Company registration number 03385241 (England and Wales)
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2023
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
COMPANY INFORMATION
Directors
John Cavill
Mark Knight
Prince Dakpoe
Secretary
Infrastructure Managers Limited
Company number
03385241
Registered office
Cannon Place
78 Cannon Street
London
EC4N 6AF
Independent Auditors
PricewaterhouseCoopers LLP
Chartered Accountants & Statutory Auditors
Atria One
144 Morrison Street
Edinburgh
EH3 8EX
Bankers
Royal Bank of Scotland Plc
36 St Andrew's Square
Edinburgh
EH2 2YB
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
CONTENTS
Page
Strategic report
1 - 2
Directors' report
3
Directors' responsibilities statement
4
Independent auditors' report
5 - 8
Statement of comprehensive income
9
Statement of financial position
10
Statement of changes in equity
11
Notes to the financial statements
12 - 22
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
STRATEGIC REPORT
FOR THE YEAR ENDED 31 DECEMBER 2023
- 1 -
The directors present their strategic report on Defence Management (Watchfield) Limited ("the Company") for the year ended 31 December 2023.
Principal objectives and strategies
The Company's principal activity is the financing and subsequent operation of the Joint Services Command and Staff College on behalf of the Ministry of Defence, under the Government's Private Finance Initiative Scheme. The contract is in year 23 of its term expiring in 2028.
Review of the business
The directors are satisfied with the overall performance of the Company and do not foresee any significant change in the Company's activities in the coming financial year, though the Company is monitoring its expenditure levels due to contractual reductions in the unitary charge from September 2023 (see going concern note in Accounting Policies).
Principal risks and uncertainties
Many of the cash flow risks are addressed by means of contractual provisions. The Company's liquidity risk was principally managed through the Company by means of long term borrowings with the debt having been repaid in the year.
The financial risk management objectives of the Company are to ensure that financial risks are mitigated by the use of financial instruments. The Company used interest rate swaps to reduce its exposure to interest rate movements on the debt. Financial instruments are not used for speculative purposes.
Future developments
The directors intend for the business to continue to operate in line with the financial forecast model, contractual terms and do not expect any strategic changes, provided that a positive resolution is achieved in respect of the matters referred to in the going concern note in Accounting Policies.
Key performance indicators
The performance of the Company from a cash perspective was assessed six monthly by the testing of the covenants of the senior debt provider. The key indicator being the debt service cover ratio. The company has been performing in line with expectations and in the year paid off the loan from the senior debt provider, therefore assessment of the company's performance against loan covenants is no longer appropriate.
Climate change
The directors recognise that it is important to disclose their view of the impact of climate change on the company. The company's key operational contracts are long-term and with a small number of known counterparties. In most cases, the cashflows from these contracts can be predicted with reasonable certainty for at least the medium-term. Having considered the company's operations, its contracted rights and obligations and forecast cash flows, there is not expected to be a significant impact upon the company's operational or financial performance arising from climate change.
Going concern
There is a material uncertainty that the Company might not have adequate resources to continue operations for at least 12 months from the date the financial statements are approved however these financial statements have been prepared on a going concern basis for the reasons set out in the Accounting Policies.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
STRATEGIC REPORT (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
- 2 -
This report was approved by the board of directors on 25 September 2024 and signed on behalf of the board by:
Mark Knight
Director
25 September 2024
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
DIRECTORS' REPORT
FOR THE YEAR ENDED 31 DECEMBER 2023
- 3 -
The directors present their annual report and the financial statements of Defence Management (Watchfield) Limited ("the Company") for the year ended 31 December 2023.
Results and dividends
The results for the year are set out on page 9.
The loss for the financial year, after taxation, amounted to £523,260 (2022: loss of £11,796,431).
The directors are satisfied with the overall performance of the Company and do not foresee any significant change in the Company's activities in the coming financial year, though the Company is monitoring its expenditure levels due to contractual reductions in the unitary charge from September 2023 (see going concern note in Accounting Policies).
Ordinary dividends were paid amounting to £nil (2022: £nil). The directors do not recommend payment of a final dividend.
Directors
The directors who held office during the year and up to the date of approval of the financial statements were as follows:
John Cavill
Mark Knight
(Appointed 31 January 2023)
Peter Sheldrake
(Resigned 31 January 2023)
Prince Dakpoe
(Appointed 1 April 2024)
Qualifying third party indemnity provisions
The company has made qualifying third party indemnity provisions for the benefit of its directors during the year. These provisions remain in force at the reporting date.
Independent auditors
The auditors, PricewaterhouseCoopers LLP, are deemed to be reappointed under section 487(2) of the Companies Act 2006.
Strategic report
The company has chosen in accordance with Companies Act 2006, s. 414C(11) to set out in the company's strategic report information required by Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, Sch. 7 to be contained in the directors' report.
Statement of disclosure to auditors
In the case of each director in office at the date the Directors' Report is approved:
• so far as the director is aware, there is no relevant audit information of which the Company's auditors are unaware; and
• they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.
This report was approved by the board of directors on 25 September 2024 and signed by order of the board by:
James Cornock
For and on behalf of Infrastructure Managers Limited
Secretary
25 September 2024
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
DIRECTORS' RESPONSIBILITIES STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2023
- 4 -
The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law).
Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing the financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
state whether applicable United Kingdom Accounting Standards, comprising FRS102 have been followed, subject to any material departures disclosed and explained in the financial statements;
make judgements and accounting estimates that are reasonable and prudent; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006.
The financial statements were approved and signed by the director and authorised for issue on 25 September 2024
Mark Knight
Director
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
INDEPENDENT AUDITORS' REPORT
TO THE MEMBERS OF DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
FOR THE YEAR ENDED 31 DECEMBER 2023
- 5 -
Report on the audit of the financial statements
Opinion
In our opinion, Defence Management (Watchfield) Limited's financial statements:
give a true and fair view of the state of the company's affairs as at 31 December 2023 and of its loss for the year then ended;
have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, including FRS102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law); and
have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements, included within the Annual Report and Financial Statements (the "Annual Report"), which comprise: the Statement of financial position as at 31 December 2023; the Statement of comprehensive income and the Statement of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.
We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC's Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
Material uncertainty related to going concern
In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 1.2 to the financial statements concerning the company’s ability to continue as a going concern. Due to an identified calculation error in the re-basing of the pricing which was incorporated in a prior contract variation the Company’s expenditure has exceeded income and if the error is not rectified expenditure will continue to exceed income. There is a process of arbitration ongoing with a decision expected by the end of 2024. As a result of the above-mentioned contract variation, and in the event that the outcome of the arbitration is not in the Company’s favour, forecasts indicate that the Company will run out of funds in June 2025 , which is within the going concern assessment period.. These conditions, along with the other matters explained in note 1.2 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt about the company's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the company were unable to continue as a going concern.
In auditing the financial statements, we have concluded that the members’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Our responsibilities and the responsibilities of the members with respect to going concern are described in the relevant sections of this report.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
INDEPENDENT AUDITORS' REPORT (CONTINUED)
TO THE MEMBERS OF DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
FOR THE YEAR ENDED 31 DECEMBER 2023
- 6 -
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, 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 audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. 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 based on these responsibilities.
With respect to the Strategic report and Directors' report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below.
Strategic report and Directors' report
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 year ended 31 December 2023 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we did not identify any material misstatements in the Directors' report.
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Directors' responsibilities statement, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they 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 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 company or to cease operations, or have no realistic alternative but to do so.
Auditors' responsibilities for the audit of the financial statements
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 auditors' 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.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
INDEPENDENT AUDITORS' REPORT (CONTINUED)
TO THE MEMBERS OF DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
FOR THE YEAR ENDED 31 DECEMBER 2023
- 7 -
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.
Based on our understanding of the company and industry, we identified that the principal risks of non-compliance with laws and regulations related to Companies Act 2006 and UK tax legislation, and we considered the extent to which non-compliance might have a material effect on the financial statements. We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to inappropriate journal entries and the risk of management bias in accounting estimates. Audit procedures performed by the engagement team included:
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, 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 deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors' report.
This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have no exceptions to report arising from this responsibility.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
INDEPENDENT AUDITORS' REPORT (CONTINUED)
TO THE MEMBERS OF DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
FOR THE YEAR ENDED 31 DECEMBER 2023
- 8 -
Paul Cheshire (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Edinburgh
25 September 2024
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2023
- 9 -
2023
2022
Notes
£
£
Turnover
3
14,213,216
19,938,716
Cost of sales
(13,945,763)
(16,811,493)
Gross profit
267,453
3,127,223
Administrative expenses
(784,704)
(628,756)
Exceptional Cost
4
(1,169,687)
(14,803,680)
Operating loss
5
(1,686,938)
(12,305,213)
Interest receivable and similar income
7
1,651,826
1,798,209
Interest payable and similar expenses
8
(128,379)
(578,436)
Loss before taxation
(163,491)
(11,085,440)
Tax on loss
9
(359,769)
(710,991)
Loss for the financial year
(523,260)
(11,796,431)
Other comprehensive income
Fair value gain on cash flow hedging instruments, net of tax
19,245
254,004
Total comprehensive expense for the year
(504,015)
(11,542,427)
All of the activities of the company are from continuing operations.
The notes on pages 12 to 22 form part of these financial statements.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
STATEMENT OF FINANCIAL POSITION
AS AT
31 DECEMBER 2023
31 December 2023
- 10 -
2023
2022
Notes
£
£
£
£
Current assets
Debtors: amounts falling due within one year
10
8,620,184
7,056,436
Debtors: amounts falling due after one year
10
26,581,093
33,225,717
Cash at bank and in hand
4,952,366
8,170,450
40,153,643
48,452,603
Creditors: amounts falling due within one year
11
(7,121,323)
(10,777,141)
Net current assets
33,032,320
37,675,462
Creditors: amounts falling due after more than one year
13
(16,586,879)
(19,427,660)
Provisions for liabilities
Deferred taxation
14
(2,224,752)
(3,523,098)
(2,224,752)
(3,523,098)
Net assets
14,220,689
14,724,704
Capital and reserves
Called up share capital
16
5,833,002
5,833,002
Hedging reserve
(19,245)
Profit and loss reserve
8,387,687
8,910,947
Total shareholders' funds
14,220,689
14,724,704
The notes on pages 12 to 22 form part of these financial statements.
The financial statements were approved by the board of directors and authorised for issue on 25 September 2024 and are signed on its behalf by:
Mark Knight
Director
Company registration number 03385241 (England and Wales)
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2023
- 11 -
Called up share capital
Hedging reserve
Profit and loss reserve
Total
£
£
£
£
Balance at 1 January 2022
5,833,002
(273,249)
20,707,378
26,267,131
Year ended 31 December 2022:
Loss for the financial year
-
-
(11,796,431)
(11,796,431)
Other comprehensive income:
Fair value movements on cash flow hedging instruments, net of tax
-
254,004
-
254,004
Total comprehensive expense for the year
-
254,004
(11,796,431)
(11,542,427)
Balance at 31 December 2022
5,833,002
(19,245)
8,910,947
14,724,704
Year ended 31 December 2023:
Loss for the financial year
-
-
(523,260)
(523,260)
Other comprehensive income:
Fair value movements on cash flow hedging instruments, net of tax
-
19,245
-
19,245
Total comprehensive expense for the year
-
19,245
(523,260)
(504,015)
Balance at 31 December 2023
5,833,002
8,387,687
14,220,689
Included in the fair value movement on cash flow hedging instrument is £24,423 (2022: £252,336) that was recycled through Interest Payable in the Statement of Comprehensive Income.
The notes on pages 12 to 22 form part of these financial statements.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2023
- 12 -
1
Accounting policies
Company information
Defence Management (Watchfield) Limited ("the Company") is a private company limited by shares incorporated in the United Kingdom and is registered in England and Wales. The registered office is located at Cannon Place, 78 Cannon Street, London, EC4N 6AF.
The Company's principal activity is the financing and subsequent operation of the Joint Services Command and Staff College on behalf of the Ministry of Defence, under the Government's Private Finance Initiative Scheme. The contract is in year 23 of its term expiring in 2028.
1.1
Accounting convention
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, as modified by the revaluation of certain financial assets and liabilities. The principal accounting policies adopted are set out below and have been consistently applied to the years presented, unless otherwise stated.
This company is a qualifying entity for the purposes of FRS 102, being a member of a group where the parent of that group prepares publicly available consolidated financial statements, including this company, which are intended to give a true and fair view of the assets, liabilities, financial position and profit or loss of the group. The company has therefore taken advantage of exemptions from the following disclosure requirements:
Section 7 ‘Statement of Cash Flows’: Presentation of a statement of cash flow and related notes and disclosures;
Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instrument Issues: Interest income/expense and net gains/losses for financial instruments not measured at fair value; basis of determining fair values; details of collateral, loan defaults or breaches, details of hedges, hedging fair value changes recognised in profit or loss and in other comprehensive income;
Section 33 ‘Related Party Disclosures’: Not to disclose transactions with wholly owned members of a group.
The financial statements of the company are consolidated in the financial statements of BIIF Holdco Limited. These consolidated financial statements are available from its registered office, Cannon Place, 78 Cannon Street, London, EC4N 6AF.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
1
Accounting policies
(Continued)
- 13 -
1.2
Going concern
The Directors note that, due to an identified calculation error in the re-basing of the pricing which was incorporated in a prior contract variation the Company’s expenditure has exceeded income and if the error is not rectified expenditure will continue to exceed income. This will result in a gradual decrease of the Company's cash reserves. A provision has been included in the financial statements to recognise the potential liability. There is a process of arbitration ongoing with a decision expected by the end of 2024.true
The Company prepares cash flow forecasts covering the expected life of the asset and so including a period of at least 12 months from the date the financial statements are approved. In drawing up these forecasts the directors have made assumptions based upon their view of the current and future economic conditions that will prevail over the forecast period. As a result of the above-mentioned contract variation, and in the event that the outcome of the arbitration is not in the Company’s favour, forecasts indicate that the Company will run out of funds in June 2025.
These conditions indicate the existence of a material uncertainty that the Company might not have adequate resources to continue operations for at least 12 months from the date the financial statements are approved. However, the directors are taking all steps available to ensure a favourable outcome and that the error will be corrected so that the Company will have sufficient cash to continue trading. It is not certain that the Company will have insufficient resources to continue trading and therefore the Directors consider that it is appropriate that the accounts are prepared on a going concern basis. These conditions indicate the existence of a material uncertainty which may cast significant doubt about the Company's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Company were unable to continue as a going concern.
1.3
Turnover
Turnover represents the services' share of the management services income received by the Company for the provision of a PFI (Private Finance Initiative) asset to the customer. This income is received over the life of the concession period. Management service income is allocated between turnover, finance debtor interest and reimbursement of the finance debtor so as to generate a constant rate of return in respect of the finance debtor over the life of the contract.
1.4
Cash and cash equivalents
Cash and cash equivalents are basic financial assets and include cash in hand, deposits held at call with banks, other short-term liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities.
The Company is obligated to keep cash reserves as at the balance sheet date in respect of requirements in the company's funding agreements. This restricted cash balance, which is shown within the "cash at bank and in hand" balance amounts to £nil (2022: £3,307,144).
1.5
Financial instruments
The company 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 company's statement of financial position when the company becomes party to the contractual provisions of the instrument.
Basic financial assets
Basic financial assets, which include debtors , cash and bank balances, are initially measured at transaction price including transaction costs and debtors 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.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
1
Accounting policies
(Continued)
- 14 -
Other financial assets
Other financial instruments are subsequently measured at fair value, with any changes recognised in the Statement of Comprehensive Income, with the exception of hedging instruments in a designated hedging relationship.
Impairment of financial assets
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.
Derecognition of financial assets
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the company 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.
Classification of financial liabilities
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 company after deducting all of its liabilities.
Basic financial liabilities
Basic financial liabilities, including Creditors, bank loans, loans from fellow group 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.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
1
Accounting policies
(Continued)
- 15 -
Other financial liabilities
Derivatives, including interest rate swaps and forward foreign exchange contracts, 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 at each reporting date. The fair values of the derivatives have been calculated by discounting the fixed cash flows at forecasted forward interest rates over the term of the financial instrument. 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.
Derecognition of financial liabilities
Financial liabilities are derecognised when the company’s contractual obligations expire or are discharged or cancelled.
1.6
Equity instruments
Equity instruments issued by the company 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 company.
1.7
Hedge accounting
The Company has entered into an arrangement with third parties that is designed to hedge future cash flows arising on variable rate interest loan arrangements, with the net effect of exchanging the cash flows arising under those arrangements for a stream of fixed interest cash flows ("interest rate swaps").
To qualify for hedge accounting, documentation is prepared specifying the hedging strategy, the component transactions and methodology used for effectiveness measurement. Changes in the carrying value of financial instruments that are designated and effective as hedges of future cash flows ("cash flow hedges") are recognised directly in a hedging reserve in equity and any ineffective portion is recognised immediately in the Statement of Comprehensive Income. Amounts deferred in equity in respect of cash flow hedges are subsequently recognised in the Statement of Comprehensive Income in the same period in which the hedged item affects net profit or loss or the hedging relationship is terminated and the underlying position being hedged has been extinguished.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
1.8
Taxation
The tax expense represents the sum of the tax currently payable and deferred tax.
Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the 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 company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting end date.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
1
Accounting policies
(Continued)
- 16 -
Deferred tax
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 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 in equity. Deferred tax assets and liabilities are offset when the company has 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.
1.9
Finance debtor
The Company has taken the transition exemption in FRS102 Section 35.10(i) that allows the Company to continue the service concession arrangement accounting policies from previous UK GAAP.
The Company accounts for the concession asset based on the ability to substantially transfer all the risks and rewards of ownership to the customer, with this arrangement the costs incurred by the Company on the design and construction of the asset have been treated as a finance debtor within these financial statements.
2
Judgements and key sources of estimation uncertainty
In the application of the company’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.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
2
Judgements and key sources of estimation uncertainty
(Continued)
- 17 -
Key sources of estimation uncertainty
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:
Impairment of assets
The carrying value of those assets recorded in the Company's Statement of Financial Position, at amortised cost less any impairment losses, could be materially reduced where circumstances exist which might indicate that an asset has been impaired and an impairment review is performed. Impairment reviews consider the fair value and/or value in use of the potentially impaired asset or assets and compare that with the carrying value of the asset or assets in the Statement of Financial Position. Any reduction in value arising from such a review would be recorded in the Statement of Comprehensive Income. Impairment reviews involve the significant use of assumptions. Consideration has to be given as to the price that could be obtained for the asset or assets, or in relation to a consideration of value in use, estimates of the future cash flows that could be generated by the potentially impaired asset or assets, together with a consideration of an appropriate discount rate to apply to those cash flows.
Service concession contract
Accounting for the service concession contract and finance debtor requires estimation of service margin, finance debtor interest rates and associated amortisation profile which is based on projected trading results to the end of the contract.
3
Turnover
2023
2022
£
£
Turnover analysed by class of business
Rendering of services
14,213,216
19,938,716
The whole of the turnover is attributable to the principal activity of the Company wholly undertaken in the United Kingdom.
4
Exceptional item
2023
2022
£
£
Expenditure
Exceptional cost
1,169,687
14,803,680
In 2022 a provision for an onerous contract was recognised. This provision is in relation to an identified calculation error in the re-basing of the pricing which was incorporated in a prior contract variation and which results in the income to the Company significantly reducing from the originally contracted position from September 2023. In 2023 the provision began to unwind.
5
Operating loss
2023
2022
Operating loss for the year is stated after charging:
£
£
Fees payable to the company's auditors for the audit of the company's financial statements
12,960
12,110
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
- 18 -
6
Employees
The average number of persons employed by the Company during the financial year amounted to nil (2022: nil). The directors are not employed by the Company and did not receive any remuneration from the Company during the year (2022: £nil).
7
Interest receivable and similar income
2023
2022
£
£
Interest income
Interest on bank deposits
177,425
36,120
Interest received on finance debtor
1,474,401
1,762,089
1,651,826
1,798,209
8
Interest payable and similar expenses
2023
2022
£
£
Interest on bank overdrafts and loans
105,925
455,129
Other interest payable and similar expenses
22,454
123,307
128,379
578,436
9
Taxation on loss
2023
2022
£
£
Current tax
UK corporation tax on profits for the current year
1,658,115
1,914,193
Adjustments in respect of prior periods
(84,648)
Total current tax
1,658,115
1,829,545
Deferred tax
Origination and reversal of timing differences
(1,298,346)
(1,118,554)
Total tax charge
359,769
710,991
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
9
Taxation on loss
(Continued)
- 19 -
The actual charge for the year can be reconciled to the expected credit for the year based on the loss and the standard rate of tax as follows:
2023
2022
£
£
Loss before taxation
(163,491)
(11,085,440)
Expected tax credit based on the standard rate of corporation tax in the UK of 23.52% (2022: 19.00%)
(38,453)
(2,106,234)
Tax effect of expenses that are not deductible in determining taxable profit
205,975
159,375
Adjustments in respect of prior years
(84,648)
Effect of change in corporation tax rate
(100,175)
(70,202)
Movement in provision
292,422
2,812,700
Taxation charge for the year
359,769
710,991
10
Debtors
2023
2022
Amounts falling due within one year:
£
£
Trade debtors
67,728
Corporation tax recoverable
73,091
100,854
Finance debtor
6,632,800
6,339,503
Other debtors
22,763
Prepayments and accrued income
1,891,530
541,936
8,620,184
7,050,021
Deferred tax asset (note 14)
6,415
8,620,184
7,056,436
2023
2022
Amounts falling due after more than one year:
£
£
Finance debtor
26,581,093
33,225,717
Total debtors
35,201,277
40,282,153
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
- 20 -
11
Creditors: amounts falling due within one year
2023
2022
Notes
£
£
Bank loans
12
4,821,882
Trade creditors
66,620
1,285,727
Onerous contract provision
4,189,410
1,405,332
Taxation and social security
859,018
Other creditors
127,635
93,072
Accruals and deferred income
2,737,658
2,312,110
7,121,323
10,777,141
During the prior year a provision for an onerous contract was recognised. The current provision is £15,973,368 (2022: £14,803,680) of which £4,189,410 (2022: £1,405,332) is expected in less than one year. This provision is in relation to an identified calculation error in the re-basing of the pricing which was incorporated in a prior contract variation and which results in the income to the Company significantly reducing from the originally contracted position from September 2023. The provision represents the total liability to the end of the concession period however based on current forecasts, which assume the error is not rectified, the company is expected not to have the liquidity to trade beyond 2025.
12
Loans and overdrafts
2023
2022
£
£
Bank loans
4,821,882
Payable within one year
4,821,882
Bank loans and overdrafts include senior debt and subordinated debt.
The bank loan was secured by a bond and floating charge over all the assets, rights and undertakings of the Company. The loan was repayable under an instalment scheme whereby small repayments are made in the first few years of the loan, the final repayment was due in August 2023. The final loan repayment was made on 7 July 2023. The loan bore interest at SONIA, including a historic credit spread adjustment spread of 0.2766% per annum plus 0.75% however the Company has an interest rate swap arrangement receiving SONIA and paying interest fixed at 5.56% for the full amount of the loan drawn, hence fixing the total interest payable on the bank loan to 6.31%. The full amount of loan drawdown at 31 December 2023 is £nil (2022: £4,278,585 ). Issue costs of £nil (2022: £22,454) were set off against the total loan drawdown.
In June 1998 the Company issued a Coupon Bearing Investment sum of £10,500,000. The subordinated debt was secured by full fixed and floating charges, ranking above other creditors. The debt bore interest at the rate per annum determined by the lender which will be calculated according to the aggregate of margin, LIBOR, and mandatory costs. The debt is repayable in 41 consecutive six monthly instalments, the first of which was repaid in August 2002. The full amount of loan drawing at 31 December 2023 is £nil (2022: £565,751 ). The final repayment date of the loan was 28 February 2023.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
- 21 -
13
Creditors: amounts falling due after more than one year
2023
2022
£
£
Onerous contract provision
11,783,958
13,398,348
Derivative financial instruments
25,660
Accruals and deferred income
4,802,921
6,003,652
16,586,879
19,427,660
During the prior year a provision for an onerous contract was recognised. The current provision is £15,973,368 (2022: £14,803,680) of which £11,783,958 (2022: £13,398,348) is expected in more than one year. This provision is in relation to an identified calculation error in the re-basing of the pricing which was incorporated in a prior contract variation and which results in the income to the Company significantly reducing from the originally contracted position from September 2023. The provision represents the total liability to the end of the concession period however based on current forecasts, which assume the error is not rectified, the company is expected not to have the liquidity to trade beyond 2025.
14
Deferred taxation
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
Liabilities
Liabilities
Assets
Assets
2023
2022
2023
2022
Balances:
£
£
£
£
Accelerated capital allowances
6,672,275
8,004,547
-
-
Short term timing differences
(4,447,523)
(4,481,449)
-
-
Derivative financial instruments
-
-
-
6,415
2,224,752
3,523,098
-
6,415
2023
Movements in the year:
£
Liability at 1 January 2023
3,516,683
Credit to profit or loss
(1,298,346)
Charge to other comprehensive income
6,415
Liability at 31 December 2023
2,224,752
The net deferred tax liability expected to reverse in 2024 is £906,329 (2023: £1,136,704). This primarily relates to the reversal of timing differences on capital allowances offset by short term timing differences.
15
Financial instruments
The fair values of the interest rate swap have been calculated by discounting the fixed cash flows at forecasted forward interest rates over the term of the financial instrument. The bank borrowing and finance debtor are both held at amortised cost.
DEFENCE MANAGEMENT (WATCHFIELD) LIMITED
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2023
15
Financial instruments
(Continued)
- 22 -
16
Called up share capital
2023
2022
2023
2022
Ordinary share capital
Number
Number
£
£
Issued and fully paid
Ordinary Shares of £1 each
5,833,002
5,833,002
5,833,002
5,833,002
There is a single class of ordinary share. There are no restrictions on the distribution of dividends and the repayment of capital.
17
Ultimate controlling party
The immediate parent undertaking is Defence Management (Holdings) Limited.
The intermediate parent undertaking is BIIF Holdco Limited, which is the parent undertaking of the smallest and largest group to consolidate these financial statements. Copies of BIIF Holdco Limited consolidated financial statements can be obtained from the Company Secretary at Cannon Place, 78 Cannon Street, London, EC4N 6AF.
The ultimate parent and controlling party is BIIF L.P. BIIF L.P. is owned by a number of investors with no one investor having individual control.
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