IFRS Restatement

Capita Group PLC 28 July 2005 The Capita Group Plc - Adoption of International Financial Reporting Standards The Capita Group Plc is required under EU Regulations to adopt International Financial Reporting Standards ('IFRS') as its primary basis of accounting for the year ending 31 December 2005. IFRS replaces UK Generally Accepted Accounting Principles ('UK GAAP'), under which the Group previously prepared its financial statements. The principal impacts on the Group's previously reported financial information are as follows: â€¢cessation of goodwill amortisation â€¢recognition of all employee benefits, principally pension obligations â€¢inclusion of a charge for employee share options based on fair value â€¢recognition of certain deferred taxation liabilities â€¢de-recognition of dividends not declared at period end A full description of the impacts of the change and adjustments required to bring the financial information in line with IFRS for the 12 months ended 31 December 2004 and six months ended 30 June 2004, and on the balance sheet as at the date of transition of 1 January 2004, is presented in the following sections. Contact details: The Capita Group Plc Tel: 020 7799 1525 Rod Aldridge, Executive Chairman Paul Pindar, Chief Executive Shona Nichols, Corporate Communications Director Capita Press Office Tel: 0870 2400 488 Restatement of Financial Information under International Financial Reporting Standards ('IFRS') Contents 1. Introduction 2. First time adoption of International Financial Reporting Standards 3. Summary of major impacts of adoption of International Financial Reporting Standards 4. Summary of significant accounting policies under IFRS 5. Reconciliation of equity at 1 January 2004 (date of transition to IFRS) 6. Reconciliation of equity at 31 December 2004 (end of last period presented under previous GAAP) 7. Reconciliation of profit for the year ended 31 December 2004 8. Notes to the reconciliations 9. Group statement of recognised income and expense 10.Group statement of changes in equity 11.Independent Auditors' Special Purpose Report to The Capita Group Plc on the preliminary IFRS Financial Information for the year ended 31 December 2004 12.Appendix 1 - Reconciliation of profit for the six months ended 30 June 2004 1. Introduction The Capita Group Plc (the Company) is a public limited company, incorporated in England and Wales under the Companies Act 1985, whose shares are publicly traded. In these financial statements, 'Group' means the Company and all its subsidiaries. Hitherto, The Capita Group Plc has prepared its primary financial statements in accordance with UK Generally Accepted Accounting Principles (UK GAAP). From 2005 the Group is required to prepare its consolidated financial statements in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). References to IFRS throughout this document refer to the application of International Accounting Standards and International Financial Reporting Standards. The first Annual Report under IFRS will be for 2005 and the first interim results reported under IFRS will be for the six months ended 30 June 2005. This document explains the differences that will arise when the Group's financial statements are prepared under IFRS rather than UK GAAP. Specifically, this document sets out reconciliations of the Group's balance sheets, as prepared under UK GAAP, to those prepared in accordance with IFRS as at 1 January 2004 (the opening balance sheet as at the date of transition to IFRS), 30 June 2004 and 31 December 2004. In addition, this document includes reconciliations of the Group's profit and loss accounts prepared under UK GAAP to those prepared in accordance with IFRS for the six months to 30 June 2004 and for the year to 31 December 2004. This restatement document has been prepared on the basis that all IFRSs, International Financial Reporting Interpretation Committee ('IFRIC') interpretations and current IASB exposure drafts will be issued as final standards and endorsed by the EU. It should be noted that, should the EU fail to endorse all of these standards in time for financial reporting in 2005 or if IFRIC issues further interpretations prior to the reporting date, this may result in the need to change the basis of accounting and or the presentation of certain items from those presented in this document. The UK GAAP information contained in this document does not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The auditors, Ernst & Young LLP, have issued unqualified opinions on the Group's UK GAAP financial statements for the years ended 31 December 2003 and 31 December 2004. 2. First time adoption of International Financial Reporting Standards The Group has applied IFRS 1 'First Time Adoption of International Financial Reporting Standards' as a starting point for reporting under IFRS. The Group's date of transition to IFRS is 1 January 2004 and comparative information in the financial statements is restated to reflect the Group's adoption of IFRS except where otherwise required or permitted by IFRS 1. IFRS 1 requires an entity to comply with each IFRS effective at the reporting date for its first financial statements prepared under IFRS. As a general rule, IFRS 1 requires such standards to be applied retrospectively. However, the standard allows several optional exemptions from full retrospective application. The Group has elected to take advantage of the following exemptions: â€¢ The Group will adopt IFRS 3 'Business Combinations' to the extent that it applies to acquisitions post 1 January 2004. Acquisitions before that date will be recorded as under previous accounting rules as the Group intends to take advantage of the exemption allowed in IFRS 1 regarding business combinations recognised before the date of transition to IFRS. All goodwill and intangibles will be tested for impairment, as required by IAS 36 'Impairment of Assets'; goodwill on an annual basis and intangibles when there is an indicator of impairment. In addition, the Group will take advantage of the exemption allowed in IFRS 1 not to apply IAS 21 'The Effects of Changes in Foreign Exchange Rates' retrospectively to fair value adjustments and goodwill arising in business combinations that occurred before the date of transition to IFRSs. â€¢ The Group will also elect to take advantage of the exemption which allows cumulative actuarial gains or losses on defined benefit pension schemes at the date of transition to IFRS to be recognised immediately. â€¢ The Group will elect to take advantage of the exemption allowed in IFRS 1 regarding cumulative translation differences. Accordingly, the cumulative translation differences for all foreign operations are deemed to be nil at the date of transition to IFRS. â€¢ The Group will elect to apply the exemptions in IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement' to apply these standards from 1 January 2005 only. â€¢ The Group will elect to take advantage of the exemptions allowed in IFRS 1 regarding IFRS 2 'Share based payments'. The Group will apply the exemptions for share based payments granted on or before 7 November 2002. This means that only equity instruments granted after 7 November 2002 that vest after the effective date of IFRS 2 on 1 January 2005 need to be valued. The Group will meet all the disclosure requirements of IFRS 2. 3. Summary of major impacts of adoption of International Financial Reporting Standards IFRS 3 - Business Combinations. The standard deals with accounting for business combinations including goodwill and intangible assets. The Group's current policy under UK GAAP, to amortise goodwill and to test for impairment when there is an indication that the carrying value of an asset might not be recoverable, will be replaced by an annual impairment test and cessation of goodwill amortisation. IAS19 - Employee Benefits. The standard covers all forms of employee benefits but the major impact for the Group will be in the accounting policies for post retirement benefits in particular for defined benefit pension schemes. The Group currently accounts for these schemes using SSAP24 and also complies with the transitional rules of FRS17. The impact on the financial statements will be to introduce a liability on the balance sheet in respect of defined benefit pension schemes and to reduce shareholders' equity by a corresponding amount. IFRS 2 - Share Based Payments The standard deals with the valuation of share awards and their treatment in the financial statements. At present no expense is recognised under UK GAAP. Under IFRS 2 share awards must be measured at fair value at grant date and should be recognised as an expense over the vesting period. Since 31 December 2003 the Group has undertaken a review of methods for valuing share option awards as all options granted since 7 November 2002, a date specified in IFRS 2, that vest after the effective date of IFRS 2 on 1 January 2005 require valuation. Options issued under the Capita Sharesave Scheme and The Capita Group Plc Executive Share Option Scheme (The 1997 Scheme) have been valued using an enhanced Black-Scholes model. The more complex Long Term Indexed Share Appreciation Scheme (LTISAS) has been valued using an appropriate valuation model. In cases where valuation expertise was required the Group has sought advice from external valuation specialists. The impact of this standard on the financial statements of the Group will be a charge to the profit and loss account for the year ended 31 December 2004 and an equivalent increase in shareholders' funds. Additionally there is a cumulative charge for adoption to the date of transition to IFRS to retained earnings. IAS 12 - Income Taxes. This standard requires entities to provide for deferred taxation based on temporary differences between the carrying amount of assets/ liabilities and their tax base. Consequently, the Group has made additional provision for deferred tax on tax deductible purchased goodwill, separately identified intangibles arising on business combinations together with deferred tax adjustments in respect of share based payments and pension costs. IAS 10 - Events after the balance sheet date. The standard does not permit dividends declared after the balance sheet date to be recognised as a liability. Consequently, under IFRS, the Group will no longer make provision for unapproved dividends at the period end. 4. Summary of significant accounting policies under IFRS The significant accounting policies adopted in the preparation of the Group's IFRS financial information are set out below: Basis of preparation The consolidated financial statements have been prepared on the historical cost basis, except for certain financial instruments, separately identifiable intangibles acquired on business combinations and the pension assets and liabilities which have been measured at fair value. The carrying value of recognised assets and liabilities that are hedged are adjusted to record changes in the fair values attributable to the risks that are being hedged. The consolidated financial statements are presented in pounds sterling and all values are rounded to the nearest tenth of a million (Â£Million) except when otherwise indicated. Basis of consolidation The consolidated financial statements comprise the financial statements of The Capita Group Plc and its subsidiaries as at 31 December each year. The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies, but in accordance with UK Generally Accepted Accounting Principles (UK GAAP). Adjustments are made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting year during which The Capita Group Plc has control. Inventories Inventories are stated at the lower of cost and net realisable value. Costs are those incurred in bringing inventories to their present location and condition. Costs include any direct materials, where applicable, and labour together with a proportion of operating overheads based on normal operating capacity but excluding borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. For long-term contracts see accounting policy below. Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Other than in respect of long-term contracts, described below, revenue represents fee income recognised in respect of services provided during the period (stated net of value added tax). Revenue is earned within the United Kingdom, Europe, India and South-east Asia. Long-term contracts (i) Brownfield outsourcing contracts - Brownfield contracts are where there is a transfer of an existing operation to the Group. For brownfield contracts all costs incurred prior to service commencement are expensed as incurred and revenue represents fees invoiced in respect of services provided. (ii) Greenfield outsourcing contracts - A greenfield contract is one in which an entirely new service is being established for our customer. For these contracts no profit is recognised until service delivery commences and is being invoiced. Upon commencement, revenue represents fees invoiced in respect of services provided. Direct incremental costs incurred on the contract prior to service commencement and reimbursable during the contract, excluding any overheads, are included in debtors and amortised over the life of the contract. On some contracts, non-refundable payments are received, prior to full service commencement, on the achievement of agreed contract delivery milestones. These are recognised as revenue when earned. (iii) Property consultancy contracts - Revenue represents the sales value of work done in the year, including fees invoiced and estimates in respect of amounts to be invoiced after the year end. Profits are recognised on long-term contracts where the final outcome can be assessed with reasonable certainty. In calculating this the percentage of completion method is used based on the proportion of costs incurred to the total estimated cost. Cost includes direct staff costs and outlays. Full provision is made for all known or anticipated losses on each contract immediately such losses are forecast. Gross amounts due from customers are stated at the proportion of the anticipated net sales value earned to date less amounts billed on account. To the extent that fees paid on account exceed the value of work performed, they are included in creditors as gross amounts due to customers. Foreign currency translation The functional and presentation currency of The Capita Group Plc and its United Kingdom subsidiaries is the pound sterling (Â£). Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the balance sheet date. All differences are taken to the consolidated income statement with the exception of differences on foreign currency borrowings that provide a hedge against a net investment in a foreign entity. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in the consolidated income statement. Tax charges and credits attributable to exchange differences on those borrowings are also dealt with in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of initial transaction. Non-monetary items measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined. The functional currencies of overseas subsidiaries include the euro, Indian rupee, Malaysian ringgit, South Korean won and the Philippine peso. As at the reporting date, the assets and liabilities of the overseas subsidiary are retranslated into the presentation currency of The Capita Group Plc at the rate of exchange ruling at the balance sheet date and its income statement is translated at the weighted average exchange rate for the year. The exchange differences arising on the retranslation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation shall be recognised in the income statement. The Group has elected not to record cumulative translation differences arising prior to the transition date as permitted by IFRS 1. In utilising this exemption, all cumulative translation differences are deemed to be zero as at 1 January 2004 and all subsequent disposals shall exclude any translation differences arising prior to the date of transition. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: Freehold buildings and long leasehold property - over 50 years Leasehold improvements - period of the lease Plant and equipment - 3-10 years The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. The recoverable amount of property, plant and equipment is the greater of net selling price 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 an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognised in the income statement in the administrative expenses line item. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year in which the item is derecognised. Borrowing costs Borrowing costs are currently recognised as an expense when incurred in accordance with the benchmark accounting treatment under IAS 23. Goodwill Goodwill recognised under UK GAAP prior to the date of transition to IFRS is stated at net book value as at this date. Goodwill recognised subsequent to 1 January 2004 is, on acquisition, initially measured at cost being the excess of the cost of the business combination over the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units expected to benefit from the combination's synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in these circumstances is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained. Intangible assets Intangible assets acquired separately are capitalised at cost and those identified in a business acquisition are capitalised at fair value as at the date of acquisition. Following initial recognition, the carrying amount of an intangible asset is its cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Amortisation is charged on assets with finite lives, this expense is taken to the income statement through the administrative expenses line item. Intangible assets created within the business are not capitalised and expenditure is charged against profits in the year in which the expenditure is incurred. Intangible assets are only tested for impairment, either individually or at the cash-generating unit level, where there is an indicator of impairment. Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised. Recoverable amount of non-current assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of the asset's recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Investments All investments are initially recorded at cost, being the fair value of the consideration given and including acquisition charges associated with the investment. Subsequently they are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. Trade and other receivables Trade receivables are recognised and carried at original invoice amount less an allowance for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified. Cash and cash equivalents Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Interest-bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised in the net profit or loss when the liabilities are derecognised or impaired, as well as through the amortisation process. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost. Surplus properties The Group provides on a discounted basis for the future rent expense and related cost of leasehold property (net of estimated sub-lease income) where the space is vacant or currently not planned to be used for ongoing operations. Pre-contract costs Pre-contract award bidding costs are expensed as incurred. Pension schemes The Group maintains a number of contracted-out money purchase schemes and contributions are charged to the income statement in the year in which they are due. In addition, the Group operates two defined benefit pension schemes and participates in five other defined benefit schemes, all of which require contributions to be made to separately administered funds. The cost of providing benefits under these schemes are determined separately for each scheme using the projected unit credit actuarial valuation method. In respect of three of the schemes in which the Group participates, the period of participation is for an agreed fixed period only. Due to the short term nature of these contracts, the costs of providing these benefits have been taken as the present value of expected contributions requested by the relevant scheme actuary over the term of the contract which have been determined using the projected unit credit actuarial valuation method Actuarial gains and losses are fully recognised in equity through the statement of recognised income and expense such that the balance sheet reflects the scheme's surplus or liability at the balance sheet date. The employer's portion of current and past service cost is charged to operating profit with the interest cost, net of expected return on assets in the plans, reported as a financing item. Derivative financial instruments The Group uses forward foreign currency contracts to reduce exposure to foreign exchange rates. The Group also makes use of interest rate swaps to adjust interest rate exposures. The Group will only apply IAS 32 and IAS 39 from 1 January 2005 as permitted by the transition arrangements in IFRS 1. Leasing Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated life of the asset or the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease-term. Income tax Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: â€¢ except where the deferred tax liability arises from the initial recognition of goodwill â€¢ except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss and â€¢ in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: â€¢ except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income tax relating to items recognised directly in equity are recognised in equity and not in the income statement. Share based payments The Group operates a number of executive and employee share schemes. For all grants of share options and awards, the fair value as at the date of grant is calculated using an option pricing model and the corresponding expense is recognised over the vesting period. The Group has taken advantage of the transitional provisions of IFRS 2 in respect of equity-settled awards and has applied IFRS 2 only to equity-settled awards granted after 7 November 2002 that had not vested before 1 January 2005. Reconciliation of equity at 1 January 2004 (date of transition to IFRS) Recognise Previous Proposed pension Deferred GAAP dividend liability taxation IFRS Notes Â£Million Â£Million Â£Million Â£Million Â£Million ------------------------------------------------------------------------------------------- Property, plant and equipment 111.7 - - - 111.7 Intangible assets 451.2 - - - 451.2 Available-for- sale financial assets 5.2 - - - 5.2 Deferred taxation 1 1.6 - - 25.4 27.0 ------------------------------------------------------------------------------------------- Total non-current assets 569.7 - - 25.4 595.1 ------------------------------------------------------------------------------------------- Trade and other receivables 136.1 - - - 136.1 Prepayments 83.3 - - - 83.3 Cash and short-term deposits 19.8 - - - 19.8 ------------------------------------------------------------------------------------------- Total current assets 239.2 - - - 239.2 ------------------------------------------------------------------------------------------- TOTAL ASSETS 808.9 - - 25.4 834.3 =========================================================================================== Trade and other payables 95.0 - - - 95.0 Interest-beari ng loans and borrowings 158.1 - - - 158.1 Employee benefits 2 10.1 - 67.7 - 77.8 Income tax payable 26.1 - - - 26.1 Proposed dividends 3 18.0 (18.0) - - - Accruals and deferred income 154.8 - - - 154.8 Provisions 4.6 - - - 4.6 ------------------------------------------------------------------------------------------- TOTAL LIABILITIES 466.7 (18.0) 67.7 - 516.4 =========================================================================================== TOTAL ASSETS LESS TOTAL LIABILITIES 342.2 18.0 (67.7) 25.4 317.9 =========================================================================================== Issued capital 13.3 - - - 13.3 Share premium 242.7 - - - 242.7 Capital redemption reserve 0.1 - - - 0.1 Retained earnings 86.0 18.0 (67.7) 25.4 61.7 ------------------------------------------------------------------------------------------- EQUITY SHAREHOLDERS' FUNDS 342.1 18.0 (67.7) 25.4 317.8 ------------------------------------------------------------------------------------------- Minority interest 0.1 - - - 0.1 =========================================================================================== TOTAL EQUITY 342.2 18.0 (67.7) 25.4 317.9 =========================================================================================== Reconciliation of equity at 31 December 2004 (end of last period presented under previous GAAP) Amorti- Goodwill sation amorti- of Recognition sation Intangible Goodwill in- Proposed Previous of pension added assets de- tangible final Deferred GAAP liability back recognised recognised assets dividend taxation IFRS Notes Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million --------------------------------------------------------------------------------------------------------------------- Property, plant and equipment 129.1 - - - - - - - 129.1 Intangible assets 1 470.2 - 29.3 10.1 (10.1) (1.8) - 2.5 500.2 Available-for- sale financial assets 0.2 - - - - - - - 0.2 Deferred taxation 2 (0.9) - - - - - - 33.5 32.6 --------------------------------------------------------------------------------------------------------------------- Total non-current assets 598.6 - 29.3 10.1 (10.1) (1.8) - 36.0 662.1 --------------------------------------------------------------------------------------------------------------------- Trade and other receivables 150.4 - - - - - - - 150.4 Prepayments 98.7 - - - - - - - 98.7 --------------------------------------------------------------------------------------------------------------------- Total current assets 249.1 - - - - - - - 249.1 --------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 847.7 - 29.3 10.1 (10.1) (1.8) - 36.0 911.2 ===================================================================================================================== Trade and other payables 87.8 - - - - - - - 87.8 Interest-beari ng loans and borrowings 152.0 - - - - - - - 152.0 Employee benefits 3 (43.5) 87.6 - - - - - - 44.1 Income tax payable 28.4 - - - - - - - 28.4 Proposed dividends 4 23.8 - - - - - (23.8) - - Accruals and deferred income 196.1 - - - - - - - 196.1 Overdrafts 37.0 - - - - - - - 37.0 Provisions 5.5 - - - - - - - 5.5 --------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 487.1 87.6 - - - - (23.8) - 550.9 ===================================================================================================================== TOTAL ASSETS LESS TOTAL LIABILITIES 360.6 (87.6) 29.3 10.1 (10.1) (1.8) 23.8 36.0 360.3 ===================================================================================================================== Issued capital 13.4 - - - - - - 13.4 Share premium 248.1 - - - - - - 248.1 Treasury shares (0.2) - - - - - - (0.2) Capital redemption reserve 0.1 - - - - - - 0.1 Foreign currency translation 0.1 - - - - - - 0.1 Retained earnings 98.7 (87.6) 29.3 - - (1.8) 23.8 36.0 98.4 --------------------------------------------------------------------------------------------------------------------- EQUITY SHAREHOLDERS' FUNDS 360.2 (87.6) 29.3 - - (1.8) 23.8 36.0 359.9 --------------------------------------------------------------------------------------------------------------------- Minority interest 0.4 - - - - - - - 0.4 ===================================================================================================================== TOTAL EQUITY 360.6 (87.6) 29.3 - - (1.8) 23.8 36.0 360.3 ===================================================================================================================== Reconciliation of profit for the year ended 31 December 2004 De- recognition/ Recognition Share Amortisation of based Goodwill of Previous pension payment amortisation intangible Deferred GAAP charge charge added back assets taxation IFRS Notes Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Continuing operations: Revenue 1,282.2 - - - - - 1,282.2 Cost of sales 955.6 - - - - - 955.6 -------------------------------------------------------------------------------------------------------------------- Gross profit 326.6 - - - - - 326.6 Administrative expenses 1, 2,3 195.5 (0.1) 4.7 (29.3) 1.8 - 172.6 -------------------------------------------------------------------------------------------------------------------- Operating profit 131.1 0.1 (4.7) 29.3 (1.8) - 154.0 Finance costs (11.9) - - - - - (11.9) -------------------------------------------------------------------------------------------------------------------- Profit before tax 119.2 0.1 (4.7) 29.3 (1.8) - 142.1 Income tax expense 4 (41.6) - - - - (2.8) (44.4) -------------------------------------------------------------------------------------------------------------------- Profit for the year from continuing operations 77.6 0.1 (4.7) 29.3 (1.8) (2.8) 97.7 Discontinued operations: Loss on discontinued operations (2.2) - - - - - (2.2) -------------------------------------------------------------------------------------------------------------------- Profit for the year 75.4 0.1 (4.7) 29.3 (1.8) (2.8) 95.5 ==================================================================================================================== Attributable to : Equity holders of the parent 75.6 0.1 (4.7) 29.3 (1.8) (2.8) 95.7 Minority interest (0.2) - - - - - (0.2) -------------------------------------------------------------------------------------------------------------------- 75.4 0.1 (4.7) 29.3 (1.8) (2.8) 95.5 ==================================================================================================================== UKGAAP IFRS Adjustments IFRS Earnings per share - basic 11.36p 3.02p 14.38p - diluted 11.21p 3.04p 14.25p ==================================================================================================================== - basic (excluding discontinued operations) 11.69p 3.02p 14.71p - diluted (excluding discontinued operations) 11.54p 3.04p 14.58p ==================================================================================================================== Notes to the reconciliations Notes to the reconciliation of equity at 1 January 2004: 1. Deferred taxation recognised. 2. As a first-time adopter of IFRSs, the Group has taken advantage of the exception allowed under IFRS 1 not to apply full retrospective application of IAS 19 Employee Benefits. Accordingly, the Group has elected to recognise all cumulative actuarial gains and losses at the date of transition to IFRSs. Consequently, the full pension liability of Â£77.8m at 1 January 2004 is recognised under IFRSs but was not fully recognised under previous GAAP. 3. Proposed dividends are not recognised under IFRS thus the provision of Â£18.0m has been written back. Notes to the reconciliation of equity at 31 December 2004: 1. Goodwill amortisation under UK GAAP of Â£29.3m added back. Â£10.1m of separately identified intangible assets have been recognised in accordance with IFRS 3/IAS 38 (de-recognised in goodwill) as has the deferred taxation liability of Â£2.5m in relation to this. The deferred taxation liability recognised results in an equal and opposite entry in goodwill. Amortisation of these separately identifiable intangible assets of Â£1.8m has been charged to the profit and loss account. 2. Deferred taxation recognised. 3. As noted above in the reconciliation of equity at 1 January 2004, the full pension liability of Â£44.1m at 31 December 2004 is recognised under IFRSs but was not fully recognised under previous GAAP. 4. Proposed dividends are not recognised under IFRS thus the provision of Â£23.8m has been written back. Notes to the reconciliation of profit for the year ended 31 December 2004: 1. The change from accounting for the defined benefit pension schemes under UK GAAP to IFRS has resulted in a reduced charge of Â£0.1m. 2. Provision for share-based payment of Â£4.7m is recognised under IFRS 2 but was not recognised under UK GAAP. 3. Goodwill amortisation under UK GAAP of Â£29.3m added back. Provision made for amortisation of Â£1.8m on separately identified intangibles. 4. Deferred taxation has been recognised. Notes to the reconciliation of the profit for the six months ended 30 June 2004: 1. Provision for share-based payment of Â£2.3m is recognised under IFRS 2 but was not recognised under UK GAAP. Goodwill amortisation under UK GAAP of Â£14.5m added back. Provision made for amortisation of Â£0.7m on separately identified intangibles. 2. The change from accounting for the defined benefit pension schemes under UK GAAP to IFRS has resulted in a reduced charge of Â£0.3m. 3. Provision has been made for holiday pay accrued of Â£0.9m. This provision is required under IFRS and will unwind by the year end as the employee holiday calendar year matches the Group's financial year. This provision was not required under UK GAAP 4. Deferred taxation has been recognised. Reconciliation of cash and cash equivalents for relevant periods: 1. No restated IFRS cash flow has been presented as there is no difference between the net cash flow presented under IFRSs and the net cash flow presented under the previous GAAP. Group Statement of Recognised Income and Expense Year ended 2004 Â£Million -------------------------------------------------------------------------------- Attributable profit for the year reported under IFRS 95.7 Actuarial losses on defined benefit plans (19.7) Exchange differences resulting from translation of foreign operations 0.1 Tax taken directly to equity 13.3 -------------------------------------------------------------------------------- Total recognised income and expense for the year under IFRS 89.4 ================================================================================ Group Statement of Changes in Equity Foreign Capital currency Share Share Treasury redemption Retainted translation Minority capital premium shares reserve earnings reserve Total interests Total Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million -------------------------------------------------------------------------------------------------------------------- 1 January 2004 under UK GAAP 13.3 242.7 - 0.1 86.0 - 342.1 0.1 342.2 -------------------------------------------------------------------------------------------------------------------- Equity dividends unapproved - - - - 18.0 - 18.0 - 18.0 IAS19 Pension liability recognised - - - - (67.7) - (67.7) - (67.7) Tax on changes relating to first time adoption - - - - 25.4 - 25.4 - 25.4 -------------------------------------------------------------------------------------------------------------------- Net changes relating to first time adoption - - - - (24.3) - (24.3) - (24.3) -------------------------------------------------------------------------------------------------------------------- 1 January 2004 - as restated 13.3 242.7 - 0.1 61.7 - 317.8 0.1 317.9 Exchange differences resulting from translation of foreign operations - - - - - 0.1 0.1 - 0.1 Actuarial losses on defined benefit plans - - - - (19.7) - (19.7) - (19.7) Tax taken directly to equity - - - - 13.3 - 13.3 - 13.3 Share based payment recognised in the profit and loss statement - - - - 4.7 - 4.7 - 4.7 Cost of own shares purchased - - (0.2) - (27.7) - (27.9) - (27.9) Shares issued 0.1 5.4 - - - - 5.5 - 5.5 Preference share issue - - - - - - - 0.5 0.5 -------------------------------------------------------------------------------------------------------------------- 13.4 248.1 (0.2) 0.1 32.3 0.1 293.8 0.6 294.4 Attributable profit for the year - - - - 95.7 - 95.7 (0.2) 95.5 Equity dividends paid - - - - (29.6) - (29.6) - (29.6) -------------------------------------------------------------------------------------------------------------------- 31 December 2004 13.4 248.1 (0.2) 0.1 98.4 0.1 359.9 0.4 360.3 ==================================================================================================================== Note: The group statement of changes in equity is not a primary statement but is included here for clarity. It will be presented, in the abridged format, as a note in the Group's full 2005 financial statements. Independent Auditors' Special Purpose Report to The Capita Group Plc on the preliminary IFRS Financial Statements for the year ended 31 December 2004 We have audited the accompanying preliminary International Financial Reporting Standards ('IFRS') financial information of The Capita Group Plc ('the Company') for the year ended 31 December 2004 which comprises a Reconciliation of Equity as at 1 January 2004, the Reconciliation of Profit and the Statement of Changes in Equity for the year ended 31 December 2004 and a Reconciliation of Equity as at 31 December 2004, together with the related accounting policies note set out on pages 2 to 6. We have not audited nor reviewed and we will not provide any opinion in respect of the Reconciliation of profit for the six months ended 30 June 2004 which has been included on page 13. This report is made solely to the Company in accordance with our engagement letters dated 29 November 2004 and 25 July 2005. Our audit work has been undertaken so that we might state to the Company 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 do not accept or assume responsibility or liability to anyone other than the Company for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors This preliminary IFRS financial information is the responsibility of the Company's directors and has been prepared as part of the Company's conversion to IFRS. It has been prepared in accordance with the basis set out in Note 4 and Note 2 which describes how IFRS have been applied under IFRS 1, including the assumptions management has made about the standards and interpretations expected to be effective, and the policies expected to be adopted, when management prepares its first complete set of IFRS financial statements as at 31 December 2005. Our responsibility is to express an independent opinion on the preliminary IFRS financial information based on our audit. We read the other information accompanying the preliminary IFRS financial information and consider whether it is consistent with the preliminary IFRS financial information. This other information comprises the description of significant changes in accounting polices on page 1. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the preliminary opening balance sheet. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the preliminary IFRS financial information is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the preliminary IFRS financial information. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the preliminary IFRS financial information. We believe that our audit provides a reasonable basis for our opinion. Emphasis of matter Without qualifying our opinion, we draw attention to the fact that Note 1 explains why there is a possibility that the preliminary IFRS financial information may require adjustment before constituting the final IFRS financial statements. Moreover, we draw attention to the fact that, under IFRSs only a complete set of financial statements with comparative financial information and explanatory notes can provide a fair presentation of the Company's financial position, results of operations and cash flows in accordance with IFRSs. Opinion In our opinion, the preliminary IFRS financial information for the year ended 31 December 2004 has been prepared, in all material respects, in accordance with the basis set out in Note 4 and Note 2, which describes how IFRS have been applied under IFRS 1, including the assumptions management has made about the standards and interpretations expected to be effective, and the policies expected to be adopted, when management prepares its first complete set of IFRS financial statements as at 31 December 2005. Ernst & Young LLP London 27 July 2005 Appendix 1 Reconciliation of profit for the six months ended 30 June 2004 De-recognition Share Goodwill /Recognition based amortisation Amortisation Previous of pension payment added of intangible Holiday Deferred GAAP charge charge back assets pay taxation IFRS Notes Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Â£Million Continuing operations: Revenue 617.3 - - - - - - 617.3 Cost of sales 411.9 - - - - - - 411.9 ----------------------------------------------------------------------------------------------------------------------- Gross profit 205.4 - - - - - - 205.4 Administrative expenses 1, 2, 3 150.5 (0.3) 2.3 (14.5) 0.7 0.9 - 139.6 ----------------------------------------------------------------------------------------------------------------------- Operating profit 54.9 0.3 (2.3) 14.5 (0.7) (0.9) - 65.8 Finance costs (5.5) - - - - - - (5.5) ----------------------------------------------------------------------------------------------------------------------- Profit before tax 49.4 0.3 (2.3) 14.5 (0.7) (0.9) - 60.3 Income tax expense 4 (17.9) - - - - - 1.0 (16.9) ----------------------------------------------------------------------------------------------------------------------- Profit for the period from continuing operations: 31.5 0.3 (2.3) 14.5 (0.7) (0.9) 1.0 43.4 Discontinued operations: Loss on discontinued operation (1.0) - - - - - - (1.0) ----------------------------------------------------------------------------------------------------------------------- Profit for the period 30.5 0.3 (2.3) 14.5 (0.7) (0.9) 1.0 42.4 ======================================================================================================================= Attributable to : Equity holders of the parent 30.5 0.3 (2.3) 14.5 (0.7) (0.9) 1.0 42.4 Minority interest - - - - - - - - ----------------------------------------------------------------------------------------------------------------------- 30.5 0.3 (2.3) 14.5 (0.7) (0.9) 1.0 42.4 ======================================================================================================================= UKGAAP IFRS Adjustments IFRS Earnings per share - basic 4.57p 1.78p 6.35p - diluted 4.54p 1.77p 6.31p ======================================================================================================================= - basic (excluding discontinued operations) 4.72p 1.78p 6.50p - diluted (excluding discontinued operations) 4.69p 1.77p 6.46p ======================================================================================================================= This information is provided by RNS The company news service from the London Stock Exchange

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