Babcock International Group PLC Transition to International Financial Reporting Standards 1. Introduction Following the EU’s adoption of International Financial Reporting Standards (IFRS), Babcock International Group PLC (the group) will be adopting IFRS in its consolidated accounts for accounting periods from 1 April 2005. The first financial information to be reported by the group in accordance with IFRS will be for the six months ending 30 September 2005 but the requirement to present comparative information means that a balance sheet prepared in accordance with IFRS as at 1 April 2004 is required. This announcement includes the consolidated results of the group converted from a UK Generally Accepted Accounting Principles (UK GAAP) basis to an IFRS basis for the period to 30 September 2004, the year to 31 March 2005 and balance sheets at 31 March 2004, 30 September 2004 and 31 March 2005. This document explains the significant accounting policy changes from the accounting policies adopted under UK GAAP for the year ended 31 March 2005. The most significant changes leading to the restatement relate to:- • The recognition, on the balance sheet, of pension scheme liabilities under IAS 19 • The inclusion of a fair value charge in respect of employee share options issued post 7 November 2002 • The cessation of goodwill amortisation • The creation and amortisation of intangibles acquired • No longer recognising proposed dividends as a liability at the balance sheet date In addition, the group will be implementing IAS 32 Financial Instruments: Disclosure and Presentation (IAS 32) and IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) in its consolidated accounts with effect from 1 April 2005. Under IAS19 there is a choice as to whether Pension Finance costs are shown under interest or within Operating Profit. The attached schedules reflect this adjustment within operating profit. Attached are: Group Balance Sheets in IFRS format as at 31 March 2005, as at 30 September 2004 and as at 31 March 2004 (section 5.1) Group Income Statement in IFRS format year ended 31 March 2005, and the six months ended 30 September 2004 (section 5.2). Appendices 1. Group Balance Sheet – reconciliation UK GAAP to IFRS including IFRS adjustments made as at 31 March 2004 2. Group Balance Sheet – reconciliation UK GAAP to IFRS including IFRS adjustments made as at 30 September 2004 3. Group Balance Sheet – reconciliation UK GAAP to IFRS including IFRS adjustments made as at 31 March 2005 G:wpdocs/gen/fm/sep05/bigtransitiontoIFRSdoc. 1
Transcript
Babcock International Group PLC
Transition to International Financial Reporting Standards
1. Introduction Following the EU’s adoption of International Financial Reporting Standards (IFRS), Babcock International Group PLC (the group) will be adopting IFRS in its consolidated accounts for accounting periods from 1 April 2005. The first financial information to be reported by the group in accordance with IFRS will be for the six months ending 30 September 2005 but the requirement to present comparative information means that a balance sheet prepared in accordance with IFRS as at 1 April 2004 is required. This announcement includes the consolidated results of the group converted from a UK Generally Accepted Accounting Principles (UK GAAP) basis to an IFRS basis for the period to 30 September 2004, the year to 31 March 2005 and balance sheets at 31 March 2004, 30 September 2004 and 31 March 2005. This document explains the significant accounting policy changes from the accounting policies adopted under UK GAAP for the year ended 31 March 2005. The most significant changes leading to the restatement relate to:- • The recognition, on the balance sheet, of pension scheme liabilities under IAS 19 • The inclusion of a fair value charge in respect of employee share options issued
post 7 November 2002 • The cessation of goodwill amortisation • The creation and amortisation of intangibles acquired • No longer recognising proposed dividends as a liability at the balance sheet date In addition, the group will be implementing IAS 32 Financial Instruments: Disclosure and Presentation (IAS 32) and IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) in its consolidated accounts with effect from 1 April 2005. Under IAS19 there is a choice as to whether Pension Finance costs are shown under interest or within Operating Profit. The attached schedules reflect this adjustment within operating profit. Attached are: Group Balance Sheets in IFRS format as at 31 March 2005, as at 30 September 2004 and as at 31 March 2004 (section 5.1) Group Income Statement in IFRS format year ended 31 March 2005, and the six months ended 30 September 2004 (section 5.2). Appendices 1. Group Balance Sheet – reconciliation UK GAAP to IFRS including IFRS
adjustments made as at 31 March 2004 2. Group Balance Sheet – reconciliation UK GAAP to IFRS including IFRS
adjustments made as at 30 September 2004 3. Group Balance Sheet – reconciliation UK GAAP to IFRS including IFRS
adjustments made as at 31 March 2005
G:wpdocs/gen/fm/sep05/bigtransitiontoIFRSdoc. 1
4. Group Income Statement – reconciliation UK GAAP to IFRS including IFRS adjustments made for the period ended 30 September 2004
5. Group Income Statement – reconciliation UK GAAP to IFRS including IFRS adjustments made for the year ended 31 March 2005
6. Segmental analysis 7. Accounting policies 2. Basis of preparation The adjustments to the UK GAAP financial statements have been prepared on the basis of all IFRSs including Standing Interpretations Committee and International Financial Reporting Interpretations Committee interpretations expected to be effective at 31 March 2006. These are subject to ongoing review and endorsement by the EU or possible amendment by interpretative guidance from the IASB and are therefore still subject to change. The unaudited financial information which follows represents our current view and may be impacted by changes in our business or to IFRS and the interpretation thereof. In general, for the first-time adoption of IFRS, the standards are applied retrospectively. However, there are a number of exceptions available under IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1) and note 4.2 details the exceptions that the group has applied. In November 2004, the EU endorsed a reduced version of the IAS 39 Financial Instruments: Recognition and Measurement (IAS 39) standard as issued previously by the International Accounting Standards Board (IASB). With effect from 1 April 2005, the group will adopt IAS 39 in accordance with the guidance issued by the IASB. In preparing this financial information, the group has assumed that the EU will endorse the amendment issued in December 2004 to IAS 19 Employee Benefits – Actuarial Gains and Losses, Group Plans and Disclosures. Following on from the previous release of this document the results for the HS&E segment have been transferred to discontinuing operations. 3. Overview of impact 3.1 Underlying profit before tax and EPS Under UK GAAP the group has previously presented measures of its underlying profit before tax which excluded exceptional items and amortisation of goodwill. This measure will be retained, but will be amended to exclude amortisation of intangibles arising on acquisition.
2
Ref
For the year ended
31 Mar 2005 £m
For the six months ended
30 Sept 2004£m
Profit before tax, goodwill and exceptional items – UK GAAP – for the year ending 31 March 2005
Discontinued operations before tax and exceptionals (tax: Mar £0.3m – Sep £0.1m)
(1.3) (0.6)
Continuing operations before tax, acquired intangibles and exceptional items
36.3 18.7
After allowing for a tax credit (relating to share based payments) the basic EPS pre-goodwill and exceptional for the year ended 31 March 2005 changes marginally from 14.20p (30 September 2004: 7.73) under UK GAAP to 14.22p (30 September 2004: 7.97) under IFRS. 3.2 Profit after tax Reconciliation of profit after tax:
Each of the above adjustments are shown after the related tax charge. EPS under UK GAAP of 10.87p (September 2004: 7.72) reduces to 10.08p (September 2004: 3.62) under IFRS mainly as a result of the amortisation of acquired intangibles. 3.3 Net assets Reconciliation of net assets:
Ref
As at31 Mar 2005
£m
As at30 Sept 2004
£m Net assets – UK GAAP 174.0 171.0Pensions 4.3 (82.6) (88.8)Acquired intangibles 4.4 9.0 10.9Goodwill 4.5 7.7 4.0Share based payments 4.6 0.1 0.1Long-term contracts 4.7 0.1 0.1Dividends 4.8 5.4 2.7Other tax adjustments 4.9 (0.3) (0.3)Holiday pay 4.10 (0.7) (0.8)Debtor discounting 4.11 (0.3) (0.1) Net assets IFRS 112.4 98.8 Each of the above adjustments is shown after the related tax effect. 4. Impact of IFRS adjustments Due to the implementation of IFRS there have been some changes to the group’s accounting policies, the following are an explanation of the resulting changes. 4.1 Presentation of financial statements The group’s financial information will be prepared on a basis that is consistent with IAS 1 Presentation of Financial Statements. The statements shown in Section 5 have been presented as far as possible in accordance with IAS 1 and may still be subject to change. This, in conjunction with other standards, has had the following impacts: i. Under UK GAAP, the group’s share of operating profit, interest and tax of equity
accounted investments were presented separately. Under IAS, the group’s share of results from equity accounted investments is presented as a single line on the income statement. As a result of the reclassification, £0.1m relating to the group’s share of tax of equity accounted investments is reclassified from tax under UK GAAP to within profit before tax under IFRS for the year ended 31 March 2005.
ii. Under IAS 1, the financial performance from discontinued operations is shown net
of tax as a single line item after profit from continuing activities.
4
iii. Finance costs: Under IAS 1, income and expense cannot be offset and therefore financial costs and financial income are separately disclosed. iv. Retirement benefit obligations and assets are being separately presented from creditors or debtors.
v. Debtors, creditors and provisions reclassifications: IAS 1 requires that assets and liabilities are presented on a current and non-current basis. vi. Generally IFRS requires further grossing-up of balance sheet items resulting in
higher debtors and creditors. vii. Other reclassifications
Software: IAS 38 requires that software costs are capitalised as intangible assets. UK GAAP included such costs in tangible fixed assets. Accordingly, £1.9m (September 2004: £0.9m) previously disclosed as tangible assets under UK GAAP is reclassified as intangible assets under IFRS.
4.2 IFRS 1 exemptions IFRS 1 sets out the rules for an entity preparing its first IFRS financial statements. The entity is required to determine its IFRS accounting policies in accordance with the IFRS that are in place at the date of transition (1 April 2004) and, in general, apply them retrospectively. There are a number of possible exemptions from the retrospective application to assist the entity in making the transition. Babcock has taken the following exemptions:
- Business combinations: Business combinations prior to the transition date (1 April 2004) have not been restated onto an IFRS basis.
- Employee benefits: All cumulative actuarial gains and losses on the group’s defined benefit pension schemes have been recognised in equity at the date of transition.
- Financial instruments: Financial instruments in the comparative period are recorded on the existing UK GAAP basis, rather than in accordance with IAS 32 and IAS 39, which will be adopted from 1 April 2005.
- Cumulative translation difference: IAS 21 The Effects of Changes in Foreign Exchange Rates requires translation differences relating to a net investment in a foreign operation to be classified as a separate component of equity. In accordance with IFRS 1, the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition.
4.3 Pensions Under UK GAAP, the group previously accounted for defined benefit pension schemes in accordance with Statement of Standard Accounting Practice 24 Accounting for Pension Costs (SSAP 24). The group also reported the transitional disclosures required in accordance with Financial Reporting Standard 17 Retirement Benefits (FRS 17), including the adjustment from the figures reported under SSAP 24 which would be required if FRS 17 was adopted in the financial statements. The methodology and assumptions used to calculate the value of pension assets and liabilities under FRS 17 are substantially consistent with the requirements of IAS 19 Employee Benefits. Although there are some minor technical differences, which result in a different income statement charge. IAS 19 allows a choice as to whether finance
5
costs/incomes are shown within interest or operating profit. The income will be shown within operating profit. The balance sheet adjustment replaces the existing SSAP 24 net pension assets and related deferred tax with the IAS 19 pension liability and the related deferred tax assets. Part of the adjustment to goodwill represents the impact of replacing the SSAP 24 pension asset in the acquisition balance sheet of certain acquisitions made in 2004/5 with the IAS 19 asset and the related deferred tax. The income statement adjustment reflects the difference between the existing SSAP 24 operating charge and the group’s IAS 19 pension charge and net pension financing credit. Under IAS 19, in the event of a significant reduction in active members, the effect on the surplus/deficit is taken to the income statement immediately rather than spread over average active service lives as with SSAP 24. This has been shown as exceptional gain of £5.6m (September: nil). Currently still under development is the treatment of government supported pension schemes where any change in contribution is funded by the government. Under UK GAAP these schemes are treated as defined contribution. Under IFRS these schemes may be treated as defined benefit schemes. This may result in some grossing up within the Income Statement and Balance Sheet but no net effect. The impact from these changes is summarised as follows:
6
As at1 Apr 2004
£m
For the year ended
31 Mar 2005 £m
For the six months ended
30 Sept 2004£m
Income statement
Service costs (8.7) (4.1)Financial income 56.6 27.1Financial expense (47.8)
(23.0)
Total operating profit change 0.1 -Exceptional curtailment 5.6 -Related taxation effect - exceptional (1.4) - Adjustment to profit after taxation 4.3
Adjustment to net assets (46.0) (82.6) (88.8) Resultant net surplus/deficit per IFRS 1.1
(14.4) (21.2) 4.4 Business combinations 4.4a Acquired Intangibles
Under UK GAAP, the difference between the consideration paid for an acquisition and the fair value of the net tangible assets acquired is recognised as goodwill. IFRS requires that intangible assets of an acquired business are separately recognised from goodwill if their fair value can be measured reliably. Intangible assets include contracts and customer relationships. Intangible assets recognised are then amortised over their useful life. Under the transition rules, the group is not required to identify any acquired intangible assets for acquisitions prior to 31 March 2004. As a result of acquisitions made in 2004/5 the group has reclassified intangible assets of £25.9m out of goodwill arising on acquisition, of which £8.8m relates to the rail maintenance contracts existing at the date of acquisition. There is an associated ordinary amortisation charge of £4.4m for the year ended 31 March 2005 (September 2004: £1.6m) and in addition the amortisation of £8.8m (September 2004: £8.8m) relating to the rail maintenance transfer which is treated as exceptional. The impact from these changes is summarised as follows:
7
For the
year ended 31 Mar 2005
£m
For the six months ended
30 Sept 2004£m
Income statement
Amortisation of intangible assets - ordinary (4.4) (1.6) - exceptional (8.8) (8.8) Adjustment to profit before taxation (13.2) (10.4)Related taxation effect - ordinary 1.3 0.5 Adjustment to profit after taxation (11.9) (9.9) Net assets
Amortisation of intangible assets (13.2) (10.4) 12.7 15.5 4.4b Changes to fair value of acquisition balance sheet
Under IFRS if during the initial accounting period (12 months from the acquisition date) the provisional values change then these changes must be reflected retrospectively within the accounts with a corresponding adjustment to goodwill. Comparative figures must be restated as though the revised figures had been used from the acquisition date. This has resulted in the fair values of the acquired assets and liabilities and the purchase consideration for Peterhouse and Turners reflected at March 2005 being restated within the September 2004 accounts. The main changes to fair values and purchase considerations were as follows:-
8
£m Adjustment to goodwill 16.7 Fixed assets (0.9) Trade and other receivables (19.0) Provisions (1.0) Increase in deferred consideration for Turners (1.9) Deferred tax on pensions and other 4.5 Current tax 1.1 Trade and other payables 0.5
Net change to net assets 0
These changes have been reflected in appendix 2. 4.5 Intangible assets - goodwill Under UK GAAP, the group’s policy was to capitalise goodwill in respect of businesses acquired and amortise on a straight-line basis over its estimated useful economic life, which had been assessed as 20 years for all recent acquisitions. In addition at 31 March 2005 it held negative goodwill of £2.9m arising on acquisitions (30 September 2004: £3.8m). On transition to IFRS, IFRS 1 requires the group to conduct an impairment review of the carrying value of capitalised goodwill at 1 April 2004 for potential impairments. No further impairments above those made under UK GAAP were required at 1 April 2004. In accordance with IFRS 3 Business Combinations, no amortisation of goodwill is charged in the group’s consolidated IFRS accounts from 1 April 2004. Instead, annual impairment reviews of the goodwill are performed. In addition, negative goodwill at 1 April 2004 of £4.7m is taken to reserves in compliance with IFRS 3. The adjustment reverses the amortisation charged in the year under UK GAAP of £6.6m with an adjustment of (£0.1m) for businesses disposed of during the year (30 September 2004: net £2.5m). Accordingly, there is a corresponding increase in net assets. Other significant items adjusting goodwill include the effect on the acquisition balance sheets under IAS 19 pensions compared to SSAP 24 and the transfer from goodwill under UK GAAP to intangibles under IFRS as effected by tax. The impact from these changes is summarised as follows:
9
As at1 Apr 2004
£m
For the
year ended 31 Mar 2005
£m
For thesix months ended
30 Sept 2004£m
Income statement Adjustment to profit before taxation 6.5 2.5Related taxation effect (0.3) (0.1) Adjustment to profit after taxation 6.2 2.4 Adjustment to net assets (a) 4.7
8.1 4.2
Taxation effect - (0.4) (0.2) 4.7
7.7 4.0
(a) £m £mAcquired intangibles (25.9) (25.9)Goodwill amortisation 6.5 2.5Negative goodwill 4.7 4.7Fair value changes e.g. pensions/other 22.8 22.9 8.1 4.2 4.6 Share-based payments Under UK GAAP, the cost of share options was based on the intrinsic value in the option at the date of grant, meaning that options granted to employees at market price do not generate an expense. Under IFRS 2 Share-based Payments, the group measures the cost of all share options granted since November 2002 using fair value models. As a result, additional expense is recognised in the IFRS income statement. The adjustment increases the operating charge of the group’s share option schemes. The impact from these changes is summarised as follows:
10
As at1 Apr 2004
£m
For the year ended
31 Mar 2005 £m
For thesix months ended
30 Sept 2004£m
Income statement Operating costs - (0.5) (0.2) Adjustment to profit before taxation - (0.5) (0.2)Related taxation effect - 0.1 0.1 Adjustment to profit after taxation - (0.4) (0.1) Net assets Tax 0.0 0.1 0.1 4.7 Long-term contracts The group accounted for long-term contracts under UK GAAP in accordance with Statement of Standard Accounting Practice 9 Stocks and Long-term Contracts. Under IFRS, long-term contracts are accounted for under either IAS 11 Construction Contracts and IAS 18 Revenue. These standards require that all such contracts, with no materiality test, as was the case under UK GAAP, are accounted for as long term contracts. In addition, IAS prohibits netting of payments on account on a more strictly defined basis resulting in a grossing up of the balance sheet under IAS. The impact from these changes is summarised as follows:
As at1 Apr 2004
£m
For the year ended
31 Mar 2005 £m
For thesix months ended
30 Sept 2004£m
Combined sales of group (1.1) (1.0)Operating costs 1.0 0.9 Adjustment to profit before taxation (0.1) (0.1)Related taxation effect 0.0 - Adjustment to profit after taxation (0.1) (0.1) Net assets Debtors 2.4 53.9 41.0Inventories (1.6) (0.7) (0.8)Creditors (0.6) (53.0) (40.1) 0.2 0.2 0.1Related taxation effect (0.1) (0.1) - Adjustment to net assets 0.1 0.1 0.1
11
4.8 Proposed dividends Under Statement of Standard Accounting Practice 17 Post Balance Sheet Events, proposed dividends are accrued for as an adjusting post balance sheet event in the accounting period to which they relate. Under IAS 10 Events after the Balance Sheet Date, dividends are recognised in the accounting period in which they are declared. Accordingly, the group has reversed the accrual for its proposed final dividends. The impact from these changes is as follows:
As at1 Apr 2004
£m
For the year ended
31 March 2005 £m
For thesix months ended
30 Sept 2004£m
Adjustment to net assets 3.1
5.4 2.7
4.9 Taxation Under IAS 12 Income Taxes, certain temporary differences, in relation to property revaluations not recognised under UK GAAP require recognition of £0.3m (at acquisition). Other tax adjustments have been reflected within the relevant adjustments as tax effects. 4.10 Holiday pay As a result of further more prescriptive guidance in IAS 19, holiday pay accruals and prepayments are definitively required. The impact from these changes is summarised as follows:
Net assets Debtors 0.4 0.4 0.6Creditors (0.8) (1.4) (1.7)Deferred tax 0.1 0.3 0.3 Adjustment to net assets (0.3) (0.7) (0.8)
12
4.11 Discounting debtors Under IAS 18 Revenue account must be taken of any inbuilt financing within extended payment terms. Where payment terms are deemed to fall into this category the related debtor is stated at the present value after discounting at prevailing interest rates. The deemed financing element of the debt is credited to profit and loss as interest income as the discount unwinds. Application of this standard has resulted in the following changes:
As at1 Apr 2004
£m
For the year ended
31 Mar 2005£m
For thesix months ended
30 Sept 2004£m
Turnover
(0.3) (0.2)
Finance income 0.2 0.3
Adjustment to profit after taxation (0.1) 0.1 Debtors (0.3) (0.4) (0.1)Deferred tax 0.1 0.1 - Adjustment to net assets (0.2) (0.3) (0.1) 4.12 Financial instruments (applicable from 1 April 2005) Within the group’s South African business a significant element of its purchases are in US dollars. In order to protect itself against currency fluctuations, the group’s policy is to hedge all firm transactional exposures. The dollar is in the main not the functional currency of the supplier and hence the contracts are deemed to include embedded derivatives which must be fair valued. The forward cover contracts are also marked to fair value and substantially offset the embedded derivative accounting. The group also uses interest rate derivative instruments to manage the group’s exposure to interest rate fluctuations on its borrowings and deposits by varying the proportion of fixed rate debt relative to floating rate debt over the forward time horizon. To achieve hedge accounting under IAS 39, the group is required to designate these financial instruments against specific assets, liabilities, income and expenses. All such instruments are measured at fair value as at the balance sheet date and the effectiveness of each hedge tested against defined criteria. Changes in the fair value of the financial instruments are recognised either in profit or loss for the period or, in the case of a cash flow hedge, directly in equity and subsequently recognised in profit or loss for the period when the underlying transaction is realised. For financial instruments designated as fair value hedges, changes in the fair value of the hedged item and the derivative are recognised in the profit and loss for the period. Gains and losses on financial instruments, both realised and unrealised, that do not quality for hedge accounting are included in the profit or loss for the period. The group will consider whether to seek hedge accounting on an instrument by instrument basis. Under IAS 39, all financial instruments are recognised on the balance sheet as either financial assets or financial liabilities.
13
Under the IFRS transition rules, IAS 32 and IAS 39 will apply to accounting periods beginning on or after 1 April 2005 with no requirement for comparative information in the period to 31 March 2005. Therefore this area will continue to be accounted for under UK GAAP in the 2004/5 comparatives of the group’s 2005/6 IFRS financial statements. An adjustment is made as at 1 April 2005 to reflect the adoption of IAS 32 and IAS 39 which restates hedged assets and liabilities to balance sheet rates and recognises the fair value of financial instruments on the balance sheet together with the associated deferred tax. The impact of these changes is not expected to be significant and will be reflected within the Group interim financial statements. 5. Financial statements These statements have been presented as far as possible in accordance with IAS 1 and may still be subject to change.
Trade and other receivables 231.7 205.2 71.9Current tax 0.3 1.2 0.3Other financial assets 0.5 0.4 0.1Cash and cash equivalents 33.1 39.1 17.5 306.2 268.9 117.9Total assets 572.7 545.9 269.5 Equity and liabilities Equity attributable to equity holders of the parent
Share capital 125.0 124.6 90.1Capital reserves 69.3 69.0 38.6Other reserves 30.6 30.6 30.6Retained earnings (112.6) (125.4) (100.7) 112.3 98.8 58.6Minority interest 0.1 0.0 0.0 Total equity 112.4 98.8 58.6 Non current liabilities Long-term borrowings 2.1 0.5 15.0Trade and payables 0.0 - 0.1Current tax payable 0.0 - 0.1Obligations under finance leases 6.2 6.7 0.7Retirement liabilities 61.8 68.4 46.6Long term provisions 23.4 18.2 7.2 93.5 93.8 69.7
15
5.1 Group balance sheet in IFRS format (continued) March
2005£m
Sept 2004
£m
March2004
£mCurrent liabilities Trade and payables 260.8 226.7 105.7Current tax payable 6.2 9.2 6.0Other financial liabilities 2.2 0.9 4.1Obligations under finance leases 2.3 3.1 0.4Bank overdrafts and loans 85.4 99.9 16.8Short-term provisions 9.9 13.5 8.2 366.8 353.3 141.2Total liabilities 460.3 447.1 210.9 Total equity and liabilities 572.7 545.9 269.5
The September 2004 balance sheet has also been updated to reflect the change in fair values and purchase consideration of the acquired net assets of the Peterhouse Group and Turners.
16
5.2 Group income statement in IFRS format Year ended 31 March 2005 Before
exceptionalsand acquired
intangibleamortisation
£m
Exceptionals and acquired
intangible amortisation
£m Total
£m Revenue 745.3
- 745.3
Profit from operations 42.1 (6.2) 35.9 Finance costs (8.5) - (8.5)Finance income 2.5 - 2.5Share of profit of joint ventures 0.2 - 0.2 Profit before tax 36.3 (6.2) 30.1Income tax expense (8.3) - (8.3) Profit for the year from continuing operations 28.0
(6.2) 21.8
Discontinued operations Current year profit after tax on discontinued operations
(1.0) - (1.0)
Loss on disposals (1.6) (1.6) Profit for the period 27.0 (7.9) 19.2 Attributable to: Equity holders of the parent 26.9 (7.8) 19.1 Minority interest 0.1 - 0.1 Earnings per share Including discontinued operations Basic 10.08pDiluted 10.07pExcluding discontinued operations Basic 11.47pDiluted 11.45p The results for HS&E have been reclassified to discontinued.
17
5.2 Group income statement in IFRS format (continued) Six months ended 30 Sept 2004 Before
exceptionalsand acquired
intangibleamortisation
£m
Exceptionals and acquired
intangible amortisation
£m Total
£m Revenue 332.8
332.8
Profit from operations 20.9 (7.5) 13.4 Finance costs (3.7) - (3.7)Finance income 1.3 - 1.3Share of profit of joint ventures 0.2 - 0.2 Profit before tax 18.7 (7.5) 11.2Income tax expense (4.4) 1.6 (2.8) Profit for the year from continuing operations
14.3 (5.9) 8.4
Discontinued operations Current year profit after tax on discontinued operations
(0.5) - (0.5)
Loss on disposals - (1.6) (1.6) Profit for the period 13.8 (7.5) 6.3 Attributable to: Equity holders of the parent 6.3 Minority interest - Earnings per share Including discontinued operations Basic 3.62pDiluted 3.59pExcluding discontinued operations Basic 4.80pDiluted 4.76p
18
Reconciliation of equity at 31 March 2004 (Date of transition to IFRS)
The effect of the changes to the Group's accounting policies on the equity of the Group at the date of transition, 31 March 2004 was as follows.
0.0 0.0 0.0 (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 (0.0)Note: IFRS column represents adjusted numbers but not correct for IFRS format or any discontinued operations identified after the period end.
Appendix 3
Income statement reconciliation for six months to 30 September 2004
Discontinued operationsHS&E and other 4.7 (0.6) (1.6) - (2.2) 13.3 (1.3) (1.6) - (2.9)
Group total 337.5 20.3 (7.5) (1.6) 11.2 758.6 40.8 (3.4) (4.4) 33.0
The tax credit related to discontinued operations was Sept 2004 £0.1m, March 2005 £0.3m
The turnover, not included above, relating to joint ventures was Sept 2004 £2.1m, March 2005 £3.1m. The share of profit after tax at September of £0.2m, and at March 2005 of £0.2m, represents a profit of £0.1m (March 2005 £0.2m) from the Defence Services segment, a profit of £0.2m (March 2005 £0.1m) from the Technical Services segment, and a loss of £0.1m (March 2005 loss £0.1) from the Networks segment.
The segmental analysis has been restated to reflect IFRS changes from UK GAAP. The restatement includes the allocation of IAS 19 pension charges to the relevant segment. Additionally, the group has allocated appropriate central costs on a percentage of sales basis to each segment.
Six months ended 30 September 2004 Year ended 31 March 2005Operating Profit Operating Profit
The exceptional items were made up of £5.6m impairments to goodwill in the Technical Services segment (March 2005: £5.6m offset by a curtailment gain on pension of £5.6m arising on a significant reduction in active members), a £1.2m credit due to the net effect of the rail maintenance transfer in the Rail segment (March 2005 £nil) and £1.5m (March 2005 £1.8m) costs relating to the closure of the Peterhouse Head Office. The £1.6m exceptional loss in discontinued operations is a loss on disposal.
Appendix 7
ACCOUNTING POLICIES The Accounting Policies set out below are expected to be formally adopted by the Board when it prepares its first Annual Report for the financial year ended 31 March 2006. These standards still remain subject to further amendments by and interpretative guidance from the International Accounting Standards Board (“IASB”) as well as the ongoing review and endorsement by the European Union, which may lead to the need for further refinement of the policies being adopted by the Group. Consequently, the Accounting Policies are provisional and may be subject to change. First time adoption of IFRS The Group's date of transition to IFRS is 1 April 2004. IFRS 1 ' First Time Adoption of International Financial Reporting Standards' generally requires companies to apply their accounting policies retrospectively. There are however a number of exemptions from this general rule in order to assist companies with the transition to reporting under IFRS. The most significant of these are set out below:
Business combinations The group has elected not to restate business combinations prior to the date of transition. Employee benefits All cumulative actuarial gains and losses have been recognised on transition to IFRS. The group will continue to apply this treatment, with all actuarial gains and losses being recognised in the statement of recognised income and expense on the assumption that the amendment to IAS 19 'Employee Benefits', issued on 16 December 2004 will be endorsed by the European Union. Financial instruments The group has adopted the exemption not to restate comparatives for IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 ' Financial Instruments: Recognition and Measurement' but to apply these standards from 1 April 2005. As a result the comparative information to the 2006 financial statements will be presented on the existing UK GAAP basis. A reconciliation between the closing 31 March 2005 balance sheet and the opening 1 April 2005 balance sheet will be shown as part of any financial statements issued commencing 1 April 2005.
Cumulative translation differences The group has elected to adopt the ‘Cumulative translation exchange differences’ exemption which resets all cumulative translation gains and losses to zero at the date of transition. Principal Accounting Policies The principal accounting policies adopted by the Group are disclosed below; Basis of consolidation The group Financial Statements include the Financial Statements of the company and all of its subsidiary undertakings made up to 31 March. (a) Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Acquisitions are included from the date of acquisition and the results of the businesses disposed of or terminated are included in the results for
Page 1 of 6
the year up to date of relinquishing control or closure and analysed as continuing or discontinued operations.
(b) Joint ventures The Group's interest in jointly controlled entities are accounted for by the equity method of accounting and are initially recorded at cost. The Group’s investment in jointly controlled entities includes goodwill (net of any accumulated impairment loss) identified on acquisition. The Group’s share of its jointly controlled entities’ post-acquisition profits or losses after tax is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Unrealised gains and losses on transactions between the Group and its jointly controlled entity are eliminated to the extent of the Group’s interest in the joint controlled entity.
Exceptional items Items that are both material and non-recurring, are presented as exceptional items within the consolidated income statement. The separate reporting of exceptional items helps provide a better indication of the group’s underlying business performance. Events which may give rise to the classification of items as exceptional include gains or losses on the disposal of properties, restructuring of businesses and asset impairments. Goodwill and intangible assets (a) Goodwill When the fair value of the consideration for an acquired undertaking exceeds the fair value of its separable net assets the difference is treated as purchased goodwill and is capitalised. When the fair value of the consideration for an acquired undertaking is less than the fair value of its separable net assets the difference is taken directly to the income statement.
Goodwill relating to acquisitions prior to 1 April 2004 is maintained at its net book value on the date of transition to IFRS. From that date goodwill is not amortised but is reviewed at least annually for impairment. Negative goodwill was written off to reserves on the date of transition to IFRS. (b) Intangible assets, which are capable of being recognised separately and measured reliably on acquisition of a business, are capitalised at fair value on acquisition. These intangibles will include contracts and customer relationships. Where these assets have a finite life, they are amortised over the period which they are expected to generate benefits, but not exceeding ten years. Customer contracts and relationships valued on acquisition are expected to generate higher benefits in the early years following such acquisition as existing contracts unwind. (c) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects are recognised as intangible assets when it is probable that the project will be a success considering its commercial and technological feasibility, and only if the cost can be measured reliably. Other development expenditure is recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development
Page 2 of 6
costs that have been capitalised are amortised from the date the product is available for use on a straight-line basis over the period of its expected benefit. Plant, property and equipment Property, plant and equipment is shown at cost less subsequent depreciation and impairment, except for land, which is shown at cost less impairment. Cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is provided on a straight line basis to write off the cost of fixed assets over their estimated useful lives to their estimated residual value (reassessed at each balance sheet date) at the following annual rates:
Freehold land Nil Freehold buildings 2% to 10% Short leasehold property Over period of lease Plant, machinery and motor vehicles 6.6% to 33.3% Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the fixed asset may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount exceeds the higher of an asset’s fair value less cost to sell or value in use. Leases Assets under finance leases are capitalised and the outstanding capital element of instalments is included in creditors. The interest element is charged against profits so as to produce a constant periodic rate of charge on the outstanding obligations. Depreciation is calculated to write the assets off over their expected useful lives or over the lease terms where these are shorter. Operating lease payments are recognised as an expense in the income statement. A provision is made where the operating leases are deemed to be onerous. Stocks and work in progress Stocks are valued at the lower of cost and net realisable value. Cost is determined on a first-in first-out method. In the case of finished goods and work in progress, cost comprises direct material and labour and an appropriate proportion of overheads. Contract accounting Contract costs are recognised when incurred. When the outcome of a contract cannot be estimated reliably contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. When the outcome of a contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognised over the period of the contract. When it is probably that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. The Group uses the 'percentage of completion method' to determine the appropriate amount of revenue to recognise in a given period. The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceeds progress billings.
Page 3 of 6
The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). Pre-contract costs are recognised as expenses as incurred, except that directly attributable costs are recognised as an asset when it can be reliably expected that a contract will be obtained and the contract is expected to result in future net cash flows. Taxation (a) Current income tax Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date. (b) Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group, and it is probable that the temporary difference will not reverse in the foreseeable future. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Foreign currencies Transactions denominated in foreign currencies are recorded in local currency at the rate of exchange ruling on the date of the transaction or at the rate at which hedged if appropriate. Monetary assets and liabilities denominated in foreign currencies are translated into the local currency at the year end exchange rates or at the rate at which they are hedged if appropriate. (a) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in sterling, which is the Company’s functional and presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at reporting period end exchange rates of monetary assets and liabilities denominated
Page 4 of 6
in foreign currencies are recognised in the income statement except when deferred in equity as qualifying net investment hedges. . Exchange differences arising from the translation of the net investment in foreign entities and of borrowings and other currency instruments designated as hedges of such investments are taken to reserves on consolidation. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at period end exchange rates. Revenue (a) Revenue in respect of contracts, is recognised by reference to the stage of completion of the contract, using the 'percentage of completion method' to determine the appropriate amount of revenue to recognise in a given period. An appropriate level of profit attributable to the contract activity is recognised if the final outcome of the contract can be reliably assessed. An expected loss on a contract is recognised immediately in the income statement. (b) Other revenue comprises the fair value of goods and services rendered by the group. Borrowing costs Borrowing costs are recognised as an expense in the period in which they are incurred. Employee benefits (a) Pension obligations The Group operates a number of pension schemes. The schemes are generally funded through payments to trustee-administered funds, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred. For defined benefit pension schemes the cost of providing benefits is determined using the projected unit credit actuarial valuation method. The group’s current and past service cost and imputed interest on the defined benefit schemes' obligations, net of the expected return on the scheme's assets, are charged to operating profit within the income statement. Actuarial gains and losses are recognised directly in equity through the Statement of Recognised Income and Expense so that the group's balance sheet reflects the fair value of the schemes' surpluses or deficits at the balance sheet date. (b) Share-based compensation The Group operates equity-settled, share-based compensation plans. The economic cost of awarding shares and share options to employees is recognised as an expense in the income statement equivalent to the fair value of the benefit awarded. The fair value is determined by reference to option pricing models. The charge is recognised in
Page 5 of 6
the income statement over the vesting period of the award. The shares purchased by the group's ESOP trusts are recognised as a deduction to equity. (c) Holiday Pay Paid holidays are regarded as an employee benefit and as such are charged to the income statement as the benefits are earned.
Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative is entered into and are subsequently re-measured at their fair value. The Group designates certain of the derivative instruments within its portfolio to be hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges) or hedges of net investments in foreign operations (net investment hedges). Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as net investment hedges are recognised in equity. Gains or losses relating to the ineffective portion are recognised immediately in the income statement. Certain derivatives do not qualify or are not designated as hedging instruments. Such derivatives are classified at fair value and any movement in their fair values is recognised in the income statement immediately. Financial risk management Financial instruments, in particular, forward currency contracts and interest swaps, are used to manage the financial risks arising from the business activities of the group and the financing of those activities. Dividends Dividends are recognised as a liability in the Group’s Financial Statements in the period in which they are declared and approved by the group's shareholders. Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key areas of estimates and judgements are contract accounting and the accounting for defined benefit pension schemes
