Defence Aviation Repair Agency - GOV.UK

Annual Report and Accounts2007/2008

Defence Aviation Repair Agency

Large AircraftRotary Electronics Components


Presented to Parliament pursuantto section 4 (6) of the GovernmentTrading Funds Act 1973 asamended by the GovernmentTrading Act 1990. Ordered by theHouse of Commons to be printedon 21 July 2008.

HC 922London: The Stationery Office£13.90

Defence Aviation Repair Agency

2DARA Annual Report and Accounts

© Crown Copyright 2008The text in this document (excluding the Royal Arms and other departmental or agency logos) may be reproduced free of charge inany format or medium providing it is reproduced accurately and not used in a misleading context.The material must be acknowledged as Crown copyright and the title of the document specified.Where we have identified any third party copyright material you will need to obtain permission from the copyright holders concerned.For any other use of this material please write to Office of Public Sector Information, Information Policy Team, Kew, Richmond, Surrey TW9 4DU or e-mail: [email protected]"ISBN:978 010295534 7

3

Report

Management Commentary04 Statement by the Chief Executive08 The Business, its Mission, its Vision and Strategy10 DARA’s Performance against Key Targets12 Business Review15 Financial Review18 Statement of Accounting Officer’s Responsibilities20 Statement on Internal Control24 Remuneration Report

Accounts26 The Certificate of the Comptroller and Auditor

General to the Houses of Parliament28 Profit and Loss Account30 Balance Sheet32 Cash Flow Statement33 Statement of total recognised gains and losses33 Reconciliation of movements in Government funds34 Notes to the Accounts52 Report of the Comptroller and Auditor General

2008/200954 Statement by the Chief Executive56 The Certificate of the Comptroller and Auditor

General to the Houses of Parliament58 Balance Sheet59 Cash Flow Statement60 Statement of total recognised gains and losses60 Reconciliation of movements in Government Funds61 Accounts Direction


4

Two major issues dominated the DARA businessesover the past year. The first came about with thetransfer of Ministerial responsibilities for DARA tothe Minster for Defence Equipment and Supportwho, at the time, was Lord Paul Drayson. Withinweeks of assuming the DARA portfolio, Ministersannounced to Parliament that DARA’s retainedbusinesses – in essence, those that were not partof the sale process – would merge with ABRO andcertain other defence engineering activities withinthe Defence Storage and Distribution Agency.The result was the intention of creating a singledefence-focussed Trading Fund with support tothe Armed Forces and MoD customers at its veryheart. This announcement was greeted with great enthusiasm by the affected employees andwelcomed by the Trades Unions.

In July, I was appointed as Chief Executive ofABRO, in addition to my role as DARA’s ChiefExecutive, which would also be the role I wouldultimately assume in the new Agency, to be calledthe Defence Support Group (DSG). I was chargedby Ministers with leading the merger team andboth Agencies as work started to define thoseelements that were essential if we were to meetthe ambitious 1 April 2008 merger timeframe.

The second issue was the proposed sale ofDARA’s Rotary and Components businesses to the final preferred bidder, Vector Aerospace, whichMinister also announced in July. The formation ofDSG signalled an important change in emphasisfor the support of land and air systems equipmentand it led to further scrutiny on the sale process to confirm that the outcome would meet the twooverarching principles guiding the sale process.Namely, that sale would be in the best interests of defence and would deliver a better long-termfuture for the businesses and their employees.

ARCHIE HUGHESChief Executive

“This year we reached closure on all aspects of the DARAStrategic Review. After a long and stressful process for everyoneconcerned, our employees nowknow their future.”

Statement by the Chief Executive

5

With debates secured in both the UK and ScottishParliaments, and rising political interest, significantamounts of work kept DARA officials and theDARA Transformation Team in MoD Centre inWhitehall fully occupied for many months.

In November, Lord Drayson left Government topursue other personal interests and an MP ofmany years experience took over the role ofthe Defence Equipment and Support Minister.Baroness Ann Taylor quickly established herselfin the role and took the necessary time to becomefully acquainted with the various issues dominatingDARA’s near horizon.

Following a further period of extended consultationand a robust evaluation of all of the options it wasannounced on 5 February 2008 in Parliament thatMoD would proceed with the sale of DARA’sRotary and Components businesses to Vector. Itwas clear that only sale could offer any realprospect of longevity for these businesses andtheir employees. As their life in MoD ownershipwas finite, to take no action was never an option,as it would ultimately result in closure andredundancy with loss of critical skills.


“In reaching the decision to sell these businesses our twinobjectives have always been toensure we obtain the best valueand most cost effective solution tofuture equipment support and thebest long-term prospects for theworkforce who we recognise havecontributed greatly to the supportof the UK’s Armed Forces.”

BARONESS ANN TAYLORMinister of Defence Equipment and Support.February 2008.

6Statement by the Chief Executive

Although there was no imperative to retain thesebusinesses in MoD ownership, privatisation couldallow them to develop further, presenting themwith the best chance of winning a share of newwork in a sub-contractor role via the through lifecontracts MoD is increasingly placing withindustry, as well as other work outside the MoD.

Negotiations with Vector included safeguardingthe rights of the employees and ensuring theywere protected within existing UK legislation.Vector also has a legal obligation to retain these businesses at their current locationsprovided it remains economically viable to do so. The importance of these businesses to thelocal communities in which they are situated isrecognised by everyone and Vector aims toquickly establish links with local leaders andcommunities to explain their own plans for the future.

Throughout the sale process, MoD and DARAengaged with subject experts to provide clearand concise guidance and advice at every stage.The outcome was that MoD could demonstrate toa wide range of interested parties, including HMTreasury, that the negotiated deal with Vector gaveMoD the best value for defence and a much moresecure future for the DARA employees.

It is with great pleasure and satisfaction that I can confirm the successful sale of the Rotary andComponents businesses on 31 March 2008. Thishas been achieved despite the difficulties andbecause of the endeavours outlined above.

Along with so many others, I must record my ownthanks and admiration for the men and women atAlmondbank and Fleetlands. I constantly maintainthey will succeed and by moving into a trulycommercial environment, they can really showtheir capabilities to the full and improve on theiralready impressive and world-renownedreputation for operational excellence.

This latest Annual Report records the impressivemargin by which DARA, once again, achieved itsKey Targets in important areas of the business.Of particular merit is that major Quality failureswere, for another year, recorded as zero and all in DARA should be immensely proud ofthis achievement, considering they work inenvironments that depend on a scrupulousattention to safety and quality.

Although the performance of DARA’s variousbusinesses are explained in more detail within the Business Review, I could not let this occasionpass without paying tribute to those who havecontributed in so many ways, helping maintain our focus and deliver an impressive output during periods of stress and uncertainty. OurLarge Aircraft business at St Athan turned in anoutstanding performance and as we have come to expect, the Electronics business at Sealandmade its own significant contribution to the overallbusiness performance, which is also the case forthe Components business at Almondbank.

7Statement by the Chief Executive

The Executive Board of Directors

ARCHIE HUGHESChief Executive

STEVE HALLFinance Director

ALAN LEWISCommercial Director

DEREK OWENHuman ResourcesDirector

JOHN REILLYChief Operating Officer

Our Rotary platforms at Fleetlands have alwaysfaced major challenges and this year has been no exception. With the tempo in operationsincreasing, particularly in the Front Line theatresin Afghanistan and Iraq, the pressure to keeptroops equipped with the helicopters they need to carry out their duties has been immense. Wewere delighted to welcome the Armed ForcesMinister, Adam Ingram, to Fleetlands where hecould witness the work being done to deliver theincreasing levels of output required to meet thedemands of our customer. The work at Fleetlandswas not going unnoticed by our foreign allies and we were also pleased to host a visit by theDefence Secretary of the Dutch Government whowas particularly impressed by the work beingdone by our teams on the Chinook platform.

Over several years, everyone in DARA hastravelled a long road and together we havewitnessed many changes. Lives have beenchanged as a consequence of decisions madeoutside our control but throughout this time theDARA employees have shown remarkable resolveand commitment. Changes in MoD’s priorities andrequirements mean these will be the last set ofAnnual Report and Accounts for DARA and therecord of achieving and performing to the higheststandards is an enviable record of which we areproud. We are now on the threshold of a new erafor the DARA businesses and whether these arein public or private sector ownership, I have every faith they will continue rising to the many challenges they will undoubtedly face in the future.

Archie HughesChief Executive16 July 2008

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The Business, its Mission, its Vision and Strategy

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The key strategic goals for 2007/08 were:To achieve all Key Targets and todeliver the Business Plans.

To successfully manage the mergerof the Large Aircraft and ElectronicsBusiness Units with ABRO.

To improve customer satisfaction,by following through results of theCustomer Review Programme.

To secure long term contractualcommitments to a future order book.

To shape the resources in line withthe E2E outcomes and order book.

To successfully manage the saleof the Rotary and ComponentsBusiness Units.

BusinessThe Defence Aviation Repair Agency (DARA)is a Government owned facility for the repair,overhaul and maintenance of military aircraft,systems, avionics and components, benefitingfrom more than 60 years of experience in directsupport to the UK Armed Forces. DARA waslaunched as an Agency on 1st April 1999 andestablished as a Trading Fund on 1st April 2001.The Agency has subsequently had its TradingFund order revoked following the successfulmerger with ABRO on 1 April 2008 and thecreation of a new Trading Fund, the DefenceSupport Group (DSG).

MissionTo deliver outstanding repair support to allour customers.

VisionTo be responsive, flexible, customer focusedand highly competitive in the provision of deepaviation repair and supply in logistics to the UKArmed Forces and other customers.

StrategyIn 2007/08 the strategy was to manage thesale of the Rotary and Components BusinessUnits and the merger of the Large Aircraft andElectronics Business Units with the Army BaseRepair Organisation (ABRO) into the newDefence Support Group (DSG).

The Business, its Mission, its Vision and strategy

10

DARA’s Performance against Key Targets

DARA’s Key Targets (KTs) for 2007/08 were agreed with the Minister for Defence Equipment & Support, and are designed to provide clearindicators of performance in the areas critical to DARA’s success.These KTs, along with other performance measures based on our Critical Success Factors, form the basis of a DARA wide performancemanagement system linking corporate strategy with business andindividual performance plans.

Key Target 1Quality

Achieve fewer than 10 attributable major CustomerConcerns.

Achieved

There were no attributable major CustomerConcerns in FY 2007/08.

Performance Against Key Targets 2007/08 were:

Key Target 2Financial Performance

Achieve an annual Return on Capital Employedof at least 3.5%.

Achieved

The actual ROCE achieved was 7.78%.

Key Target 3Business Transformation

Carry out the actions necessary to support thepotential sale of the Rotary and ComponentsBusinesses and complete the merger of allretained DARA Business Units with ABRO, suchthat a new combined Trading Fund is fullyoperational by April 2008.

Achieved

The sale of Rotary & Components was completedon 31 March 2008, with the retained DARABusiness Units merging with ABRO under a newTrading Fund Order and was fully operational on 1 April 2008.

Key Target 4Efficiency

Improve overall efficiency by at least 6%.

Achieved

Overall efficiency improved by 11.31%.

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Future Key Targets

The Key Targets for 2007/08 were the final Key Targets agreed for DARA.Following the 1 April 2008 merger with ABRO the Key Targets agreed for2008/09 are for Defence Support Group to link corporate strategy withindividual performance plans.

The key targets agreed for 2008/09 are:

Key Target 1Quality

To deliver an improved quality performance by achieving fewer than 4attributable major customer concerns within DSG’s Air Business and reducingupheld customer complaints within the Land Business by 5% against the2007/08 outturn.

Key Target 2Financial Performance

To achieve at least a 3.5% Return on Capital Employed.

Key Target 3Business Transformation

To establish a transformation plan, approved by the DSG Trading Fund Board,by December 2008 that fully exploits the synergies and benefits of merger,including numerical targets for improvements in cost and performance forsubsequent years.

Key Target 4Efficiency

To improve overall efficiency by at least 4% against 2007/08 outturn.

Key Target 5Delivery

To meet delivery targets as agreed with the Customer as follows:Air Business – To achieve 95% of Customer Programmes; and Land Business – To meet Customer agreed targets for delivery schedules onCritical Programme lines (94% Sep 08, 94% Dec 08 and 97% Mar 09) andLAND Load tasks (92% Jun 08, 92% Sep 08, 92% Dec 08, and 92% Mar 09).

12

Business Review

It was a different kind of diversionfor the employees at St Athan andSealand who were now workingtowards a merger with theircolleagues in the Land environmentin ABRO but again their soundperformance spoke volumes interms of output and commitment.Keeping aircraft flying has longbeen at the heart of DARA’semployees and this continuesto the present day.

Business Performance and ReviewDARA began the 2007 tradingyear with its four remainingbusinesses, namely the LargeAircraft Business Unit at St Athan,Electronics at Sealand, Componentsat Almondbank and Rotary atFleetlands operating at full stretch insupport of the UK’s Armed Forces.Although the possibility of sale wasat the forefront of the minds of mostemployees working in the Rotaryand Components businesses, it stilldid not divert their focus or attentionaway from delivering a very solidbusiness performance.

13Business Review

ElectronicsEach year DARA’s Electronics business at Sealandhas consistently delivered a creditable tradingperformance. This financial year is no differentdespite encountering difficulties in terms ofthroughput of items but with prudent costmanagement, the business turned in a healthyfinancial performance helping to secure DARA’ssound trading results.

Three key priorities dominated Sealand’sElectronics year. Firstly, DARA’s partnership withSelex, Thales and GE Aviation to form the TotalSupport Services (TSS). Secondly, work with theTyphoon project team to help develop an onshorecapability for this vital aircraft platform. Fromestablishing a feasibility team to study thepractical aspects of supporting this platform, toestablishing a team that was focussed ondemonstrating DARA’s test and repair capabilityfor Typhoon avionics equipment, the Sealandemployees are winning hearts and minds withinthe MoD and industry with their practicalapproach to innovation and delivery.

The third, of course, was the ongoing workassociated with merging this business withABRO to fully realise the potential benefitsand exploit the best practice that exists acrossboth organsiations.

Evidence of the employees at Sealand’sinnovative approach lies in the groundbreakingnew apprenticeship scheme rolled out at Sealandin 2006. As the first of its kind anywhere in MoD,DARA’s non-industrial apprenticeship scheme isproving a highly successful training ground withDARA’s first apprentice on the scheme beingchosen as Open/Distance Learner of the Year atDeeside College’s awards ceremony. The schemeis proving so successful that three furtherapprentices have been taken on at Sealand duringthe year.

Large AircraftDARA’s VC10 business turned in one of its bestever performances during this financial year,exceeding projected output and reducing coststo deliver a highly commendable achievement.This was the first year that the Large AircraftBusiness Unit operated as a standalone businessoutside DARA’s traditional Fixed Wing operations,which makes the performance of the team evenmore commendable.

Recognition of this business’s performance wasnot lost on our partners, BAE Systems or the MoDcustomer, which was endorsed with the award ofthe Javelin Green contract extension. This will seeDARA support the VC10 platform through to itsout of service date.

It was not only in aircraft maintenance and repairthat employees of this business have shown theirvalue. The Large Aircraft Purchasing and Supplyteam, in partnership with BAE Systems and FRAviation Service, was narrowly pipped in the 2007Chartered Institute of Purchasing and Supplyawards in London by the team from globalhealthcare specialists Glaxo-SmithKline andVWR International.

Collecting the Chairman’s award from BAE Systemsis becoming common practice amongst LargeAircraft employees with two bronze awards goingto staff who produced some innovative new waysto improve working practices. These are classicexamples of this workforce’s positive mentalityand attitude of constantly looking for ways toimprove the service they provide to customersand partners.

14Business Review

ComponentsAlthough there was an increase in work for theemployees at Almondbank, the costs were alsogreater than planned resulting in a less profitableperformance than originally anticipated.The Components employees have risen to manychallenges over the years and take action tocontinuously improve their performance. A recentinitiative to radically overhaul and streamline thewarehouse operations has delivered impressiveresults. By reducing the warehouse function’sfootprint on the site, improving outbounddeliveries of stock to achieve a 100% target anddelivering an average of 92% accuracy forinventory records, the Almondbank employeescontinue to demonstrate a professionalism thathas long been their hallmark.

Welcome news for the Components staff camewith the announcement of a nine-year contractwith BAE Systems to support the Tornadoavailability contract – ATTAC. Under a directtasking arrangement with the Tornado IPT, DARA’sAlmondbank employees will continue to play asignificant role in the support arrangements fora key aircraft platform.

RotaryThe challenges facing DARA’s Rotary businessduring the year were significant and extensive.The calls made upon the Rotary team’smaintenance and repair capabilities, brought aboutby intense operations in Afghanistan and Iraq,have stretched all the employees working on theChinook, Sea King and Lynx helicopter platforms.

With an increase in numbers of aircraft needing toundergo major maintenance and repair, the coststo the business in delivering output rose in directproportion and made the challenge of deliveringa positive financial performance much more difficultto achieve. Associated with a 23% increase inlevels of activity, were the difficulties faced by thebusiness in attracting the right calibre of newrecruits, which were essential to meet theemerging needs of our customers.

DARA has long sourced local talent through itsown apprenticeship schemes and the trainingdepartment at Fleetlands has a proud traditionof turning out skilled individuals who have goneon to become valued employees. However, theincreasing demand for fully trained techniciansand engineers has exposed the skills shortagein the local area. The inevitable consequenceof securing a skilled workforce to meet anincreasing workload was that DARA’s costsincreased. By improving output and deliveryof aircraft back to the customer, the balanceturned in DARA’s favour and the business turnedin a creditable and profitable performance.

15Financial Review

Cost Base £m

Operating Profit %

Financial Review2007/08 was a year of substantial change forDARA in its seventh year as a Trading Fund andthe final year prior to the merger with ABRO toform Defence Support Group.

Preparation continued for the potential sale ofVC10, Rotary Wing and Components BusinessUnits culminating in the eventual sale completionon 31 March 2008 to Vector Aerospace.

Overall, DARA’s financial performance compared to its plan was strong with Profit before Exceptional Items, Interest and Dividend of £10.357m, a considerable improvement on the original plan of £8.853m profit.

Exceptional losses of £40m includes net assetson sale of Rotary and Components of £68m,offset by a receipt of £17m of which £1m wasring-fenced by DARA for IT separation costs, anda forecast further receipt of £12m. This loss doesnot reflect the reduction in future liabilities whichwould have fallen to the MoD.

Trading ResultsDARA achieved higher than planned turnover,mainly through increased productivity levels withadditional revenues again earned from supportingthe operations in Afghanistan and Iraq, while stillmeeting the customers’ standard contractualtargets. Corporate costs were contained within£0.1m of plan despite the considerablepreparation activity for sale and merger.

Advantageous market conditions, coupled withstrong process and higher than planned cashholdings, resulted in an improvement over plan of £1.1m interest receivable.

As in prior years the MoD has continued to meetDARA’s redundancy costs and has confirmed thatit will continue to do so following the merger withABRO to form Defence Support Group. It has alsoconfirmed that it will meet all operating andtermination costs of the Red Dragon facility as aconsequence of DARA’s closure of its Fast Jetbusiness at St Athan and withdrawal from the RedDragon facility in 2006/07. Accordingly noprovision has been made for these future liabilitiesin these Accounts.

240

220

200

180

160

140

120

100

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

4.0%

6.0%

10.0%

8.0%

2.0%

0.0%

(4.0%)

(2.0%)

2001/02 2002/03 2003/04 2004/05 2006/07 2006/07

2005/06

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PeopleSale and merger affected all DARA’s employeesto varying degrees during the past year. For manypeople it remained business as usual, having tocope with the increased volumes of work whilekeeping fully focussed on quality and safety.Once again, the DARA employees returned anoutstanding performance with no major qualityconcerns despite higher than expected levelsof activity.

For others the emphasis was working with ABROcolleagues, MoD Centre and several externaladvisers to bring about a successful merger andsale completion. Undertaking, at times, veryonerous duties and working in parallel to achievethe twin objectives of merger and sale while alsomaintaining their normal day to day duties wasquite remarkable. It signifies the calibre ofemployee that is now either supporting the newDefence Support Group or delivering a top classservice to Vector Aerospace.

Cash Flow and FundingCurrent liquidity remains very strong with a netcash position of £61.8m (2006/07: £57.2 m),showing an increase of £4.6m in year (2006/07:decrease £7.0m). Once again operational cashflows were very strong and ahead of forecast.Loan repayments and interest of £4.8m and£1.9m respectively were made on time and in linewith the loan agreements.

Cash is principally held in Sterling (£60.7m) butalso in US Dollars ($1.2m) and Euros (€0.5m).All cash investment activity is conducted using a combination of Lloyds TSB money market callsand the HM Treasury Debt Management AccountDeposit Facility. Currency risks are managedthrough a combination of natural hedges andforward contracts. The outstanding contract forthe sale of US$1.1m through to February 2008originally placed to manage currency exposureon the Honeywell Engines contract, which waspaid in US$, closed out during 2007/08. During2006/07 due to the closure of the Enginesbusiness and the cessation of the HoneywellEngines contract, this was matched with apurchase forward to remove all currency risk.There are no further forward contracts remaining.

The capital structure consists of Public DividendCapital (PDC) at £42.3m, and loan capital of£35.7m (2006/07 - £40.5m). All Long Term Loansand Public Dividend Capital were transferred toshort term creditors at the year end inaccordance with Treasury direction issued for thecapital repayment and restructuring in preparationfor the formation of Defence Support Group.

The Balance Sheet continues to be characterisedby the high levels of cash, which is, in part,financed by the short-term creditors. In addition,the significant levels of debtor and short termcreditors reflect the accounting entries resultingfrom both the sale and merger activities,nevertheless cash resources are clearly sufficientfor the business’s needs and accordingly adividend for 2007/08 of £4.2m was declared andpaid in August 2007 (2006/07 £6.0m).

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In preparing the accounts, the Accounting Officeris required to comply with the Government FinancialReporting Manual prepared by HM Treasury andin particular to:

– observe the Accounts Direction issued by HMTreasury, including the relevant accounting anddisclosure requirements and apply suitableaccounting policies on a consistent basis;

– make judgements and estimates on areasonable basis;

– state whether applicable accounting standardsas set out in the Government Financial ReportingManual have been followed, and disclose andexplain any material departures in the financialstatements; and

– prepare the financial statements on the goingconcern basis, unless it is inappropriate topresume that DARA will continue in operation.

The Accounting Officer of the Ministry of Defencehas designated the Chief Executive of DARA asthe Accounting Officer for the Trading Fund. Therelevant responsibilities as Accounting Officer,including responsibility for the propriety andregularity of the public finances for which theAccounting Officer is answerable, for the keepingof proper records and for safeguarding DARA’sassets, are set out in the Accounting Officer’sMemorandum, issued by HM Treasury andpublished in Managing Public Money.

As far as I am aware, there is no relevant auditinformation of which DARA’s auditors are unawareand as Accounting Officer, I have taken all the steps that ought to have been taken to makemyself aware of any relevant audit informationand to establish that DARA’s auditors are aware of that information.

Archie HughesChief Executive and Accounting Officer16 July 2008

Under Section 4(6) of theGovernment Trading Funds Act1973, HM Treasury has directedthe Defence Aviation RepairAgency (DARA) to prepare astatement of accounts for eachfinancial year in the form and onthe basis set out in the AccountsDirection. The accounts areprepared on an accruals basisand must give a true and fair viewof DARA’s state of affairs at theyear end, and of its profit and loss,recognised gains and losses andcash flows for the financial year.

Statement of Accounting Officer’s Responsibilities

19Statement of Accounting Officer’s Responsibilities

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As Chief Executive of DARA,I am personally accountable to the Secretary of State for Defencefor the performance of DARA inaccordance with the FrameworkDocument and DARA’s CorporateStrategic Plan. The DARA OwnersAdvisory Council, chaired by theMinister for Defence Equipment &Support as representative of ourowners, meets quarterly to reviewDARA’s performance against its key targets and Business Planobjectives.

Scope of responsibilityAs Accounting Officer, I haveresponsibility for maintaininga sound system of internal controlthat supports the achievementof DARA’s policies, aims andobjectives, whilst safeguardingthe public funds and departmentalassets for which I am personallyresponsible, in accordance withthe responsibilities assignedto me in Managing Public Money.

Statement on Internal Control

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The purpose of the systemof internal controlThe system of internal control is designed tomanage risk to a reasonable level rather than toeliminate all risk of failure to achieve policies,aims and objectives; it can therefore only providereasonable and not absolute assurance ofeffectiveness. The system of internal control isbased on an ongoing process designed toidentify and prioritise the risks to the achievementof DARA’s policies, aims and objectives, toevaluate the likelihood of those risks beingrealised and the impact should they be realised,and to manage them efficiently, effectively andeconomically. The system of internal control hasbeen in place in DARA for the year ended 31March 2008 and up to the date of approval of theannual report and accounts, and accords withTreasury guidance.

Capacity to handle riskThe DARA Board has provided leadership to therisk management process through the regularconsideration of risk, both at main board meetingsand in the Executive Governance Review Groupand Audit Committee meetings, and by the riskmanagement strategy and policy.

Our procedures for Corporate and Business Unitrisk registers, together with our implementationof risk management for major projects, continuesto ensure that risk management is embeddedin all our business activities. We are continuallyassessing the approach to risk management,to ensure that all business units and projectscontinue to operate within Treasury guidelines.The Risk Management software previouslyintroduced, is now fully operational throughoutthe Business Units and support directorates.Further user licences were purchased during theyear, we are about to upgrade to the latest versionand are arranging for additional training at allBusiness Units.

The risk and control frameworkDARA complies with HM Treasury instructions andguidelines for Corporate Governance. In order tomeet the requirements of an embedded systemof internal control, DARA has established a RiskManagement system, which consists of:

– A Risk Management Strategy, whichincorporates the aims, objectives and rationalewithin DARA for managing risk.

– A Risk Management Policy, which outlines theapproach used within DARA for implementingrisk management and includes a riskmanagement reporting structure.

– Appointed Risk Management Committee, whichreviews and evaluates internal standards andprocedures relative to the management of riskand disseminates risk information and guidanceon best practice.

– Appointed Risk Co-ordinators within eachBusiness Unit and Directorate who areresponsible for the maintenance of localRisk Registers.

– A DARA Corporate Risk Register, whichrepresents the broad spectrum of corporaterisks and is owned and regularly reviewedby the DARA Board.

– Business Continuity Plans, which are managedby the site risk co-ordinators to facilitate theunity of Risk Management and BusinessContinuity. All four DARA sites updated theirBusiness Continuity Plans in 2007/08 and MoDhas highlighted the DARA BCM Action Plan inits Policy Guidance and Good Practice sectionwithin Business Continuity Management.

– Insurance Policies are in place to meet DARA’slegal responsibilities and to mitigate certain risks.No insurance is taken against any potentialliabilities to the MoD.

– Information Management; DSG as part of themerger process is consolidating its informationmanagement systems, including the protectionof data through IT systems. Policies andprocedures controlling the storage ofinformation and access to the IT system arebeing revised to accommodate the DSGpolicies and uploaded into the new DSGBusiness System, where all policies andprocedures are held.

– Internal Audit Services, which have beenoutsourced since July 2005, provide an annualrisk based programme of internal audits.During 2007/08, in addition to the audit of theKey Targets, all of which were achieved, therewere five major and one lesser audit completed,one of which gained full assurance, four substantialassurances and one limited assurance. TheExecutive Governance Review Group ensurethat all accepted recommendations from theseaudits are implemented within three months andat year end there were none outstanding.


22

Review of EffectivenessAs Accounting Officer, I have responsibilityfor reviewing the effectiveness of the systemof internal control. My review of the effectivenessof the system of internal control is informed bythe work of the internal auditors and the executivemanagers within DARA who have responsibilityfor the development and maintenance of theinternal control framework, and comments madeby the external auditors in their managementletter and other reports. I have receivedsatisfactory letters of assurance from executivemanagers and the DARA Governance ReviewGroup. The Board and the Audit Committee haveadvised me on the implications of the resultof my review of the effectiveness of the systemof internal control. Plans to address controlweaknesses and ensure continued improvementof our processes are in place.

DARA has established the following processesto identify, evaluate and control risk:

– A Board, which meets each month to considerthe plans and strategic direction of theorganisation, comprising the Executive Directorsof DARA and two external independent NonExecutive Directors, one of whom is Chairmanof the DARA Audit Committee, and the otherchairman of DARA’s Remuneration Committee.

– A Governance Review Group, which comprisesall Executive Board members together with theHead of Internal Audit and other key personnelas required. The primary purpose of theGovernance Review Group is to monitor andreview all assurance activities being undertakenwithin DARA. The group also aims to furtherdevelop Corporate Governance practicesin general.

– Periodic reports from the Chairman of theAudit Committee, to the Board, concerninginternal control.

– Regular reports from each Directorateas part of the performance managementregime. An assessment of the key risks andtheir management/mitigation is included inthese reports.

– DARA staff and the Board fully understandthe Department’s approach to CorporateGovernance and the management of risk.This approach has produced a robust riskmethodology using subjective assessmentsof Very High/High/Medium/Low/Very Low risksagainst the impact of a particular risk to DARAobjectives as well as a likelihood of the riskmaturing. These assessments are updatedregularly and form the basis of the decisionmaking process at the Board.

– Risk Registers are owned, maintained andmanaged by the Business Units and SupportDirectorates with a Strategic Risk Registerowned and managed by the Board. The RiskManager reporting directly to the FinanceDirector has responsibility for coordinatingand managing the Risk Management process.

– DARA Risk management structure hasbeen designed to ensure that informationis communicated upstream and downstreamwithin the organisation. Risk Managementis included as a regular agenda item at Siteand Directorate meetings with links into theBusiness Continuity Plans. The RiskManagement software, Active Risk Manager(ARM), is fully functional and reports aregenerated and issued to management tofacilitate the control and mitigation of the risks.

Significant Internal ControlWeaknessesFor the financial year 2007/08, the internal auditprocess did not identify any areas of significantcontrol weakness; this despite the significantdisruption created by the planned sale of twoBusiness Units and the merger of DARA withABRO. In addition there has been no loss of dataor unauthorised release or loss of personal data.The Interim Management Letter from the externalauditors, which indicates that there are no issuesto report, has further enhanced this. During thistransition process there will be a period ofuncertainty and it is recognised that there will benew and significant risks arising that will needcareful management and control, but I amconfident that our systems of internal control aremore than adequate for the task.



24

Remuneration Report

strategy having due regard to the financial successof DARA, current Government and MoD policiesand targets, and public sector pay guidance.

Performance pay is dependent firstly on DARAmeeting agreed Key Targets at a corporate leveland then on individuals meeting agreed targetscascaded from the Corporate Plan. Achievementis determined by individual assessment within theline management chain. Pay and changes toconditions of service are approved by the DARABoard and Remuneration Committee prior to theannual pay negotiating process with the TradesUnions and reviewed after implementation.

All pay awards are subject to satisfactoryperformance of the duties assigned.

Service contracts of DirectorsCivil Service appointments are made in accordancewith the Civil Service Commissioners’ RecruitmentCode, which requires appointment to be on meriton the basis of fair and open competition but alsoincludes the circumstances when appointmentsmay otherwise be made.

Unless otherwise stated below, the ExecutiveDirectors hold appointments, which are open-endeduntil they reach the normal retiring age of 60. Earlytermination, other than for misconduct, would resultin the individual receiving compensation as set outin the Civil Service Compensation Scheme. Furtherinformation about the work of the Civil ServiceCommissioners can be found atwww.civilservicecommissioners.gov.uk

Archie Hughes was appointed as Chief Executiveon 01 January 2004 on a 3 year fixed-term contract.Compensation for early termination, other than formisconduct, would be in accordance with the CivilService Compensation Scheme. This contract wasextended to December 2007, however in July 2007he was appointed Chief Executive of both DARAand ABRO, an appointment that continues intoDefence Support Group post merger.

As ABRO Directors’ contracts came to the endof their term, DARA Directors were graduallyappointed in the equivalent role on the ABROBoard to assist with the merger process. All DARAExecutive Directors remain Executive Directorswithin Defence Support Group from 1 April 2008.

Non-Executive Directors are not appointed as CivilServants. Contracts may be terminated at onemonth’s notice by either party or on dissolution ofthe Board unless found guilty of gross misconductwhen termination will be immediate. They may beextended by mutual agreement. There are nocompensation entitlements for early termination.Current contractual arrangements applying to thenon-executive directors as at 31 March 2008 wereas follows:

Remuneration CommitteeThe purpose of the Remuneration Committeeis to agree the strategic policy in relation to theremuneration of DARA employees, consistentwith the Personnel Delegations held by the ChiefExecutive of DARA.

The remuneration of all DARA staff except SeniorCivil Servants is set by the Remuneration Committeein agreement with HM Treasury.

A Non Executive Director (Richard Fenny) was chairman to the Committee Committee toDecember 2007 with Andy Akerman as Chairmanfrom January 2008 to March 31 2008, and thereare three other Members, the Chief Executive ofDARA, Finance Director and Human ResourcesDirector. The Committee met as required during thefinancial year and all recommendations arisingfrom the Committee have been implemented.

The Committee continues to make a positive inputinto the strategic direction of DARA Pay Settlementsprior to ratification by the DARA Board.

There is a second remuneration committee which isa subsidiary of the Owners Advisory Council (OAC)which convenes on an ad-hoc basis to advise theOAC on the DARA Chief Executive’s annual bonus.

Remuneration PolicyThe Chief Operating Officer, Commercial Directorand Human Resources Director are Senior CivilServants. As such their pay is set throughrecommendations made by the Review Body onSenior Salaries which provides independent adviceto the Prime Minister and the Secretary of State forDefence on remuneration of Senior Civil Servants.The Review Body takes account of the evidence itreceives about wider economic considerations andthe affordability of its recommendations. Furtherinformation about the work of the Review Body canbe found at www.ome.uk.com.

All other staff have their remuneration determinedby a process consistent with MoD and HM Treasuryregulations. The Chief Executive has delegatedpowers for the setting of terms and conditions ofemployment, including pay, for all DARA staff. Thisdelegation requires him to consult with the MoDand HM Treasury before agreeing any changes topay and grading systems and arrangements. Thisis achieved through the Pay Remit process wherebythe DARA Pay Strategy is submitted for MoD andHM Treasury approval before negotiation with staffrepresentatives. The outcome of negotiations isreported back to HM Treasury through the annualoutturn statement.

The DARA Pay Strategy is approved by the DARABoard and Remuneration Committee and isdesigned to achieve the Corporate business

25

Remuneration Details of Directors (audited)Age Gross Salary, Performance Real increase Total accrued Cash Equivalent Cash Equivalent Real increase

bonuses and Bonus as a in pension and pension at Transfer Value Transfer Value in Cash Equivalent allowances percentage related lump age 60, at (CETV) at (CETV) at Transfer Value

of Total sum at age 60 31/03/08 31/03/07 31/03/08 (CETV) after(last year Remuneration and related adjustment for in brackets) lump sum inflation and

changes in market investment factors

£’000 % £’000 £’000 £’000 £’000 £’000Executive Directors

Archie Hughes Chief Executive Officer47 295–300 42% 0–2.5 5–10 78 118 24

(175–180)

John Reilly Chief Operating Officer54 105–110 7% 2.5–5 130–135 618 722 16

(95–100)

Steve Hall Finance Director42 70–75 11% 5–7.5 65–70 203 264 24

(10–15)

Derek Owen Human Resources Director56 90–95 9% 2.5–5 125–130 636 743 20

(85–90)

Alan Lewis Commercial Director51 90–95 9% 2.5–5 75–80 309 373 19

(85–90)

Age Fees(last year in brackets)£’000

Non-Executive Directors

Richard Fenny Non-Executive Director (to 31 December 2007) 57 0–5(0–5)

Andy Akerman Non-Executive Director 55 5–10(5–10)

Michael Jones Non-Executive Director (from 1 January 2008) 63 -


Remuneration Report

Richard Fenny was appointed as a Non-ExecutiveDirector on a 3 year contract commencing 21January 2001. This was extended by a further 3 years to January 2007, and further extended untilDecember 2007.

Michael Jones was appointed as a Non-ExecutiveDirector of DARA from 1 January 2008 in addition tohis responsibilities as a Non Executive Director of

ABRO with remuneration reported in ABROaccounts, also as a Non-Executive Director.This appointment transfers to Defence SupportGroup from 1 April 2008.

Andy Akerman was appointed as a Non ExecutiveDirector on a 9 month contract commencing on 22February 2006 which was extended to September2007, and further extended to March 2008.

A Cash Equivalent Transfer Value (CETV) is theactuarially capitalised value of the pension schemebenefits accrued by a member at a particular pointin time. Due to certain factors being incorrect inlast year’s CETV calculator there may be a slightdifference between the final CETV for 2006/07 andthe start of period CETV for 2007/08.

None of the directors have opted for aPartnership Account. Therefore there are noemployer contributions to such accounts inrespect of these directors.

None of the directors have received a payment ofcompensation for loss of office under the terms ofan approved compensation scheme and no awardsor compensation have been paid to former directors.

None of the directors have remunerationpackages containing non-cash elements.No payments have been made to third parties for the services of a director.

26

Respective Responsibilities of DARA, the Chief Executive and AuditorDARA and the Chief Executive are responsible forpreparing the Annual Report, the RemunerationReport and the financial statements in accordancewith the Government Trading Funds Act 1973 andTreasury directions made thereunder, and forensuring the regularity of financial transactions.These responsibilities are set out in the Statementof Accounting Officer’s Responsibilities.

My responsibility is to audit the financialstatements in accordance with relevant legal and statutory requirements, and with InternationalStandards on Auditing (UK and Ireland).

I report to you my opinion as to whether thefinancial statements give a true and fair view andwhether the financial statements and the part of the Remuneration Report to be audited havebeen properly prepared in accordance with theGovernment Trading Funds Act 1973 and HMTreasury directions made thereunder. I report toyou whether, in my opinion, the information, whichcomprises the statement by the Chief Executive,Our Business, Mission, Vision and Strategy,Performance against key targets and the financialand business reviews, included in the AnnualReport, is consistent with the financial statements.I also report whether, in all material respects, theexpenditure and income have been applied to thepurposes intended by Parliament and thefinancial transactions conform to the authoritieswhich govern them.

In addition, I report to you if DARA has not keptproper accounting records, if I have not receivedall the information and explanations I require formy audit, or if information specified by HMTreasury regarding remuneration and othertransactions is not disclosed.

I review whether the Statement on Internal Controlreflects DARA's compliance with HM Treasury’sguidance, and I report if it does not. I am notrequired to consider whether this statement coversall risks and controls, or form an opinion on theeffectiveness of DARA's corporate governanceprocedures or its risk and control procedures.

I certify that I have audited thefinancial statements of DARA forthe year ended 31st March 2008under the Government TradingFunds Act 1973. These comprisethe Income and ExpenditureAccount, the Balance Sheet, theCashflow Statement and Statementof Total Recognised Gains andLosses and the related notes.These financial statements havebeen prepared under theaccounting policies set out withinthem. I have also audited theinformation in the RemunerationReport that is described in thatreport as having been audited.

The Certificate of the Comptroller and AuditorGeneral to the Houses of Parliament

27

I read the other information contained in theAnnual Report and consider whether it isconsistent with the audited financial statements.This other information comprises the statement by the Chief Executive, Our Business, Mission,Vision and Strategy, Performance against keytargets and the financial and business reviews.I consider the implications for my report if Ibecome aware of any apparent misstatements or material inconsistencies with the financialstatements. My responsibilities do not extend to any other information.

Basis of opinionsI conducted my audit in accordance withInternational Standards on Auditing (UK andIreland) issued by the Auditing Practices Board.My audit includes examination, on a test basis,of evidence relevant to the amounts, disclosuresand regularity of financial transactions included in the financial statements and the part of theRemuneration Report to be audited. It alsoincludes an assessment of the significantestimates and judgments made by DARA and theChief Executive in the preparation of the financialstatements, and of whether the accountingpolicies are most appropriate to DARA'scircumstances, consistently applied andadequately disclosed.

I planned and performed my audit so as to obtainall the information and explanations which Iconsidered necessary in order to provide me withsufficient evidence to give reasonable assurancethat the financial statements and the part of theRemuneration Report to be audited are free frommaterial misstatement, whether caused by fraudor error, and that in all material respects theexpenditure and income have been applied to the purposes intended by Parliament and thefinancial transactions conform to the authoritieswhich govern them. In forming my opinion I also evaluated the overall adequacy of thepresentation of information in the financialstatements and the part of the RemunerationReport to be audited.

Opinions

In my opinion:

· the financial statements give a true and fairview, in accordance with the GovernmentTrading Funds Act 1973 and directions madethereunder by HM Treasury, of the state ofDARA's affairs as at 31 March 2008 and of itsloss for the year then ended;

· the financial statements and the part of theRemuneration Report to be audited have beenproperly prepared in accordance with theGovernment Trading Funds Act 1973 and HM Treasury directions made thereunder; and

· information, which comprises the statement by the Chief Executive, Our Business, Mission,Vision and Strategy, Performance against keytargets and the financial and business reviews,included within the Annual Report, is consistentwith the financial statements.

Opinion on RegularityIn my opinion, in all material respects, theexpenditure and income have been applied to the purposes intended by Parliament and thefinancial transactions conform to the authoritieswhich govern them.

ReportMy report on these financial statements is atpages 52 to 53.

T J BurrComptroller and Auditor General17 July 2008

National Audit Office151 Buckingham Palace RoadVictoria, London SW1W 9SS

The Certificate of the Comptroller and Auditor General to the Houses of Parliament

Continuing Discontinued 2007/2008Note £’000 £’000 £’000

Turnover 54,842 78,987 133,829

Cost of sales 3 41,586 71,664 113,250

Gross profit 13,256 7,323 20,579

Operating expenses 3 9,938 284 10,222

Operating profit 3,318 7,039 10,357

Loss/(Profit) on disposal of fixed assets 3a 4 (34) (30)

Loss on Disposal of Discontinuing Operations 3a – 39,885 39,885

Exceptional Release of provisions 3a (1,126) – (1,126)

Exceptional Costs 3a 201 121 322

Profit/(Loss) on ordinary activities before interest 4,239 (32,933) (28,694)

Interest receivable 3,525

Interest payable 4 1,857

(Loss)/Profit on ordinary activities before Dividend (27,026)

Dividend payable 4,200

Retained (Loss)/Profit (31,226)

Return on capital employed (ROCE) 7.78%

The notes on pages 34 to 51 form part of these accounts.

28

Profit and Loss Account for the year ended 31 March 2008

Restated2006/2007

Continuing Discontinued Total£’000 £’000 £’000

56,745 96,857 153,602

39,553 93,493 133,046

17,192 3,364 20,556

10,750 295 11,045

6,442 3,069 9,511

(8) (529) (537)

– – –

– – –

– – –

6,450 3,598 10,048

2,990

2,071

10,967

6,000

4,967

7.84%

29

30

Balance Sheet as at 31 March 2008

31 March 2008 31 March 2007Note £’000 £’000

Fixed assetsTangible 7 19,054 61,305

19,054 61,305

Current assetsStock & Work in progress 8 185 9,913

Debtors and prepayments 9 36,511 26,900

Cash at bank and in hand 10 61,763 57,177

98,459 93,990

Current liabilitiesCreditors: amounts falling due within one year 11 (99,485) (27,823)

Net current (liabilities)/assets (1,026) 66,167

Total assets less current liabilities 18,028 127,472

Provisions for liabilities and charges 12 (67) (2,717)

Net Assets 17,961 124,755

Financed by:Capital and reservesPublic dividend capital – 42,303

Long-term loans 13 – 35,670

Revaluation reserve 14 10,263 22,913

General reserve 15 7,698 23,869

Government funds 17,961 124,755



The above date is the date authorised for issue, being the date of despatch by the Trading Fund’s Board, to the Comptroller andAuditor General, for laying before the Houses of Parliament

2007/2008 2006/2007Note £’000 £’000

(a) Reconciliation of operating profit to net cash inflow from operating activities:Operating profit 10,357 9,511

Impairment of fixed assets 502 (955)

Depreciation charges 2,244 2,361

(Decrease) in Provisions for liabilities and charges (477) (663)

Exceptional costs (322) -

Decrease in stock & WIP 3,065 410

(Increase) in debtors (5,020) (3,647)

Increase/(decrease) in creditors 8,096 (4,069)

Net cash inflow from operating activities 18,445 2,948

(b) Cash flow statement:Net cash inflow from operating activities 18,445 2,948

Acquisitions and Disposals 16c (5,699) –

Dividends paid (4,200) (6,000)

Returns on investments and servicing of finance 16a 1,668 874

Capital expenditure and financial investment 16a (788) 13

Financing 16a (4,840) (4,840)

Increase/(decrease) in cash 4,586 (7,005)

(c) Reconciliation of net cash flowto movement in net funds/(debt):Increase/(decrease) in cash 16b 4,586 (7,005)

Decrease in borrowings 4,840 4,840

Movement in net funds 16b 9,426 (2,165)

Net funds at start of year 16,667 18,832

Net funds at end of year 16b 26,093 16,667


32

Cash flow statement for the year ended 31 March 2008

2007/2008 2006/2007£’000 £’000

(Loss)/Profit for the financial year (27,026) 10,967

Surplus on revaluation of fixed assets credited to the reserves 2,408 1,244

Less: revaluations on assets disposed (14,873) (9)

Transfer out of revaluation reserve (185) (1,120)

Transfer into general reserve 15,055 1,099

Total recognised gains and losses relating to the period (24,621) 12,181

Reconciliation of movements in Government funds

2007/2008 2006/2007£’000 £’000

Government Funds at 1 April 124,755 123,414

Dividends (4,200) (6,000)

Total recognised gains and losses relating to the year (24,621) 12,181

Movements in long-terms loans and public dividend capital (77,973) (4,840)

Net movement in Government funds (106,794) 1,341

Balance at Period End 17,961 124,755


33

Statement of total recognised gains and losses for the year ended 31 March 2008

34

Notes to the Accountsfor the year ended 31 March 2008

1 Accounting policies

Basis of accountingThe accounts have been prepared in accordancewith the FReM issued by HM Treasury, whichprovides guidance on the application of generallyaccepted accounting practice in the UnitedKingdom to Trading Funds, and the AccountsDirection issued by the Treasury. The particularaccounting policies adopted by DARA aredescribed below. They have been appliedconsistently in dealing with items consideredmaterial in relation to the accounts.

Prior Year ComparativesPrior year comparatives for discontinuedoperations includes Engines and Fast Jetsbusiness units, closed on March 31 2007, andRotary and Components business units, sold onMarch 31 2008.

Accounting conventionThese accounts have been prepared in accordancewith the accruals concept and the historical costconvention, modified to account for the revaluationof land and buildings and other fixed assets, atcurrent costs or value to the business.

TurnoverTurnover comprises the invoiced and accrued valueof services (excluding VAT and other sales taxes).

Tangible fixed assets

Land and buildingsWhere DARA is the principal beneficial userof Departmental Estate, such estate is treated as anasset of the Agency although legal ownership restswith the Secretary of State for Defence. Aprofessional valuation, in accordance with the RoyalInstitute of Chartered Surveyors Appraisal andValuation Standards, was carried out by Fuller Peiserduring 2005/06. Land and Buildings are revalued inthe years between professional valuations, using theCorporate Financial Controller (CFC) ModifiedHistoric Cost Accounting (MHCA) index.

Other fixed assetsPlant, equipment, computers and motor transportare capitalised where the useful life exceeds oneyear and the cost of acquisition exceeds £10,000excluding VAT. The value of capitalised plant,equipment and motor transport is reviewedannually and adjustments made for technologicalobsolescence, using the CFC MHCA Index in therelevant periods.

DepreciationFreehold land is not depreciated. Depreciationon buildings, plant and equipment, motor vehiclesand IT equipment is calculated to write off the cost,or valuation, of assets by equal instalments overtheir estimated useful lives. The lives are periodicallyreviewed for obsolescence of the assets.

The depreciation rates applied to the maincategories of assets are based on the followingestimates of useful life.

BuildingsNot exceeding fifty yearsPlant & EquipmentBetween three and twenty yearsMotor TransportBetween three and ten yearsIT EquipmentBetween three and ten years

Where an impairment loss has occurredwith reference to the value in use of an asset,a discount rate of 3.5% has been appliedto the cashflows.

Pension costsPast and present employees are covered by theprovisions of the Principal Civil Service PensionScheme (PCSPS) and Armed Forces PensionSchemes (AFPS) which is non-contributory andunfunded. Although the scheme is a defined benefitscheme, liability for payment of future benefitsis a charge to the PCSPS or AFPS appropriately.The cost of pension cover provided is by paymentsof charges (Accrued Superannuation LiabilityCharges – ASLC) based on a percentage ofsalary. Salaries include gross salary, certainperformance bonuses and recruitment andretention allowances. It does not include theestimated monetary value of benefits in kind.Payments are made at contribution ratesdetermined by the Government Actuary.

Foreign exchangeAll foreign denominated transactions are translatedat the appropriate rate of exchange, being theprevious month’s average rate. At 31 March,balances are translated into sterling at a yearend spot rate.

Use of financial instruments is explained in note 19.

35Notes to the Accounts for the year ended 31 March 2008

2 Turnover

Stock Stock is valued at the lower of cost (includingattributable overheads) and net realisable value.The majority of DARA’s work for the MoD is ona spares exclusive basis. Material held for thispurpose continues to be owned by MoD andis not included in DARA’s stock valuation.DARA’s stock comprises material purchasedto support spares inclusive contracts and sparesmanufactured and owned by DARA itself.Provisions are made to cover obsolescent items.Items are reviewed for obsolescence on a regularbasis and at the end of the financial year.

Work in progressMost of DARA’s sales contracts exclude the costof spares, which are provided free of chargeby the customer. Therefore, work in progressis valued on the basis of direct labour andindirect production support, plus those businessoverheads that are directly related to productionactivity. For spares inclusive contracts, the costof the spares consumed is also included in theWIP valuation. The rates used to value WIP arereviewed annually.

Long term contractsLong term contract (LTC) balances are statedat costs incurred (net of amounts transferredto cost of sales), after deducting related paymentson account. Profit on individual long term contractsis taken only when their outcome can be foreseenwith reasonable certainty, based on the lower ofthe percentage margin earned to date and thatprudently forecast at completion, taking accountof agreed claims. Turnover on long term contractsis ascertained in a manner appropriate to thestage of completion of the contract.

Provision for losses on contractsWhen it is known that a contract is forecast tomake a loss, a provision is made at the time theloss is identified.

Operating leasesRentals under operating leases are charged to theprofit and loss account as incurred.

Return on capital employedThe basis for calculating return on capitalemployed is the profit before interest for the year,as a percentage of the average capital employedduring the year. Capital employed comprises totalnet assets (fixed assets at net book value, pluscurrent assets, less current liabilities) and addingback the short term loans provided fromgovernment sources.

Provision for bad and doubtful debtsDARA makes provision for bad and doubtful debtsbased on an aged debtor and debtor categoryanalysis. Bad debts are written off immediatelythey are deemed to be irrecoverable.

Value Added TaxSale TransactionsDARA has a single registration for VAT with HMRevenue & Customs and accounts for VAT on anaccruals basis.

Sale TransactionsThe Board of DARA consider that, although thesale of Rotary Wing and Components was onlyformally completed in the early hours of 1 April2008, the work that had already been completedmeans that the substance of the transaction wasmaterially complete by the year end. Thereforethese financial statements to March 2008 haveaccrued for the cash flows relating to the sale and the repayment of loans and public dividendcapital, although they do not show the amounts as being received or paid.

Turnover is not analysed by market segmentbecause substantially all of the turnover relatesto the same class of business: the repair, overhauland maintenance of military aircraft, systemsand components.

Turnover is stated net of trade discounts, provisions,VAT and similar taxes. Discontinued Operations wasthe sale of Rotary and Components Business Unitsto Vector Aerospace on March 31 2008 with prioryear Discontinued Operations additionally being theclosure of the Engines Business Unit and the FastJets Business unit on March 31 2007.

Exceptional items:Note

Loss on disposal of Rotary & Components 3c – 39,885 39,885

Exceptional Release of provisions 12 (1,126) – (1,126)

Exceptional Costs (ii) 201 121 322

Loss/(Profit) on disposal of fixed assets 4 (34) (30)

(921) 39,972 39,051

(ii) Exceptional costs are those specifically incurred for merger activities (Continuing Operations) or sale of Rotary andComponents (Discontinued Operations).

36

3 Cost of sales, operating expenses and exceptional items

Notes to the Accounts for the year ended 31 March 2008

2007/2008Cost of sales Continuing Discontinued (i) Total

Note £’000 £’000 £’000

Staff costs 5b 32,734 41,625 74,359

Supplies and services consumed 4,659 23,804 28,463

Accommodation costs 4,310 3,607 7,917

Depreciation 898 1,325 2,223

Other administration costs 6 (1,015) 1,303 288

Total cost of sales 41,586 71,664 113,250

Operating expenses

Staff costs 5b 3,562 284 3,846

Supplies and services consumed 172 – 172

Accommodation costs 49 – 49

Depreciation 21 – 21

Other administration costs 6 6,134 – 6,134

Total operating expenses 9,938 284 10,222

Cost of sales & operating expenses

Staff costs 5b 36,296 41,909 78,205

Supplies and services consumed 4,831 23,804 28,635

Accommodation costs 4,359 3,607 7,966

Depreciation 919 1,325 2,244

Other administration costs 6 5,119 1,303 6,422

Total cost of sales & operating expenses 51,524 71,948 123,472

(i) Discontinued Operating expenses are those solely and directly attributable to Rotary and Components, sold 31 March2008. All other Operating Expenses are substantially attributed to Continuing Operations and did not materially changeas a result of either sale, or as a result of the closure of Fast Jets and Engines businesses in 2006/07.

3a Exceptional items

– – –

– – –

– – –

(8) (529) (537)

(8) (529) (537)


2006/2007Continuing Discontinued (i) Total

£’000 £’000 £’000

31,721 58,993 90,714

3,480 19,270 22,750

3,712 14,708 18,420

623 1,660 2,283

17 (1,138) (1,121)

39,553 93,493 133,046

3,896 295 4,191

501 – 501

31 – 31

78 – 78

6,244 – 6,244

10,750 295 11,045

35,617 59,288 94,905

3,981 19,270 23,251

3,743 14,708 18,451

701 1,660 2,361

6,261 (1,138) 5,123

50,303 93,788 144,091

As Restated

Pre sale Post saleNote £’000 Movement £’000

Fixed assetsTangible 7 61,438 (42,384) 19,054

61,438 (42,384) 19,054

Current assetsStock & Work in progress 8 6,848 (6,663) 185

Debtors and prepayments 9 30,918 5,593 36,511

Cash at bank and in hand 10 66,949 (5,186) 61,763

104,715 (6,256) 98,459

Current liabilitiesCreditors: amounts falling due within one year 11 (108,240) 8,755 (99,485)

Net current (liabilities) (3,525) 2,499 (1,026)

Total assets less current liabilities 57,913 (39,885) 18,028

Provisions for liabilities and charges 12 (67) - (67)

Net Assets 57,846 (39,885) 17,961

Financed by:Capital and reservesPublic dividend capital – – –

Long-term loans 13 – – –

Revaluation reserve 14 25,136 (14,873) 10,263

General reserve 15 32,710 (25,012) 7,698

Government funds 57,846 (39,885) 17,961

The Sale immediately prior to the closing Balance Sheet position resulted in a significant movement in debtors and creditors asshown. The merger with ABRO on 1 April 2008 resulted in Treasury direction for the repayment of Public Dividend Capital and loansprior to the restructuring of Defence Support Group, hence no balance is held in PDC or Long Term Loans at 31 March 2008.


3b Balance Sheet immediately prior and post sale of Rotary and Components

£’000

Net Assets (67,943)

Separation costs incurred (i) (1,000)

Receipt from Vector Aerospace on sale 17,000

Additional Net Working Capital Debtor 12,058

Loss on sale of business (39,885)

Revaluation Reserve taken through STRGL 14,873

(25,012)

(i) Separation costs are IT costs incurred as a direct result of the sale of Rotary and ComponentsBusiness Units.

40

4 Interest payable and similar charges

2007/2008 2006/2007£’000 £’000

On loans wholly repayable within five years 1,857 550

On loans not wholly repayable within five years – 1,521

1,857 2,071


3c Profit and loss on Sale of Rotary and Components

41

5 Staff numbers and costs

(a) Staff numbers 2007/2008 2006/2007Number of Number ofemployees employees

The average number of persons employedduring the year was:Senior management 5 5

Service personnel 31 49

Civilian personnel 2,048 2,482

Agency staff 207 337

2,291 2,873

Total number of persons employed at 31 March 2008 (including Agency staff) was 980 employees (2,691as at 31 March 2007), equivalent to 972 full time employees (2,678 as at 31 March 2007). The variance tothe average numbers throughout the year is due to the sale of Rotary and Components on 31 March 2008.

(b) Payroll costs 2007/2008 2006/2007£’000 £’000

in Cost of sales:Salaries, wages and allowances 55,037 65,023

Social security 4,084 4,984

Pension costs 9,639 11,234

Agency Staff 5,599 9,473

74,359 90,714

in Operating expenses:Salaries, wages and allowances 2,674 3,034

Social security 244 267

Pension costs 492 584

Agency staff 436 306

3,846 4,191

Total:Salaries, wages and allowances 57,711 68,057

Social security 4,328 5,251

Pension costs 10,131 11,818

Agency Staff 6,035 9,779

Total payroll costs 78,205 94,905


42

5 Staff numbers and costs (continued)

(c) Pension benefitsPension benefits for civilian employees are provided through the Civil Service Pension arrangements.From 1 October 2002, civil servants may be in one of three statutory based ‘final salary’ defined benefitschemes (Classic, Premium and Classic Plus). The schemes are unfunded, with the cost of benefits metby monies voted by Parliament each year. Pensions payable under Classic, Premium and Classic Plusare increased annually in line with changes in the Retail Prices Index. New entrants between 1 October2002 and 30 July 2007 could choose between membership of Premium or joining a good quality ‘moneypurchase’ stakeholder arrangement with a significant employer contribution (partnership pension account).New entrants from 30 July 2007 may choose only between a partnership pension and the “Nuvos”occupational pension scheme.

Employee contributions are set at the rate of 1.5% of pensionable earnings for Classic and 3.5% forPremium, Classic Plus and Nuvos. Benefits in Classic accrue at the rate of 1/80th of pensionable salaryfor each year of service. In addition, a lump sum equivalent to three years’ pension is payable onretirement. For Premium, benefits accrue at the rate of 1/60th of final pensionable earnings for eachyear of service. Unlike Classic, there is no automatic lump sum (but members may give up (commute)some of their pension to provide a lump sum). Classic Plus is essentially a variation of Premium, butwith benefits in respect of service before 1 October 2002 calculated broadly as per Classic. Benefitsin Nuvos accrue at the rate of 2.3% of pensionable earnings towards members pensions annually,to a maximum of 75% of final salary.

The partnership pension account is a stakeholder pension arrangement. The employer makes a basiccontribution of between 3% and 12.5% (depending on the age of the member) into a stakeholderpension product chosen by the employee. The employee does not have to contribute but where theydo make contributions, the employer will match these up to a limit of 3% of pensionable salary (in additionto the employer’s basic contribution). Employers also contribute a further 0.8% of pensionable salaryto cover the cost of centrally provided risk benefit cover (death in service and ill health retirement).

The Principal Civil Service Pension Scheme (PCSPS) is an unfunded defined benefit scheme and it isnot possible to separately identify DARA’s share of the underlying assets and liabilities. A full actuarialvaluation was carried out as at 31 March 2007. Details can be found in the resource accounts of theCabinet Office: Civil Superannuation (www.civilservice-pensions.gov.uk).

Employer contribution rates are determined by the Government Actuary at one of four rates in the range17.1% to 26.5% of pensionable pay, based on salary bands.

Employer contributions are reviewed every four years, following a full scheme valuation by the GovernmentActuary. The contribution rates reflect benefits as they are accrued, not when the costs are actuallyincurred, and reflect past experience of the scheme. Salary bands are revalorised each year.

Similarly, employers’ contributions to the Armed Forces Pension Scheme (AFPS) are determined by theGovernment Actuary at a rate of 36.3% for Officers and 21.8% for other ranks.

For 2007/2008 employers’ contributions of £22,772 were paid to one or more of a panel of four appointedstakeholder pension providers (2006/2007: £19,988). Employer contributions are age-related and rangefrom 3% to 12.5% of pensionable pay. Employers also match employee contributions up to 3% ofpensionable pay. Contributions due to the partnership pension providers at the balance sheet datewere £2,541 (2006/2007: £1,790).

5 employees retired early on ill-health grounds; the total accrued pension liabilities in the year amountedto £7,412 (2006/2007 1 person – liabilities amounted to £6,830).


43

6 Other administration costs

2007/2008 2006/2007in Cost of sales: £’000 £’000

Travel and subsistence, including vehicle hire 808 1,258

IT and telecommunications 20 10

Training, recruitment and consultancy 1,350 1,376

Impairment of fixed assets (i) 501 (961)

Other expenses 2,966 3,439

Cost reimbursement (ii) (5,174) (5,726)

(Utilisation)/creation of provision for loss making contracts (183) 183

Utilisation of provision for Engines decomissioning – (700)

288 (1,121)

in Operating expenses: £’000 £’000

Auditors’ remuneration (iii) 64 96

Travel and subsistence, including vehicle hire 475 389

IT and telecommunications 4,285 4,100

Training, recruitment and consultancy 331 904

Insurance 906 1,026

Impairment of fixed assets (i) 1 6

Other expenses 164 270

Gains on Foreign Exchange (27) (484)

Cost reimbursement (ii) (65) (63)

6,134 6,244

Total: £’000 £’000

Auditors’ remuneration (iii) 64 96

Travel and subsistence, including vehicle hire 1,283 1,647

IT and telecommunications 4,305 4,110

Training, recruitment and consultancy 1,681 2,280

Insurance 906 1,026

Impairment of fixed assets (i) 502 (955)

Other expenses 3,130 3,709

Gains on Foreign Exchange (27) (484)

Cost reimbursement (ii) (5,239) (5,789)

(Utilisation)/creation of provision for loss making contracts (183) 183

Utilisation of provision for Engines decomissioning - (700)

Total of other administration costs 6,422 5,123


(i) Impairment of fixed assets relates primarily to buildings at the Fleetlands & Sealand sites, as required by Financial ReportingStandard 11. 2006/07 impairment relates primarily to the reversal of impairments carried out in 2005/06 following the transfer ofFast Jets and Engines Fixed Assets to other Business Units.

(ii) The total cost reimbursement has been shown separately from other expenses for greater visibility.(iii) Auditors’ remuneration is for the statutory audit fee due to the National Audit Office.

31 March 2008 31 March 2007£’000 £’000

Stocks – 2,782 Work in progress – net costs incurred 185 7,131

Total stock and work in progress 185 9,913

44

7 Fixed assets

The movements in each class of assets were:Land & Plant & Assets in Total

Buildings Equipment, course of tangibleMotor Vehicles construction

and IT£’000 £’000 £’000 £’000

Cost or valuation:

At 1 April 2007 139,709 31,422 513 171,644

Additions – – 477 477

Revaluation 4,300 671 13 4,984

Reclassification (i) 810 82 (892) -

Disposals (ii) (84,679) (18,325) (10) (103,014)

At 31 March 2008 60,140 13,850 101 74,091

Depreciation:

At 1 April 2007 82,229 28,110 – 110,339

Depreciation charged during the year 1,602 642 – 2,244

Impairments 490 12 – 502

Revaluation 1,978 598 – 2,576

Disposals (44,475) (16,149) – (60,624)

At 31 March 2008 41,824 13,213 – 55,037

Net book value

At 1 April 2007 57,480 3,312 513 61,305

At 31 March 2008 18,316 637 101 19,054

(i) Reclassification comprises the capitalisation of assets in the course of construction.(ii) Disposals predominantly comprise of the assets sold with Rotary and Components.

8 Stock and work in progress


45

9 Debtors and prepayments

31 March 2008 31 March 2007£’000 £’000

Trade and other debtors (i) 6,635 20,922

Receipt due from sale of Rotary and Components (ii) 29,058 –

Bad debt provision (1) (88)

Prepayments and accrued income 819 6,066

36,511 26,900

(i) Within Trade and other debtors is a balance of £2,304k for other central government bodies and £4,331k for bodiesexternal to government, (2006/2007 other government bodies £13,172k, external to government £7,750k).

(ii) Receipts due for sale of Rotary and Components is £17.0m due 1 April 2008, with a further £12.058m due on reconciliation ofthe completion statements.

10 Cash at bank

31 March 2008 31 March 2007£’000 £’000

Cash on short term deposit (i) – 58,306

Cash at bank (ii) 61,763 (1,129)

61,763 57,177

(i) Wherever possible cash is held in interest earning accounts, which are redeemable on demand within one working day.(ii) Actual cash balance 31 March 2007 £0.1m. Balance reflects BACS payment of £1.2m clearing bank on 3 April 2007.

11 Creditors

Amounts falling due within one year: 31 March 2008 31 March 2007£’000 £’000

Trade creditors (i) (ii) 780 2,683

Taxation and social security (ii) 2,298 1,771

Accruals 5,250 10,111

Deferred income 13,155 8,367

Sundry creditors (ii) 29 51

Public Dividend Capital repayable to the MOD 42,303 –

Loans payable within 12 months 35,670 4,840

99,485 27,823

(i) DARA’s policy is to pay its suppliers within contracted payment terms or general conditions governing the terms for the typeof business undertaken or, in the absence of specially agreed terms, within 30 days of receipt of a valid invoice. This complieswith HM Treasury guidelines and the Governments “Better Payment Practice Code”. In 2007/08 96% (2006/07 96%) ofinvoices, by value, were paid within this target.

(ii) Within trade, taxation and social security and sundry creditors is a balance of £2,507k for other central government bodiesand £600k for bodies external to government, (2006/2007 central government bodies £2,036k, external to government £2,418k).


46

12 Provisions for liabilities and charges

Loss on Revenue Other Totalcontracts Provision

note (i) note (ii)£’000 £’000 £’000 £’000

Balance at 1 April 2007 183 101 2,433 2,717

Increase in provisions – 23 44 67

Released in year – (70) (1,736) (1,806)

Utilised in year (183) (31) (697) (911)

Balance at 31 March 2008 – 23 44 67

(i) Revenue provision is in respect of the probable repayment of amounts invoiced to MoD customers, where refundsor partial refunds are likely.

(ii) Released in year was predominantly Engines decommissioning provision which was no longer required due to the sale.

The liabilities and charges provided for fall due in the following periods:

31 March 2008

Revenue Other TotalProvision

£’000 £’000 £’000Amounts payable within:

Under one year 23 44 67

One to five years – – –

Over five years – – –

23 44 67

The MoD has confirmed that it will continue to meet any liabilities in respect of DARA’s redundancycosts, and all operating and termination costs of the Red Dragon facility consequent upon DARA’swithdrawal from the Red Dragon facility. Accordingly, no provision has been made for these futureliabilities in these accounts.


47

31 March 2008 31 March 2007£’000 £’000

Loan repayable by 31 March 2021 – 27,495

Loans repayable by 31 March 2011 – 8,175

– 35,670

Amounts repayable within one year are included in creditors – see note 11.

13 Long term loans

2007/2008 2006/2007£’000 £’000

Balance at 1 April 22,913 22,798

Transfer to profit and loss account (3) (21)

Transfer to general reserve (182) (1,099)

Revaluations in year 2,408 1,244

Less: revaluations on assets disposed (14,873) (9)

Balance at 31 March 10,263 22,913

14 Revaluation reserve

2007/2008 2006/2007£’000 £’000

Balance at 1 April 23,869 17,803

Retained (loss)/profit (31,226) 4,967

Transfer from Revaluation Reserve 15,055 1,099

Balance at 31 March 7,698 23,869

15 General reserve


48

2007/2008 2006/2007£’000 £’000

(a) Detailed analysis of gross cash flows

Returns on investments and servicing of finance

Interest received 3,525 2,958

Interest paid (1,857) (2,084)

1,668 874

Capital expenditure

Assets in the course of construction (824) (410)

Disposal of fixed assets 36 423

(788) 13

Financing

With the MoD:

Decrease in borrowings (4,840) (4,840)

(4,840) (4,840)

(b) Analysis of changes in net funds

At 1 April Cashflow At 31 March2007 2008£’000 £’000 £’000

Cash at bank and in hand 57,177 4,586 61,763

Debt due within one year (4,840) (30,830) (35,670)

Debt due after one year (35,670) 35,670 –

Total 16,667 9,426 26,093

(c) Acquisitions and Disposals

Note 2007/2008£’000

Cash disposed of as part of Sale of Rotary and Components (i) 3b (5,186)

IT separation costs (513)

(5,699)

(i) Cash included as part of the Net Working Capital calculation for the sale of Rotary and Components.Refer to Note 3 and Note 9 for further details of sale impact.


16 Cash flow statement note

49

2007/2008 2006/2007£’000 £’000

Operating profit is shown after charging foroperating lease rentals as follows:Lease of buildings at RAF St Athan (i) 350 8,095

Lease of vehicles and Other Equipment (ii) 279 505

Total operating leases paid 629 8,600

(i) Contained within note 3 – Accommodation costs

(ii) Contained within note 6 – Vehicle hire, and Other expenses and within note 3 – Supplies and services consumed

Commitments in the next financial year(2008/09) are as follows:

Land & VehiclesBuildings Total

£’000 £’000 £’000

Leases expiring within:

One year – 5 5

Two to five years inclusive 258 110 368

Over five years 150 – 150

Total 408 115 523

Expected Rental Receipts in the nextfinancial year (2008/09) are as follows:

Land & Buildings£’000

Leases expiring within:

One year 122

Two to five years inclusive –

Over five years –

Total 122

There are no finance leases.

18 Commitments and contingent liabilities

There are no commitments or contingent liabilities at 31 March 2008 (and nil at 31 March 2007).Any liabilities concerning environmental pollution considered to be pre-Trading Fund eventsfall to the MoD. All other environmental liabilities have been provided for appropriately.


17 Operating leases


Treasury operations are conductedwithin a framework of policies,mandates and delegationsauthorised by the Board. DARAuses forward foreign currencysales and purchase contracts asderivative instruments for riskmanagement purposes only. Theinternal control environment isregularly reviewed.

Interest Rate RiskDARA’s funding is determined by fixed rateGovernment loans. There are no floating rateliabilities. The weighted average rate of interest for 2007/08 was 4.74% (2006/07: 4.72%). Theweighted average period for which the rate isfixed is 0 years due to the Treasury direction to repay Public Dividend Capital and loans inconnection with Capital restructuring for DefenceSupport Group on 1 April 2008.

Currency RiskDARA conducts business in £ sterling, US dollarsand euros and is therefore subject to foreignexchange risk. DARA manages this risk by naturalhedging and entering into forward foreign exchangecontracts. DARA has two active foreign currencybank accounts. DARA policy states that transactionsare translated at the prior month average rate.Year-end foreign denominated net assets havebeen translated at a year end spot rate.

Liquidity RiskDARA used a combination of 8 year and 20 yearloans throughout the year. Current liquiditythroughout the year was strong. Cash at bank isavailable on demand and short term investmentsare conducted through the HM Treasury DebtManagement Account Deposit Facility (DMADF)and the Lloyds TSB Bank plc Money Market. Allloans are due to be repaid as part of the CapitalRestructuring for Defence Support Group on 1April 2008.

Counterparty / Credit RiskDARA’s policy is to minimise counter-party riskby only entering into contracts with institutionswith long term credit ratings of AA or better.

19 Financial Instruments


The Ministry of Defence (MoD) is a related party.During the year, DARA has had materialtransactions with the Department and with otherentities for which MOD is the parent department.None of the DARA Board members or keymanagerial staff have any related party interestswhich may conflict with their managementresponsibilities.

20 Related parties

On 1 April 2008 all of DARA's retained assets andliabilities and all of its remaining Operations weremerged with ABRO and transferred to a newTrading Fund, Defence Support Group. There areno other post balance sheet events.

21 Post Balance Sheet events

There were no material losses or any specialpayments made during the year.

22 Losses and special payments

MOD has agreed to pay for DARA’s redundancycosts, in 2007/2008 these costs amounted to£7.586m (2006/2007 £19.995m).

23 Redundancy

The Government Financial Reporting Manual(FReM) requires DARA’s Annual Report andAccounts to be audited by the Comptroller andAuditor General. DARA’s auditor is the NationalAudit Office (NAO). The cost of this audit is £64k(2006/2007 £96k) and no payments were made to this auditor for any other service. In addition,the Key Targets within the Annual Report andAccounts are audited by the MoD DefenceInternal Audit Service. Internal audit serviceswere provided by BHBi Consultancy Ltd andDefence Internal Audit at a cost of £59k(2006/2007 BHBi £94k).

24 Auditors

52

The Defence Aviation Repair Agency (DARA)2007-08Report of the Comptroller and Auditor General

IntroductionThe Defence Aviation RepairAgency (DARA) was established asa Trading Fund of the Ministry ofDefence in 2001 to provide aviationsupport and repair services to theArmed Forces. In a MinisterialAnnouncement on 22 May 2007,the Minister of State (DefenceEquipment and Support) informedParliament of the intention to createa single Defence Support Group(DSG) as a Trading Fund of theMinistry of Defence, comprisingthe Large Aircraft and Electronicsbusinesses of the DARA, alongwith the businesses contained inthe Army Base Repair Organisation(ABRO), a further Trading Fund ofthe Ministry of Defence.

Following an earlier ministerial announcement on 2 February 2006, the Ministry of Defence has been examining options for the sale, closure orrestructuring of some or all of DARA’s businessunits. My predecessor reported to Parliamenttwice on the restructuring programme alongsidehis opinions on DARA’s 2005-06 and 2006-07financial statements. His reports covered theclosure of the Fast Jets and Engines businessunits, and the process to market test for possiblebidders for the Rotary Wing and Componentsbusiness units. I am now providing a further reportto Parliament on whether the assets and liabilitiescontained in the DARA Trading Fund have beentransferred in accordance with Parliamentaryintentions. My report also covers the sale of theRotary Wing and Components business unitswhich were sold to Vector Aerospace at the end of the 2007-08 financial year.

The scope of my examination is limited to whetheror not the sale has been correctly carried out inaccordance with Parliamentary process andintention, and whether or not DARA’s results forthe financial year have been reported inaccordance with Government Financial ReportingRequirements.

Creation of the Defence SupportGroup and Transfer of Assets andLiabilities contained in DARAParliament approved the creation of the DSG witheffect from 1 April 2008, and under orders laid byMinisters, approved the transfer of the assets andliabilities pertaining to the Large Jets andElectronics businesses from the DARA TradingFund as at 31 March 2008 into the new DSGTrading Fund. These transfers included therepayment of long term loans to the Ministry ofDefence, as well as the transfer of sale proceedsarising from the disposal of the Rotary Wing andComponents business units.

As a result of my audit I am able to confirm thetransfer of assets totalling £117.51 million andliabilities of £99.55 million into the DSG TradingFund, and also that they are correctly recorded inthe financial records of DSG. As part of thistransfer, Public Dividend Capital of £42.30 million,and long term loans of £35.67 million wererepaid, using cash from DARA, to the Secretary ofState for Defence in accordance with Sections 2(6) a and b of the Government Trading Funds Act,and new Public Dividend Capital was issued tothe Defence Support Group.

53The Defence Aviation Repair Agency (DARA) 2007-08Report of the Comptroller and Auditor General

Pending the completion of the sale agreement,Ministers requested and received Parliamentaryapproval for a revised DARA trading fund order.The revised fund contained the Rotary Wing andComponents Business Units consisting of assetsof £77.70 million and liabilities of £9.76 millionwhich were transferred to Vector Aerospaceunder the sale transaction.

Basis of Account DARA comprised four business units, details ofwhich are set out in pages 12 to 14 of the annualreport. Two of these businesses have beentransferred into DSG as ongoing operations, andthe remaining two have been sold to VectorAerospace, and therefore discontinued as fundedoperations of DARA.

The DARA financial statements also containdetailed disclosures to explain the nature of thetransfer of assets to DSG, the sale to Vector, andthe implications arising from the early repaymentof long term loans and public dividend capital tothe Secretary of State. I consider the goingconcern basis applied to these accounts to beappropriate and in accordance with InternationalStandard on Auditing (UK and Ireland) 570 (GoingConcern) and the disclosure of continuing anddiscontinuing operations to be in accordance withFinancial Reporting Standard 3 (ReportingFinancial Performance).

Accounting for the Sale of theRotary and Components BusinessUnits to Vector AerospaceAt the end of the 2007-08 year, the Secretary of State sold the Rotary Wing and Componentsbusiness units with a combined net asset value of £67.94 million to Vector Aerospace for netproceeds of £17 million, of which £1m was ringfenced by DARA to fund IT separation costs, anda further receipt payable in respect of workingcapital of £12 million, resulting in a loss on sale of £39.89 million recorded in the financialstatements of DARA. Under the sale agreementthe net proceeds figure was arrived at after takinginto account future liabilities for staff redundancyand employer pension costs had the businessunits remained in MoD ownership. Vector has also assumed responsibility for some otherenvironmental and general liability costs. Thisrecognition of potential liabilities which wouldhave fallen due on the Ministry of Defence wasused in the sales negotiations to ameliorate theoffer price agreed between the Ministry ofDefence and Vector Aerospace.

ConclusionThe sale of the Rotary Wing and ComponentsBusiness Units was authorised by the ChiefSecretary to HM Treasury, and the distribution of the assets and liabilities of the DARA TradingFund as at 31 March 2008 was made inaccordance with Parliamentary intent.

DARA have, in preparing their financialstatements, shown the sale of business units toVector as a separate class of transaction, makingit clear to the users of the financial statements,that the sale transaction is outwith the usualbusiness of the Trading Fund, and have alsoincluded detailed commentary in the annualreport and notes to the accounts. As a result of my examination, I am satisfied that the assetsand liabilities of DARA have been distributed inaccordance with Parliamentary intention, and thatthe accounts, as presented, give a true and fairview of DARA‘s financial position as at 31 March 2008.


54


The following accounts and auditopinion represent the final period of the DARA Trading Fund up to 23 May 2008. Whilst no furthertrading activity was undertaken,the remaining accountingmovements and proceduralactivities were satisfactorilycompleted with the residualbalances transferred to the Ministry of Defence.


56

The Certificate of the Comptroller and AuditorGeneral to the Houses of Parliament

I certify that I have audited thefinancial statements of the DefenceAviation Repair Agency for theperiod ended 23 May 2008 underthe Government Trading Funds Act 1973. These comprise theBalance Sheet, the Cash FlowStatement and Statement of TotalRecognised Gains and Losses andthe related notes. These financialstatements have been preparedunder the accounting policies setout within them.

Respective responsibilities of theChief Executive and auditorThe Defence Aviation Repair Agency and ChiefExecutive as Accounting Officer are responsiblefor preparing the financial statements inaccordance with the Government Trading FundsAct 1973 and HM Treasury directions madethereunder and for ensuring the regularity offinancial transactions. These responsibilities areset out in the Statement of Chief Executive’sResponsibilities.

My responsibility is to audit the financialstatements in accordance with relevant legal andregulatory requirements, and with InternationalStandards on Auditing (UK and Ireland).I report to you my opinion as to whether thefinancial statements give a true and fair view andwhether the financial statements have beenproperly prepared in accordance with theGovernment Trading Funds Act 1973 and HMTreasury directions made thereunder. I alsoreport whether, in all material respects, thefinancial transactions conform to the authoritieswhich govern them.

In addition, I report to you if the Defence AviationRepair Agency has not kept proper accountingrecords and if I have not received all theinformation and explanations I require for my audit.

Basis of audit opinionI conducted my audit in accordance withInternational Standards on Auditing (UK andIreland) issued by the Auditing Practices Board.My audit includes examination, on a test basis, ofevidence relevant to the amounts, disclosures andregularity of financial transactions included in thefinancial statements. It also includes anassessment of the significant estimates andjudgments made by the Chief Executive in thepreparation of the financial statements, and ofwhether the accounting policies are mostappropriate to the Defence Aviation RepairAgency’s circumstances, consistently applied andadequately disclosed.

I planned and performed my audit so as to obtainall the information and explanations which Iconsidered necessary in order to provide me withsufficient evidence to give reasonable assurancethat the financial statements are free from materialmisstatement, whether caused by fraud or error,and that in all material respects the financialtransactions conform to the authorities whichgovern them. In forming my opinion I alsoevaluated the overall adequacy of the presentationof information in the financial statements.

57

OpinionsIn my opinion:

• the financial statements give a true and fairview, in accordance with the GovernmentTrading Funds Act 1973 and directions madethereunder by HM Treasury, of the state of theDefence Aviation Repair Agency’s affairs as at23 May 2008; and

• the financial statements have been properlyprepared in accordance with the GovernmentTrading Funds Act 1973 and HM Treasurydirections made thereunder.

Opinion on RegularityIn my opinion, in all material respects, thefinancial transactions conform to the authoritieswhich govern them.

ReportMy report on these financial statements is atpages 52 to 53.


National Audit Office151 Buckingham Palace RoadVictoria, London SW1W 9SS

The Certificate of the Comptroller and Auditor General to theHouses of Parliament

58

Balance Sheet as at 23 May 2008

23 May 2008 31 March 2008Note £’000 £’000

Fixed assetsTangible – 19,054

– 19,054

Current assetsStock & Work in progress – 185

Debtors and prepayments – 36,511

Cash at bank and in hand – 61,763

– 98,459

Current liabilitiesCreditors: amounts falling due within one year – (99,485)

Net current liabilities – (1,026)

Total assets less current liabilities – 18,028

Provisions for liabilities and charges – (67)

Net Assets – 17,961

Financed by:Capital and reservesRevaluation reserve – 10,263

General reserve – 7,698

Government funds – 17,961


The above date is the due date authorised for issue, being the date of despatch by the Trading Fund's Board, to the Comptrollerand Auditor General, for laying before the Houses of Parliament.

2008/2009Sale Transfer to DSG Transfer to MOD Total

Note £’000 £’000 £’000 £’000

(a) Reconciliation of operating result to net cash flow from operating activities:Operating result – – – –

Decrease in Provisions for liabilities and charges – (67) – (67)

Decrease in stock & WIP – 185 – 185

Decrease in debtors 17,000 19,511 – 36,511

Decrease in creditors – (39,325) (60,160) (99,485)

Net cash flow from operating activities 17,000 (19,696) (60,160) (62,856)

(b) Cash flow statement:Net cash flow from operating activities 17,000 (19,696) (60,160) (62,856)

Acquisitions and Disposals a – (17,961) – (17,961)

Capital expenditure and financial investment b – 19,054 – 19,054

Increase/(Decrease) in cash 17,000 (18,603) (60,160) (61,763)

(c) Reconciliation of net cash flowto movement in net funds:Increase/(Decrease) in cash 17,000 (18,603) (60,160) (61,763)

Movement in net funds 17,000 (18,603) (60,160) (61,763)

Net funds at start of period (17,000) 18,603 60,160 61,763

Net funds at 23 May 2008 – – – –

Notesa) Transfer of general reserve and revaluation reserve to Defence Support Groupb) Transfer of fixed assets at net book value to Defence Support Group

The accounting policies for 2007/08 on pages 34 to 35 continued to apply for the period 1 April 2008 to 23 May 2008.

59

Cash flow statement for the period ended 23 May 2008

60

2008/2009£’000

Result for the financial period –

Transfer out of revaluation reserve to Defence Support Group (10,263)

Transfer out of general reserve to Defence Support Group (7,698)

Total recognised gains and losses relating to the period (17,961)

Reconciliation of movements in Government funds

2008/2009£’000

Government Funds at 1 April 17,961

Total recognised gains and losses relating to the period (17,961)

Net movement in Government funds (17,961)

Balance at period end –

The accounting policies for 2007/08 on pages 34 to 35 continued to apply for the period 1 April 2008 to23 May 2008.

Statement of total recognised gains and losses for the period ended 23 May 2008

61

Accounts Direction given by the Treasury inAccordance with Section 4(6)(a) of theGovernment Trading Funds Act 1973

4. Compliance with the requirements of the FReMwill, in all but exceptional circumstances, benecessary for the accounts to give a true andfair view. If in these exceptional circumstances,compliance with the requirements of the FReMis inconsistent with the requirement to give atrue and fair view the requirements of theFReM should be departed from only to theextent necessary to give a true and fair view.In such cases, informal and unbiasedjudgement should be used to devise anappropriate alternative treatment which should be consistent with both the economiccharacteristics of the circumstancesconcerned and the spirit of the FReM.Any material departure from the FReM should be discussed in the first instance withthe Treasury.

5. This accounts direction supersedes that issuedon the 11 November 2007.

David WatkinsHead of Financial Reporting Policy Team,Her Majesty’s Treasury03 July 2008

1. This direction applies to the Defence AviationRepair Agency.

2. The Defence Aviation Repair Agency shallprepare final accounts for the period 1 April2008 to 23 May 2008 in compliance with theaccounting principles and disclosurerequirements of the edition of the GovernmentFinancial Reporting Manual issued by HMTreasury (“the FReM”) which is in force for2008-09, subject to the following revision:

(a) An Annual Report, Statement of InternalControl and Remuneration Report are notrequired; and

(b) The requirement for:

(1) A brief Foreword explaining thepurpose of the account;

(2) An abbreviated Accounting Policiesnote;

(3) Explanatory notes on movement offunds; and if appropriate

(4) A closing statement that residualbalances have been transferred to theMinistry of Defence.

3. The accounts shall be prepared so as:

(a) to give a true and fair view of the state ofaffairs as at 23 May 2008 (at which datethe trading fund was wound up) and oftotal recognised gains and losses, andcash flows of the trading fund for theperiod ended; and

(b) to provide further disclosure of anymaterial income or expenditure that has notbeen applied to the purposes intended byParliament, or material transactions thathave not conformed to the authoritieswhich govern them.


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Large AircraftRotary Electronics Components

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