share price has been relatively flat over the year but this masks a rather more volatile time for the company as challenges in its French mobile phone business contributed to a decision to cut the dividend by a third. Vivendi owns a collection of businesses spanning mobile phones, broadband, television, music and computer games and the share price is significantly below the aggregate value of those businesses. Following management changes, the company has now embarked on a different strategy that we believe will see one or more of those businesses disposed of. This reflects a recognition by management that the present structure does not work, as a huge amount of value could be created for shareholders if the discount were successfully eliminated. The company trades on very low multiples of earnings and, even after the cut in dividend, currently yields over 6%. We added to our holding in Vivendi after the sharp sell-off in the shares earlier in the year and this, together with the dividend income, has meant that Vivendi made a small positive contribution to returns during the year. Other Losses within this sector have come from small Japanese companies, where we have been reducing our investments. Despite very wide discounts indeed, it seems unlikely that management will pursue the kind of strategy that could lead to those discounts being reduced. Closed End Funds The weighting in closed end funds has expanded over the year and we have been particularly focused on the listed private equity sector. Holdings in Pantheon and Electra have been supplemented with new investments including LMS Capital and AP Alternative Assets. These investments were made on average discounts above 30% and we are confident in the value of the underlying businesses. In addition, action is being taken to address wide discounts, with no new investments being made by the funds and capital being returned to shareholders from the sale of existing holdings. Mining & Resources Nexen was a large contributor to performance for the year under review as a result of a take over bid from CNOOC at a premium of circa 60% to the prevailing share price. This was almost matched by a very strong performance over the year from Amerisur Resources, a London listed oil exploration company with assets in South America. It has been a challenge to make money out of gold mining stocks despite another year of decent gains in the gold spot price. We currently have 3% in gold mining companies, which is lower than a year ago. A loss on the sale of one holding was partially offset by the gains made in others. Property Granite Real Estate, a Canadian listed REIT, performed well; with its share price rising by over 30% during the year. This has been driven by improving investor sentiment following the implementation of a more shareholder friendly strategy. The company yields almost 6% and is trading on a discount to NAV of circa 12%, which is far more attractive than most of its peer group of North American REITs. Suntec REIT in Singapore is an example of a more recent investment. This company owns prime commercial property in Singapore and yields almost 6.5%. There is scope for this to be increased after the company completes its recently announced asset enhancement initiative. Liquidity A comment is warranted on the level of liquidity within the portfolio which has expanded from 10% one year ago to 20% as at 30 September 2012. Much of this increase has come about during the last few months of the financial year, as stronger markets and narrower discounts in some of our stocks allowed us to take profits and to build up our cash levels for investment into more attractive opportunities. We do not target a particular level of cash. However, at times cash will build up as the timing of sales and purchases do not always match. Outlook There is good value in our portfolio of stocks relative to the market, as evidenced by the continued very wide weighted average discount to NAV. In these holdings is embedded a store of value that can be released through corporate activity such as takeovers and reorganisations. Corporate activity may affect a small sub-set of our portfolio in any given period; as we have seen in the past year with Nexen, Allied Gold and Fraser & Neave. A more general narrowing of discounts will occur when investors gain confidence in the economic and political environment and can make longer term investment decisions. Because the investment environment has been so influenced by central bank policies, many investors have become less interested in stockpicking and the major decision has been between 'risk-on' and 'risk-off'. This has led many of them into using only the mostliquid index investments so as to be able to change their orientation quickly. Longer-term investment is discouraged for both corporate and stock market investors. For this reason, we consider the monetary activism as carried out by the US Federal Reserve, the Bank of England and the ECB to be misconceived. In delivering a transient shot in the arm to the markets we are also destroying the predictability and stability that we need to make sound investments and capital allocations both as investors and as a society. Notwithstanding the economic and policy headwinds, we will continue to seek to invest in good companies at attractive valuations. John Pennink Asset Value Investors Limited 12 November 2012 Consolidated Statement of Comprehensive Income of the Group for the year ended 30 September 2012 2012 2012 2011 2011 Revenue Capital 2012 Revenue Capital 2011 return return Total return return Total £'000 £'000 £'000 £'000 £'000 £'000 Income Investment income (note 2) 30,865 - 30,865 25,929 - 25,929 Gains/(losses) on investments held at fair value - 55,533 55,533 - (91,472) (91,472) Unclaimed distribution monies - 52 52 - - - (Losses)/gains on Equities Index Stock 2013 held at fair value - (243) (243) - 145 145 Exchange losses on currency balances - (1,242) (1,242) - (1,639) (1,639) 30,865 54,100 84,965 25,929 (92,966) (67,037) Expenses (note 3) Investment management fee (2,200) (2,200) (4,400) (2,471) (2,471) (4,942) Back VAT on management and performance fees - - - 111 69 180 Other expenses (including irrecoverable VAT) (1,235) (58) (1,293) (1,194) - (1,194) Profit/(loss) before finance costs and tax 27,430 51,842 79,272 22,375 (95,368) (72,993) Finance costs (note 4) (1,486) (7) (1,493) (2,116) (7) (2,123) Profit/(loss) before taxation 25,944 51,835 77,779 20,259 (95,375) (75,116) Taxation (note 5) (1,894) 9 (1,885) (1,854) 11 (1,843) Profit/(loss) for the year 24,050 51,844 75,894 18,405 (95,364) (76,959) Earnings per Ordinary Share (note 6) 15.06p 32.46p 47.52p 11.50p (59.57)p (48.07)p The Company did not have any income or expense that was not included in profit/(loss) for the year. Accordingly, the "Profit/(loss) for the year" is also the "Total comprehensive income for the year", as defined in IAS 1 (revised) and no separate Statement of Comprehensive Income has been presented. The total column of this statement is the profit and loss account of the Group. The revenue return and capital return columns are supplementary to this and are prepared under the guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations. All income is attributable to the equity holders of British Empire Securities and General Trust plc. There are no minority interests. Consolidated and Company Statements of Changes in Equity for the year ended 30 September 2012 Ordinary Capital share redemption Share Capital Merger Revenue capital reserve premium reserve reserve reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Group For the year ended 30 September 2012 Balance as at 30 September 2011 16,008 2,927 28,078 620,938 41,406 31,028 740,385 Ordinary Shares bought back and cancelled (7) 7 - (264) - - (264) Ordinary Shares bought back and held in treasury - - - (7,982) - - (7,982) Total comprehensive income for the year - - - 51,844 - 24,050 75,894 Ordinary dividends paid - - - - - (13,607) (13,607) Special dividend paid - - - - - (3,201) (3,201) Balance as at 30 September 2012 16,001 2,934 28,078 664,536 41,406 38,270 791,225 For the year ended 30 September 2011 Balance as at 30 September 2010 16,008 2,927 28,078 716,302 41,406 24,949 829,670 Total comprehensive income for the year - - - (95,364) - 18,405 (76,959) Ordinary dividends paid - - - - - (12,326) (12,326) Special dividend paid - - - - - - - Balance as at 30 September 2011 16,008 2,927 28,078 620,938 41,406 31,028 740,385 Company For the year ended 30 September 2012 Balance as at 30 September 2011 16,008 2,927 28,078 622,706 41,406 29,260 740,385 Ordinary Shares bought back and cancelled (7) 7 - (264) - - (264) Ordinary Shares bought back and held in treasury - - - (7,982) - - (7,982) Total comprehensive income for the year - - - 51,841 - 24,053 75,894 Ordinary dividends paid - - - - - (13,607) (13,607) Special dividend paid - - - - - (3,201) (3,201) Balance as at 30 September 2012 16,001 2,934 28,078 666,301 41,406 36,505 791,225 For the year ended 30 September 2011 Balance as at 30 September 2010 16,008 2,927 28,078 718,073 41,406 23,178 829,670 Total comprehensive income for the year - - - (95,367) - 18,408 (76,959) Ordinary dividends paid - - - - - (12,326) (12,326) Special dividend paid - - - - - - Balance as at 30 September 2011 16,008 2,927 28,078 622,706 41,406 29,260 740,385 Consolidated and Company Balance Sheets as at 30 September 2012 Company Group 2012 2011 2012 2011 £'000 £'000 £'000 £'000 Non-current assets Investments held at fair value through profit or loss 809,196 758,889 807,181 756,871 Current assets Other receivables 5,776 3,819 5,776 3,820 Cash and cash equivalents 7,778 5,660 7,780 5,662 13,554 9,479 13,556 9,482 Total assets 822,750 768,368 820,737 766,353 Current liabilities Other payables (9,539) (6,238) (7,526) (4,223) Equities Index Stock 2013 held at fair value through profit or loss (7,038) - (7,038) - Total assets less current liabilities 806,173 762,130 806,173 762,130 Non-current liabilities 8 ^1/8 per cent Debenture Stock 2023 (14,921) (14,914) (14,921) (14,914) Equities Index Stock 2013 held at fair value through profit or loss - (6,795) - (6,795) Provision for deferred tax (27) (36) (27) (36) Net assets 791,225 740,385 791,225 740,385 Equity attributable to equity Shareholders Ordinary share capital 16,001 16,008 16,001 16,008 Capital redemption reserve 2,934 2,927 2,934 2,927 Share premium 28,078 28,078 28,078 28,078 Capital reserve 666,301 622,706 664,536 620,938 Merger reserve 41,406 41,406 41,406 41,406 Revenue reserve 36,505 29,260 38,270 31,028 Total equity 791,225 740,385 791,225 740,385 Net asset value per Ordinary Share - basic (note 7) 500.47p 462.51p 500.47p 462.51p Number of shares in issue excluding Treasury 158,094,985 160,080,089 158,094,985 160,080,089 Consolidated and Company Cash Flow Statements for the year ended 30 September 2012 Company Group 2012 2011 2012 2011 £'000 £'000 £'000 £'000 Reconciliation of profit/(loss) before taxation to net cash inflow from operating activities Profit/(loss) before taxation 77,779 (75,116) 77,779 (75,116) Losses/(gains) on Equities Index Stock 2013 held at fair value 243 (145) 243 (145) Realised exchange losses on currency balances 1,242 1,639 1,242 1,639 (Gains)/losses on investments held at fair value through profit or loss (55,530) 91,475 (55,533) 91,472 Purchases of investments (556,735) (626,817) (556,735) (626,817) Sales of investments 563,194 634,405 563,194 634,405 Decrease/(increase) in other receivables 733 (219) 733 (219) Increase/(decrease) in creditors 925 (322) 927 (319) Taxation (3,444) (2,612) (3,443) (2,612) Amortisation of Debenture issue expenses 7 7 7 7 Net cash inflow from operating activities 28,414 22,295 28,414 22,295 Financing activities Dividends paid (16,808) (12,326) (16,808) (12,326) Payments for Ordinary Shares bought back and cancelled (264) - (264) - Payments for Ordinary Shares bought back and held in Treasury (7,982) - (7,982) - Buyback of Equities Index Stock 2013 - (204) - (204) Redemption of 10 ^3/8 per cent Debenture Stock 2011 - (8,484) - (8,484) Cash outflow from financing activities (25,054) (21,014) (25,054) (21,014) Increase in cash and cash equivalents 3,360 1,281 3,360 1,281 Exchange movements (1,242) (1,639) (1,242) (1,639) Change in cash and cash equivalents 2,118 (358) 2,118 (358) Cash and cash equivalents at beginning of year 5,660 6,018 5,662 6,020 Cash and cash equivalents at end of year 7,778 5,660 7,780 5,662 Notes 1. Accounting policies The financial statements of the Group and the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. These comprise standards and interpretations approved by the International Accounting Standards Board (IASB), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee (IASC) that remain in effect, to the extent that IFRS have been adopted by the European Union. The functional currency of the Group is pounds sterling because this is the currency of the primary economic environment in which the Group operates. The financial statements are also presented in pounds sterling rounded to the nearest thousand, except where otherwise indicated. (a) Basis of preparation The principal accounting policies adopted are set out below. Where presentational guidance set out in the Statement of Recommended Practice (the SORP) for investment trusts issued by the Association of Investment Companies (the AIC) in January 2009 is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. (b) Adoption of new and revised standards At the date of authorisation of these financial statements, the following Standards which have not been applied in these financial statements were in issue but were not yet effective (and in some cases had not yet been adopted by the EU): International Accounting Standards (IAS/IFRS) Effective for periods beginning on or after IFRS 9 Financial Instruments: Classification & 1 January 2015 Measurement IFRS 10 Consolidated Financial Statements 1 January 2013 IFRS 11 Joint Arrangements 1 January 2013 IFRS 12 Disclosure of Interest in other Entities 1 January 2013 IFRS 13 Fair-Value Measurement 1 January 2013 The Company is considering what impact, if any, the adoption of these standards/interpretations in future periods will have. Currently they do not believe that there will be a material impact on the 2013 consolidated financial statements. (c) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiary) made up to 30 September each year. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. All intra-group transactions, balances, income and expenses are eliminated on consolidation. As permitted by Section 408 of the Companies Act 2006 no Company Statement of Comprehensive Income has been prepared. (d) Presentation of Statement of Comprehensive Income In order to reflect better the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. The Company is registered as a UK Investment Company under Section 833 of the Companies Act 2006. Additionally, net revenue is the measure which the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Section 1159 of the Corporation Tax Act 2010. (e) Use of estimates The preparation of financial statements requires the Group to make estimates and assumptions that affect items reported in the Group and Company balance sheet and Consolidated Statement of Comprehensive Income and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on best knowledge of current facts, circumstances and, to some extent, future events and actions, the Group's actual results may ultimately differ from those estimates, possibly significantly. Unquoted equity investments that the Group holds are not traded and, as such, the prices are more uncertain than those more widely traded securities. The unquoted investments are valued by reference to valuation techniques approved by the Directors and in accordance with the International Private Equity and Venture Capital Valuation (IPEVC) guidelines as described in note 1(i). (f) Income Dividends receivable on equity shares are recognised as revenue for the year on an ex-dividend basis. Where an ex-dividend date is not available, dividends received on or before the year end are treated as revenue for the year. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that discounts estimated future cash receipts through the expected life of the financial asset to the asset's net carrying amount. Interest receivable from cash and short term deposits is accrued to the end of the year. (g) Expenses All expenses and interest payable are accounted for on an accruals basis. Expenses have been charged to revenue except as follows: • The base management fee has been allocated 50% to revenue and 50% to capital within the Consolidated Statement of Comprehensive Income. The performance element of the management fee is charged 100% to capital within the Consolidated Statement of Comprehensive Income; • Expenses which are incidental to the purchase or sale of an investment are recognised within the Consolidated Statement of Comprehensive Income as a capital item; • Expenses are presented as capital where a connection with the maintenance or enhancement of the value of investments can be demonstrated. (h) Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit before tax as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that were enacted or substantially enacted at the balance sheet date. In line with the recommendations of the SORP, the allocation method used to calculate tax relief on expenses presented against capital returns in the supplementary information in the Consolidated Statement of Comprehensive Income is the "marginal basis". Under this basis, if taxable income is capable of being offset entirely by expenses presented in the revenue return column of the Consolidated Statement of Comprehensive Income, then no tax relief is transferred to the capital return column. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are 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 can be utilised. Deferred tax is charged or credited in the Consolidated Statement of Comprehensive Income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with within equity. Investment trusts which have approval as such under Section 1158 of the Corporation Tax Act 2010 are not liable for taxation on capital gains. (i) Investments held at fair value through profit or loss When a purchase or sale is made under a contract, the terms of which require delivery within the timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date. In accordance with IFRS recognition and measurement principles, all the Group's investments are classified as investments designated at fair value through profit or loss and are described in these financial statements as investments held at fair value. All investments are designated as held at fair value upon initial recognition and are measured at subsequent reporting dates at fair value, which is either the bid price or the last traded price, depending on the convention of the exchange on which the investment is quoted. Fair values for unquoted investments, or investments for which the market is inactive, are established by using various valuation techniques in accordance with the IPEVC guidelines. These may include recent arm's length market transactions, the current fair value of another instrument which is substantially the same, discounted cash flow analysis and option pricing models. Where there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, that technique is utilised. Where no reliable fair value can be estimated for such instruments, they are carried at cost subject to any provision for impairment. Investments held by the subsidiary undertaking are classified as "held for trading" and are valued at fair value in accordance with the policies above for listed and unlisted holdings. Profits or losses on investments "held for trading" are taken to revenue. Foreign exchange gains and losses for fair value through profit or loss on investments are included within the changes in their fair value. (j) Movements in fair value Changes in fair value of investments not designated as held for trading are recognised in the Consolidated Statement of Comprehensive Income as a capital item. On disposal, realised gains and losses are also recognised in the Consolidated Statement of Comprehensive Income as capital items. (k) Cash and cash equivalents Cash comprises cash in hand and at bank and short term deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value. The story has been truncated, [TRUNCATED]
British Empire Sec BTEM Annual Financial Report
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