The directors present the strategic report for Environments for Learning Limited ("the Company") and its subsidiaries (collectively "the Group") for the year ended 30 September 2022.
The results for the Group for the year are set out on page 10 and the financial position as at the year end is shown on page 11.
The profit for the year ended 30 September 2022 was £1,481,966 and the net assets as at 30 September 2022 totalled £3,779,882. Ordinary dividends were paid during the year totalling £1,602,262.
The Directors have considered the results for the year in line with the underlying agreements that govern the Group's contractual arrangements and are content with performance over that time.
The Group’s principal activities, as disclosed in the Directors' Report, are governed by respective agreements and trading relationships with end users, funders and sub-contractors. The Group's principal risk exposure is to financial risks as detailed in this section.
One of the risks to the Group is that services may not be able to continue due to the financial failure of one of the Group’s subcontractors. As a result, the financial stability of the facilities management and management service companies are being monitored. The Directors have reviewed benchmarking information, where relevant, on the facilities management contract fee and are comfortable that this is a market rate which would enable replacement of the contractor for a similar fee. The management service subcontractor fee has been reviewed and the Directors feel comfortable that the service is at market rate.
Financial risk management
The Group has exposure to a variety of financial risks which are managed with the purpose of minimising any potential adverse effect on the Group’s performance.
The Board has policies for managing each of these risks and they are summarised below:
Interest rate risk
The Group hedged its interest rate risk at the inception of each project by swapping its variable rate debt into fixed rate by the use of an interest rate swap. Each of the seven PFI projects have interest rate swaps which are detailed in note 18.
Inflation risk
The companies' projected revenues and most of their costs were linked to inflation at the inception of the projects, resulting in the projects being largely insensitive to inflation.
Liquidity risk
The Group adopts a prudent approach to liquidity management by maintaining sufficient cash and liquid resources to meet its obligations as they fall due. Due to the nature of the projects, cash flows are reasonably predictable and this is not considered to be a significant risk area for the Group.
At the start of each PFI project, the Group negotiated debt facilities with an external party to ensure that the Group has sufficient funds over the life of the PFI concessions. Financial and other covenants were largely complied with during the year and the balances are aged in line with their expected repayment dates. Details of non-compliance and related going concern impacts can be found in the going concern accounting policy in note 1.4.
Full details of loan can be found in note 16.
The Directors are not aware of any current activities of the Group that are expected to impact the future development of the Group in the foreseeable future on the basis that the Group continues to benefit from long-term contractual agreements for the provision of services to local authorities.
In the view of the Directors, the key performance indicators are net profit and dividend distributions.
The Directors have reviewed the net profit for the year of £1,481,966 (2021: £1,282,438) and note a 16% increase year on year. The Directors are content with this performance and more generally are content with the underlying financial performance of the various contracts that the Group is party to.
Dividend distributions in the year totalled £1,602,262 (2021: £3,473,000). The Directors note that these are reduced from the prior year due to certain financial commitments at an underlying contract level and certain timing issues. The Directors have reviewed forecast distributions from the Group's subsidiaries and are content that future dividend distributions will improve through careful cashflow and reserve management.
The Board of Directors of the Company and the Group, both individually and collectively, consider they have acted appropriately and in such a way as to promote the success of the Company and Group for the benefit of its members as a whole and its long-term future.
The Company and Group have no direct employees as the Company and Group are managed under Management Service Agreements ("MSAs"). The Board of Directors are satisfied that those people employed under the MSAs are appropriately qualified and have the support systems in place to carry out their role. The Board of Directors are engaged with each team under the MSAs to ensure the ongoing management of the underlying contracts of the Company and Group and work collaboratively with the teams to achieve success.
The Company is a holding company for special purpose companies which have finite lifespans with a defined set of obligations under their Project Agreements. The long-term success of the Group is delivered by meetings its objectives through effective relationships with its stakeholders, including suppliers and end users. This is affected by regular reviews with suppliers and end users to ensure delivery of the Group’s objectives. The Company and Group maintain risk registers which are reviewed on an ongoing basis to ensure their contractual obligations are met and exceeded where possible.
Due to the nature of the Group’s operations, the impact of the community and environment is paramount to its success. Operating safely is the Group’s primary objective and is integrated in everything the Group undertakes. A safe environment is managed through effective leadership, implementation of robust policies, procedures and instructions, safety management review processes both internally and externally with relevant stakeholders, reporting, auditing and monitoring. An independent safety advisor is appointed by each of the companies within the Group who reports directly to the Board of Directors.
The Group delivers contracts to support essential services within the public sector and take their responsibility of ensuring that an appropriate environment is managed and maintained to ensure the highest quality service can be delivered from the assets under the Group’s management.
On behalf of the board
The directors present their annual report and financial statements for the year ended 30 September 2022.
The results for the year are set out on page 10.
The Directors are satisfied with the overall performance of the Group and do not foresee any significant change in the Group's activities in the coming financial year.
Ordinary dividends were paid amounting to £1,602,262. The directors do not recommend payment of a further dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The Group does not undertake any research and development activities and has no plans to do so in future.
The Group continues to monitor the performance and service delivery of the underlying contracts that they are party to. The Directors note that, subsequent to the year end, several of the Group's subsidiaries breached their senior loan facility agreements and the Directors have assessed the impact of these breaches in Note 1.4. In addition to this assessment, the Directors have considered wider future developments and note that there are no plans to fundamentally change the operations of the Group and the contracts that the Group is party to that would indicate any future material changes to the Group's operations and financial performance.
The Group recognises the importance of its environmental responsibilities, monitors its impact on the environment, and implements policies via its sub-contractors to reduce any damage that might be caused by the Group’s activities. The Group has no direct employees and all work is carried out via contracts with third parties. As such, the Group has not consumed more than 40,000 kWh of energy in this reporting period, it qualifies as a low energy user under relevant regulations and is not required to report on its emissions, energy consumption or energy efficiency activities.
The auditor, Johnston Carmichael LLP, is deemed to be reappointed under section 487(2) of the Companies Act 2006.
We have audited the financial statements of Environments for Learning Limited (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 30 September 2022, which comprise the group statement of comprehensive income, the group balance sheet, the company balance sheet, the group statement of changes in equity, the company statement of changes in equity, the group statement of cash flows and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice). In our opinion the financial statements:
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor responsibilities for the audit of the financial statements section of our report. We are independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
Material uncertainty relating to going concern.
We draw attention to note 1.4 in the financial statements which indicates that there have been Events of Default (EoDs) under the Credit Agreement, Project Agreement and Facilities Management Subcontract Agreement in two of the Groups subsidiaries, namely Environments for Learning Leeds PFI Three Limited and Environments for Learning Leeds PFI Four Limited.
The EoDs relate to alleged breaches of Availability criteria that led to non-payment of the Leeds City Council (“the Council”) Unitary Charge and non-payment of the Service Contractor (“Mitie FM”) service fee subsequent to the year end.
Additionally, the Group's seven PFI project companies (namely Environments for Learning Leeds PFI One Limited, Environments for Learning Leeds PFI Two Limited, Environments for Learning Leeds PFI Three Limited, Environments for Learning Leeds PFI Four Limited, Environments for Learning Sandwell PFI One Limited, Environments for Learning St Helens PFI Limited and Pyramid Schools (Plymouth) Limited) ("the Subsidiaries") do not have a Parent Company Guarantee (“PCG”) due to the liquidation of Interserve Group Limited. As a consequence of this, the combined Construction and Facilities Management is terminable which in turn triggers a technical default in the Loan Facilities Agreement meaning the lender can recall the senior loan on demand.
As stated within note 1.4, these events or conditions, along with other matters as set forth in note 1.4, indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
The other information comprises the information included in the Annual Report other than the financial statements and our auditor’s report thereon. The Directors are responsible for the other information contained within the Annual Report. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
The information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
The Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
The parent company financial statements are not in agreement with the accounting records and returns; or
Certain disclosures of Directors’ remuneration specified by law are not made; or
We have not received all the information and explanations we require for our audit.
As explained more fully in the Statement of directors’ responsibilities set out on page 5, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the group’s and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the group or parent company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Extent the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
We assessed whether the engagement team collectively had the appropriate competence and capabilities to identify or recognise non-compliance with laws and regulations by considering their experience, past performance and support available.
All engagement team members were briefed on relevant identified laws and regulations and potential fraud risks at the planning stage of the audit. Engagement team members were reminded to remain alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
We obtained an understanding of the legal and regulatory frameworks that are applicable to the group and the parent company and the sector in which they operate, focusing on those provisions that had a direct effect on the determination of material amounts and disclosures in the financial statements. The most relevant frameworks we identified include:
United Kingdom Generally Accepted Accounting Practice, including FRS 102;
UK Companies Act 2006;
UK Corporation Tax legislation; and
VAT legislation.
We gained an understanding of how the group and parent company are complying with these laws and regulations by making enquiries of management and those charged with governance. We corroborated these enquiries through our review of relevant correspondence with regulatory bodies and board meeting minutes.
We assessed the susceptibility of the group’s financial statements to material misstatement, including how fraud might occur, by meeting with management and those charged with governance to understand where it was considered there was susceptibility to fraud. This evaluation also considered how management and those charged with governance were remunerated and whether this provided an incentive for fraudulent activity. We considered the overall control environment and how management and those charged with governance oversee the implementation and operation of controls. We identified a heightened fraud risk in relation to:
Revenue recognition; and
Management override of controls.
In addition to the above, the following procedures were performed to provide reasonable assurance that the financial statements were free of material fraud or error:
Recalculating the unitary charge received by taking the base charge per the project agreement and uplifting for RPI;
Agreeing a sample of months’ income receipts to invoice and bank statements;
Performing an assessment on the service margins used in the year and agreeing margins used to the active financial models;
Reconciling the finance income and amortisation to the finance debtor reconciliation to ensure allocation methodology is in line with contractual terms and relevant accounting standards;
Reviewing minutes of meetings of those charged with governance for reference to: breaches of laws and regulation or for any indication of any potential litigation and claims; and events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud;
Reviewing the level of and reasoning behind the group and parent company’s procurement of legal and professional services
Performing audit work procedures over the risk of management override of controls, including testing of journal entries and other adjustments for appropriateness, evaluating the business rationale of significant transactions outside the normal course of business and reviewing judgements made by management in their calculation of accounting estimates for potential management bias;
Completion of appropriate checklists and use of our experience to assess the group and parent company’s compliance with the Companies Act 2006; and
Agreement of the financial statement disclosures to supporting documentation.
Our audit procedures were designed to respond to the risk of material misstatements in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve intentional concealment, forgery, collusion, omission or misrepresentation. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
Use of our report
This report is made solely to the parent company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the parent company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the parent company and the parent company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
As permitted by s408 Companies Act 2006, the company has not presented its own profit and loss account and related notes. The company’s profit for the year was £1,468,821 (2021 - £3,390,694 profit).
Environments for Learning Limited (“the company”) is a private limited company domiciled and incorporated in England and Wales. The registered office is 1 Park Row, Leeds, United Kingdom, LS1 5AB.
The group consists of Environments for Learning Limited and all of its subsidiaries as detailed in note 12.
These financial statements have been prepared in accordance with FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (“FRS 102”) and the requirements of the Companies Act 2006.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.
The financial statements have been prepared under the historical cost convention, modified to include certain financial instruments at fair value. The principal accounting policies adopted are set out below.
The consolidated Group financial statements consist of the financial statements of the parent company Environments for Learning Limited together with all entities controlled by the parent company (its subsidiaries) and the Group’s share of its interests in joint ventures and associates.
All financial statements throughout the Group are made up to 30 September 2022.
All intra-group transactions, balances and unrealised gains on transactions between group companies are eliminated on consolidation. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Subsidiaries are consolidated in the Group’s financial statements from the date that control commences until the date that control ceases.
These financial statements are prepared on the going concern basis. The Directors have a reasonable expectation that the Group will continue in operational existence for the foreseeable future. However, the Directors are aware of certain matters which may impact the performance of the Group in future.
The Directors have reviewed detailed model forecasts for each PFI project, which forecast financial performance through to project completion, incorporating relevant terms of the Project Agreements, subcontracts and Credit Agreements and reasonable, prudent economic assumptions. These forecasts are updated semi-annually and predict that each project will be profitable and will have sufficient cashflow to meet its liabilities as they fall due through to the end of their concession.
Design and build projects have business models that are reviewed annually and updated to include relevant ongoing works. These are conducted on a breakeven or "cost plus margin" basis and the companies are expected to break even or be profitable to the end of their life.
The Group has positive net assets but has net current liabilities. This is due to events of defaults ("EoDs") occurring subsequent to the year end resulting in senior debt facilities being classified as current.
Subsequent to the year end there were EoDs under the Loan Facilities Agreement, Project Agreement, Facilities Management Subcontract Agreement and combined Construction and FM Contract in two of the Group's subsidiaries, Environments for Learning Leeds PFI Three Limited and Environments for Learning Leeds PFI Four Limited. The EoDs relate to alleged breaches of Availability criteria that led to non-payment of the Leeds City Council Unitary Charge and non-payment of the Service Contractor service fee.
Additionally, the Group's seven PFI project companies do not have a Parent Company Guarantee due to the liquidation of Interserve Group Limited. This has led to technical defaults in the Loan Facilities Agreements which mean that the lenders could recall the senior debts from these subsidiaries on demand.
More details on the EoDs are provided in the "Settlement Agreements" and "Parent Company Guarantee" sections below.
At the date of signing the financial statements no proceedings had commenced to recall the Subsidiaries' senior debts earlier than repayment by instalments. The Directors acknowledge that there are significant risks surrounding the EoDs which could impact the Group's Subsidiaries' ability to continue as going concerns and the future financial performance of the Group. However, appropriate actions are being taken to mitigate these risks and the likelihood of the default resulting in the Subsidiaries or the Group no longer being able to continue is remote.
The Directors confirm that there are no plans that would change the future operations of the Group. Consequently, the Directors have prepared the financial statements on a going concern basis however note that the EoDs give rise to a material uncertainty which may cause significant doubt about the Group's and Subsidiaries' ability to continue as a going concern and, therefore, that it may be unable to realise its assets and discharge its liabilities in the normal course of business.
Settlement Agreements ("SAs")
Following the year end there were EoDs under the Loan Facilities Agreements, Project Agreements, Facilities Management Subcontract Agreements and combined Construction and FM Contracts in two of the Group's subsidiaries, Environments for Learning Leeds PFI Three Limited and Environments for Learning Leeds PFI Four Limited ("the Subsidiaries"). The EoDs relate to alleged breaches of Availability criteria that led to non-payment of the Leeds City Council (“the Council”) Unitary Charges and non-payment of the Service Contractor (“Mitie FM”) service fees.
In October 2022 the Council reported alleged breaches of availability criteria, as defined in the Project Agreements, relating to specific health and safety related matters. This resulted in disputed deductions being withheld from the monthly Unitary Charge invoices over the period 1 October 2022 to 31 October 2023 which were passed down to Mitie FM and withheld from their service fee payment until the point where the Council deductions were higher than the FM service fee.
As the Council, the Subsidiaries and Mitie FM had been unable to agree a way forward during this time to remedy the outstanding reported issues, the Council started to withhold payment of the full monthly unitary charge invoice. As the Mitie FM service fee payment is significantly lower than the Unitary Charge value, this has left the Subsidiaries in financial difficulties as at the signing date and although it has been able to pay its latest loan obligations on 30 September 2023, it has been unable to pay a number of its creditors. Consequently, the Subsidiaries have not been able to meet the minimum debt service cover ratio test required under the Loan Facilities Agreement placing the Subsidiaries in default. The Company has continued to inform the lenders in respect of the non-payment situation, the actions the Subsidiaries have taken to reserve its rights to the Council and maintained good relationships throughout.
The Subsidiaries, Council and Mitie are working to finalise the terms of the settlement agreement to resolve the operational issues by forming SAs. The SAs are designed to resolve the current contractual issues which will put in place stringent plans and schedules to enable the parties to progress operationally and to find a method to release agreed monies withheld by the Authority.
Under the terms of the draft SAs it is proposed that the Council and Mitie FM will release agreed sums to the Subsidiaries and the Council will resume paying the full contractual Unitary Charge while Mitie FM will commence agreed remedial work. Subject to the occurrence of all of these events, this will allow the Subsidiaries to pay their outstanding creditors and to meet their next loan obligations on 31 March 2024.
The Council have the option to terminate the Project Agreement due to the EoDs. Should the contracts be terminated prior to the SAs being agreed then there may be potential inflows to the Subsidiaries. However, these inflows are uncertain in value and timeliness and therefore the Group could not place any reliance on funds being received on termination to cover, or part cover, the repayment of the senior debts.
On the basis of the above covenant breaches on the Subsidiaries' senior loans, these amounts have been presented as due wholly within one year.
The Directors have considered the impact of these breaches on the Company's investments in its Subsidiaries and have concluded that they expect investments and loans due from the Subsidiaries to be serviced once the above actions have taken place. Accordingly, the Directors do not consider the fixed asset investments in the Subsidiaries to be impaired.
Parent Company Guarantee
The Group's seven PFI project companies (Environments for Learning Leeds PFI One Limited, Environments for Learning Leeds PFI Two Limited, Environments for Learning Leeds PFI Three Limited, Environments for Learning Leeds PFI Four Limited, Environments for Learning Sandwell PFI One Limited, Environments for Learning St Helens PFI Limited and Pyramid Schools (Plymouth) Limited) ("the Subsidiaries") have failed to have a Parent Company Guarantee (“PCG”) in place as a result of the liquidation of Interserve Group Limited which has led to the combined Construction and FM Contract becoming terminable as well as triggering technical defaults in the Loan Facilities Agreements.
An EoD was triggered when Interserve PLC went into administration on 15 March 2019 as it was parent company guarantor for Interserve (Facilities Management) Ltd and Interserve Construction Limited. Waivers were signed in 2020 accepting the PCG of Interserve Group Limited meaning the Subsidiaries were no longer in default.
On 5 October 2023 Interserve Group Limited ("IGL") appointed liquidators under a Creditors Voluntary Liquidation. IGL is a Major Project Party as it provides a PCG for Tilbury Douglas Construction Limited ("TDCL") in relation to the Construction and FM Contract (combined contract) between the Subsidiaries and TDCL. Therefore, as a result of IGL's liquidation, the combined Construction and FM Contracts have become terminable. This insolvency event has also triggered a technical default in the Loan Facilities Agreements of the Subsidiaries. This has been known for some time and the Subsidiaries have been working with ICG, TDCL, Mitie FM and the Lenders to find a resolution. The FM services are being carried out by Mitie via a contract with the Subsidiaries' contractor (TDCL), and a PCG is being sought from them.
Turnover is recognised at the fair value of the consideration received or receivable for goods and services provided in the normal course of business, and is shown net of VAT and other sales related taxes.
When cash inflows are deferred and represent a financing arrangement, the fair value of the consideration is the present value of the future receipts. The difference between the fair value of the consideration and the nominal amount received is recognised as interest income.
In the parent company financial statements, investments in subsidiaries are initially measured at cost and subsequently measured at cost less any accumulated impairment losses.
A subsidiary is an entity controlled by the group. Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities.
The group has elected to apply the provisions of Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instruments Issues’ of FRS 102 to all of its financial instruments.
Financial instruments are recognised in the group's balance sheet when the group becomes party to the contractual provisions of the instrument.
Financial assets and liabilities are offset and the net amounts presented in the financial statements when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
Basic financial assets, which include debtors and cash and bank balances, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Other financial assets, including investments in equity instruments which are not subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the transaction price. Such assets are subsequently carried at fair value and the changes in fair value are recognised in profit or loss, except that investments in equity instruments that are not publicly traded and whose fair values cannot be measured reliably are measured at cost less impairment.
Financial assets, other than those held at fair value through profit and loss, are assessed for indicators of impairment at each reporting end date.
Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows have been affected. If an asset is impaired, the impairment loss is the difference between the carrying amount and the present value of the estimated cash flows discounted at the asset’s original effective interest rate. The impairment loss is recognised in profit or loss.
If there is a decrease in the impairment loss arising from an event occurring after the impairment was recognised, the impairment is reversed. The reversal is such that the current carrying amount does not exceed what the carrying amount would have been, had the impairment not previously been recognised. The impairment reversal is recognised in profit or loss.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the group transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the group after deducting all of its liabilities.
Basic financial liabilities, including creditors, bank loans and loans from fellow group companies, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Derivatives, including interest rate swaps, are not basic financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value through profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the group's contractual obligations expire or are discharged or cancelled.
Equity instruments issued by the group are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the group.
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the profit and loss account 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 have been enacted or substantively enacted by the reporting end date.
Deferred tax liabilities are generally recognised for all timing differences and deferred tax assets are recognised to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. Such assets and liabilities are not recognised if the timing difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each reporting end date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the profit and loss account, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset if, and only if, there is a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority.
Accounting for PFI contracts
On transition to FRS 102, the Group took advantage of the exemptions available under section 35.10(i) to allow the treatment of financial assets receivable to be consistent with the accounting policies in place prior to transition to FRS 102.
Under the terms of the Project Agreements, substantially all of the risks and rewards of ownership of the properties remain with the local government counterparties. During the period of construction, costs incurred as a direct consequence of financing, designing and construction the assets, including finance costs, were capitalised and shown as work-in-progress. On completion, deemed sales were recognised in turnover and deemed construction expenditure were recognised in cost of sales. Amounts receivable were classified as a "finance debtor" asset receivable.
Revenue received from the local government counterparties are apportioned between:
capital repayments;
finance income; and
operating revenue.
Non-controlling interests
Non-controlling interests in the equity of consolidated subsidiaries are identified separately from the Group's equity. Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling interests' share of changes in equity since the date of the combination.
The proportions of profit or loss and other changes in equity allocated to the owners of the parent company and to the owners of the non-controlling interests are determined on the basis of economic interests during the period of calculation.
In the application of the group’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
The following judgements (apart from those involving estimates) have had the most significant effect on amounts recognised in the financial statements.
As noted in Note 1.11, Accounting for PFI Contracts, the Group provides services under certain private finance agreements to local authority counterparties. Under the terms of these Agreements, the local authority counterparty controls the services to be provided by the Group over the contract term. Based on the contractual arrangements, the Group has classified the project as a service concession arrangement and has accounted for the principal assets of, and income streams from, the project in accordance with FRS 102, Section 34.12 Service Concession Arrangements and the exemptions available under section 35.10(i).
Under the terms of the arrangement, the Group has the right to receive a baseline contractual payment stream for the provision of the services from or at the direction of the local authority counterparty and, as such, the asset is accounted for as a financial asset. The financial asset was initially recognised at the fair value of the consideration received, based on the fair value of the construction (or upgrade) services, plus any directly attributable transaction costs.
Revenue is recognised from the supply of services, which represents the timing of services provided under contracts to the extent that there is a right to consideration and is recorded at the fair value of the consideration received or receivable.
The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are as follows.
Financial instruments
The Group holds derivative financial instruments which have the effect of fixing the interest rate payable on bank borrowings. Amounts payable or receivable in respect of interest rate derivatives are recognised as adjustments to interest over the period of the contract.
Hedge accounting
Where a derivative financial instrument is designated as a hedge of the variability in the cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the fair value of the derivative financial instrument is recognised directly in the statement of comprehensive income as other comprehensive income or expense. Any ineffective portion of the hedge is recognised immediately in profit or loss.
Where hedge accounting recognises assets or liabilities then an associated deferred tax liability or asset is also recognised.
Cash flow hedges
The effective portion of the changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit and loss in the periods in which the hedged item affects profit or loss, or when the hedging relationship ends.
Hedge accounting is discontinued when the entity revokes the hedging relationship, the hedging instrument expires or is sold, terminated, exercised or no longer qualifies for hedge accounting. Any gain or loss accumulated in equity at the time is reclassified to profit or loss when the hedged item is recognised in profit or loss. When a forecast transaction is no longer expected to occur, any gain or loss that was previously recognised in other comprehensive income is reclassified immediately to profit or loss.
"Turnover", as presented in the Group Profit and Loss Account, is wholly derived from the Group's sole trade, being the design, build, financing and operation of public infrastructure, and is wholly derived from the United Kingdom.
The above Group and Company audit fee and the Company's tax compliance fee of £1,320 (2021: £1,000) were borne by Pyramid Schools (Plymouth) Limited, a wholly owned subsidiary of the Group.
During the current and prior years, the Group and Company had no employees.
The Directors of the Company and its subsidiaries are not remunerated by the Group. The above amounts were paid to related parties for directorship services.
An increase in the United Kingdom's corporation tax rate from 19% to 25%, effective from 1 April 2023, was substantively enacted prior to the balance sheet date. Deferred tax has been recognised at 25%.
The Group has no tax losses (2021: £nil). There are deferred tax assets and liabilities relating to interest rate derivatives which will unwind over the term of the hedging arrangements. All movements in deferred tax have been recognised in other comprehensive income.
The actual charge for the year can be reconciled to the expected charge for the year based on the profit or loss and the standard rate of tax as follows:
In addition to the amount charged to the profit and loss account, the following amounts relating to tax have been recognised directly in other comprehensive income:
Details of the company's subsidiaries at 30 September 2022 are as follows:
As disclosed in Note 1.4, Going concern, subsequent to the year end there were technical breaches in senior debt loan covenant compliance for seven of the Group's PFI project companies which allow the respective lenders contractual rights to request the loans to be repaid immediately in full. As a result, the entire debt balance has been disclosed as due within one year.
The bank loans are secured by fixed and floating charges over the property, assets and rights of the relevant companies that are party to the loans. Certain financial covenants are required to be met and these are reviewed semi-annually by way of a financial model.
The Group has borrowings from two sources: loans from banking institutions ("bank loans") and loans from related parties ("other borrowings").
The entire debt is held by seven subsidiaries within the Group and the terms are generally similar across each of these contracts.
The bank loans were drawn between 2009 and 2013 and are repayable semi-annually in March and September by pre-determined ageing profiles until their final maturations between 2032 and 2038. The interest rate varies between loans from 0.65% to 2.4% over base rate. The base rate was historically calculated using LIBOR and was updated during the calendar year of 2022 to be calculated using SONIA, following the cessation of LIBOR.
The variable interest rates on all of the bank loans have been fully hedged to mitigate this risk. More details on the hedging instruments can be found in the Financial Instruments note, note 18.
The other borrowings were drawn between 2009 and 2013 and were forecast to be repaid semi-annually in March and September by pre-determined ageing profiles until their final maturations between 2034 and 2038. The interest rates are all fixed between 12.5% and 13.0%. Payments are subject to bank loan lender approval which requires various financial covenants to be met.
The following are the major deferred tax liabilities and assets recognised by the group and company, and movements thereon:
The deferred tax assets and liabilities relate to the interest rate hedging derivatives which will unwind over the terms of the underlying arrangements. All movements in deferred taxation have been recognised in other comprehensive income.
The Group has senior secured loans in seven of its subsidiaries, which all accrue interest at a variable rate based on the Bank of England base rate plus a margin. In order to hedge against the risks from interest rate variations, interest rate swap agreements were entered into with banks whereby on a semi-annual basis sums are exchanged reflecting the difference between the variable rate and a fixed rate calculated on the predetermined principal amounts outstanding at that time.
Details of the underlying transactions are as follows:
Subsidiary | Start date | Length (years) | Notional amount (£) | Fixed rate (%) |
Pyramid Schools (Plymouth) Limited | February 2007 | 25 | 41,045,000 | 5.06 |
Environments for Learning Leeds PFI One Limited | April 2007 | 27 | 105,268,000 | 5.13 |
Environments for Learning Leeds PFI Two Limited | March 2008 | 26 | 34,126,000 | 4.95 |
Environments for Learning Leeds PFI Three Limited | August 2008 | 26 | 30,964,000 | 4.94 |
Environments for Learning Leeds PFI Four Limited | December 2011 | 26 | 16,579,995 | 3.27 |
Environments for Learning Sandwell PFI One Limited | July 2009 | 28 | 23,084,167 | 4.99 |
Environments for Learning St Helens PFI One Limited | December 2010 | 28 | 28,500,000 | 4.4025 |
Subsidiary | Value at 30 September 2022 | Value at 30 September 2021 |
Pyramid Schools (Plymouth) Limited | (126,966) | (5,376,695) |
Environments for Learning Leeds PFI One Limited | (1,034,484) | (19,872,171) |
Environments for Learning Leeds PFI Two Limited | (147,443) | (6,352,326) |
Environments for Learning Leeds PFI Three Limited | (145,896) | (5,462,496) |
Environments for Learning Leeds PFI Four Limited | 1,264,590 | (2,436,426) |
Environments for Learning Sandwell PFI One Limited | (106,783) | (4,985,000) |
Environments for Learning St Helens PFI One Limited | 416,098 | (6,395,793) |
| 119,116 | (50,880,907) |
The Company's two share classes do not carry any right to fixed income and rank pari passu in all respects.
The Hedging Reserve represents the fair value of interest rate cashflow hedge assets and liabilities net of deferred taxation.
Retained Earnings represents accumulated profits and losses net of dividends.
Subsequent to the year end, a number of the Group's subsidiaries encountered events of defaults under their Loan Facilities Agreements, Project Agreements and other associated contracts. This has resulted in the senior debt facilities being classified as current in these financial statements. Full details of these events, the impact to the financial statements and the related impact to going concern can be found in the going concern accounting policy in Note 1.4.
The remuneration of key management personnel is as follows.
The Directors of the Company and its subsidiaries are not remunerated by the Group. The above amounts were paid to related parties for directorship services.
There are no other key management personnel other than the Directors.
During the year the Group entered into the following transactions with related parties:
"Loan interest charged" relates to interest charged on the loan balances noted in the below table.
The following amounts were outstanding at the reporting end date:
Included in amounts due to "Entities with control" are loan balances due to entities who have beneficial control of the Group. Further details on the conditions of these loans can be found in note 17.
Amounts due to "key management personnel" relate to amounts outstanding at the year end due to entities who have beneficial control of the Group for directorship services provided as noted above.