The Financial Reporting Review Panel (“the Panel”) has had under review the report and accounts of Grainger Trust plc (“the company”, now Grainger plc) for the year ended 30 September 2006.

During the period in question, the company transferred trading properties with a carrying amount, at cost, of £43.5m to a Jersey Property Unit Trust (“the JPUT”), a wholly-owned subsidiary of the company at 30 September 2006. On transfer, the properties were reclassified as investment properties and a gain on revaluation to market value of £23.5m was recognised in the income statement.

The Panel was concerned about the reclassification of these properties. IAS 40 “Investment property” limits the circumstances in which transfers to, or from, investment property can be made to those circumstances, specified in the standard, that provide evidence of a change in use. No such change in use attended the company’s transfer to the JPUT.

As a result of discussion with the Panel, the directors have agreed that the transfer did not comply with the requirements of IAS 40 as it did not provide evidence of the required change in use.

In their 2007 preliminary announcement released today, the directors state that they have conducted a considered and detailed review of all of the group’s property assets. As a result of their review, the directors have concluded that, amongst other findings, the properties selected for transfer to the JPUT were originally acquired for the purpose of long term capital appreciation and rental growth and, consequently, should always have been shown as investment property rather than trading stock. This error has been corrected by a prior year adjustment, restating the opening 2006 balance sheet (i.e. at 1 October 2005) and the income statement for the year ended 30 September 2006.

The total value of the assets reclassified in this prior year adjustment amounts to £67m out of Grainger’s total property portfolio valued at £2.0bn at 30 September 2006. The correction results in the reduction of the 2006 reported profit after tax by £16.5m. Together with the effect of other changes described in the company’s announcement, the 2006 profit after tax reduces from £50.5m to £33.5m with net assets reducing by £0.5m to £250.1m.

The Panel welcomes the action taken by the directors today. On the basis that the required adjustments are made in the full published accounts for the year to 30 September 2007, the Panel regards its concerns as satisfied.

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the Committee on Corporate Governance, the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board).
2. The role of the Panel is to examine the annual accounts of public and large private companies to see whether they comply with the requirements of the Companies Act 1985 (‘the Act’), including applicable accounting standards. Following implementation of the Accounting Regulation (EC) No. 1606/2002, this may mean compliance with UK or International Financial Reporting Standards.
3. Where breaches of the Act are discovered the Panel seeks to take corrective action that is proportionate to the nature and effect of the defects, taking account of market and user needs. Where a company’s accounts are defective in a material respect the Panel will, wherever possible, try to secure their revision by voluntary means, but if this approach fails the Panel is empowered to make an application to the court under section 245B of the Companies Act 1985 for an order for revision. To date no court applications have been made.
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