Barratt Developments PLC – Annual report – 30 June 2023
Industry: real estate
1. Basis of preparation (extract 1)
Critical accounting judgements and key sources of estimation uncertainty
The preparation of Financial Statements in conformity with UK adopted IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on the Directors’ best knowledge of the amounts, actual results may ultimately differ from those estimates. The Directors have made no individual critical accounting judgements that have a significant impact upon the Financial Statements, apart from those involving estimations.
The most significant estimates made by the Directors in these Financial Statements, which are the key sources of estimation uncertainty that may have a significant risk of causing a material difference to the carrying amounts of assets and liabilities within the next financial year, are:
- Margin recognition — see note 3; and
- Costs associated with legacy properties — see note 20.
20. Provisions
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date and are discounted to present value where the effect is material.
The Company had no provisions in either year.
Costs in relation to completed developments
Following the legal completion and handover to customers of all units on a site, the Group may retain obligations which are not settled for a number of years. These include costs in relation to the adoption of roads or public open space by local authorities, other contractual obligations to third parties and, in certain cases, the costs of remedial works where defects have been identified.
Whilst a proportion of this cost will not be realised within 12 months, the Group has an obligation to complete the works immediately should it be requested to do so. The balance in total is therefore considered to be current in nature. All outstanding issues on completed developments are resolved as soon as is practicable.
Costs associated with legacy properties
External wall systems and associated review
On 13 March 2023, the Group signed the Self-Remediation Terms and Contract, codifying the commitments previously made under the Building Safety Pledge to undertake or to fund remediation or mitigation works on external wall systems (EWS) on all buildings of 11 metres or above in England and Wales that it has developed or refurbished in the 30 years preceding the date of the Building Safety Pledge, and to reimburse the Government’s Building Safety fund wherever they have contributed to such activities. The Group has provided for the cost of fulfilling this commitment, as well as assisting with remedial work identified at a limited number of other legacy properties where it has a legal liability to do so, where relevant build issues have been identified, or it is considered probable that such build issues exist.
The Group is undertaking a review of all of its current and legacy buildings where it has used EWS or cladding solutions and continues to assess the action required in line with the latest updates to Government guidance, as it applies, to multi-storey and multi-occupied residential buildings. All our buildings, including those incorporating EWS or cladding solutions, were signed off by approved inspectors as compliant with the relevant Building Regulations at the time of completion.
This is a complex area requiring significant estimates with respect to the estimates for the number of buildings affected, the individual remediation requirements of each building and the costs associated with that remediation (see also note 29). During the year, following the identification of further buildings requiring remediation and the receipt of more detailed cost estimates on buildings for which a full assessment of the work required has been completed, an additional £213.4m has been provided for the remediation of external wall systems. For buildings on which a detailed cost assessment has yet to be performed, this assumes an updated cost per plot of c. £23,000 (2022: c. £21,000), plus an estimate of future cost price inflation over the expected period until the remediation is completed. The new buildings came into scope during the year because buildings which held valid EWS1 certificates at 30 June 2022 were found to require remediation, or because of new contact from, or information supplied by, building owners. All building owners were contacted again following the signing of the Self- Remediation Terms on 13 March 2023, which led to an increase in contact from building owners during the year. An additional contingency was also allowed to reflect further buildings being identified as within the scope of the Self-Remediation Terms and Contract and for unforeseen remediation costs beyond management’s current knowledge. Provisions of £41.1m (2022: £12.8m) were released in respect of buildings that were found to either require less remediation than expected or for which no remediation is required.
It has been assumed that the majority of the work will be completed over the next five years. This depends on a number of factors including timely engagement by building owners and remediation work being completed in line with our estimated timings. Accordingly, the provision has been discounted to its present value at the reporting date, resulting in a credit to cost of sales of £51.9m (2022: £nil) due to an increase in the discount rate in the period from 1.9% to 4.7% driven by higher gilt rates at the year end.
The investigation of the works required at many of the buildings is at an early stage and therefore it is possible that these estimates will change over time or if government legislation and regulation further evolves. In relation to the Scottish Safer Buildings Accord, signed on 31 May 2023, the external wall provision is recorded on the basis that the standard of remediation required in Scotland is consistent with England and Wales. This will be confirmed when the final contract with the Scottish government is signed.
The estimates are based on key assumptions that will be updated as work and time progresses. The sensitivity of the provision held at the balance sheet date to the following possible movements in key assumptions is shown below, assuming that the contingency is not utilised:
Reinforced concrete frames
As announced in July 2020, we took the decision to pay for required remedial action on the reinforced concrete frame at the Citiscape development in Croydon and undertook an associated review of 27 other developments designed by the same engineering firm or its associated companies. This review is substantially complete and remediation work is ongoing. During the period, a net additional £37.2m was recognised in respect of increases in the estimated remediation costs on certain properties under this review, including £18.6m incurred on one development on which remediation plans have now been finalised. The estimates are based on key assumptions that will be updated as work and time progresses.
It is now anticipated that remediation on these buildings will extend beyond one year from the balance sheet date. Accordingly, the provision has been discounted to its present value using a rate of 4.7%, consistent with the EWS provision.
In addition to this review, structural issues have been separately found at two developments where reinforced concrete frames were designed for us by a different engineering firm to that employed at Citiscape. The full extent of the remediation work required is not yet known, however, £7.6m has been provided at the balance sheet date. The buildings affected are still being assessed and therefore this provision may need to be increased in future periods (see note 29)
Management have made estimates as to the future costs, extent of the remedial works required and the costs of providing alternative accommodation to any residents affected by the remedial works. The Financial Statements have been prepared based on currently available information, including known costs and quotations where possible. However, the extent, cost and timing of remedial work may change as work progresses.
29. Contingent liabilities
Contingent liabilities related to subsidiaries
The Company has guaranteed certain bank borrowings of its subsidiary undertakings.
Certain subsidiary undertakings have commitments for the purchase of trading stock entered into in the normal course of business.
In the normal course of business, the Group has given counter-indemnities in respect of performance bonds and financial guarantees. Management estimates that the bonds and guarantees amount to £412.7m (2022: £420.7m) and confirms that, at the date of these Financial Statements, the possibility of cash outflow is considered minimal and no provision is required.
External wall systems and associated review
As disclosed in note 20, on 13 March 2023, the Group signed the Self-Remediation Terms and Contract, codifying the commitments previously made under the Building Safety Pledge. The Group is currently undertaking a review of all of its current and legacy buildings where it has used EWS or cladding solutions. Approved inspectors signed off all of our buildings, including the EWS or cladding used, as compliant with the relevant building regulations at the time of completion.
At 30 June 2023, the Group held provisions of £535.9m (2022: £434.6m) in relation to EWS and associated reviews, based on management’s best estimate of the cost and timing of remediation of in-scope buildings. It is possible that as remediation work proceeds, additional remedial works are required which do not relate to EWS or cladding solutions. Such works may not have been identified from the reviews and physical inspections undertaken to date and may only be identified when detailed remediation work is in progress. Therefore, the nature, timing and extent of any such costs was unknown at the balance sheet date.
It is also possible that the number of buildings requiring remediation may increase. This could occur because buildings which hold valid EWS1 certificates are found to require remediation or because investigatory works identify remediation not previously identified.
In addition, we recognise that the retrospective review of building materials and fire-safety matters continues to evolve. The Financial Statements have been prepared based on currently available information and regulatory guidance. However, these estimates may be updated if government legislation and regulation further evolves.
On 31 May 2023 the Group signed the Scottish Safer Buildings Accord, committing to resolve life critical fire safety defects in multi‑occupancy residential domestic or part-domestic buildings, over 11 metres, built by us as a developer in the period of 30 years to 1 June 2022. This Accord is not legally binding, but we are committed to working in good faith with the Scottish Government to agree a legal form contract. The Group is already undertaking remedial work at all multi-occupancy buildings over 11 metres in Scotland at which fire safety defects have been identified and the Group’s EWS provision at 30 June 2023 includes the estimated cost of this work. These estimates are based on the assumption that the standard of remediation required in Scotland is consistent with that in England and Wales and therefore depend on the final form of the contract agreed with the Scottish Government.
Reinforced concrete frames
As disclosed in note 20, following the issues identified at Citiscape, the Group is conducting a review of developments designed by the same engineering firm or its associated companies. The Financial Statements have been prepared based on currently available information; however, the detailed review is ongoing and the extent and cost of any remedial work may change as this work progresses.
Separately, during the year structural issues have been found at two developments where reinforced concrete frames were designed for us by a particular engineering firm. Investigatory work is proceeding to identify the remediation works required and associated cost. It is possible that further costs or additional buildings are identified as part of this review, the nature, timing and extent of which were unknown at the balance sheet date.
Contingent liabilities related to JVs
The Group has given counter-indemnities in respect of performance bonds and financial guarantees to its JVs totalling £9.5m at 30 June 2023 (2022: £2.2m).
The Group has also given a number of performance guarantees in respect of the obligations of its JVs, requiring the Group to complete development agreement contractual obligations in the event that the JVs do not perform as required under the terms of the related contracts. At 30 June 2023, the probability of any loss to the Group resulting from these guarantees is considered to be remote.
Contingent liabilities related to legal claims
Provision is made for the Directors’ best estimates of all known material legal claims and all legal actions in progress. The Group takes legal advice as to the likelihood of success of claims and actions and no provision is made (other than for legal costs) where the Directors consider, based on such advice, that claims or actions are unlikely to succeed, or a sufficiently reliable estimate of the potential obligations cannot be made.
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