IFRS Restatement
BAE SYSTEMS PLC
28 April 2005
28 April 2005
BAE SYSTEMS plc
Transition to International Financial Reporting Standards
1. Introduction
Following the EU's adoption of International Financial Reporting Standards
(IFRS),
BAE Systems plc (the group) will be adopting IFRS in its consolidated accounts
for accounting periods from 1 January 2005.
The first financial information to be reported by the group in accordance with
IFRS will be for the six months ending 30 June 2005 but the requirement to
present comparative information means that a balance sheet prepared in
accordance with IFRS as at 31 December 2003 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 year to 31 December 2004 and the six months to 30 June 2004.
This document explains the accounting policy changes from the accounting
policies adopted under UK GAAP for the year ended 31 December 2004.
The most significant changes leading to the restatement relate to:
•The consolidation of the regional aircraft financing special purpose
entities under IFRS
•The recognition, on the balance sheet, of pension scheme liabilities,
after allocation to joint ventures and associates
•The inclusion of a fair value charge in respect of outstanding employee
share options
•The cessation of goodwill amortisation
•No longer recognising proposed dividends as a liability at the balance
sheet date
In addition, the group shall 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 January 2005.
Further information is included in the following appendices, which are available
on the group's website, www.baesystems.com
Appendix
1. Group Income Statement - Total IFRS adjustments made for the year
ended 31 December 2004
2. Group Income Statement - Total IFRS adjustments made for six
months ended 30 June 2004
3. Group Balance Sheet - Total IFRS adjustments made as at 31
December 2004
4. Group Balance Sheet - Total IFRS adjustments made as at 30 June
2004
5. Group Balance Sheet - Total IFRS adjustments made as at 31
December 2003
6. Group Income Statement - Details of IFRS adjustments made for the
year ended 31 December 2004
7. Group Income Statement - Details of IFRS adjustments made for six
months ended 30 June 2004
8. Group Balance Sheet - Details of IFRS adjustments made as at 31
December 2004
9. Group Balance Sheet - Details of IFRS adjustments made as at 30
June 2004
10. Group Balance Sheet - Details of IFRS adjustments made as at 31
December 2003
11. Reformat of UK GAAP Group Income Statement for the year ended 31
December 2004
12. Reformat of UK GAAP Group Income Statement for the six months
ended 30 June 2004
13. Reformat of UK GAAP Group Balance Sheet for the year ended 31
December 2004
14. Reformat of UK GAAP Group Balance Sheet for the year ended 30 June
2004
15. Reformat of UK GAAP Group Balance Sheet for the year ended 31
December 2003
16. Pro forma IFRS Group Balance Sheet reflecting the impact of IAS 32
and IAS 39 as at 1 January 2005
17. Accounting policies for adoption in the first full set of IFRS
financial statements
A webcast of the presentation is also available on the group's website,
www.baesystems.com
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 December 2005. 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.
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
January 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.
3. Overview of impact
3.1 EBITA
Under UK GAAP the group has previously presented a measure of its underlying
performance that excluded exceptional and non-trading items. This measure was
earnings before interest, taxation and amortisation (EBITA).
This measure of underlying performance will remain under IFRS together with the
two adjustments set out in section 3.2.
Reconciliation of EBITA for the year ended 31 December 2004
Ref £m
EBITA - UK GAAP 1,013
Reformatted into IFRS format 4.1 4
EBITA - UK GAAP in IFRS format 1,017
IFRS adjustments:
Regional aircraft financing 4.3 4
Pensions 4.4 16
Business combinations 4.5 (6)
Development costs 4.7 27
Share-based payments
4.8 (18)
Long-term contracts 4.9 2
Reduced depreciation from reversal of revaluation 4.10 11
reserve
EBITA - IFRS 1,053
3.2 Underlying profit
Reconciliation of underlying profit for the year ended 31 December
2004
UK GAAP IFRS
£m £m
EBITA 1,013 1,053
Add back fair value of acquired inventories 1 - 6
1,013 1,059
Interest: (207) (176)
- excluding net financing credit on pensions 2 - (24)
- excluding market value movements on - -
derivative instruments
(207) (200)
Underlying profit before tax 806 859
Tax before: (234) (280)
- impact of fair value of acquired - (2)
inventories 1
- impact of net financing credit on pensions 2 - 9
(234) (273)
Minority interests (1) (1)
Preference dividends (21) (21)
Underlying taxed earnings 550 564
Weighted average number of shares in issue 3,058m 3,058m
Underlying earnings per share 18.0p 18.4p
1 The profit on acquired inventories on acquisitions made during the year: IFRS
requires the value of acquired inventories to be written up by the profit on
those acquired inventories at acquisition thus reducing profits post
acquisition. This adjustment eliminates the impact of this requirement on the
post acquisition period results.
2 The pension net financing credit of £24m included in finance costs under IFRS
comprises the net of the expected returns on scheme assets and one year's
interest cost of discounting the pension liabilities. Given the volatility of
this item it has been excluded when determining underlying profit.
Underlying taxed earnings increased to £564m under IFRS (£550m under UK GAAP).
3.3 Profit for the year
Reconciliation of profit for the year ended 31 December 2004
Before After
tax tax
Ref £m £m
Loss - UK GAAP (232) (466)
Reformatted into IFRS format 4.1 (95) -
---------------------------------- ------ -------- --------
Loss - UK GAAP in IFRS format (327) (466)
IFRS adjustments:
Regional aircraft financing 4.3 11 8
Pensions 4.4 38 21
Business combinations 4.5 (13) (8)
Goodwill amortisation 4.6 457 457
Development costs 4.7 17 16
Share-based payments 4.8 (18) (9)
Long-term contracts 4.9 2 1
Reduced depreciation from reversal of 4.10 11 8
revaluation reserve
Taxation 4.12 - (25)
---------------------------------- ------ -------- --------
Profit - IFRS 178 3
---------------------------------- ------ -------- --------
3.4 Earnings per share (EPS)
Reconciliation of EPS for the year ended 31 December 2004
UK GAAP IFRS
Pence Pence
£m per share £m per share
(Loss)/profit for the year (467) 2
Preference dividends (21) (21)
--------------------------- ------- -------- ------- --------
Loss for the year after (488) (16.0) (19) (0.6)
preference dividends
Add back/(deduct)
Net financing credit on - (15)
pensions, post tax
Uplift on acquired - 4
inventories, post tax
Amortisation of intangible - 13
assets
Goodwill impairment 546 581
Goodwill amortisation 492 -
--------------------------- ------- -------- ------- --------
Underlying earnings 550 18.0 564 18.4
--------------------------- ------- -------- ------- --------
Weighted average number of 3,058m 3,058m
shares in issue
--------------------------- ------- -------- ------- --------
3.5 Net assets
Reconciliation of net assets as at 31 December 2004
Ref £m
Net assets - UK GAAP 4,738
Reformatted into IFRS format (4)
Net assets - UK GAAP in IFRS format 4,734
IFRS adjustments:
Regional aircraft financing 4.3 36
Pensions 4.4 (2,710)
Business combinations 4.5 (12)
Goodwill amortisation 4.6 457
Development costs 4.7 22
Share-based payments 4.8 (8)
Long-term contracts 4.9 8
Reversal of revaluation reserve 4.10 (120)
Proposed dividends 4.11 178
Taxation 4.12 80
Net assets - IFRS 2,665
3.6 Net debt
Reconciliation of net debt as at 31 December 2004
Ref £m
Net debt - UK GAAP 5
IFRS adjustments:
Regional aircraft financing 4.3 (673)
Net debt - IFRS (668)
4. Changes in accounting policies
Due to the implementation of IFRS there have been some changes to the group's
accounting policies:
4.1 Presentation of financial statements
The group's financial information has been prepared on a basis that is
consistent with IAS 1 Presentation of Financial Statements.
This, in conjunction with other standards, has had the following impacts:
i. Equity accounted investments: IAS 31 Interests in Joint Ventures requires
more emphasis to be placed on the legal form of arrangements rather than
what happens in practice. Accordingly, the group's investment in Airbus will
be accounted for as an associate under IAS 28 Investments in Associates from
the date of transition to IFRS. The impact of the change in accounting
treatment is only presentational and does not impact income recognition or
shareholders' funds as the group is continuing to account for its share of
the Airbus results and net assets. The accounting treatment for all other
investments that are accounted for as joint ventures under UK GAAP remains
unchanged.
In addition, under UK GAAP, the group's share of operating profit, interest
and tax of equity accounted investments were presented separately. Under IAS
1, 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, £95m 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.
ii. Finance costs: Under IAS 1, income and expenses cannot be offset and
therefore financial costs and financial income are separately disclosed.
iii.Other income: Under IAS 1, income and expenses cannot be offset and
therefore other income is presented separately from operating costs.
iv. General reclassifications:
• Cash and cash equivalents: Under IFRS, short-term deposits are
reclassified as cash and cash equivalents.
• Investment property: IAS 40 Investment Property requires that all
land and buildings that are owned but not in use within the group or are
for sale, are separately classified as investment property.
• Retirement benefit obligation: This is being separately presented
from creditors.
• Taxation: IAS 1 requires that assets and liabilities for current tax
and deferred tax assets and liabilities are presented separately.
(v)Debtors, creditors and provisions reclassifications: IAS 1 requires that
assets and liabilities are presented on a current and non-current basis.
(vi) Long-term contract related reclassifications: IFRS requires that the
amounts recoverable under long-term contracts are presented on the balance
sheet as a single amount.
(vii) Other reclassifications:
• Minority interests: The adjustment reflects the reclassification of
minority interests in respect of the group's equity accounted
investments to be shown as a component of the net assets of the equity
investments within the balance sheet.
• Software: IAS 38 requires that software costs are capitalised as
intangible assets. UK GAAP included such costs in tangible fixed assets.
Accordingly, amortisation of £4m previously expensed as depreciation
under UK GAAP is reclassified as amortisation of 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 IFRSs that are in place at the date of transition (1 January
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. BAE Systems has taken the following exemptions:
• Business combinations: Business combinations prior to the transition date
(1 January 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 transition date.
• Financial instruments: Financial instruments in the comparative period to
be presented in the 2005 Annual Report are recorded on the existing UK GAAP
basis, rather than in accordance with IAS 32 and IAS 39.
• 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 Regional aircraft financing
As previously reported, the group has provided guarantees in respect of residual
values and head lease and finance payments on certain regional aircraft sold.
These arrangements were transacted through Special Purpose Entities (SPEs) that
were not considered to be quasi subsidiaries forming part of the consolidated
group under UK GAAP. In addition, the group entered into various lease
arrangements that are treated as operating leases under UK GAAP.
A significant proportion of the net exposures arising from these arrangements is
covered by a Financial Risk Insurance Programme (FRIP), which provides insurance
cover for potential shortfalls in contracted and expected income.
On transition to IFRS, IAS 27 Consolidated and Separate Financial Statements
(IAS 27) requires the consolidation of all subsidiaries and SPEs the group
controls at 1 January 2004. Based on the IAS 27 definition of control, and after
taking into account the facts and circumstances relevant at the transition date,
the group has determined that it controls these SPEs. Accordingly, the gross
assets and obligations of the SPEs are consolidated in the IFRS balance sheet as
at 1 January 2004. In addition, a number of the lease arrangements are
reclassified from operating leases under UK GAAP to finance leases following
their assessment against the lease classification criteria in IAS 17 Leases with
resulting changes to assets and debt.
Additionally, the reclassification of certain operating leases as finance leases
outlined above require the reclassification of amounts payable under operating
leases included within creditors due after more than one year to amounts payable
under finance leases within net debt. The post-FRIP aircraft provision under UK
GAAP remains under IFRS.
The balance sheet adjustment replaces the existing UK GAAP note 20 recourse
provision and Option Aircraft Bond with aircraft (property, plant and
equipment), an insurance receivable (debtors), creditors and external debt. The
adjustment to the income statement includes the recognition of additional lease
income on the aircraft within revenue, depreciation on the aircraft within
operating costs and an interest charge on the additional net debt offset by the
reversal of the NPV adjustment disclosed under UK GAAP.
The impact from these changes is summarised as follows:
for the
as at year ended
1 January 31 December
2004 2004
£m £m
Income statement
Revenue 44
Operating costs (40)
----------
EBITA 4
Financial income 10
Financial expense (3)
----------
Adjustment to profit before taxation 11
Related taxation effect (3)
----------
Adjustment to profit after taxation 8
----------
Net assets
Property, plant and equipment 389 301 (A)
Debtors 153 169
Cash and cash equivalents 7 7
Creditors 220 56 (B)
Loans and overdrafts (943) (680)
Provisions 227 198 (C)
--------- ----------
53 51
Related taxation effect (16) (15)
--------- ----------
Adjustment to net assets 37 36
--------- ----------
Notes:
£m
(A) Aircraft 301
Less return cost provisions (C) (32)
----------
Aircraft related assets, net 269
(B) UK GAAP creditors 38
Recourse provision within creditors under UK GAAP 18
----------
Adjustment to creditors 56
(C) Reverse recourse provision 230
Retain return cost provisions (32)
----------
Adjustment to provisions 198
4.4 Pensions
Under UK GAAP, the group currently accounts for defined benefit pension schemes
in accordance with Statement of Standard Accounting Practice 24 Accounting for
Pension Costs (SSAP 24). The group also reports 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 (IAS 19). An area of difference that impacts the
adjustment from SSAP 24 to IAS 19 relates to the valuation of pension fund
assets. Under FRS 17, equities are valued using mid-market prices at valuation
date whereas IFRS requires the use of bid prices.
The group has allocated an appropriate share of the IAS 19 pension deficit to
the equity accounted investments using a consistent method of allocation.
The balance sheet adjustment replaces the existing SSAP 24 pension asset and
related deferred tax with the group's share of the IAS 19 pension liability in
provisions and the group's share of the IAS 19 deficit allocated to the equity
accounted investments within fixed asset investments, and the related deferred
tax assets. The adjustment to intangible assets represents the impact of
replacing the SSAP 24 pension asset in the acquisition balance sheet of certain
acquisitions made in 2004 with the IAS 19 liability 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. The group's share of the operating charge recorded by the
equity accounted investments is shown as an adjustment to the share of equity
accounted investments profit.
The impact from these changes is summarised as follows:
for the
as at year ended
1 January 31 December
2004 2004
£m £m
Income statement
Operating costs 11 (A)
Share of results of equity accounted 6 (B)
investments
Financial income 542 (C)
Financial expense (521) (C)
----------
Adjustment to profit before taxation 38
Related taxation effect (17)
----------
Adjustment to profit after taxation 21
----------
Net assets
Intangible assets - 51
Investments in joint ventures and (154) (260)
associates
Debtors (531) (602)
Retirement benefit obligation (2,314) (3,031) (D)
--------- ----------
(2,999) (3,842)
Related taxation effect 896 1,132
--------- ----------
Adjustment to net assets (2,103) (2,710)
--------- ----------
Notes:
£m
(A) Operating costs 11
Share of operating profit of equity accounted 5
investments (B)
----------
Adjustment to EBITA 16
(B) Share of operating profit of equity accounted 5
investments
Share of finance costs of equity accounted 3
investments
Share of tax of equity accounted investments (2)
----------
6
(C) Financial income 542
Financial expense (521)
Share of finance costs of equity accounted investments 3
(B) ----------
Adjustment to finance costs 24
(D) Reverse SSAP 24 US healthcare liability 57
Reverse SSAP 24 other pension liabilities 122
Recognise IAS 19 UK/US pension deficit (3,068)
Recognise IAS 19 US healthcare liabilities (73)
Recognise IAS 19 European scheme liabilities (69)
----------
(3,031)
4.5 Business combinations
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 trademarks, order backlog, licences and
patented technologies. 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 2004. As a
result of acquisitions made in 2004, the group has reclassified intangible
assets of £153m out of goodwill arising on acquisition, with an associated
amortisation charge of £7m for the year ended 31 December 2004.
Under UK GAAP, the fair value of acquired inventory is stated at the lower of
cost or net realisable value. Under IFRS, the fair value of acquired inventory
is based on selling price less a reasonable allowance for the costs of
completion and disposal. As a result, an adjustment of £6m was made to the
acquisition balance sheet. As at 31 December 2004 the uplifted inventory had
been traded through the income statement, resulting in a £6m decrease in profit
before tax for the year. Deferred tax liabilities have also been recognised in
respect of these intangible assets with a corresponding increase in acquired
goodwill.
The impact from these changes is summarised as follows:
for the
year ended
31 December
2004
£m
Income statement
Operating costs (6)
Amortisation of intangible assets (7)
----------
Adjustment to profit before taxation (13)
Related taxation effect 5
----------
Adjustment to profit after taxation (8)
----------
Net assets
Intangible assets 30 (A)
Creditors 7
Provisions (1)
----------
36
Related taxation effect (48)
----------
Adjustment to net assets (12)
----------
Notes:
£m
(A) Deferred tax in respect of acquired intangibles 49
Uplift on acquired inventories (6)
Other impacts on fair values at acquisition (6)
Amortisation of intangible assets (7)
----------
30
4.6 Intangible assets - goodwill
Under UK GAAP, the group's policy was to capitalise goodwill in respect of
businesses acquired and amortise it on a straight line basis over its estimated
useful economic life, which had been assessed as 20 years for all recent
acquisitions.
On transition to IFRS, IFRS 1 requires the group to conduct an impairment review
of the carrying value of capitalised goodwill at 1 January 2004 for potential
impairments. No further impairments above those made under UK GAAP were required
at 1 January 2004.
In accordance with IFRS 3 Business Combinations, no amortisation of goodwill is
charged in the group's consolidated IFRS accounts from 1 January 2004. Instead,
annual reviews of the goodwill are performed to test for impairments.
The adjustment reverses the amortisation charged in the year under UK GAAP of
£492m. In addition, £35m of amortisation charged under UK GAAP relating to the
Avionics business is treated as an additional impairment under IFRS.
Accordingly, there is a corresponding increase in net assets.
The impact from these changes is summarised as follows:
for the
as at year ended
1 January 31 December
2004 2004
£m £m
Income statement
Operating costs 348
Share of results of equity accounted 109
investments
----------
Adjustment to profit before taxation 457
Related taxation effect -
----------
Adjustment to profit after taxation 457
----------
Net assets
Goodwill - 348
Investments in joint ventures and - 109
associates --------- ----------
457
Related taxation effect - -
--------- ----------
Adjustment to net assets - 457
--------- ----------
4.7 Intangible assets - development costs
Under IAS 38 Intangible Assets (IAS 38), the group is required to recognise,
capitalise and amortise intangible assets on the balance sheet providing they
meet certain identifiability and recognition criteria.
Intangible assets include company funded development expenditure.
Most of the group's expenditure on research and development is conducted under
specific customer contracts. The balance relates to company funded research and
development expenditure which under UK GAAP was expensed as incurred. Of this
balance, a significant proportion relates to research costs that will continue
to be expensed as incurred.
IAS 38 requires company funded development expenditure to be capitalised from
the point it meets certain recognition criteria and amortised over the estimated
life of the development product.
The adjustment capitalises certain research and development costs previously
expensed under UK GAAP.
The impact from these changes is summarised as follows:
for the
as at year ended
1 January 31 December
2004 2004
£m £m
Income statement
Operating costs 4 (A)
Share of results of equity accounted 13 (B)
investments
----------
Adjustment to profit before taxation 17
Related taxation effect (1)
----------
Adjustment to profit after taxation 16
----------
Net assets
Intangible assets 3 8
Investments in joint ventures and 1 16
associates
--------- ----------
4 24
Related taxation effect (1) (2)
--------- ----------
Adjustment to net assets 3 22
--------- ----------
Notes:
£m
(A) Capitalise previously expensed development costs 6
Amortisation of intangible assets (2)
----------
Operating costs 4
(B) Capitalise previously expensed development costs 21
Amortisation of intangible assets (8)
----------
Share of results of equity accounted investments 13
4.8 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. Options granted under Save-As-You-Earn schemes
are at a 20% discount to market price on the date of the grant and are exempt
from UK GAAP accounting.
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, with a portion of the increase being reflected in an increased balance
sheet liability in respect of certain cash-settled share option schemes operated
in the group's US business.
The impact from these changes is summarised as follows:
for the
as at year ended
1 January 31 December
2004 2004
£m £m
Income statement
Operating costs (18)
----------
Adjustment to profit before taxation (18)
Related taxation effect 9
----------
Adjustment to profit after taxation (9)
----------
Net assets
Provisions (4) (14)
--------- ----------
(4) (14)
Related taxation effect 1 6
--------- ----------
Adjustment to net assets (3) (8)
--------- ----------
4.9 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 or IAS 18 Revenue depending on the characteristics of the
contract and its deliverables. These standards provide more guidance on the
determination of the timing and amount of revenue recognition.
The impact from these changes is summarised as follows:
for the
as at year ended
1 January 31 December
2004 2004
£m £m
Income statement
Combined sales of group and equity accounted 29
investments
Less: adjustment for share of equity 14
accounted investments
Operating costs (41)
----------
Adjustment to profit before taxation 2
Related taxation effect (1)
----------
Adjustment to profit after taxation 1
----------
Net assets
Debtors 33 31
Creditors (22) (18)
-------- ----------
11 13
Related taxation effect (4) (5)
-------- ----------
Adjustment to net assets 7 8
-------- ----------
4.10 Revaluation of land and buildings
It had been the group's policy under UK GAAP to revalue its land and buildings
until Financial Reporting Standard 15 Tangible Fixed Assets was adopted in 2000.
At that point the group elected that no further revaluation of land and
buildings would be undertaken. The group will not be adopting the exemption
under the transition rules of IFRS 1 that allows the previous GAAP valuation to
be used as the deemed cost on transition to IFRS. Accordingly, the group has
reversed the previously recognised revaluations and has reverted to the use of
historical cost for land and buildings.
The balance sheet adjustment reverses the existing UK GAAP revaluation reserve
against the underlying fixed assets. The income statement adjustment reflects
the reduction in the depreciation charge.
The impact from this change is summarised as follows:
for the
as at year ended
1 January 31 December
2004 2004
£m £m
Income statement
Operating costs 11
----------
Adjustment to profit before taxation 11
Related taxation effect (3)
----------
Adjustment to profit after taxation 8
----------
Net assets
Property, plant and equipment (147) (136)
--------- ----------
(147) (136)
Related taxation effect 19 16
--------- ----------
Adjustment to net assets (128) (120)
--------- ----------
4.11 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 dividends.
4.12 Taxation
Under IAS 12 Income Taxes, certain temporary timing differences, principally in
respect of capital losses and rollover relief, that previously were not
recognised under UK GAAP, have been recognised. In addition, under IFRS deferred
tax liabilities are created on a periodic basis where goodwill is tax
deductible.
The impact from these changes is summarised as follows:
for the
as at year ended
1 January 31 December
2004 2004
£m £m
Income statement
Taxation expense (25)
----------
Adjustment to profit after taxation (25)
----------
Net assets
Deferred tax assets 107 80
--------- ----------
Adjustment to net assets 107 80
--------- ----------
4.13 Financial instruments (applicable from 1 January 2005)
The global nature of the group's business means it is exposed to volatility in
currency exchange rates. In order to protect itself against currency
fluctuations, the group's policy is to hedge all firm transactional exposures as
well as to manage anticipated economic cash flow exposures over the medium term.
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 or loss for the period. Gains and losses on
financial instruments, both realised and unrealised, that do not qualify for
hedge accounting are included in profit or loss for the period. The group aims
to achieve hedge accounting treatment for all derivatives that hedge material
foreign currency exposures and those interest rate exposures where hedge
accounting can be achieved.
Under IAS 39, all financial instruments are recognised on the balance sheet as
either financial assets or financial liabilities.
Under the IFRS transition rules, IAS 32 and IAS 39 will apply to accounting
periods beginning on or after 1 January 2005 with no requirement for comparative
information in the period to 31 December 2004. Therefore this area and Vodafone
Exchangeable Bond and convertible preference shares discussed below will
continue to be accounted for under UK GAAP in the 2004 comparatives of the
group's 2005 IFRS financial statements. An adjustment is made as at 1 January
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.
Vodafone Exchangeable Bond
As previously reported, the company has in issue Bonds of £674m due in 2006
which allow the Bondholders the option to exchange the Bonds for the Exchange
Property, which is represented by the group's holding in the ordinary share
capital of Vodafone Group Plc. Under IAS 39 this option is considered to be an
embedded derivative that has to be separated from the underlying debt balance,
measured at fair value and accounted for separately within net assets.
Convertible preference shares
The group has in issue 7.75p (net) cumulative convertible preference shares of
25p each that are convertible into the group's ordinary shares of 2.5p each at
the option of the holder on 31 May in any of the years up to 2007, on the basis
of 0.47904 ordinary shares for every preference share. From 1 July 2007 to 1
January 2010, the company may redeem any outstanding shares at 100p per share
together with any arrears and accruals of dividends. In accordance with IAS 32
this is considered to be a compound financial instrument consisting of both a
debt component and an equity component which require separate accounting
treatment. The debt component represents the amortised cost of the instrument
and will be presented as a component of liabilities in the IFRS balance sheet.
The equity component represents the value of the option to convert the
preference shares into ordinary shares and will be presented separately within
shareholders' funds.
The impact from these changes is summarised as follows:
as at
1 January
2005
£m
Investments in joint ventures and associates 770
Debtors (83)
Other financial assets 162
Cash and cash equivalents (16)
Loans and overdrafts (267)
Creditors 64
Other financial liabilities (210)
Provisions (4)
--------
Net assets 416
Related taxation effect 6
--------
Adjustment to net assets 422
--------
Group Airbus / MBDA
derivative derivatives Exchangeable Preference
contracts Bond shares Total
£m £m £m £m £m
Assets/
(liabilities)
- group (9) - (62) - (71) (A)
- JV/
associates (3) 1,199 - - 1,196 (B)
Net debt (84) - 24 (223) (283) (C)
Deferred tax
- group 14 - (8) - 6
- JV/
associates - (426) - - (426) (B)
-------- -------- -------- -------- ------- -----
(82) 773 (46) (223) 422
-------- -------- -------- -------- ------- -----
Notes:
£m
(A) Restate debtors from hedge rate (83)
Recognise market value of financial assets 162
Restate creditors from hedge rate 64
Recognise market value of financial liabilities (210)
Restate provisions from hedge rate (4)
-------
(71)
(B) Adjustment to assets/liabilities 1,196
Related deferred tax (426)
-------
Adjustment to investments in joint ventures and 770
associates
(C) Adjust cash from hedge rate (16)
Adjustment to loans and overdrafts (267)
-------
Adjustment to net debt (283)
5. Restated Group Income Statement
for the year for the six
ended 31 December months ended 30
2004 June 2004
Unaudited Unaudited
£m £m £m £m
------------------------------ ------ ------ ------- ------
Combined sales of group and 13,552 6,097
equity accounted investments
Less: adjustment for share of (4,370) (2,002)
equity accounted investments
------------------------------ ------ ------ ------- ------
Revenue 9,182 4,095
Operating costs (9,181) (4,008)
------ -------
Excluding goodwill impairment (8,587) (3,817)
and amortisation of intangible
assets
Amortisation of intangible (13) (2)
assets
Goodwill impairment (581) (189)
------ -------
Other income 110 40
Share of results of equity 216 93
accounted investments ------ -------
Excluding goodwill impairment, 348 153
finance costs and tax
Goodwill impairment - -
Finance costs (27) (9)
Tax (105) (51)
------ -------
------------------------------ ------ ------ ------- ------
327 220
------ -------
Operating profit excluding the 1,053 471
following items:
Amortisation of intangible (13) (2)
assets
Goodwill impairment (581) (189)
Finance costs of equity (27) (9)
accounted investments
Tax of equity accounted (105) (51)
investments
------ -------
Finance costs
Financial income 609 269
Financial expense (758) (345)
------ -------
(149) (76)
Taxation expense (175) (75)
------------------------------ ------ ------ ------- ------
Profit for the period 3 69
------------------------------ ------ ------ ------- ------
Attributable to:
BAE Systems shareholders 2 69
Equity minority interests 1 -
------------------------------ ------ ------ ------- ------
3 69
------------------------------ ------ ------ ------- ------
Basic (loss)/profit per (0.6)p 1.9p
share
------------------------------ ------ ------ ------- ------
6. Restated Group Balance Sheet
As at As at As at
31 December 30 June 31 December
2004 2004 2003
Unaudited Unaudited Unaudited
£m £m £m
-------------------------------- -------- -------- --------
Non-current assets
Intangible assets 6,115 5,825 6,020
Property, plant and 1,746 1,658 1,769
equipment
Investment property 155 159 167
Investments in joint ventures 1,469 1,396 1,457
and associates
Other investments 66 90 95
Debtors 511 425 458
Deferred tax assets 1,090 1,108 1,004
-------------------------------- -------- -------- --------
11,152 10,661 10,970
-------------------------------- -------- -------- --------
Current assets
Inventories 498 449 388
Debtors, including amounts due 2,198 2,948 3,002
from customers for contract
work
Other investments 763 662 699
Cash and cash equivalents 1,651 871 971
-------------------------------- -------- -------- --------
5,110 4,930 5,060
-------------------------------- -------- -------- --------
Total assets 16,262 15,591 16,030
-------------------------------- -------- -------- --------
Non-current liabilities
Loans and overdrafts (2,113) (2,393) (2,363)
Creditors (464) (484) (463)
Retirement benefit (3,210) (2,918) (2,489)
obligation
Deferred tax liabilities (14) - -
Provisions (241) (194) (204)
-------------------------------- -------- -------- --------
(6,042) (5,989) (5,519)
-------------------------------- -------- -------- --------
Current liabilities
Loans and overdrafts (951) (994) (1,108)
Creditors (6,154) (5,191) (5,315)
Corporation tax (200) (195) (196)
Provisions (250) (213) (203)
-------------------------------- -------- -------- --------
(7,555) (6,593) (6,822)
-------------------------------- -------- -------- --------
Total liabilities (13,597) (12,582) (12,341)
-------------------------------- -------- -------- --------
2,665 3,009 3,689
-------------------------------- -------- -------- --------
Capital and reserves
Issued share capital 143 143 143
Share premium 412 412 412
Treasury shares (7) (8) (9)
Statutory reserve 202 202 202
Other reserves 5,236 5,137 5,223
Profit and loss reserve (3,331) (2,886) (2,292)
-------------------------------- -------- -------- --------
Shareholders' funds
-------- -------- --------
Equity 2,389 2,734 3,413
Non-equity 266 266 266
-------- -------- --------
2,655 3,000 3,679
-------------------------------- -------- -------- --------
Equity minority interests 10 9 10
-------------------------------- -------- -------- --------
2,665 3,009 3,689
-------------------------------- -------- -------- --------
Net debt
Other investments - current 763 662 699
Cash and cash equivalents 1,651 871 971
Loans and overdrafts -
non-current (2,113) (2,393) (2,363)
Loans and overdrafts - current (951) (994) (1,108)
-------------------------------- -------- -------- --------
(650) (1,854) (1,801)
Cash on customers' account
(within creditors) (18) (24) (5)
-------------------------------- -------- -------- --------
(668) (1,878) (1,806)
-------------------------------- -------- -------- --------
7. Pro forma IFRS Group Balance Sheet reflecting the impact of IAS 32
and IAS 39
As at
1 January
2005
£m
------------------------------------------------------ --------
Non-current assets
Intangible assets 6,115
Property, plant and equipment 1,746
Investment property 155
Investments in joint ventures and 2,239
associates
Other investments 66
Debtors 500
Other financial assets 12
Deferred tax assets 1,096
------------------------------------------------------ --------
11,929
------------------------------------------------------ --------
Current assets
Inventories 498
Debtors, including amounts due from 2,126
customers for contract work
Other investments 763
Other financial assets 150
Cash and cash equivalents 1,635
------------------------------------------------------ --------
5,172
------------------------------------------------------ --------
Total assets 17,101
------------------------------------------------------ --------
Non-current liabilities
Loans and overdrafts (2,375)
Creditors (464)
Retirement benefit obligation (3,210)
Other financial liabilities (72)
Deferred tax liabilities (14)
Provisions (245)
------------------------------------------------------ --------
(6,380)
------------------------------------------------------ --------
Current liabilities
Loans and overdrafts (956)
Creditors (6,090)
Other financial liabilities (138)
Corporation tax (200)
Provisions (250)
------------------------------------------------------ --------
(7,634)
------------------------------------------------------ --------
Total liabilities (14,014)
------------------------------------------------------ --------
3,087
------------------------------------------------------ --------
Capital and reserves
Issued share capital 77
Share premium 412
Equity option 78
Treasury shares (7)
Statutory reserve 202
Other reserves 5,236
Profit and loss reserve (2,921)
------------------------------------------------------ --------
Shareholders' funds 3,077
------------------------------------------------------ --------
Equity minority interests 10
------------------------------------------------------ --------
3,087
------------------------------------------------------ --------
Net debt
Other investments - current 763
Cash and cash equivalents 1,635
Loans and overdrafts - non-current (2,375)
Loans and overdrafts - current (956)
------------------------------------------------------ --------
(933)
Cash on customers' account (within creditors) (18)
------------------------------------------------------ --------
(951)
------------------------------------------------------ --------
This information is provided by RNS
The company news service from the London Stock Exchange
Friday, 22nd November 2024
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