8. Tangible Fixed Assets

Note:
i. Additions on intangible assets (Note 7) and tangible fixed assets include accruals amounting in total to £2,066,322,000 (2001-02: £1,690,228,000);

ii. Other movements comprise reclassifications between tangible fixed asset categories, intangible assets, stock and transfers to operating costs. It also includes assets transferred to a Trading Fund not included within the Departmental Boundary; and

iii. Fixed Assets as at 31 March 2003 include capitalised provisions at cost of £321,000,000.

8.1 The net book value of tangible fixed assets by each major class of asset includes an amount of £115,389,000 (2001-02: £94,098,000) in respect of assets held under finance leases and PFI contracts. The movement in the year incorporates prior year adjustments. Detail by asset category is as follows:

8.2 Analysis of Land and Buildings:

The net book values at 31 March 2003 and 1 April 2002 include assets in the course of construction of £662,966,000 and £1,577,948,000 respectively.

*Relates to properties that are being used by the Department where no legal title is held. Such properties have been valued on the same basis as all other properties used by the Department.

8.3 Professional valuation of Land and Buildings was carried out by external valuers, as follows:

8.4 Quinquennial Revaluation

8.4.1 All categories of fixed assets, except Intangibles, ACOC and Capital Spares, were subject to a quinquennial revaluation with an effective valuation date of 1 April 2002. The Valuations for Land & Buildings and Fighting Equipment were applied to Fixed Asset Registers (FAR) and reflected in the financial statements in 2002-03. The valuations for Plant, Machinery and Vehicles and IT & Communications would not be incorporated in the FAR until 1 April 2003. However, for the purposes of these financial statements, the impact of the valuation of these assets has been reflected in the accounts by way of an adjusting post Balance Sheet event, after making appropriate adjustments to uplift the 1 April 2002 values by a Valuation Office Agency supplied uplift factor for the period up to 31 March 2003.

8.4.2 Operational land and buildings were valued by two firms of external professional valuers: the Valuation Office Agency valued the UK estate and the Overseas estate was valued by ATIS REAL Weatheralls, whose valuers are members of the Royal Institution of Chartered Surveyors (RICS). These valuations were undertaken in accordance with the RICS Appraisal and Valuation Manual and were on the basis of the existing use value the Department and did not take account of alternative use value. Because of the specialised nature of the Departmental estate, the great majority of assets were thus valued on the Depreciated Replacement Cost basis.

8.4.3 Surplus land and buildings were valued by qualified internal Defence Estates staff, on the basis of Open Market Value.

8.4.4 Fighting equipment was valued, on a Depreciated Replacement Cost basis, by Advantage Technical Consulting, HVR Consulting Services Ltd and LSC Group.

8.4.5 Plant, Machinery & Vehicles and IT & Communications were both valued on a Depreciated Replacement Cost basis by the Valuation Office Agency, whose valuers are members of the Royal Institution of Chartered Surveyors.

8.4.6 The net effect of the professional valuation on the asset values is shown below by individual asset category. A decrease in valuation of an asset is set off against the revaluation reserve in the first instance, and any excess write down is charged to the Operating Cost Statement as an Impairment in accordance with accounting policy in Note 1.

i. The net increase on the Land & Buildings carrying value was £455 million. Impairment charged to the Operating Cost Statement was £1,595 million;

ii. The net decrease on the Fighting Equipment carrying value was £919 million. Impairment charged to the Operating Cost Statement was £2,131 million;

iii. The net increase on the Plant, Machinery & Vehicles carrying value was £136 million. Impairment charged to the Operating Cost Statement was £98 million; and 

iv. The net increase on the IT & Communications carrying value was £18 million. Impairment charged to the Operating Cost Statement was £31 million.

9. Investments

Public Dividend Capital and Loans at 31 March 2003 were held in the following Trading Funds:

Analysis of loans repayable by instalments:

At 31 March 2003, the loan made to QinetiQ Group Limited, a subsidiary undertaking of QinetiQ, amounted to £50,100,000 (31 March 2002: £100,000,000) and the book value of investment in QinetiQ amounted to £78,120,001.

On 28 February 2003, QinetiQ Group Limited repaid £100 million of the loan. The repayment was in the form of a cash repayment of £40 million and an issue of a loan note (‘the Acquila / Chertsey loan note’) by QinetiQ Group Limited of £60 million. The loan note is repayable from the net proceeds of disposals of certain identified assets. The loan note was interest free to 30 June 2003, thereafter interest will be charged at rates relating to LIBOR until 28 August 2004. Since the creation of the loan note an amount of £9,900,000 has been repaid, being the proceeds of disposal of one of the identified assets.

As at 31 March 2003, the loans repaid by QinetiQ and subsidiary undertakings, representing the partial original asset value of the business since its formation on 1 July 2001, amounted to £99,900,000. Cash received on part disposal of the shares to The Carlyle Group during 2002-03 amounted to £39,427,000.

9.1 Other Investments

Investments, including ‘Golden’ shares, were held in the following at 31 March 2003 and 31 March 2002:

Shareholding in QinetiQ

The Department holds 5 classes of shares in QinetiQ. A brief summary of the financial and voting rights of each class are detailed below in order of their ranking in accordance with the Articles of Association of QinetiQ.

Convertible ‘A’ ordinary (3,773,481 shares of 1p each – 49% of class)

Voting Rights – holders of these shares are entitled to receive notice of, attend, speak and vote at general meetings of the company.

Dividends – none to be paid until Preference Shares have been redeemed in full along with any accrued Preference Dividend.

Convertible ‘B’ ordinary (285,833 shares of 1p each – 49% of class)

Dividend and Voting rights as per ‘A’ Ordinary shares.

Convertible Preferred (3,752,686 shares of 1p each – 100% of class)

Voting rights – this class of shareholder is not entitled to receive notice of, nor attend, speak or vote at general meetings of the company.

Dividends – until conversion each Convertible Preferred share in issue will be entitled to the same dividend as paid on each ‘A’ Ordinary Share.

Redeemable Cumulative Preference (70,308,000 shares of £1 each – 62.5% of class)

Voting rights – preference shareholders are not entitled to receive notice of, nor attend, speak or vote at general meetings of the company.

Dividend – to be paid at the rate of 9% per annum on the nominal value of the preference shares held.

Dividends will not be paid, but will accrue until the preference shares are redeemed at the Sale, Listing or the Winding up of the company. At 31 March 2003, the dividend accrued on these shares amounted to £527,300, which will be recognised in the Operating Cost Statement in the year in which it is received, in accordance with accounting policy in Note 1.9.

Special Rights Redeemable of £1 each – the one ‘Special Share’, which is held by MOD

The Special Shareholder has the right to require the Company to implement and maintain a regime which protects the defence and security interests of the nation. Voting Rights – the Special Shareholder must receive notice of, and may attend and speak at general company and share class meetings, but carries no voting rights, except to enforce certain aspects of the compliance regime.

Preferential ‘Golden’ Shares at £1 each (1 share QinetiQ Group plc, 1 share QinetiQ Limited)

The Preferential ‘Golden’ Shareholder has the right to require the Company to implement and maintain a regime which protects the defence and security interests of the nation. Voting Rights – the Special Shareholder must receive notice of, and may attend and speak at general company and share class meetings, but carries no voting rights, except to enforce certain aspects of the compliance regime.

Dividends – the Special Shareholder has no right to share in the capital or profits of the company other than – in the event of a liquidation – to be repaid the capital paid up in respect of the special share before other shareholders receive any payment.

QinetiQ also issued other classes of shares on its formation, which are not shown above. These shares were issued to the employees of the company.

9.2 Net assets

The reported net assets, after deducting loans due to MOD, of the investments held at 31 March 2003 and 31 March 2002 were:

During the year, a dividend of £6,000,000 was received from DSTL and a dividend of £2,587,166 (2001-02: £2,430,775) was received from The UK Hydrographic Office in respect of the financial year ended 31 March 2002. These are included within operating income. No dividend was received from The Met Office, Defence Aviation Repair Agency, QinetiQ and ABRO.

9.3 The Department has a 100% interest in the non-preferential shares of International Military Services Limited, a company registered in England. International Military Services Limited ceased trading on 31 July 1991. Following settlement of outstanding contracts, the company will be liquidated. The Department has written down the value of the investment to nil.

9.4 All the shares held are unlisted and are valued at historical cost. The 7.5% Non-cumulative irredeemable preference shares in Chamber of Shipping Limited and British Shipping Federation Limited are valued at 1p each reflecting the value at which shares would be recovered by the two companies should membership by the Department be ceded, as laid down in the Articles of Association of the respective companies.

9.5 ‘Golden’ shares confer on the Secretary of State for Defence special rights regarding ownership, influence and control, including voting rights in certain circumstances, under the individual Articles of Association of the relevant companies in which the shares are held. Further detailed information can be obtained from the companies’ individual annual reports and accounts which can be obtained from:

10. Related Party Transactions

10.1 The Defence Science and Technology Laboratory, The UK Hydrographic Office, The Met Office, the Defence Aviation Repair Agency and the Army Base Repair Organisation operate as Executive Defence Agencies financed by Trading Fund. QinetiQ was formed as a Self Financing Public Corporation. These fall within the ambit of the Department and are regarded as related parties outside the Departmental Boundary with which the Department has had material transactions. All transactions are carried out on terms which are contracted on an arms length basis, and are subject to internal and external audit. The NAAFI is outside the Departmental Boundary and is also regarded as a related party.

The following bodies are Executive NDPBs of the MOD. They are self-accounting on an accruals basis, and are regarded as Related Parties. During the year, each NDPB has had a material transaction with the Department, as listed below:

Fleet Air Arm Museum

Grant-in-Aid: £527,578 (2001-02: £528,325) Flag Officer Maritime Aviation (Chairman), Commodore Naval Aviation (Deputy Chairman), Commanding Officer HMS Heron (RNAS Yeovilton), Commanding Officer HMS Seahawk (RNAS Culdrose), Director Support Operations (Rotary Wing) and Assistant Director Policy Co-ordination & Aviation (Director Naval Operations) are members of the Board of Trustees.

National Army Museum

Grant-in-Aid: £4,747,800 (2001-02: £4,684,103)
No Departmental representation.

Royal Air Force Museum

Grant-in-Aid: £6,060,731 (2001-02: £5,992,022)
No Departmental representation.

Royal Marines Museum

Grant-in-Aid: £654,601 (2001-02: £655,784)
Director Royal Marines, Corps Secretary Headquarters Royal Marines and Corps Regimental Sergeant Major, Royal Marines Stonehouse, Plymouth are members of the Board of Trustees.

Royal Naval Museum

Grant-in-Aid: £882,286 (2001-02: £875,359)
Naval Base Commander Portsmouth and Chief of Staff (Warfare) CinCFleet are members of the Board of Trustees.

Royal Navy Submarine Museum

Grant-in-Aid: £488,008 (2001-02: £485,303)
Rear Admiral Submarines is a member of the Board of Trustees.

Oil and Pipelines Agency (Profits to be surrendered to the Consolidated Fund after the year-end)

Agency Fees: £1,523,000 (2001-02: £1,412,800) VAT recovery £266,525 (2001-02: £247,200).
Director Defence Fuels Group is a member of the Board of Directors.

Other

Ian Andrews CBE TD, Second Permanent Under Secretary of State, is a trustee of the Imperial War Museum.
Mr Charles Miller Smith is Chairman of Scottish Power. These entities are therefore related parties of the Ministry of Defence.

The payments made to these entities were:

		£000
Imperial War Museum	Various transactions	19
Scottish Power	Various transactions	5,222

During the year there were also various works of art and other items transferred to and from the Imperial War Museum. No value was attributed to these items.

Note:
i. The Department also pays a number of grants to other bodies outside the Departmental Boundary. These include Grants-in-Aid to the Royal Hospital Chelsea and the Commonwealth War Graves Commission; and

ii. The museums are designated NDPBs under the National Heritage Act 1983. Each NDPB is required to produce annual accounts in accordance with the Charities (Accounts and Reports) Regulations 1995 (Statutory Instrument 1995 No. 2724). The Oil and Pipelines Agency is a corporate body established under the Oil and Pipelines Act 1985.

Last Updated: 3 Dec 03