Rolls-Royce Group plc Statement re: IFRS (part 1)

14 April 2005

                             ROLLS-ROYCE GROUP plc                             

                  PREPARATIONS COMPLETED FOR ADOPTION OF IFRS                  

Rolls-Royce, the world-leading power systems company for aerospace, marine and
energy markets, today announced the completion of preparations to adopt
International Financial Reporting Standards (IFRS). 

Commenting on the Group's adoption of the new accounting rules, Andrew
Shilston, Finance Director, said:

"Rolls-Royce has followed a consistent and successful strategy for many years.
Our business model has proved robust and we are focused on the creation of
long-term value for our shareholders, customers and employees.

"The adoption of IFRS will have some impact on the presentation of our accounts
but will not change our business model, our strategy, our risk management
processes or our cash flows."

Highlights

Reported earnings per share for 2004 up by 29%, as compared with the figure
announced in February (and underlying eps up by 7%)

No change to the Group's guidance on trading performance for 2005. Under IFRS,
however, underlying profits for 2005 are expected to be significantly ahead of
current market expectations, which are based on UK Generally Accepted
Accounting Principles

No effect on the Group's trading cash flows

No effect on the Group's management of its businesses

"Underlying profits" to be retained as key measure of operating performance,
with some redefinition

A full overview of the impact of IFRS is set out on pages 1 to 16 of the
Transition document (part 2), together with a set of restated 2004 financial
statements for comparative purposes (pages 17 to 23). Six appendices to the
(unaudited) financial statements describe the Group's summarised accounting
policies under IFRS ((appendix 1) and provide a numerical breakdown of the
restatements for 2004 (appendices 2  to 6).

To date, Rolls-Royce has prepared its accounts in compliance with UK Generally
Accepted Accounting Principles ("UK GAAP").  EU regulations require Rolls-Royce
to adopt IFRS in its financial statements from 2005. A study was begun by the
Group in 2002, in conjunction with our auditors KPMG Audit plc, to review what
changes would be required in order to move from UK GAAP to IFRS. Restatements
of our 2004 results are unaudited, but our auditors have agreed the principles
that have now been adopted by the Group.

There are five principal areas in which the implementation of the new
accounting rules will result in important changes to the financial statements
as compared with past practice.

As a consequence of these changes, and other less significant adjustments noted
in the attached document, future financial statements will not be readily
comparable with past statements.  Setting the restated 2004 Results* against
those announced in February 2005, the net differences can be summarised as
follows:

2004 profit and loss account under IFRS vs. UK GAAP

Increase of £58 million profit before tax (from £306 million to £364 million)

Increase of 29 per cent in reported earnings per share (from 12.07pence to
15.56 pence)

2004 profit and loss account under IFRS vs. UK GAAP - underlying **

Increase of £19 million profit before tax (from £345 million to £364 million)

Increase of 7 per cent in underlying earnings per share (from 14.50 pence to
15.56 pence)

2004 year end balance sheet under IFRS vs. UK GAAP

Reduction of £861 million net assets (from £2,307m to £1,446m)

Increase of £69 million net debt (from £80m to £149m)

* excluding the impact of IAS 39 Financial Instruments, whichhas been adopted
with effect from 1.1.05 (see page 2, "Basis of preparation" in the Transition
document)

**before non-trading items (see page 4 in the Transition document)


The five principal areas are affected as follows:

 1. Research and Development costs

UK GAAP:  Research and development costs were in general expensed through the
profit and loss account as and when they were incurred.

IFRS (as required by IAS 38):  A portion of development costs, as defined by
specified criteria, must be capitalised as intangible assets. Broadly, these
criteria will apply where the relevant spending can be reliably identified with
development rather than research and is likely to generate future earnings -
conditions that will generally be met, on a typical new engine programme, at
around the date of engine certification.  Spending will then be capitalised
from the date of capitalisation - to be determined in practice by two internal
review boards, covering commercial and technical issues - until the respective
engine's entry into service.  (Spending prior to the threshold date will
continue to be expensed as incurred.) The resulting asset will be amortised on
a straight-line basis over 15 years. It will also be re-assessed each year (in
an "impairment test") to ensure that the recorded value is supported by the
estimated value of the respective future earnings.

Financial impact:  An additional (post-tax) net asset of £108 million will
appear on the restated ("R") 2004 year-end balance sheet.  Research and
development costs expensed through the 2004 (R) profit and loss account will
increase by £6 million, because the amount required to be amortised will exceed
by £6 million the amount that was previously expensed and will now be removed
from the profit and loss account by being capitalised for the year.

Sales of original equipment

UK GAAP:  Where no linked aftermarket contract existed at the time of the
original equipment (OE) sale, all costs of OE sold were expensed through the
profit and loss account as incurred.

IFRS (as required by IAS 38):  Where no linked aftermarket contract exists but
the Group has contractually agreed to supply aftermarket parts and services to
the purchaser of a new engine, and has a reasonable degree of control over the
aftermarket, any production costs in excess of the engine's cash selling price
will be treated as an investment made with a view to the future value of the
engine's aftermarket. IFRS requires this investment, as an intangible asset, to
be capitalised(subject, as in (1) above, to the amount being reliably
quantifiable and expected to generate future earnings). The asset will be
amortised on a straight-line basis over a maximum of ten years (subject, as in
(1) above, to an impairment test to ensure that the recorded value is supported
by the estimated value of the respective future earnings).

Financial impact:  An adjustment to net assets of £87 million, after tax, will
be reported on the 2004 (R) balance sheet.  This represents the cumulative
deficits, net of past amortisation, incurred on engines sold by the Group since
1998.  Operating costs recorded in the 2004 (R) profit and loss account will
increase by £10 million, this being the amount by which the required
amortisation for the year exceeds the engine-sale deficits incurred in 2004
that were previously charged to the profit and loss account but will now be
capitalised, after off-setting existing provisions.

Financial risk and revenue-sharing partners

UK GAAP:  Receipts from financial risk and revenue-sharing partners ("RRSPs")
were recorded within the profit and loss account as 'other operating income'. 
Payments to partners, which arose from sales of the respective programmes, were
charged through the profit and loss account and included within 'cost of
sales'.

IFRS (as required by IAS 32/39): Investments that are made by financial RRSPs
(i.e. as opposed to investments made by industrial partners and any repayable
UK government launch investment) are regarded under IFRS as financial
instruments.  Thus receipts from financial RRSPs will no longer be treated as
operating income.  Instead, they will give rise to a balance sheet liability -
which will be set up to reflect the present value of expected future payments
to these partners.  Thereafter, this creditor item will be adjusted to take
account of (a) actual payments made; and (b) any change in the present value of
future payments, as a consequence of the imputed finance costs and any altered
revenue expectations. The net adjustment to the balance sheet item will be
recorded in the profit and loss account within 'net finance costs'.

Financial impact:  A liability of £325 million, after tax, will be reported on
the opening balance sheet for 2005, representing the present value of expected
future payments to financial RRSPs under existing agreements.  No restatement
of 2004 results is required for the introduction of this new policy.

Treatment of hedging for foreign exchange

UK GAAP:  Financial derivatives, employed to hedge future transactions,
particularly in respect of foreign exchange, were "hedge" accounted.  That is
to say, profit was recorded at the achieved exchange rate, blending together
any transactions executed at spot rates and the settlement of maturing forward
contracts held in the hedge book. Unrealised losses and gains on the on-going
contracts within the hedge book were disclosed within the notes to the
accounts.

IFRS (as required by IAS 32/39):  The Group will continue to utilise forward
exchange contracts, in the "portfolio" approach that is well suited to its
needs.  It will no longer apply "hedge" accounting, however, which under IFRS
would require the Group to make significant changes to the way in which it
operates its hedging policies.  Therefore, operating profits will be reported
without the benefit of any off-set from financial derivatives, as though
translated at spot rates only.  At the same time, the aggregate value of all
the Group's outstanding derivatives will be shown as one asset on the balance
sheet, which will be "marked-to-market" each year, to reflect its fair value. 
In the profit and loss account, net finance costs will record the net gain or
loss on both realised derivative transactions and unrealised, marked-to-market
adjustments.  In order to retain a fundamental feature of its past reporting,
the Group will exclude the unrealised gains/losses in its calculation of
"underlying profits", which will continue to reflect the settlement of foreign
exchange cover and other benefits, as in the past.

Financial impact: A "hedging reserve" of £719 million, net of tax, will be
established on the opening balance sheet for 2005, to reflect an unrealised
foreign exchange gain resulting from the marked-to-market valuation of the
Group's derivatives hedge book at that date. This will be released through 
turnover over a four-year period.  Future changes in marked-to-market
valuations will be passed through the profit and loss account in the year they
arise. No restatement of 2004 results is required for the introduction of this
new policy.

Pensions and other post-retirement benefits

UK GAAP:  Pension-funding requirements were determined by triennial actuarial
reviews.  Pension costs were charged to the profit and loss account as
operating costs in accordance with UK GAAP (ie SSAP 24).  Any deficits in the
pension schemes' assets as compared with their future liabilities were recorded
in the notes to the accounts.

IFRS (as required by IAS19, but closely in line with disclosures already made
in Notes to the Accounts under FRS17):  Any deficit will be recorded as a
liability on the balance sheet. Changes in the value of the deficit will be
taken through the Statement of Recognised Income and Expenses, which has no
impact on the calculation of earnings per share.  A separate annual charge will
be made to the profit and loss account, which will comprise a service cost and
a finance cost - though these will be separated, with the service charge going
through operating costs and the finance charge through net finance costs. 
Generally, as for other companies that have a large deficit, the total pension
fund charge to the profit and loss account will under IFRS be lower than under
UK GAAP. The change in the accounting treatment of the Group's pension
arrangements will have no impact on their funding.

Financial impact:  An additional liability of £1,076m, after tax, will be
reported on the 2004 (R) balance sheet, with a corresponding reduction to Group
reserves.  The charge to the profit and loss account for 2004 (R) will fall by
£41m, before tax.

Finally, four important points should be noted about the impact on the Group 
of switching to accounts compiled under IFRS:

(i)         it will have no effect on the Group's trading cash flows;

(ii)        it will have no impact on how the Group's businesses are managed;

(iii)      it is expected that the Group's reported profits for 2005 on an  
underlying basis will be significantly ahead of current market expectations,
which are based on UK GAAP;

(iv)      it is expected that reported profits will in future be significantly
more volatile, principally as a result of the requirement to mark-to-market the
value of financial instruments.

The policies now being adopted by Rolls-Royce are in line with the IFRS
expected to be adopted by the EU formally as of December 31, 2005. These
standards still remain subject to further change, which may lead to further
refinement of the policies implemented by Rolls-Royce.

                                   * * * * *                                   

For further information, please contact:

Duncan Campbell-Smith -- 020-7227- 9193 (mobile [phone])

Director of Corporate Communications

Peter Barnes-Wallis -- 020-7227-9141 (mobile [phone])       

Director of Financial Communications

www.Rolls-Royce.com