Adoption of IFRS
Halma PLC
02 September 2005
Halma p.l.c.
Adoption of International Financial Reporting Standards
2 September 2005
Halma, the leading safety, health and environmental technology group, today provides an unaudited summary
of the restatement to International Financial Reporting Standards ('IFRS') of its 2004/05 Interim and Full
Year Consolidated Income Statement and Balance Sheet. This summary is provided in advance of the
publication of Halma's Interim Report for the 26 weeks to 1 October 2005 on 6 December 2005, which will be
the Group's first report prepared under IFRS.
Highlights of the restated figures are as follows:
52 weeks to 2 April 2005 26 weeks to 2 October 2004
UK GAAP UK GAAP
IFRS Change IFRS Change
Profit before taxation * £50.4m £49.9m -1% £24.6m £24.5m -1%
Statutory profit before taxation £44.9m £49.6m +10% £22.0m £24.3m +11%
Earnings per share ** 9.42p 9.45p 0% 4.59p 4.65p +1%
Statutory earnings per share 7.97p 9.38p +18% 3.91p 4.62p +18%
Shareholders' equity £175.6m £173.3m -1% £174.0m £166.6m -4%
* for UK GAAP, before goodwill amortisation of £5,491,000 (half year: £2,667,000); for IFRS,
before amortisation of acquired intangible assets of £361,000 (half year: £175,000).
**
for UK GAAP, before goodwill amortisation of 1.45p (half year: 0.68p); for IFRS, before
amortisation of acquired intangible assets of 0.07p (half year: 0.03p).
Commenting on the Group's adoption of the new accounting rules Kevin Thompson, Finance Director, said:
'The information presented today shows that there is little overall impact on Halma's reported financial
results from the adoption of IFRS. The Group's underlying business economics are unchanged, underpinned
by a strong balance sheet and good cash generation.
'The main impacts of IFRS on Halma's figures are in the following areas:
• pensions - recognising the deficit on pension funds within the Consolidated
Balance Sheet.
- a new method of calculating the pension expense and splitting it
between operating and financing elements.
• share-based payments - an expense is included in the Consolidated Income Statement.
• dividends - now only accrued when the dividend is declared.
• development costs - certain development costs are capitalised and amortised although
the majority of R&D costs continue to be expensed as incurred.
• acquisitions - unamortised goodwill as at March 2004 becomes the opening
goodwill amount, with no further amortisation. Any acquired
intangibles will be amortised.
- goodwill written off to reserves prior to 1998 will no longer be
recycled through the Consolidated Income Statement, and the
related deferred tax liability is released.
'There are a number of presentational changes to the financial statements. There are no significant
impacts for Halma arising from the changes to rules in relation to financial instruments.
'Looking ahead, two areas are worthy of note:
• the pensions expense will now be more closely related to the balance sheet net asset/liability
position. Trends in longevity and movements in discount rates are important factors in
determining the expense and overall balance sheet position.
• the share-based payments expense is expected to increase over the coming years in particular as
the cost of the new Performance Share Plan builds towards its expected ongoing annual run rate
of approximately £2 million, depending on performance. This is likely to affect the
year-on-year comparison of profit.'
To date, Halma has prepared its accounts in compliance with UK Generally Accepted Accounting Principles ('
UK GAAP'). EU regulations require Halma to adopt IFRS in its financial statements from 2005. The Group
has reviewed those changes necessary to move from UK GAAP to IFRS. The restatement of the 2004/05
financial statements is unaudited and has been prepared on the basis of IFRS expected to be adopted by the
EU at 1 April 2006. These standards are subject to ongoing review and interpretation and therefore may be
subject to change.
The effect of the adoption of IFRS on Halma's financial statements, including a reconciliation of the main
changes, a summary of Consolidated Income Statements for the 52 weeks to 2 April 2005 and 26 weeks to 2
October 2004 restated under IFRS, together with shareholders' equity at those dates and principal
accounting policy changes are given below as part of this announcement.
A document summarising the key aspects of Halma's adoption of IFRS in a pdf format can be found on the
Halma website, www.halma.com, as well as a copy of this announcement and other information about the Halma
Group.
For further information, please contact:
Halma p.l.c. +44 (0)1494 721 111
Andrew Williams, Chief Executive
Kevin Thompson, Finance Director
Hogarth Partnership Limited +44 (0)20 7357 9477
Rachel Hirst/Andrew Jaques
HALMA p.l.c.
Adoption of International Financial Reporting Standards
Halma p.l.c. will in future be reporting its consolidated results in accordance with International
Financial Reporting Standards ('IFRS'), beginning with its Interim Report for the 26 weeks to 1 October
2005. This statement presents and explains the unaudited restatement to an IFRS basis of the Group's
results and shareholders' equity for the 26 weeks to 2 October 2004 and the 52 weeks to 2 April 2005,
which were previously reported under UK Generally Accepted Accounting Principles ('UK GAAP'). These
restated figures will form the comparative information for the Group's first IFRS accounts in 2005/06.
Reconciliation and explanation of changes
A reconciliation of the changes is as follows:
£000 52 weeks to/as at 2 April 2005 26 weeks to/as at 2 October 2004
Statutory Statutory
profit before profit before
Shareholders' taxation Shareholders'
taxation equity equity
As reported under UK GAAP 44,898 175,598 21,951 173,983
Pensions * (330) (28,825) (165) (28,368)
Share-based payments * (192) 691 (72) 532
Dividends - 14,457 - 9,510
Development costs * 68 1,885 194 1,983
Holiday pay * (23) (563) (105) (622)
Reversal of goodwill 5,491 5,320 2,667 4,864
amortisation
Deferred taxation on goodwill - 4,980 - 4,831
Amortisation of acquired
intangible assets
(361) (284) (175) (117)
As restated under IFRS 49,551 173,259 24,295 166,596
* effect on shareholders' equity stated net of associated deferred tax
Pensions
Under UK GAAP, the Group recorded a total pension charge for the 52 weeks to 2 April 2005 of £5.1 million.
Under IFRS the net charge of £5.4 million reflects an operating charge of £4.3 million and a finance
charge of £1.1 million, increasing the total charge by £0.3 million.
The IFRS finance charge is calculated as the expected return on pension assets and an interest charge
imputed on the scheme liabilities. Accordingly the pension cost in future may be volatile and will depend
on, amongst other factors, the value of scheme assets and liabilities, asset return assumptions and
corporate bond rates.
The reduction in shareholders' equity arises because under IFRS the whole pension deficit, net of the
associated deferred tax asset, is accrued in the Consolidated Balance Sheet. At 2 April 2005 the Group's
pension deficit was £40.9 million, the related deferred tax asset was £12.3 million and the Group had a
net £0.2 million pension asset in its UK GAAP balance sheet. Therefore the total impact on shareholders'
equity of the change to IFRS is a net reduction of £28.8 million.
Share-based payments
This charge relates to employee share related schemes operated by the Group. Under UK GAAP, no charge was
made against profit in relation to the Group's share option schemes. Under IFRS the fair value of options
is assessed and charged against profit over the period from granting to vesting, resulting in an extra
£0.2 million charge against profit for the 52 weeks to 2 April 2005. This charge is only applied to
options awarded on or after 7 November 2002 that had not vested at 2 April 2005. Future charges are
expected to rise because of the value of subsequent awards and in particular as the new Performance Share
Plan is phased in. The total cost of all share-based payments is expected to have an annual run rate of
approximately £2 million by March 2008, depending on performance.
Dividends
Under IFRS, dividends are considered a liability in the period they are declared. Accordingly the
accruals for the interim dividend at 2 October 2004 and the final dividend at 2 April 2005 are released
under IFRS and charged against profit in the following reporting period.
Development costs
The Group previously expensed all research and development costs as incurred, as permitted by UK GAAP. IFRS
requires development costs that meet certain criteria to be capitalised and amortised over their expected economic
life. As the majority of the Group's development costs are directed towards incremental improvements of existing
products the majority of the costs will continue to be expensed as incurred. The net increase in profit of £0.1
million for the 52 weeks to 2 April 2005 reflects the excess of new costs being capitalised in the period over the
amortisation of costs already capitalised. An asset of £1.9 million is included in the 2 April 2005 IFRS
Consolidated Balance Sheet.
Holiday pay
The Group previously accrued for holiday pay only in those territories where it was required under local accounting
regulations. IFRS requires holiday pay to be accrued for all employees.
Reversal of goodwill amortisation
The £5.5 million of goodwill amortisation charged in the 52 weeks to 2 April 2005 under UK GAAP is reversed, as
IFRS has replaced the amortisation charge with an annual impairment test.
Deferred taxation on goodwill
Goodwill held in reserves under UK GAAP will not now be recycled through the Consolidated Income Statement under
IFRS on sale or closure of the business to which it relates. Therefore the deferred tax provision held against
these balances, which at 2 April 2005 amounted to £5.0 million, is no longer required.
Amortisation of acquired intangible assets
IFRS requires a new approach to the allocation of purchase consideration on acquisitions made since 3 April 2004,
reducing the carrying value of goodwill by allocating purchase price to amortisable intangible assets. This has
resulted in recognition of £1.4 million of intangible assets acquired during the 52 weeks to 2 April 2005, the
amortisation charge on which amounts to £0.4 million.
Summary Consolidated Income Statement for the 52 weeks £000
to 2 April 2005
Under UK IFRS Under
GAAP adjustments IFRS
(see below)
Profit from operations before goodwill
amortisation
50,344 259 50,603
Goodwill amortisation (5,491) 5,491 -
Profit from operations 44,853 5,750 50,603
Net finance income/(expense) 45 (1,097) (1,052)
Profit before tax 44,898 4,653 49,551
Tax (15,540) 540 (15,000)
Profit for the period 29,358 5,193 34,551
Statutory earnings per ordinary share 7.97p 9.38p
Profit before tax * 50,389 49,912
Earnings per share * 9.42p 9.45p
* before goodwill amortisation (UK GAAP) and amortisation of acquired intangible assets (IFRS), see note 2.
Summary Consolidated Income Statement for the 26 weeks £000
to 2 October 2004
Under UK IFRS Under
GAAP adjustments IFRS
(see below)
Profit from operations before goodwill
amortisation
24,503 225 24,728
Goodwill amortisation (2,667) 2,667 -
Profit from operations 21,836 2,892 24,728
Net finance income/(expense) 115 (548) (433)
Profit before tax 21,951 2,344 24,295
Tax (7,570) 270 (7,300)
Profit for the period 14,381 2,614 16,995
Statutory earnings per ordinary share 3.91p 4.62p
Profit before tax * 24,618 24,470
Earnings per share * 4.59p 4.65p
* before goodwill amortisation (UK GAAP) and amortisation of acquired intangible assets (IFRS), see note 2.
Summary of IFRS adjustments to Consolidated Income Statement £000
52 weeks to 26 weeks to
Notes 2 April 2005 2 Oct 2004
Profit from operations
Defined benefit pension schemes - operating costs 3 767 383
Share-based payments 4 (192) (72)
Development costs capitalised, net of amortisation 6 68 194
Holiday pay 7 (23) (105)
Amortisation of acquired intangible assets 8 (361) (175)
Profit from operations before goodwill amortisation 259 225
Reversal of goodwill amortisation charge 9a 5,491 2,667
Profit from operations 5,750 2,892
Net finance income/(expense)
Defined benefit pension schemes - finance charge
3 (1,097) (548)
Profit before tax 4,653 2,344
Tax
Deferred tax on goodwill in reserves 9b 344 195
Deferred tax on other restatements 10 196 75
Total tax 540 270
Profit for the period 5,193 2,614
Summary of IFRS adjustments to Shareholders' Equity £000
At 2 April At 2 Oct
Notes 2005 2004
Shareholders' equity as previously reported under UK GAAP 175,598 173,983
Defined benefit pension obligations * 3 (28,825) (28,368)
Share-based payments * 4 691 532
Dividends 5 14,457 9,510
Development costs * 6 1,885 1,983
Holiday pay * 7 (563) (622)
Acquired intangible assets* 8 (284) (117)
Goodwill 9a,c 5,320 4,864
Deferred tax on goodwill in reserves 9b 4,980 4,831
Shareholders' equity as restated under IFRS 173,259 166,596
* net of associated deferred tax
Principal accounting policy changes
1. Basis of accounting
Halma p.l.c. and its subsidiaries (the 'Group') have previously prepared consolidated financial statements under
UK Generally Accepted Accounting Principles ('UK GAAP'). From 3 April 2005 the Group will be required to prepare
consolidated financial statements in accordance with International Financial Reporting Standards ('IFRS') and
International Accounting Standards (IAS) adopted by the European Union (EU). References to IFRS throughout this
document refer to the application of IFRS and IAS as adopted by the EU.
The Group's first published figures under IFRS will be in the Interim Report for the 26 weeks to 1 October 2005
and the first Annual Report under IFRS will be the Annual Report and Accounts for the 52 weeks to 1 April 2006.
The transition date for IFRS purposes is 4 April 2004, being the start of the earliest period of comparative
information.
To explain the effect of this transition on the Group's reported performance and financial position, information
for the 26 weeks to 2 October 2004 and 52 weeks to 2 April 2005, which was previously published under UK GAAP,
has been restated in summary form in this document. This information is unaudited.
Standards currently in issue and adopted by the EU are subject to interpretation issued from the International
Financial Reporting Interpretations Committee ('IFRIC'). Further standards may be issued by the International
Accounting Standards Board that will be adopted for financial years beginning on or after 1 January 2005. IFRS
is currently being applied in the United Kingdom and in a large number of other countries simultaneously for the
first time. Due to the number of new and revised standards included within the body of standards that comprise
IFRS, there is not yet significant established practice on which to draw in forming decisions regarding their
interpretation and application. Accordingly, practice is continuing to evolve. At this preliminary stage,
therefore, the full financial effect of reporting under IFRS as it will be applied and reported on in the Group's
first IFRS financial statements for the year ended 1 April 2006 may be subject to change.
Generally, transition to IFRS requires full retrospective application. However IFRS 1 'First-Time Adoption of
IFRS' allows a certain number of mandatory and optional exemptions from this general rule. Where the Group
intends to take advantage of these exemptions they are noted below.
2. Measures of underlying performance
Under UK GAAP, in addition to the statutory figures the Group reported profit and earnings per share before
goodwill amortisation and exceptional items, to present a more consistent measure of underlying performance.
Under IFRS, it is proposed to report profit and earnings per share figures before the amortisation of acquired
intangible assets and significant items, in addition to the statutory figures. Significant items are those
which, because of their size or incidence, require separate disclosure to enable underlying trading performance
to be assessed. They include items such as restructuring costs, asset impairment charges and profits and losses
on the sale or closure of businesses, which were classified as exceptional items under UK GAAP.
A reconciliation of the statutory profit before taxation to these profit figures is as follows:
£000 52 weeks to 2 April 2005 26 weeks to 2 October 2004
UK GAAP IFRS UK GAAP IFRS
Statutory profit before tax 44,898 49,551 21,951 24,295
Add back:
Goodwill amortisation 5,491 - 2,667 -
Amortisation of acquired - 361 - 175
intangibles
50,389 49,912 24,618 24,470
3. Defined benefit pension commitments
Under UK GAAP, the Group charged the cost of providing defined benefit pension arrangements on a systematic and
rational basis in accordance with SSAP 24 'Accounting for Pension Costs'. Differences between this cost and the
contributions paid to the schemes were recorded as prepayments or accruals as appropriate. Additional
disclosures were provided in accordance with FRS 17 'Retirement Benefits'.
Under IFRS the Group measures its defined pension commitment in accordance with IAS 19 'Employee Benefits'. The
net pension asset or liability - being the difference between the fair value of the schemes' assets and the
present value of their obligations - is recorded in the Consolidated Balance Sheet, along with the associated
deferred tax asset. Current and past service costs are charged against profit from operations. Interest on the
schemes' liabilities and the expected return on the schemes' assets are charged or credited to finance costs in
the Consolidated Income Statement. In line with the proposed amendment to IAS 19 - which is expected to be
adopted by the EU shortly - actuarial gains and losses arising after the transition date will be taken directly
to reserves.
As permitted by IFRS 1 all actuarial gains and losses at 4 April 2004 have been recognised in full on the
Consolidated Balance Sheet.
4. Share-based payments
Under UK GAAP no charge was made in the Consolidated Profit and Loss Account in relation to the Group's share
option schemes.
In accordance with IFRS 2 'Share-Based Payments' the fair value of employee share-based rewards have been
calculated using the Black-Scholes method and charged to the Consolidated Income Statement on a straight line
basis over the expected vesting period. This charge is adjusted to reflect the expected and actual levels of
vesting and any changes to the vesting period that arise from non-market based performance conditions.
In accordance with the exemption permitted under IFRS 1, IFRS 2 has only been applied to options awarded on or
after 7 November 2002 that had not vested at 2 April 2005.
Under UK GAAP, the charge for the Employee Share Incentive Plan was charged against profit as incurred. Under
IFRS, this charge is capitalised onto the Consolidated Balance Sheet and charged to the Consolidated Income
Statement over the Plan's three year vesting period.
5. Dividends
Under UK GAAP, proposed dividends were recognised as a liability in the period to which they related. Under
IFRS, dividends are recognised as a liability in the period in which they are declared. Accordingly the accruals
for dividends not declared at 2 April 2005 and 2 October 2004 have been released.
6. Development costs
Under UK GAAP, the Group wrote off all research and development expenditure as incurred.
IAS 38 'Intangible Assets' requires development costs that meet certain criteria to be capitalised as an
intangible asset and amortised over their expected economic life.
Due to the nature of the Group's businesses, the majority of development costs are directed towards incremental
improvements of existing products and do not qualify for capitalisation. Those development costs that do meet
the criteria for capitalisation are amortised over three years.
7. Short-term employee benefits
Under UK GAAP, Group companies accrued for holiday pay only when required to by local accounting regulations.
Under IFRS 19, the cost of all holiday entitlement earned but not taken at the balance sheet date is accrued on
the Consolidated Balance Sheet.
8. Acquired intangible assets
IFRS requires intangible assets which are acquired with a subsidiary undertaking to be recognised separately from
goodwill and amortised over their estimated economic life, if they are separable from the acquired business or
derive from contractual or legal rights. £1.4 million of such assets in respect of acquisitions since the
transition date have been reclassified from goodwill and their amortisation charged against the Consolidated
Income Statement. These are being amortised over periods ranging from three to ten years.
9. Goodwill
a. Amortisation
Under UK GAAP, goodwill which arose on acquisitions after 28 March 1998 was capitalised as an intangible asset in
the Consolidated Balance Sheet and amortised over its estimated economic life of 20 years. Under IFRS,
capitalised goodwill is no longer amortised but is tested annually for impairment. Accordingly, the amortisation
charged against the Consolidated Income Statement for the 52 weeks to 2 April 2005 has been reversed and added
back to goodwill.
b. Goodwill in reserves
Under UK GAAP, goodwill on acquisitions prior to 28 March 1998 was taken directly to reserves, but would have
been included in the determination of profit or loss on sale or closure of the business to which it relates. As
required by IFRS 1, goodwill in reserves will no longer be included in the determination of profit or loss on
sale or closure of the business to which it relates.
The UK GAAP deferred tax provision relating to goodwill held in reserves has been released as a result of this
change.
c. Carrying value
As permitted by IFRS 1, the Group has elected to deem the UK GAAP net book value of goodwill at 3 April 2004 as
the IFRS cost of goodwill at transition date.
Under UK GAAP, goodwill was considered a Sterling asset. IFRS considers goodwill to be an asset denominated in
the currency of the acquired business. Goodwill relating to overseas businesses will therefore be retranslated
each period end using the relevant closing exchange rates, with the difference taken to reserves.
10. Deferred taxation
Under UK GAAP, deferred taxation was provided on timing differences between the accounting and taxable profit.
Under IAS 12 'Income Taxes' deferred tax is provided on temporary differences between the book carrying value and
tax base of assets and liabilities.
ENDS
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