4.1 Leases and borrowings

Accounting policies

Leased assets

Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases. For property leases, the land and building elements are treated separately to determine the appropriate lease classification.

Finance leases

Assets funded through finance leases are capitalised either as property, plant and equipment, or intangible assets, as appropriate, and are depreciated/amortised over their estimated useful lives or the lease term, whichever is shorter. The amount capitalised is the lower of the fair value of the asset or the present value of the minimum lease payments during the lease term, measured at the inception of the lease. The resulting lease obligations are included in liabilities, net of finance charges. Finance costs on finance leases are charged directly to the income statement on the effective interest rate basis.

Operating leases

Assets leased under operating leases are not recorded on the balance sheet. Rental payments are charged directly to the income statement on a straight-line basis.

Lease incentives

Lease incentives primarily include upfront cash payments or rent-free periods. Lease incentives are capitalised and spread over the period of the lease term.

Critical accounting estimates and assumptions

The Group has a number of complex high value lease arrangements. The Group follows the guidance of IAS 17 "Leases" to determine the classification of leases as operating leases versus finance leases. The classification of a lease as a finance lease as opposed to an operating lease will change EBITDA as the charge made by the lessor will pass through finance charges and depreciation will be charged on the capitalised asset. Retained earnings may also be affected depending on the relative size of the amounts apportioned to capital repayments and depreciation. IAS 17 "Leases" requires the Group to consider splitting property leases into their component parts (i.e. land and building elements). As only the building elements could be considered as a finance lease, management must make a judgement, based on advice from suitable experts, as to the relative value of the land and buildings.

Loans and borrowings

Interest bearing bank loans and overdrafts are initially recorded at fair value, net of attributable transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being capitalised to qualifying assets or recognised in the income statement over the period of the borrowings on the effective interest rate basis. Interest bearing borrowings have been subcategorised on the balance sheet as borrowings and obligations under finance leases.

4.1.1 Borrowings and finance leases


Notes27 November
2011
£'000
28 November
2010
£'000
Current liabilities


Borrowings 4.1.2 3,270 2,282
Obligations under finance leases 4.1.3 19,643 16,485


22,913 18,767
Non-current liabilities


Borrowings 4.1.2 45,793 9,774
Obligations under finance leases 4.1.3 42,561 45,573


88,354 55,347
Total borrowings and finance leases
111,267 74,114

4.1.2 Borrowings


Less than one year
£'000
Between
one year and
two years
£'000
Between
two years
and five years
£'000
Total
£'000
As at 28 November 2010



Secured loans 2,145 3,718 6,056 11,919
Unsecured loans 137 137
Total borrowings 2,282 3,718 6,056 12,056
As at 27 November 2011



Secured loans 3,270 3,160 42,633 49,063
Total borrowings 3,270 3,160 42,633 49,063

The secured loans outstanding at period end can be analysed as follows:

Principal
amount
£'000
InceptionSecured overCurrent
interest rate
Instalment
frequency
Final payment
due
Carrying
value as at
27 November
2011
£'000
Carrying
value as at
28 November
2010
£'000
8,000 May-07 Certain
warehouse assets
Clearing bank
base rate + 3.0%
Quarterly Feb-15 5,579 7,158
1,530 Dec-06 Freehold
property
Clearing bank
base rate + 1.5%
Quarterly Feb-12 803 956
1,466 Feb-09 Freehold
property
LIBOR + 2.25% Quarterly Feb-12 1,063 1,210
2,848 Dec-09 Freehold
property
LIBOR + 3.5% Quarterly Jan-13 2,328 2,595
40,234 Jul-10 Property, plant
and equipment
LIBOR + 3.5% Note Jan-14 39,290


49,063 11,919
Disclosed as:


Current 4.1.1 3,270 2,282
Non-current 4.1.1 45,793 9,774


49,063 12,056

† No capital repayments are due on the £100 million credit facility until 5 January 2014. It is the Group's intention to refinance the facility at that time in accordance with the long-term capital management strategy of the Group. The carrying value as at 27 November 2011 is net of capitalised transaction costs. Details of the associated covenants of this facility can be found in the Directors'report.

There were no unsecured loans outstanding at period end (2010: £0.1 million).

4.1.3 Obligations under finance leases


27 November
2011
£'000
28 November
2010
£'000
Obligations under finance leases due:

Within one year 19,643 16,485
Between one and two years 18,127 16,121
Between two and five years 17,512 21,947
After five years 6,922 7,505
Total obligations under finance leases 62,204 62,058

Notes27 November
2011
£'000
28 November
2010
£'000
Minimum lease payments due:


Within one year
23,072 20,087
Between one and two years
20,217 18,576
Between two and five years
20,019 24,546
After five years
7,921 9,459


71,229 72,668
Less: future finance charges
(9,025) (10,610)
Present value of finance lease liabilities
62,204 62,058
Disclosed as:


Current 4.1.1 19,643 16,485
Non-current 4.1.1 42,561 45,573

62,204 62,058

The existing finance lease arrangements entered into by the Group contain no restrictions concerning dividends, additional debt and further leasing. Furthermore, no material leasing arrangements exist relating to contingent rent payable, renewal or purchase options and escalation clauses.