Audit committee report, contact with UK FRC and additional disclosures in annual report

Derwent London plc – Annual report – 31 December 2016

Industry: real estate

Report of the Audit Committee (extract)

Other matters addressed by the Committee (extract)

  • The Company was contacted by the FRC regarding its disclosure in the 2015 Report and Accounts relating to the accounting for conversion of the 2.75% unsecured convertible bonds 2016. The Committee assisted the Company in responding to the request for further information following which the matter was satisfactorily concluded with no adjustment being required. Additional disclosures are included in the 2016 annual report.

The FRC’s review was based on the Company’s annual report and accounts and does not benefit from detailed knowledge of its business or an understanding of the underlying transactions entered into. Their correspondence provides no assurance that the report and accounts are correct in all material respects; the FRC’s role is not to verify the information provided but to consider compliance with reporting requirements.

Notes to the financial statements (extract)

23 Borrowings and derivative financial instruments (extract)

2.75% unsecured convertible bonds 2016

In June 2011 the Group issued its first convertible bonds which paid a coupon of 2.75% and had a conversion price of £22.22 per share. In December 2014, the Group issued a notice for the early redemption of these bonds. All the bondholders opted to convert in January 2015 with the result that 7,875,776 new ordinary shares of 5p each were issued at the conversion price of £22.22 per share, and the bonds were subsequently cancelled. Of the proceeds of £175.0m received from the bondholders, £0.5m was credited to share capital and £174.5m was credited to retained earnings. The premium on issue was not required to be transferred to a share premium account because merger relief was available due to the structure of the transaction. The ordinary shares issued on conversion of the bonds by Derwent London plc were exchanged for exchangeable redeemable preference shares (‘ERPS’) in the subsidiary company which issued the bonds, and the redemption of the ERPS converted the merger reserve into a realised profit. The £9.4m that had been credited to other reserves on issue was transferred to retained earnings on conversion of the bonds. In addition, unamortised amounts totalling £4.3m due to early redemption have been charged to retained earnings. After £0.1m of transaction costs, the total taken to retained earnings on conversion was, therefore, £179.5m.