International Financial Reporting Standards
Serco Group plc
Transition to International Financial Reporting Standards ('IFRS')
This announcement provides further details of Serco's transition to IFRS.
Separately today, we have announced our interim results and released our
Business Review. Copies of these documents are available on our website http://
www.serco.com/
1. Introduction
During 2002, and in order to implement a 'financial reporting strategy' adopted
by the European Commission in June 2000, the European Union (EU) approved an
Accounting Regulation requiring all EU listed companies to follow International
Financial Reporting Standards ('IFRS') in their consolidated financial
statements for financial years commencing on or after 1 January 2005. In
accordance with these requirements, Serco Group plc (the 'Group') will adopt
IFRS in its financial statements for the year ended 31 December 2005. These
financial statements will include comparatives for the year ended 31 December
2004 restated under IFRS. The Group is required to report under IFRS for the
first time in the Group's interim results for the six months ended 30 June
2005, with comparatives for the six months ended 30 June 2004.
There is no change to the Group's underlying performance under IFRS and, in
particular, there is no impact on the Group's cash flow.
The restatements result in:
an increase of £6.6m (11.5%) in 2004 full year profit before tax to £64.0m, and
an increase of £2.6m (9.3%) for the six months ended 30 June 2004 to £30.7m
a decrease of £135.2m (44.4%) in net assets at 31 December 2004 to £169.2m; and
£27.0m (16.0%) decrease in net assets at 1 January 2005 to £142.3m on the
recognition of financial instruments (see section 9)
Restatements and changes in disclosure arise primarily as a result of:
inclusion of a proportionate share of joint ventures' financial performance and
position;
goodwill no longer being amortised;
reclassification of franchise assets from goodwill to intangible assets;
recognition of all employee benefit related assets and obligations, principally
defined benefit pension schemes;
inclusion of a fair value charge in relation to share-based payment;
dividend liability recognised when approved;
change in recognition of deferred tax; and
recognition of certain financial instruments at fair value at 1 January 2005.
2. Purpose of this report
This report explains how the Group's previously reported financial performance
and position are reported under IFRS. This includes, on an IFRS basis:
the Group's consolidated balance sheet at 1 January 2004, the Group's date of
transition to IFRS;
the Group's consolidated balance sheets at 30 June 2004, 31 December 2004 and 1
January 2005; and
the Group's consolidated income statement for the year ended 31 December 2004
and the six months ended 30 June 2004.
The significant changes as a result of the adoption of IFRS compliant
accounting policies are discussed below, and the detailed restatements of the
financial results follow on pages 9 to 20. The Group's significant accounting
policies under IFRS are set out in section 10.
This financial information has been prepared on the basis of financial
reporting standards expected to be applicable at 31 December 2005. These are
subject to ongoing review and endorsement by the European Union or possible
amendment by interpretive guidance from the International Accounting Standards
Board ('IASB') and the International Financial Reporting Interpretations
Committee ('IFRIC') and are therefore still subject to change.
The report covers the period from 1 January 2004 to 1 January 2005. The report
also includes the independent auditors' (Deloitte & Touche LLP) report to the
Group in relation to the reconciliations of the consolidated balance sheets at
1 January 2004 and 31 December 2004 and the consolidated income statement for
the year ended 31 December 2004 between UK GAAP and IFRS.
3. IFRS 1 'First-time Adoption of International Financial Reporting Standards'
IFRS 1 establishes the transitional requirements for the preparation of
financial statements in accordance with IFRS for the first time. The general
principle is that the IFRS effective at the first-time adoption reporting date
(31 December 2005 for the Group) are to be applied retrospectively to the
opening IFRS balance sheet (1 January 2004), the comparative period (2004) and
the reporting period (2005).
Outlined below is the Group's position in relation to key exemptions and
exceptions that are available under IFRS.
Business combinations
The Group has adopted the exemption not to apply IFRS 3 'Business Combinations'
in respect of acquisitions occurring prior to 1 January 2004.
The Group has accounted for acquisitions prior to 1 January 2004 as follows:
the carrying amount of goodwill recognised under UK GAAP as at 1 January 2004
has not been adjusted, other than an adjustment for the recognition of
intangible assets acquired but previously not separately recognised;
from the date of transition to IFRS (1 January 2004) goodwill is no longer
amortised.
there has been no remeasurement of original 'fair values' determined at the
date of
acquisition.
In February 2003, the Group acquired a 10-year franchise from the province of
Ontario, Canada, relating to Ontario Driving Examination Services (DES). On
transition to IFRS, the right to manage and operate the franchise has been
recognised as an intangible asset, with a corresponding reduction in goodwill.
Employee benefits
Under IAS 19 'Employee Benefits', the Group is required to reflect its
obligations or surpluses under defined benefit pension schemes on the balance
sheet.
The Group has elected under IFRS 1 to recognise all cumulative actuarial gains
and losses on defined benefit pension schemes at the date of transition to
IFRS. Actuarial gains and losses are recognised in full in the period in which
they occur. They are recognised outside the income statement and are presented
in the consolidated statement of recognised income and expense.
On transition to IFRS, the Group has recognised the full IAS 19 liability in
respect of the Serco Pension and Life Assurance Scheme (SPLAS). In addition,
the Group has an obligation to contribute to defined benefit pension schemes as
a result of contracts and franchises that it operates and manages. The Group
has recognised as a liability its share of the obligation that it will fund
over the period of the contract or franchise.
Cumulative translation differences
The Group has adopted the exemption to set cumulative translation differences
for all foreign operations to zero at 1 January 2004. The gain or loss on a
subsequent disposal of any foreign operation will exclude translation
differences that arose before 1 January 2004, but will include later
translation differences.
Share-based Payment
IFRS 2 has been applied to all grants of equity instruments after 7 November
2002 that had not vested as at 1 January 2005.
Under UK GAAP, the Group's shares held in the Employee Share Ownership Plan
(ESOP) trust were amortised within the ESOP reserve and charged to the profit
and loss account.
Under IFRS 2, the fair value of all share and share option awards is calculated
and then amortised in the income statement over the vesting period. The
carrying amount of the ESOP reserve on transition to IFRS has been maintained
at the carrying amount under UK GAAP at that date. On transition to IFRS, the
cumulative IFRS 2 charge has been shown within a separate Share-based Payment
reserve within Equity.
Financial Instruments
The Group has adopted IAS 32 'Financial Instruments: Disclosure and
Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement'
effective from 1 January 2005 and therefore there is no impact on the Group's
balance sheet as at 1 January 2004 or 31 December 2004 on transition to IFRS.
Adjustments arising from adopting IAS 39 impact the opening balance sheet at
1 January 2005 as certain financial instruments, notably interest rate swaps,
are recognised at fair value. The effect of these adjustments is shown in
section 9.
Movements in the fair value of these financial instruments are recognised
within a separate Hedging and Translation reserve within Equity.
Accounting for PFI contracts
In March 2005, the International Financial Reporting Interpretations Committee
('IFRIC') issued a draft interpretation on accounting for service concession
arrangements (PFI/PPP). The IFRIC is currently considering the comments
received on this draft guidance, with the final guidance expected to be issued
over coming months.
Until the final guidance is issued and endorsed by the EU and in the absence of
specific guidance within IFRS, the Group has, from 1 January 2005, recognised
the PFI debtors relating to concession arrangements held by PFI companies at
amortised costs as defined by IAS 39. The effect of adopting this policy is to
maintain an accounting treatment consistent with UK GAAP whilst ensuring that
the accounting treatment remains consistent with existing IFRS.
The draft guidance from IFRIC, if it were issued in final form, would
potentially require a number of changes to the accounting treatment of service
concession arrangements. One of the more significant aspects would be the
requirement to recognise the assets associated with concession arrangements at
fair value. This requirement could potentially produce a significant increase
in the carrying value of the Group's PFI debtors held within PFI companies.
4. Key IFRS adjustments and their impact on the financial statements
Key IFRS adjustments are outlined below, with summary financial details for the
specific accounting periods being provided in sections 5, 6, 8 and 9.
IAS 31 'Interests in Joint Ventures'
IAS 31 requires that interests in joint ventures are recognised using
proportionate consolidation or the alternative equity method of accounting.
This is a change from the gross equity method required under UK GAAP.
The Group has elected to recognise its interests in joint ventures using the
proportionate consolidation method whereby the Group's share of each of the
assets, liabilities, income and expenses of its joint ventures is combined line
by line with similar items in the Group's financial statements or reported as
separate line items within the Group's financial statements.
Consequently, the presentation of information on joint ventures is now
comprehensive.
There is no impact on profit for the year as a result of the change.
IFRS 3 'Business Combinations'
IFRS prohibits the amortisation of goodwill. The goodwill amortisation charge
under UK GAAP of £15.9m for the year ended 31 December 2004 and £8.1m for the
six months ended 30 June 2004 has been reversed in the IFRS restated results.
IAS 38 'Intangible Assets'
Franchise assets which are identifiable non-monetary assets have been
reclassified as intangible assets in accordance with IFRS requirements. The
effect of this is to reclassify assets from goodwill to other intangible assets
of £47.7m as at 1 January 2004, £59.0m as at 31 December 2004 and £55.8m as at
30 June 2004. Net assets are not affected by this adjustment.
The amortisation charge relating to these franchise assets was £5.4m for the
year ended 31 December 2004 and £3.0m for the six months ended 30 June 2004.
In addition where the Group has recognised its share of a defined benefit
pension obligation that it will fund over the period of a contract or
franchise, the liability recognised on transition to IFRS or at the beginning
of the contract or franchise is treated as an intangible asset representing the
rights to the future economic benefits of the contract or franchise.
IAS 19 'Employee Benefits': Pension scheme adjustments
In accordance with IAS19, the Group has recognised retirement benefit
obligations in relation to defined benefit schemes. Where the Group takes on a
contract and assumes the obligation to contribute variable amounts to the
defined benefit scheme throughout the contract, and it is not virtually certain
that these contributions will be recovered from the customer, the Group has
recognised its proportionate share of the pension scheme obligations together
with a corresponding amount as an intangible asset, representing the right to
the future economic benefits of operating the contract or franchise over its
life. Where it is virtually certain that pension contributions will be
recovered, the Group has recognised a financial asset in trade and other
receivables.
The Group has potential deferred tax assets in respect of the deficits on
defined benefit pension schemes. Under IAS 12, these are recognised to the
extent that it is probable that taxable profits will be available against which
the deductible temporary difference can be utilised.
These changes have resulted in the following adjustments to the balance sheet:
As at 1 As at 31 As at 30
January 2004 December 2004 June 2004
£m £m £m
Other intangible assets 4.1 15.5 16.3
Deferred tax asset 42.0 50.8 33.5
Trade and other receivables 12.1 20.0 1.2
Deferred tax liabilities - (4.0) -
Retirement benefit obligation (169.9) (204.5) (161.2)
Net assets (111.7) (122.2) (110.2)
Under UK GAAP, the pension charge was included in cost of sales and
administrative expenses. The IAS 19 pension charge includes a service cost
which is included in cost of sales and administrative expenses, and interest on
pension obligations net of the return on pension fund assets which is included
in finance costs. The amortisation of intangible assets is included within
other operating expenses. The net effect is to increase profit before tax by £
0.4m for the year ended 31 December 2004 and to reduce profit before tax by £
0.3m for the six months ended 30 June 2004.
IAS 19 'Employee Benefits'; Employee benefit accruals and provisions
IAS 19 requires that when employees provide a service to a company, the
estimated amount that will be paid in exchange for those services should be
recognised.
On transition to IFRS, the Group has recognised employee benefit accruals and
provisions in respect of holiday pay, long-term disability benefits and
long-term service award benefits. The adjustment on transition reflects a
cumulative adjustment for the services provided by employees up to the date of
transition. Following transition, the movement on these accruals and
provisions reflects the current period service cost.
Arising from the recognition of these accruals and provisions, net of deferred
tax, net assets have reduced by £16.0m as at 1 January 2004, £17.5m as at 31
December 2004, and £16.7m as at 30 June 2004.
IAS 10 'Events After the Balance Sheet Date'
Under IAS 10, dividends declared after the balance sheet date are not
recognised as a liability at the balance sheet date.
Dividends are recorded in the Group's consolidated financial statements in the
period in which they are approved by the Group's shareholders.
The dividends proposed but not approved at the balance sheet date have been
reversed from the financial statements. This has the effect of increasing the
net assets of the Group by the amount of the proposed dividend of £7.0m as at 1
January 2004, £8.3m as at 31 December 2004 and £3.5m as at 30 June 2004.
IFRS 2 'Share-based Payment'
IFRS 2 'Share-based Payment' requires the recognition of an expense in relation
to all share-based payments such as the Group's share and share option
schemes.
The Group issues equity-settled share-based payments to certain employees and
operates an Inland Revenue approved Save As You Earn share option scheme open
to eligible employees which allows the purchase of shares at a discount to the
market value. These are measured at fair value at the date of grant. The fair
value is expensed on a straight-line basis over the vesting period, based on
the Group's estimate of shares that will eventually vest.
Fair value is measured by use of the Black Scholes, Binomial or Monte Carlo
Simulation models depending on the type of scheme.
Under UK GAAP, the Group's shares held in the ESOP trust were amortised within
the ESOP reserve and charged to the profit and loss account. This charge has
been reversed and replaced with the IFRS 2 charge.
The IFRS 2 charge for 2004 was £4.6m and after reversing the amortisation of
shares held in the ESOP reserve of £1.2m, the net effect is to reduce profit
before tax by £3.4m for the year ended 31 December 2004 and £1.2m for the six
months ended 30 June 2004. A related deferred tax asset of £0.5m as at 1
January 2004, £1.4m as at 31 December 2004 and £0.8m as at 30 June 2004 has
been recognised and will be realised as and when share options vest and are
exercised.
IAS 12 'Income Taxes'
The income tax adjustments required under IAS12 fall into two categories:
Firstly, deferred tax that needs to be provided in respect of other IFRS
restatement accounting adjustments (for example, pension scheme adjustments,
employee benefits accruals, goodwill). Secondly, specific deferred tax
adjustments that arise on the different recognition criteria of deferred tax
balances between UK GAAP (FRS19) and IFRS (IAS12) (for example, PFI contracts
and unremitted earnings from overseas subsidiaries, joint ventures and
investments).
The most significant taxation adjustments for the Group relate to the deferred
tax treatment of pensions and PFI contracts. The Group has accounted for
deferred tax assets in respect of the pension related assets and deficits
(refer to the above note regarding pension scheme adjustments under IAS19).
The principles for the calculation of and recognition of deferred tax for PFI
contracts under IAS12 are different to those applied under FRS19.
Specifically, IAS12 requires that whenever a PFI debtor is acquired as part of
a business combination, deferred tax needs to be provided upon recognition of
that debtor for all future tax that will become payable as the debtor is
recovered. For the Group, this has resulted in additional deferred tax
liabilities being recognised at the date of transition. In addition, IAS12
further requires that whenever a PFI debtor is recognised but not by way of a
business combination, deferred tax is only recognised as the debtor is
recovered - no additional deferred tax is recognised in transition and this
therefore leads to smaller deferred tax liabilities in early periods of the
contract with an increasing effective tax rate over the project life. As a
result of the change in accounting for deferred tax on PFI debtors, the tax
charge has reduced by £2.5m for the year ended 31 December 2004 and £0.8m for
the six months ended 30 June 2004. The additional deferred tax in the balance
sheet has led to a reduction in net assets of £17.6m as at 1 January 2004, £
18.7m as at 31 December 2004 and £18.0m as at 30 June 2004.
IAS 39 'Financial Instruments: Recognition and Measurement'
The Group adopted IAS39 'Financial Instruments: Recognition and Measurement' on
1 January 2005; the standard therefore had no effect on the Group's financial
statements prior to that date. Adoption of IAS39 resulted in a £26.9m reduction
in opening net assets (£37.9m net of a tax credit of £11.0m) on
1 January 2005. This represents the net effect of marking to market the
interest rate swaps, cross-currency swaps and other derivatives held by the
Group. The effect on opening net assets has been reflected in reserves. These
derivatives are mainly held to convert the floating rate interest obligations
of PFI special purpose companies into fixed rate obligations, and to hedge the
Group's obligations under its long-term loan notes.
Where the Group has elected to apply hedge accounting, all hedges are 'highly
effective' under
IAS 39 on 1 January 2005 and are expected to remain so.
5. 1 January 2004 - presentational changes, and equity reconciliation
a) Impact of IAS1 'Presentation of Financial Statements' on the consolidated
balance sheet as at 1 January 2004
This table highlights the presentational impact of IFRS on the consolidated
balance sheet as at 1 January 2004. Assets, liabilities and shareholders'
funds are stated under UK GAAP values and format and are mapped from this
starting position to the line item classification required under IFRS.
IAS 1
Presentational
changes
UKGAAP
UKGAAP values values in
and format IFRS format
£m £m £m
Fixed assets Non-current assets
Intangible assets 223.0 (1.1) 221.9 Goodwill
Other intangible
1.1 1.1 assets
Property, plant
Tangible assets 77.3 77.3 and equipment
Investments in joint Investment in joint
ventures 24.9 24.9 ventures
Debtors due after more than one year
Amounts recoverable under contracts
Amounts due by joint ventures
PFI Debtor
PFI Assets in the course of construction
Pension Prepayment
Other debtors
Deferred tax
1.7 1.7 asset
Trade and other
395.9 395.9 receivables
325.2 397.6 722.8
Current assets Current assets
Stocks 39.5 39.5 Inventories
Amounts recoverable
under contracts
Amounts due by
joint ventures
Other debtors
Prepayments
Tax recoverable
PFI debtor
Debtors: Amounts Trade and other
due within one year 278.9 20.4 299.3 receivables
Debtors: Amounts
due after more than
one year 419.6 (419.6)
Cash at bank and Cash and cash
in hand 170.9 170.9 equivalents
908.9 (399.2) 509.7
Creditors : Amounts
falling due within
one year Current liabilities
Trade and other
Trade creditors (81.3) (257.4) (338.7) payables
1.7 1.7 Tax liabilities
Obligations under
(5.9) (5.9) finance leases
(4.5) (4.5) Loans
Accruals and
deferred income (177.9) 177.9
Obligations under
finance leases
Other Taxes and
Social Security
Other creditors
Amounts owed to
joint ventures < 1
Year
Non recourse loans
Other Loans
Other creditors including
taxation and social
security (90.9) 90.9
Proposed dividend (7.0) (7.0) Proposed dividend
(357.1) 2.7 (354.4)
Non-current
liabilities
Obligations under
(17.5) (17.5) finance leases
Creditors: Amounts
falling due after more
than one year (539.7) 17.5 (522.2) Loans
(27.9) (27.9) Deferred tax liabilities
Provisions for liabilities
and charges (56.5) 56.5 - Provisions
Retirement benefit
(29.7) (29.7) obligation
(596.2) (1.1) (597.3)
Net assets 280.8 - 280.8 Net assets
Called up share capital 8.7 8.7 Share capital
Share premium
Share premium account 190.8 190.8 account
Own shares
(16.9) (16.9) reserve
Capital redemption
Capital redemption reserve 0.1 0.1 reserve
Profit and loss account 98.1 98.1 Retained earnings
Equity shareholders'
funds 280.8 - 280.8 Total equity
b) Reconciliation of equity at 1 January 2004
This table highlights the financial impact of the key IFRS adjustments covered
in section 4 on the consolidated balance sheet as at 1 January 2004.
IAS 31 IAS138 IAS19 IAS19 IAS10 IFRS2 IAS12
Interest Employee Employee Share
in joint Intangible benefits benefits based Income
ventures assets -pensions -other Dividends payment taxes Other
UKGAAP IFRS
£m £m £m £m £m £m £m £m £m £m
Non-current
assets
Goodwill 221.9 5.2 (47.7) - - - - - 0.4 179.8
Other
intangible
assets 1.1 - 47.7 4.1 - - - - 2.4 55.3
Property,
plant
and
equipment 77.3 15.1 - - - - - - 1.7 94.1
Investment
in
joint
ventures 24.9 (24.9) - - - - - - - -
Deferred
tax
assets 1.7 - - 42.0 5.5 - 0.5 4.7 0.3 54.7
Trade and
other
receivables 395.9 61.2 - 42.7 - - - - (2.0) 497.8
722.8 56.6 - 88.8 5.5 - 0.5 4.7 2.8 881.7
Current
assets
Inventories 39.5 3.0 - - - - - - - 42.5
Trade and
other
receivables 299.3 50.2 - (30.6) - - - - (1.2) 317.7
Cash and
cash
equivalents 170.9 13.7 - - - - - - 184.6
509.7 66.9 - (30.6) - - - - (1.2) 544.8
Total
assets 1,232.5 123.5 - 58.2 5.5 - 0.5 4.7 1.6 1,426.5
Current
liabilities
Trade and
other
payables (338.7) (36.9) - - (15.4) - - - 0.6 (390.4)
Tax
liabilities 1.7 (3.4) - - - - - - - (1.7)
Obligations
under
finance
leases (5.9) (1.3) - - - - - - (0.5) (7.7)
Loans (4.5) (11.0) - - - - - - - (15.5)
Proposed
dividend (7.0) - - - - 7.0 - - - -
(354.4) (52.6) - - (15.4) 7.0 - - 0.1 (415.3)
Non-current
liabilities
Obligations
under
finance
leases (17.5) (5.5) - - - - - - (1.2) (24.2)
Loans (522.2) (54.6) - - - - - - - (576.8)
Deferred
tax
liabilities (27.9) (8.6) - - (0.1) - - (22.3) - (58.9)
Provisions - - - - (6.0) - - - - (6.0)
Trade and
other
payables - - - - - - - - (3.0) (3.0)
Retirement
benefit
obligations (29.7) (1.6) - (169.9) - - - - 2.6 (198.6)
(597.3) (70.3) - (169.9) (6.1) - - (22.3) (1.6) (867.5)
Net assets 280.8 0.6 (111.7) (16.0) 7.0 0.5 (17.6) 0.1 143.7
Equity
Share
capital 8.7 - - - - - - - - 8.7
Share
premium 190.8 - - - - - - - - 190.8
Own shares
reserve (16.9) - - - - - - - - (16.9)
Capital
redemption
reserve 0.1 - - - - - - - - 0.1
Retained
earnings 98.1 - 1.9 (16.0) 7.0 (1.2) (17.6) (0.6) 71.6
Share-based
payment
reserve - - - - - - 1.7 - - 1.7
Retirement
benefit
obligations
reserve - - - (113.6) - - - - - (113.6)
Translation
reserve - - - - - - - - 0.7 0.7
280.8 - - (111.7) (16.0) 7.0 0.5 (17.6) 0.1 143.1
Minority
interest - 0.6 - - - - - - - 0.6
Total
equity 280.8 0.6 - (111.7) (16.0) 7.0 0.5 (17.6) 0.1 143.7
6. 31 December 2004 - presentational changes, and equity and profit
reconciliations
a) Impact of IAS1 'Presentation of Financial Statements' on the consolidated
profit and loss account for the year ended 31 December 2004
This table highlights the presentational impact of IFRS on the consolidated
profit and loss account for the year ended 31 December 2004. Income and
expense are stated under UK GAAP values and format and are mapped from this
starting position to the line item classification required under IFRS.
IAS1
Presenta-
tional
changes
UKGAAP values UKGAAP values
and format in IFRS format
Profit and Loss Income Statement
account
£m £m £m
Turnover: Group
and share of joint
ventures 1,636.9 1,636.9
Less; Share of
joint ventures (255.5) (255.5)
Group turnover 1,381.4 1,381.4 Revenue
Cost of sales (1,190.5) (1,190.5) Cost of sales
Gross profit 190.9 190.9 Gross profit
Amortisation of Other operating
intangible assets (16.5) (16.5) expenses
Other administrative Administrative
expenses (139.7) (139.7) expenses
Operating profit Profit from
continuing operations 34.7 34.7 operations
Share of operating Joint venture
profit in joint ventures 25.4 25.4 operating profit
Interest receivable
and similar income 35.3 35.3 Investment income
Interest payable
and similar charges (38.0) (38.0) Finance costs
Profit on ordinary
activities before Profit before
taxation 57.4 57.4 tax
Taxation on profit
on ordinary activities (20.4) (20.4) Tax
Profit on ordinary
activities after Profit for the
taxation 37.0 37.0 year
Share of joint venture
minority interest (0.6) 0.6
Minority interest (0.4) 0.4 Attributable to:
Equity holders
36.0 of the parent
1.0 1.0 Minority interest
Profit for the
financial year 36.0 1.0 37.0
Equity dividends (11.8)
Retained profit for
the financial year 24.2
Earnings per
ordinary share (EPS)
Basic EPS 8.37p 8.37p
Diluted EPS 8.27p 8.27p
b) Reconciliation of the income statement for the year ended 31 December 2004
This table highlights the financial impact of the key IFRS adjustments covered
in section 4 on the consolidated income statement for the year ended 31
December 2004.
IAS 31 IFRS 3 IAS38 IAS 19 IFRS 2 IAS 12
Interest in Business Employee Share-
joint combina- Intangible Benefits based Income
ventures tions assets -pensions payments taxes Other
UK
GAAP IFRS
£m £m £m £m £m £m £m £m £m
Revenue 1,381.4 255.5 - - - - - - 1,636.9
Cost of
sales (1,190.5) (207.1) - - 3.9 - - (0.6) (1,394.3)
Gross
profit 190.9 48.4 - - 3.9 - - (0.6) 242.6
Other
operating
expenses (16.5) - 15.9 (5.4) (1.2) - - - (7.2)
Administrative
expenses (139.7) (23.0) - - 0.2 (3.4) - (0.3) (166.2)
Profit from
operations 34.7 25.4 15.9 (5.4) 2.9 (3.4) - (0.9) 69.2
Joint venture
operating profit 25.4 (25.4) - - - - - - -
Investment
income 35.3 *- - - - - - - 35.3
Finance
costs (38.0) *- - - (2.5) - - - (40.5)
Profit
before tax 57.4 - 15.9 (5.4) 0.4 (3.4) - (0.9) 64.0
Tax (20.4) *- (1.5) - (0.2) 0.9 2.5 (0.8) (19.5)
Profit for
the year 37.0 - 14.4 (5.4) 0.2 (2.5) 2.5 (1.7) 44.5
Attributable to:
Equity holders
of the parent 36.0 - 14.4 (5.4) 0.2 (2.5) 2.5 (1.7) 43.5
Minority interest 1.0 - - - - - - - 1.0
37.0 - 14.4 (5.4) 0.2 (2.5) 2.5 (1.7) 44.5
Earnings per
share (EPS)
Basic 8.37p 10.11p
Diluted 8.27p 9.99p
*UK GAAP values include the Group's share of joint venture investment income,
finance costs and tax.
c) Impact of IAS1 'Presentation of Financial Statements' on the consolidated
balance sheet as at 31 December 2004
This table highlights the presentational impact of IFRS on the consolidated
balance sheet as at 31 December 2004. Assets, liabilities and shareholders'
funds are stated under UK GAAP values and format and are mapped from this
starting position to the line item classification required under IFRS.
IAS1
UKGAAP Presenta- UKGAAP
values and tional values in
format changes IFRS format
£m £m £m
Non-current
Fixed assets assets
Intangible assets 215.2 (7.0) 208.2 Goodwill
Other intangible
- 7.0 7.0 assets
Property, plant
Tangible assets 79.5 - 79.5 and equipment
Investments in Investment in
joint ventures 27.2 - 27.2 joint ventures
Other
Other investments 13.7 - 13.7 investments
Debtors due
after more
than one
year
Amounts
recoverable
under contracts
Amounts due
by joint ventures
PFI Debtor
PFI Assets in
the course of
construction
Pension
Prepayment
Other debtors
Trade and
other
296.9 296.9 receivables
335.6 296.9 632.5
Current assets Current assets
Stocks 36.2 (13.2) 23.0 Inventories
Amounts
recoverable
under contracts
Amounts due
by joint ventures
Other debtors
Prepayments
Tax recoverable
PFI debtor
Debtors: Amounts Trade and
due within one other
year 293.6 49.4 343.0 receivables
Debtors: Amounts
due after more
than one year 333.6 (333.6)
Cash and
Cash at bank cash
and in hand 173.9 173.9 equivalents
837.3 (297.4) 539.9
Creditors : Amounts
falling due within
one year Current liabilities
Trade and
Trade creditors (76.9) (275.3) (352.2) other payables
Retirement
benefit
(0.4) (0.4) obligations
Obligations under
(6.5) (6.5) finance leases
(23.5) (23.5) Loans
Accruals and
deferred income (192.0) 192.0
Obligations under
finance leases
Other Taxes and
Social Security
Other creditors
Amounts owed
to joint ventures
< 1 Year
Non recourse loans
Other Loans
Other creditors
including taxation
and social
security (114.2) 114.2
Proposed
dividend (8.3) (8.3) Proposed dividend
(391.4) 0.5 (390.9)
Non-current
liabilities
Creditors: Amounts
falling due after
more than one Obligations under
year (415.1) 401.5 (13.6) finance leases
(401.5) (401.5) Loans
Deferred tax
(32.2) (32.2) liabilities
Trade and
- - other payables
Provisions for
liabilities and
charges (62.0) 62.0 - Provisions
Retirement
benefit
(29.8) (29.8) obligation
(477.1) - (477.1)
Net assets 304.4 - 304.4 Net assets
Called up
share capital 8.7 - 8.7 Share capital
Share premium
Share premium
account 191.5 - 191.5 account
Own shares
ESOP reserve (15.8) - (15.8) reserve
Capital Capital
redemption redemption
reserve 0.1 - 0.1 reserve
Profit and Retained
loss account 119.9 2.7 122.6 earnings
Translation
(2.7) (2.7) reserve
Equity
shareholders'
funds 304.4 - 304.4 Total equity
d) Reconciliation of equity at 31 December 2004
This table highlights the financial impact of the key IFRS adjustments covered
in section 4 on the consolidated balance sheet as at 31 December 2004.
IAS 31 IFRS3 IAS 38 IAS19 IAS19 IAS10 IFRS2 IAS12
UK Interest Business Employee Employee Share
GAAP in joint combin- Intangible benefits benefits based Income
ventures ations assets -pensions -other Dividends payment taxes Other IFRS
£m £m £m £m £m £m £m £m £m £m £m
Non-current
assets
Goodwill 208.2 11.4 15.9 (59.0) - - - - - 0.9 177.4
Other
intangible
assets 7.0 - - 53.6 15.5 - - - - (1.1) 75.0
Property,
plant and
equipment 79.5 16.0 - - - - - - - 0.7 96.2
Investment
in
joint
ventures 27.2 (27.2) - - - - - - - - -
Other
investments 13.7 - - - - - - - - - 13.7
Deferred
tax
assets - 1.3 - - 50.8 5.4 - 1.4 (12.2) 3.4 50.1
Trade and
other
receivables 296.9 62.6 - - 32.3 - - - - (1.2) 390.6
632.5 64.1 15.9 (5.4) 98.6 5.4 - 1.4 (12.2) 2.7 803.0
Current
assets
Inventories 23.0 3.9 - - - - - - - - 26.9
Trade and
other
receivables 343.0 56.7 - - (12.3) - - - - 2.7 390.1
Cash and
cash
equivalents 173.9 27.2 - - - - - - - (0.6) 200.5
539.9 87.8 - - (12.3) - - - - 2.1 617.5
Current
liabilities
Trade and
other
payables (352.2) (47.4) - - - (16.9) - - - (0.5) (417.0)
Retirement
benefit
obligation (0.4) - - - 0.4 - - - - -
Tax
liabilities - (3.9) - - - - - - - (1.9) (5.8)
Obligations
under
finance
leases (6.5) (1.3) - - - - - - - (0.3) (8.1)
Loans (23.5) (22.6) - - - - - - - (0.3) (46.4)
Proposed
dividend (8.3) - - - - - 8.3 - - - -
(390.9) (75.2) - - 0.4 (16.9) 8.3 - - (3.0) (477.3)
Non-current
liabilities
Obligations
under
finance
leases (13.6) (4.2) - - - - - - - (0.4) (18.2)
Loans (401.5) (50.1) - - - - - - - 0.3 (451.3)
Deferred
tax
liabilities (32.2) (10.4) (1.5) - (4.0) - - - (6.5) (0.4) (55.0)
Trade and
other
payables - (1.1) - - - - - - - 0.5 (0.6)
Provisions - - - - - (6.0) - - - - (6.0)
Retirement
benefit
obligations (29.8) (9.2) - - (204.9) - - - - 1.0 (242.9)
(477.1) (75.0) - - (208.9) (6.0) - - (6.5) 1.0 (774.0)
Net assets 304.4 1.7 14.4 (5.4) (122.2) (17.5) 8.3 1.4 (18.7) 2.8 169.2
Equity
Share
capital 8.7 - - - - - - - - - 8.7
Share
premium 191.5 - - - - - - - - - 191.5
Own shares
reserve (15.8) - - - - - - (0.6) - - (16.4)
Capital
redemption
reserve 0.1 - - - - - - - - - 0.1
Retained
earnings 122.6 - 14.4 (5.4) 2.2 (17.5) 8.3 (4.2) (18.7) 2.7 104.4
Share-based
payment
reserve - - - - - - - 6.2 - - 6.2
Retirement
benefit
obligations
reserve - - - - (124.4) - - - - - (124.4)
Translation
reserve (2.7) - - - - - - - - 0.1 (2.6)
304.4 - 14.4 (5.4) (122.2) (17.5) 8.3 1.4 (18.7) 2.8 167.5
Minority
interest - 1.7 - - - - - - - - 1.7
Total
equity 304.4 1.7 14.4 (5.4) (122.2) (17.5) 8.3 1.4 (18.7) 2.8 169.2
7. Independent Auditors' Report To The Board Of Directors Of Serco
Group Plc On The 2004 Reconciliations
We have audited the reconciliations of the consolidated balance sheet at 1
January 2004 and 31 December 2004 and consolidated income statement for the
year ended 31 December 2004 between UK GAAP and International Financial
Reporting Standards ('IFRS'), (together 'the 2004 Reconciliations').
This report is made solely to the Board of Directors, in accordance with our
engagement letter dated 30 August March2004 2005 and solely for the purpose of
assisting with the transition to IFRS. Our audit work has been undertaken so
that we might state to the Company's board of directors those matters we are
required to state to them in an auditors' report and for no other purpose. To
the fullest extent permitted by law, we will not accept or assume
responsibility to anyone other than the company for our audit work, for our
report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
The Company's directors are responsible for ensuring that the Company and the
Group maintains proper accounting records and for the preparation of the 2004
Reconciliations on the basis set out in section 10, which describes how IFRS
will be applied under IFRS 1, including the assumptions the directors have made
about the standards and interpretations expected to be effective, and the
policies expected to be adopted, when the company prepares its first complete
set of IFRS financial statements as at 31 December 2005. Our responsibility is
to audit the 2004 Reconciliations in accordance with relevant United Kingdom
legal and regulatory requirements and auditing standards and report to you our
opinion as to whether the 2004 Reconciliations are prepared, in all material
respects, on the basis set out in section 10.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom auditing standards
issued by the Auditing Practices Board. An audit includes examination, on a
test basis, of evidence relevant to the amounts and disclosures in the 2004
Reconciliations. It also includes an assessment of the significant estimates
and judgements made by the directors in the preparation of the 2004
Reconciliations and of whether the accounting policies are appropriate to the
circumstances of the Group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the 2004 Reconciliations
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the 2004 Reconciliations.
Without qualifying our opinion, we draw attention to section 10 which explains
why there is a possibility that the 2004 Reconciliations may require adjustment
before constituting the final 2004 Reconciliations. Moreover, we draw
attention to the fact that, under IFRS, only a complete set of financial
statements comprising a balance sheet, income statement, statement of changes
in equity, cash flow statement, together with comparative financial information
and explanatory notes, can provide a fair presentation of the Group's financial
position, results of operations and cash flows in accordance with IFRS.
Opinion
In our opinion the 2004 Reconciliations are prepared, in all material respects,
on the basis set out in section 10 which describes how IFRS will be applied
under IFRS 1, including the assumptions the directors have made about the
standards and interpretations expected to be effective, and the policies
expected to be adopted, when the company prepares its first complete set of
IFRS financial statements as at 31 December 2005.
Deloitte & Touche LLP
Chartered Accountants
London
31 August 2005
8. 30 June 2004 - presentational changes, and equity and profit reconciliations
a) Impact of IAS1 'Presentation of Financial Statements' on the consolidated
profit and loss account for the six months ended 30 June 2004
This table highlights the presentational impact of IFRS on the consolidated
profit and loss account for the six months ended 30 June 2004. Income and
expense are stated under UK GAAP values and format and are mapped from this
starting position to the line item classification required under IFRS.
IAS1 UKGAAP
UKGAAP Presenta- values
values and tional in IFRS
format changes format
Income
Statement
Profit and
Loss account £m £m £m
Turnover: Group
and share of
joint venture 804.5 804.5
Less: Share
of joint
ventures (120.4) (120.4)
Group turnover 684.1 684.1 Revenue
Cost of
Cost of sales (589.5) (589.5) sales
Gross
Gross profit 94.6 94.6 profit
Other
Amortisation of operating
intangible assets (8.4) (8.4) expenses
Other
administrative Administrative
expenses (68.9) (68.9) expenses
Operating profit
continuing Profit from
operations 17.3 17.3 operations
Share of Joint venture
operating profit operating
in joint ventures 11.8 11.8 profit
Investment
17.5 17.5 income
Finance
(18.5) (18.5) costs
Net interest
and similar
income (1.0) 1.0
Profit on
ordinary
activities before Profit before
taxation 28.1 - 28.1 tax
Taxation on
profit on
ordinary
activities (10.1) (10.1) Tax
Profit on
ordinary
activities Profit for
after taxation 18.0 18.0 the year
Share of joint
venture minority
interest (0.1) 0.1 Attributable to:
Minority interest (0.1) 0.1
Equity holders
17.8 of the parent
Minority
0.2 0.2 interest
Profit for the
financial year 17.8 0.2 18.0
Equity dividends (3.5)
Retained profit
for the financial
year 14.3
Earnings per
ordinary share
(EPS)
Basic EPS 4.14p 4.14p
Diluted EPS 4.09p 4.09p
b) Reconciliation of the income statement for the six months ended 30 June 2004
This table highlights the financial impact of the key IFRS adjustments covered
in section 4 on the consolidated income statement for the six months ended 30
June 2004.
IAS 31 IFRS3 IAS38 IAS19 IFRS2 IAS12
Interest Business Employee Share-
in joint combina- Intangible Benefits - based Income
ventures tions assets pensions payments taxes Other
UKGAAP IFRS
£m £m £m £m £m £m £m £m £m
Revenue 684.1 120.4 - - - - - - 804.5
Cost of
sales (589.5) (99.4) - - 1.3 - - (0.3) (687.9)
Gross profit 94.6 21.0 - - 1.3 - - (0.3) 116.6
Other
operating
expenses (8.4) - 8.1 (3.0) (0.4) - - - (3.7)
Administrative
expenses (68.9) (9.2) - - - (1.2) - (0.7) (80.0)
Profit from
operations 17.3 11.8 8.1 (3.0) 0.9 (1.2) - (1.0) 32.9
Joint venture
operating profit 11.8 (11.8) - - - - - - -
Investment
income 17.5 *- - - - - - - 17.5
Finance costs (18.5) *- - - (1.2) - - - (19.7)
Profit
before tax 28.1 - 8.1 (3.0) (0.3) (1.2) - (1.0) 30.7
Tax (10.1) *- (0.9) - 0.1 0.3 0.8 0.1 (9.7)
Profit for
the year 18.0 - 7.2 (3.0) (0.2) (0.9) 0.8 (0.9) 21.0
Attributable to:
Equity holders
of the parent 17.8 - 7.2 (3.0) (0.2) (0.9) 0.8 (0.9) 20.8
Minority interest 0.2 - - - - - - - 0.2
18.0 - 7.2 (3.0) (0.2) (0.9) 0.8 (0.9) 21.0
Earnings per
share (EPS)
Basic EPS 4.14p 4.84p
Diluted EPS 4.09p 4.78p
*UK GAAP values include the Group's share of joint venture investment income,
finance costs and tax.
c) Impact of IAS1 'Presentation of Financial Statements' on the consolidated
balance sheet as at 30 June 2004
This table highlights the presentational impact of IFRS on the consolidated
balance sheet as at 30 June 2004. Assets, liabilities and shareholders' funds
are stated under UK GAAP values and format and are mapped from this starting
position to the line item classification required under IFRS.
IAS1
UKGAAP Presenta- UKGAAP
values and tional values in
format changes IFRS format
£m £m £m
Non-current
Fixed assets assets
Intangible
assets 215.1 (1.1) 214.0 Goodwill
Other intangible
1.0 1.0 assets
Tangible Property, plant
assets 72.0 72.0 and equipment
Investments in Investment in
joint ventures 27.5 27.5 joint ventures
Debtors due
after more
than one year
Amounts
recoverable
under contracts
Amounts due
by joint ventures
PFI Debtor
PFI Assets in
the course of
construction
Pension
Prepayment
Other debtors
Trade and
378.0 378.0 other receivables
314.6 377.9 692.5
Current assets Current assets
Stocks 41.0 (13.3) 27.7 Inventories
Amounts
recoverable
under contracts
Amounts due
by joint ventures
Other debtors
Prepayments
Tax recoverable
PFI debtor
Debtors: Amounts
due within one Trade and
year 276.2 45.7 321.9 other receivables
Debtors: Amounts
due after more
than one year 410.4 (410.4)
Cash at bank Cash and
and in hand 168.3 - 168.3 cash equivalents
895.9 (378.0) 517.9
Creditors : Amounts
falling due within
one year Current liabilities
Trade and
Trade creditors (70.7) (247.5) (318.2) other payables
(6.8) (6.8) Tax liabilities
Obligations
under finance
(5.7) (5.7) leases
(0.6) (0.6) Loans
Accruals and
deferred income (174.5) 174.5
Obligations under
finance leases
Other Taxes and
Social Security
Other creditors
Amounts owed
to joint ventures
< 1 Year
Non recourse
loans
Other Loans
Other creditors
including taxation
and social security (86.1) 86.1
Proposed dividend (3.5) (3.5) Proposed dividend
(334.8) - (334.8)
Non-current
liabilities
Obligations
under finance
(15.5) (15.5) leases
Creditors: Amounts
falling due after
more than one year (526.0) 15.6 (510.4) Loans
Deferred tax
(27.7) (27.7) liabilities
Provisions for
liabilities and
charges (56.2) 56.2 - Provisions
Retirement benefit
(28.5) (28.5) obligation
(582.2) 0.1 (582.1)
Net assets 293.5 - 293.5 Net assets
Called up
share capital 8.7 8.7 Share capital
Share premium Share premium
account 190.9 190.9 account
Own shares
ESOP reserve (16.2) (16.2) reserve
Capital
Capital redemption redemption
reserve 0.1 0.1 reserve
Profit and loss Retained
account 110.0 110.0 earnings
Equity shareholders'
funds 293.5 - 293.5 Total equity
d) Reconciliation of equity at 30 June 2004
This table highlights the financial impact of the key IFRS adjustments covered
in section 4 on the consolidated balance sheet as at 30 June 2004.
IAS 31 IFRS3 IAS 38 IAS19 IAS19 IAS10 IFRS2 IAS12
Interest in Business Employee Employee Share
joint combina- Intangible Benefits Benefits based Income
ventures tions assets -pensions -other Dividends payment taxes Other
UK
GAAP IFRS
£m £m £m £m £m £m £m £m £m £m £m
Non-current
assets
Goodwill 214.0 5.1 8.1 (55.8) - - - - - (4.6) 166.8
Other
intangible
assets 1.0 - - 52.8 16.3 - - - - 0.8 70.9
Property,
plant and
equipment 72.0 13.7 - - - - - - - 1.2 86.9
Investment
in joint
ventures 27.5 (27.5) - - - - - - - - -
Deferred
tax
assets - 0.9 - - 33.5 5.5 - 0.8 (3.7) 1.7 38.7
Trade and
other
receivables 378.0 61.6 - - 1.2 - - - - (1.7) 439.1
692.5 53.8 8.1 (3.0) 51.0 5.5 - 0.8 (3.7) (2.6) 802.4
Current
assets
Inventories 27.7 2.3 - - - - - - - - 30.0
Trade and
other
receivables 321.9 52.5 - - - - - - - 0.4 374.8
Cash and
cash
equivalents 168.3 15.8 - - - - - - - - 184.1
517.9 70.6 - - - - - - - 0.4 588.9
Current
liabilities
Trade and
other
payables (318.2) (33.9) - - - (16.2) - - - - (368.3)
Tax
liabilities (6.8) (4.0) - - - - - - - - (10.8)
Obligations
under
finance
leases (5.7) (1.4) - - - - - - - (0.4) (7.5)
Loans (0.6) (16.2) - - - - - - - (0.1) (16.9)
Proposed
dividend (3.5) - - - - - 3.5 - - -
(334.8) (55.5) - - - (16.2) 3.5 - - (0.5) (403.5)
Non-current
liabilities
Obligations
under
finance
leases (15.5) (4.7) - - - - - - - (0.6) (20.8)
Loans (510.4) (51.3) - - - - - - - - (561.7)
Deferred
tax
liabilities (27.7) (7.8) (0.9) - - - - - (14.3) - (50.7)
Provisions - - - - - (6.0) - - - - (6.0)
Trade and
other
payables - (4.3) - - - - - - - - (4.3)
Retirement
benefit
obligations (28.5) - - - (161.2) - - - - - (189.7)
(582.1) (68.1) (0.9) - (161.2) (6.0) - - (14.3) (0.6) (833.2)
Net assets 293.5 0.8 7.2 (3.0) (110.2) (16.7) 3.5 0.8 (18.0) (3.3) 154.6
Equity
Share
capital 8.7 - - - - - - - - - 8.7
Share
premium 190.9 - - - - - - - - - 190.9
Own shares
reserve (16.2) - - - - - - (0.7) - - (16.9)
Capital
redemption
reserve 0.1 - - - - - - - - - 0.1
Retained
earnings 112.4 - 7.2 (3.0) 1.1 (16.7) 3.5 (2.0) (18.0) 0.9 85.4
Share-based
payment
reserve - - - - - - 3.5 - - 3.5
Retirement
benefit
obligations
reserve - - - - (111.3) - - - - - (111.3)
Translation
reserve (2.4) - - - - - - - - (4.2) (6.6)
293.5 - 7.2 (3.0) (110.2) (16.7) 3.5 0.8 (18.0) (3.3) 153.8
Minority
interest - 0.8 - - - - - - - - 0.8
Total
equity 293.5 0.8 7.2 (3.0) (110.2) (16.7) 3.5 0.8 (18.0) (3.3) 154.6
9. Reconciliation of equity at 1 January 2005 as a result of adopting IAS 32
and IAS 39
As at 31 IAS 32 and As at 1
December 2004 IAS 39 January 2005
Restated under Financial Restated
IFRS instruments under IFRS
£m £m £m
Non-current assets 803.0 11.0 814.0
Current assets 617.5 - 617.5
Current liabilities (477.3) (4.3) (481.6)
Non-current liabilities (774.0) (33.6) (807.6)
Net assets 169.2 (26.9) 142.3
10. Significant accounting policies
The financial information has been prepared on the basis of financial reporting
standards expected to be applicable at 31 December 2005. These are subject to
ongoing review and endorsement by the European Union or possible amendment by
interpretive guidance from the International Accounting Standards Board
('IASB') and the International Financial Reporting Interpretations Committee
('IFRIC') and are therefore still subject to change.
The financial information has been prepared on the historical cost basis. The
principal accounting policies adopted are set out below.
Presentation of financial information
The primary statements within the financial information contained in this
document have been presented substantially in accordance with IAS 1
'Presentation of Financial Statements'. However, this format and presentation
may require modification in the event that further guidance is issued and as
practice develops.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company, entities controlled by the Company (its subsidiaries) and entities
jointly controlled by the Company (its joint ventures) made up to 31 December
each year. Control is achieved where the Company has the power to govern the
financial and operating policies of an investee entity so as to obtain benefits
from its activities.
On acquisition, the assets and liabilities and contingent liabilities of a
subsidiary are measured at their fair values at the date of acquisition. Any
excess of the cost of acquisition over the fair values of the identified net
assets acquired is recognised as goodwill. Any deficiency of the cost of
acquisition below the fair values of the identifiable net assets acquired (i.e.
discount on acquisition) is credited to the profit and loss account in the
period of acquisition.
The results of subsidiaries and joint ventures acquired or disposed of during
the year are included in the consolidated income statement from the effective
date of acquisition or up to the effective date of disposal as appropriate.
Where necessary, adjustments are made to the financial statements of
subsidiaries and joint ventures to bring accounting policies used into line
with those used by the Group.
All intragroup transactions, balances, income and expenses are eliminated on
consolidation.
Investments in joint ventures
The Group's investments in joint ventures are reported in the financial
statements using the proportionate consolidation method, whereby the Group's
share of each of the assets, liabilities, income and expenses of its joint
ventures is combined line by line with similar items in the Group's financial
statements or reported as separate line items within the Group's financial
statements.
Goodwill
Goodwill arising on consolidation represents the excess of the cost of
acquisition over the Group's interest in the fair value of the identifiable net
assets and liabilities of a subsidiary, or jointly-controlled entity at the
date of acquisition.
Goodwill is recognised as an asset. Goodwill is not amortised and is reviewed
for impairment at least annually. Any impairment is recognised immediately in
the income statement and is not subsequently reversed.
On disposal of a subsidiary or jointly-controlled entity, the attributable
amount of goodwill is included in the determination of the profit or loss on
disposal.
Goodwill arising on acquisitions before the date of transition to IFRS has been
retained at the previous UK GAAP amounts subject to being tested for impairment
at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has
not been reinstated.
Revenue recognition
Revenue is measured at the fair value of the consideration received or
receivable and represents amounts receivable for goods and services provided in
the normal course of business, net of discounts, VAT and other sales-related
taxes.
Sales of goods are recognised when goods are delivered and title has passed.
Revenue from long-term project-based contracts is recognised in accordance with
the Group's accounting policy below.
Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective interest rate applicable, which is the rate
that exactly discounts estimated future cash receipts through the expected life
of the financial asset to that asset's net carrying amount.
Dividend income from investments is recognised when the shareholders' rights to
receive payment have been established.
Segmental information
Segmental information is based on two segment formats: the primary format
reflects the Group's management structure, whereas the secondary format is
geographically-orientated.
Unallocated items comprise mainly corporate expenses. Specific corporate
expenses are allocated to the corresponding segments. Segment assets comprise
goodwill, other intangible assets, property, plant and equipment, other debtors
and prepayments, inventories, and trade and other receivables (excluding
corporation tax recoverable). Liabilities comprise trade and other payables,
retirement benefit obligations, and other creditors. Eliminations represent
inter-company balances between the different segments.
Long-term project-based contracts
The Group has a number of long-term contracts for the provision of complex,
project-based services. Where the outcome of such long-term project-based
contracts can be measured reliably, revenue and costs are recognised by
reference to the stage of completion of the contract activity at the balance
sheet date. This is measured by the proportion that contract costs incurred
for work performed to date bear to the estimated total contract costs, except
where this would not be representative of the stage of completion. Variations
in contract work, claims and incentive payments are included to the extent that
they have been agreed with the customer.
Where the outcome of a long-term project-based contract cannot be estimated
reliably, contract revenue is recognised to the extent of contract costs that
it is probable will be recovered. Contract costs are recognised as expenses in
the period in which they are incurred.
When it is probable that the total contract costs will exceed total contract
revenue, the expected loss is recognised as an expense immediately.
All bid costs are expensed through the income statement up to the point where
contract award (or full recovery of costs) is virtually certain. Bid costs
incurred after this point are then capitalised within trade and other
receivables. On contract award these bid costs are amortised through the
income statement over the contract period by reference to the stage of
completion of the contract activity at the balance sheet date.
Leases
Leases are classified as finance leases whenever the terms of the lease
transfer substantially all the risks and rewards of ownership to the lessee.
All other leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at fair
value or, if lower, at the present value of minimum lease payments determined
at the inception of the lease. The corresponding liability to the lessor is
included in the balance sheet as a finance lease obligation. Lease payments
are apportioned between finance charges and reduction of the lease obligation
so as to achieve a constant rate of interest on the remaining balance of the
liability. Finance charges are charged directly against income, unless they
are directly attributable to a qualifying asset, in which case they are
capitalised in accordance with the Group's policy on borrowing costs (see
below).
Rentals payable under operating leases are charged to income on a straight-line
basis over the term of the relevant lease.
Foreign currencies
Transactions in currencies other than pounds sterling are recorded at the rates
of exchange on the dates of the transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign currencies are
retranslated at the rates prevailing on the balance sheet date. Non-monetary
assets and liabilities carried at fair value that are denominated in foreign
currencies are translated at the date when the fair value was determined.
Gains and losses arising on retranslation are included in the net profit or
loss for the period, except for exchange differences arising on non-monetary
assets and liabilities where the changes in fair value are recognised directly
in equity.
On consolidation, the assets and liabilities of the Group's overseas operations
are translated at exchange rates prevailing on the balance sheet date. Income
and expense items are translated at the average exchange rates for the period.
Exchange differences arising, if any, are classified as equity and transferred
to the Group's translation reserve. Such translation differences are
recognised as income or expenses in the period in which the operation is
disposed of.
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 the closing rate.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or
production of qualifying assets, which are assets that necessarily take a
substantial period of time to get ready for their intended use or sale, are
added to the cost of those assets, until such time as the assets are
substantially ready for their intended use or sale.
All other borrowing costs are recognised in profit or loss in the period in
which they are incurred.
Profit from operations
Profit from operations is stated after charging restructuring costs and before
investment income and finance costs.
Retirement benefit costs
Payments to defined contribution pension schemes are charged as an expense as
they fall due.
For defined benefit pension schemes, the cost of providing benefits is
determined using the Projected Unit Credit Method, with actuarial valuations
being carried out at each balance sheet date. Actuarial gains and losses are
recognised in full in the period in which they occur. They are recognised
outside the income statement and are presented in the consolidated statement of
recognised income and expense.
Past service cost is recognised immediately to the extent that the benefits are
already vested, and is amortised on a straight-line basis over the average
period until the benefit becomes vested.
The retirement benefit obligation recognised in the balance sheet represents
the present value of the defined benefit obligation as adjusted for
unrecognised past service costs, and as reduced by the fair value of scheme
assets. Any asset resulting from this calculation is limited to past service
cost, plus the present value of available refunds and reductions in future
contributions to the plan.
Defined benefit obligations arising from contractual obligations
Where the Group takes on a contract and assumes the obligation to contribute
variable amounts to the defined benefit pension scheme throughout the period of
the contract and it is not virtually certain that the contributions will be
recovered from the customer, the Group's share of the defined benefit
obligation less its share of the pension scheme assets that it will fund over
the period of the contract is recognised as a liability at the start of the
contract with a corresponding amount being recognised as an intangible asset.
The intangible assets which reflects the Group's right to manage and operate
the contract, is amortised over the contract period. Subsequent actuarial gains
and losses in relation to the Group's share of pension obligation are
recognised outside the income statement and are presented in the consolidated
statement of recognised income and expense.
Where the Group takes on a contract and assumes the obligation to contribute
variable amounts to the defined benefit pension scheme throughout the period of
the contract and it is virtually certain that the contributions will be
recovered from the customer, the Group's share of the defined benefit
obligation less its share of the pension scheme assets are recognised as a
liability at the start of the contract with a corresponding amount being
recognised as a financial asset at fair value, being the fair value of the
reimburseable rights. In the consolidated income statement, the expense
relating to the defined benefit plan is presented net of the amount recognised
for reimbursement. Subsequent actuarial gains and losses in relation to the
Group's share of pension obligations are recognised outside the income
statement and are presented in the consolidated statement of recognised income
and expense. The change in fair value of the reimburseable right that is not
presented in the income statement is reported in the consolidated statement of
recognised income and expense.
Multi-employer pension schemes
Multi- employer pension schemes are classified as a defined contribution
pension scheme or a defined benefit scheme under the terms of the scheme.
When sufficient information is not available to use defined benefit accounting
for a multi-employer defined benefit pension scheme, the Group accounts for the
scheme as if it were a defined contribution scheme.
Taxation
The tax expense represents the sum of current tax expense and deferred tax
expense.
Current tax expense is based on taxable profit for the year. Taxable profit
differs from net profit as reported in the income statement because it excludes
items of income or expense that are taxable or deductible in other years and it
further excludes items that are never taxable or deductible. The Group's
liability for current tax is calculated using tax rates that have been enacted
or substantively enacted by the balance sheet date.
Deferred tax is provided, using the liability method, on temporary differences
at the balance sheet date between the tax bases of assets and liabilities and
their carrying amounts for accounting purposes.
Deferred tax liabilities are generally recognised for all taxable temporary
differences. Deferred tax assets are generally recognised for all deductible
temporary differences, carry forward of unused tax credits and unused tax
losses, to the extent that it is probable that taxable profit will be available
against which these items can be utilised.
Such assets and liabilities are not recognised if the temporary difference
arises from goodwill or from the initial recognition of an asset and liability
in a transaction that is not a business combination and, at the time of the
transaction, affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and joint ventures, except where the
Group is able to control the reversal of the temporary difference and it is
probable that the temporary difference will not reverse in the foreseeable
future.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
utilised.
Deferred tax is measured at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised, based upon tax
rates and legislation that have been enacted or substantively enacted at the
balance sheet date. Deferred tax is charged or credited to the income
statement, except where it relates to items charged or credited directly to
equity, in which case the deferred tax is also recognised in equity.
Property, plant and equipment
Assets held for use in the rendering of services, or for administrative
purposes, are stated in the balance sheet at cost, net of accumulated
depreciation and any provision for impairment.
Depreciation is provided on a straight-line basis at rates to reduce the assets
to their residual value over their estimated useful lives.
The principal annual rates used are:
Freehold buildings 2.5%
Short-leasehold The higher of 10%
building or the rate
improvements produced by lease term
Machinery 15% - 20%
Motor vehicles 18% - 50%
Furniture 10%
Office equipment 20% - 33%
Leased equipment The higher of the
rate produced by
lease term or useful
life
The gain or loss arising on the disposal or retirement of an asset is
determined as the difference between the sales proceeds and the carrying amount
of the asset and is recognised in income.
Other intangible assets
Development expenditure relating to software is capitalised as an intangible
asset only if all of the following conditions are met:
An asset is created that can be identified
It is probable that the asset created will generate future economic benefits
The development cost of the asset can be measured reliably
Development expenditure is amortised over the period in which the Group is
expected to benefit. This period is between three to five years, or the length
of the contract if longer. Provision is also made for impairment. All other
development expenditure is written off as incurred.
Licences comprise premiums paid for the acquisition of licences, which are
amortised on a straight line basis over the life of the licence.
Franchises represent bid costs relating to costs incurred in obtaining
franchise rights, and franchise goodwill arising on the acquisition of
franchises. These are amortised on a straight-line basis over the life of the
franchise.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication
that those assets have suffered an impairment loss. If any such indication
exists, the recoverable amount of the asset is estimated in order to determine
the extent of the impairment loss (if any). Where the asset does not generate
cash flows that are independent from other assets, the Group estimates the
recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment
loss is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the
asset (cash-generating unit) is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not exceed
the carrying amount that would have been determined had no impairment loss been
recognised for the asset (cash-generating unit) in prior years. A reversal of
an impairment loss is recognised as income immediately.
Impairment losses and reversals are included within administrative expenses
within the income consolidated statement.
Inventories
Inventories are stated at the lower of cost and net realisable value. Where
applicable, cost includes an appropriate proportion of direct material and
labour.
Share-based payment
The Group has applied the requirements of IFRS 2 'Share-based Payment'. In
accordance with the transitional provisions, IFRS 2 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested as of 1
January 2005.
The Group issues equity-settled share-based payments to certain employees and
operates an Inland Revenue approved Save As You Earn share option scheme open
to eligible employees which allows the purchase of shares at a discount. These
are measured at fair value at the date of grant. The fair value is expensed on
a straight-line basis over the vesting period, based on the Group's estimate of
shares that will eventually vest.
Fair value is measured by use of the Black Scholes, Binomial or Monte Carlo
Simulation models depending on the type of scheme. The expected life used in
the models has been adjusted, based on management's best estimate, for the
effects of non-transferability, exercise restrictions, and behavioural
considerations. Where relevant, the value of the option has also been adjusted
to take account of market conditions applicable to the option.
Accounting for PFI contracts
Within Public Private Partnership (PPP) projects (including Private Finance
Initiative (PFI) projects), where the concession agreement transfers limited
risks and rewards associated with ownership to the contractors, during the
period of initial asset construction costs incurred as a direct consequence of
financing, designing and constructing the asset are shown as 'PFI assets in the
course of construction' within trade and other receivables. On completion of
the asset construction phase the asset is transferred within trade and other
receivables to a 'PFI debtor.'
Revenues received from the customer are apportioned between capital repayments
and operating revenue. The 'finance income' element of the capital repayment is
shown as notional interest receivable within investment income.
The Group has fully owned Special Purpose Companies (SPC) which are used for
the purpose of running the PFI business. All other SPCs are joint ventures and
accounted for using the proportionate consolidation method.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and balances with banks and
similar institutions, which are readily convertible to known amounts of cash
and which are subject to insignificant changes in value and have a maturity of
three months or less. This definition is also used for the consolidated cash
flow statement.
Dividends
Dividends are recorded in the Group's consolidated financial statements in the
period in which they are approved by the Group's shareholders.
Debt
Debt is initially stated at the amount of the net proceeds after deduction of
issue costs. The carrying amount is increased by the finance cost in respect
of the accounting period and reduced by payments made in the period.
Debt of certain Special Purpose Companies and joint ventures is described as
non recourse debt. Debt is described as non recourse debt only if the debt
funds the construction or ownership of a specific asset and the security
granted to the relevant lenders is limited to the shares in the borrowing
company and the assets and cash flows of the borrowing company.
Derivative financial instruments and hedging activities
The Group has adopted IAS39 'Financial Instruments: Recognition and
Measurement' with effect from
1 January 2005. Derivatives are initially accounted and measured at fair value
on the date a derivative contract is entered into and subsequently measured at
fair value. The gain or loss on re-measurement is taken to the income
statement except where the derivative is a designated cash flow hedging
instrument. The accounting treatment of derivatives classified as hedges
depends on their designation, which occurs on the date that the derivative
contract is committed to. The Group designates derivatives as:
A hedge of the fair value of an asset or liability ('fair value hedge').
A hedge of the income/cost of a highly probable forecast transaction or
commitment ('cash flow hedge').
A hedge of net investment in a foreign entity.
Gains or losses on fair value hedges that are regarded as highly effective are
recorded in the income statement with the gain or loss on the hedged item
attributable to the hedged risk.
Gains or losses on cash flow hedges that are regarded as highly effective are
recognised in equity. Where the forecast transaction results in a financial
asset or liability only gains or losses previously recognised in equity are
reclassified to profit or loss in the same period as the asset or liability
affects profit or loss. Where the forecast transaction or commitment results
in a non-financial asset or a liability, then any gains or losses previously
deferred in equity are included in the cost of the related asset or liability.
If the forecast transaction or commitment results in future income or
expenditure, gains or losses deferred in equity are transferred to the income
statement in the same period as the underlying income or expenditure. The
ineffective portion of the gain or loss on the hedging instrument is recognised
in profit or loss.
For the portion of hedges deemed ineffective or transactions that do not
qualify for hedge accounting under IAS 39, any change in assets or liabilities
is recognised immediately in the income statement. Where a hedge no longer
meets the effectiveness criteria, any gains or losses deferred in equity are
only transferred to the income statement when the committed or forecast
transaction is recognised in the income statement. However, where cash flow
hedge accounting has been applied for a forecast or committed transaction that
is no longer expected to occur, then the cumulative gain or loss that has been
recorded in equity is transferred to the income statement. When a hedging
instrument expires or is sold, any cumulative gain or loss existing in equity
at that time remains in equity and is recognised when the forecast transaction
is ultimately recognised in the income statement.
Where the group hedges net investments in foreign entities through currency
borrowings, the gains or losses on the translation of the borrowings are
recognised in equity. Gains and losses accumulated in equity are included in
the income statement when the foreign operation is disposed of.
For further information please contact Serco Group plc: +44 (0) 1256 745 900
Dominic Cheetham, Corporate Communications Director
Richard Hollins, Head of Investor Relations
www.serco.com
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