IFRS-Part 2

Rotork PLC 21 June 2005 PART 2 Rotork p.l.c. Audited 2004 accounts restated under International Financial Reporting Standards Index 1 Consolidated Income Statement 2 Consolidated Balance Sheet 3 Consolidated Statement of Cash Flows 4 Consolidated Statement of Recognised Income and expense 5 - 9 Accounting Policies 10 - 32 Other notes to the Financial Statements Consolidated Income Statement for the year ended 31 December 2004 Notes £'000 Revenue 2 146,883 Cost of sales (79,097) _____ Gross profit 67,786 Other income 4 136 Distribution costs (1,816) Administrative expenses (35,638) Other expenses 5 (36) _____ Profit from operations 2 30,432 Financial income 7 4,766 Financial expenses 7 (3,692) _____ Profit before tax 8 31,506 Tax expense 9 (10,508) _____ Net profit for the year 20,998 ==== Pence Basic earnings per share 17 24.5 Diluted earnings per share 17 24.3 Consolidated Balance Sheet at 31 December 2004 Notes £'000 Assets Property, plant and equipment 10 13,877 Intangible assets 11 20,169 Deferred tax assets 12 6,988 Other receivables 489 _____ Total non-current assets 41,523 Inventories 13 21,015 Trade receivables 34,060 Current tax 14 2,176 Other receivables 14 2,525 Cash and cash equivalents 15 25,298 _____ Total current assets 85,074 ______ Total assets 126,597 ====== Equity Issued capital 4,300 Preference shares 47 Share premium 4,993 Reserves 425 Retained earnings 58,489 ______ Total equity 16 68,254 ----______ Liabilities Interest-bearing loans and borrowings 18 268 Employee benefits 19 23,569 Deferred tax liabilities 12 1,155 Provisions 20 521 ______ Total non-current liabilities 25,513 Bank overdraft 15 473 Interest bearing loans and borrowings 18 253 Trade payables 21 15,609 Current tax 21 5,779 Other payables 21 9,674 Provisions 20 1,042 ______ Total current liabilities 32,830 Total liabilities 58,343 ______ Total equity and liabilities 126,597 ====== Consolidated Statement of Cash Flows for the year ended 31 December 2004 Notes £'000 £'000 Cash flows from operating activities Profit for the year 20,998 Adjustments for: Amortisation of intangibles 70 Amortisation of development costs 322 Depreciation 2,577 Charge for share schemes 208 Profit on sale of fixed assets (72) Financial income (4,766) Financial expenses 3,692 Income tax expense 10,508 _____ 33,537 Increase in inventories (2,600) Increase in trade and other receivables (6,228) Increase in trade and other payables 4,130 Difference between pension charge and cash contribution (5,633) Decrease in provisions (130) Increase in other employee benefits 748 _____ 23,824 Income taxes paid (10,441) _____ Cash flows from operating activities 13,383 Investing activities Purchase of tangible fixed assets (3,099) Development costs capitalised (102) Sale of tangible fixed assets 295 Acquisition of subsidiary net of cash acquired (912) Interest received 973 _____ Cash flows from investing activities (2,845) Financing activities Issue of ordinary share capital 458 Purchase of ordinary share capital (691) Purchase of own preference shares (5) Interest paid (136) Repayment of amounts borrowed 188 Repayment of finance lease liabilities (58) Dividends paid on ordinary shares (17,751) Dividends paid on preference shares (4) ______ Cash flows from financing activities (17,999) ______ Net decrease in cash and cash equivalents (7,461) Cash and cash equivalents at 1 January 2004 32,134 Effect of exchange rate fluctuations on cash held 152 ______ Cash and cash equivalents at 31 December 2004 15 24,825 ====== Consolidated Statement of Recognised Income and Expense For the year ended 31 December 2004 £'000 Foreign exchange translation differences (1,212) Actuarial loss in pension scheme (5,792) Movement on deferred tax relating to actuarial loss 237 _____ Net loss recognised directly in equity (6,767) Net profit for the year 20,998 _____ Total recognised income and expense 14,231 ===== Notes to the Financial Statements for the year ended 31 December 2004 Except where indicated, values in these notes are in £'000 Rotork plc is a Company domiciled in England. The consolidated financial statements of the Company for the year ended 31 December 2004 comprise the Company and its subsidiaries (together referred to as the Group). 1. Accounting policies Basis of preparation EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidated financial statements of the company, for the year ended 31 December 2005, be prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in the EU ('adopted IFRS'). These special purpose consolidated financial statements have been prepared on the basis of the recognition and measurement requirements of IFRS in issue that are either endorsed by the EU and effective (or available for early adoption) at 31 December 2005 or are expected to be endorsed and effective (or available for early adoption) at 31 December 2005, the Group's first annual reporting date at which it is required to use adopted IFRS. Based on these adopted and unadopted IFRS, the directors have made assumptions about the accounting policies expected to be applied, which are set out below, when the first IFRS financial statements are prepared for the year ending 31 December 2005. In particular, the directors have assumed that the December 2004 amendment to IAS 19 -Employee Benefits and the April 2005 amendment to IAS39 - Cash Flow Hedge Accounting of Intra-group Forecast Transactions will be adopted by the EU in sufficient time that they will be available for use in the IFRS financial statements for the year ending 31 December 2005. In addition, the adopted IFRS that will be effective (or available for early adoption) in the financial statements are still subject to change and to additional interpretations and therefore cannot be determined with certainty. Accordingly the accounting policies for the year ended 31 December 2005 will be determined finally only when the financial statements for that year are prepared. As permitted by IFRS 1, the following standards: IFRS 5 - Non-current Assets Held for Sale and Discontinued Operations, IAS 32 - Financial Instruments: Disclosure and Presentation and IAS 39 - Financial Instruments: Recognition and Measurement are not expected to be applied until 1 January 2005 and accordingly have not been applied in these special purpose consolidated IFRS financial statements for the year ended 31 December 2004. These special purpose consolidated financial statements are not the Group's first consolidated financial statements as defined by IFRS 1. For this reason amounts are presented for the year to 31 December 2004 only and comparative information as would normally be required under IFRS is not given. An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Group is provided in note 28. Basis of accounting The financial statements have been prepared under the historical cost convention subject to the items referred to in the derivative financial instruments note below. The accounting policies set out below have been consistently applied in preparing an opening IFRS balance sheet at 1 January 2004 for the purposes of transition to IFRS. The accounting policies have been applied consistently by Group entities. The preparation of financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The key areas where estimates have been used and the assumption applied are in the impairment testing of goodwill (note 11) and in assessing the defined benefit pension scheme liabilities (note 19). Consolidation The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries for the year to 31 December 2004. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases. Intragroup balances and any unrealised gains or losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Foreign currencies Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to sterling at foreign exchange rates ruling at the dates the values were determined. Assets and liabilities of foreign subsidiaries, including goodwill and fair value adjustments arising on consolidation, are translated into sterling at rates of exchange ruling at the balance sheet date. The revenues and expenses of foreign subsidiaries are translated to sterling at rates approximating those ruling at the date of the transactions. Differences on exchange arising from the retranslation of the opening net investment in subsidiaries, and from the translation of the results of those subsidiaries at average rate, are recognised directly in equity. Any differences that have arisen since 1 January 2004, the date of transition to IFRS, are presented as a separate component of equity. Translation differences that arose before the date of transition to IFRS in respect of all foreign entities are not presented as a separate component. Revenue Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from services rendered is recognised in the income statement in proportion to the stage of completion of the transaction at the balance sheet date. The stage of completion is assessed by reference to surveys of work performed. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods also continuing management involvement with the goods. Intangible assets i) Goodwill Goodwill represents amounts arising on acquisition of subsidiaries. In respect of acquisitions that have occurred since I January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Negative goodwill arising on acquisitions would be recognised directly in profit and loss. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under UK GAAP on transition. The classification and accounting treatment of business combinations that occurred prior to 1 January 2004 has not been reconsidered in preparing the Group's opening IFRS balance sheet at 1 January 2004. Goodwill is stated at cost or deemed cost less any impairment losses. The carrying value of goodwill is reviewed at each balance sheet date and is allocated to cash-generating units. An impairment loss is recognised whenever the carrying value of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. ii) Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense as incurred. Development costs incurred after the point at which the commercial and technical feasibility of the product have been proven, and the decision to complete the development has been taken and resources made available, are capitalised. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Development expenditure has and estimated useful life of 5 years and is written off on a straight-line basis. iii) Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. The useful life of each of these assets is assessed on an individual basis and they range from 1 to 15 years. Amortisation is charged on a straight-line basis over the estimated useful life of the assets. Property, plant and equipment Freehold land is not depreciated. Long leasehold buildings are amortised over fifty years or the expected useful life of the building where less than fifty years. Other assets are depreciated by equal annual instalments by reference to their estimated useful lives and residual values at the following annual rates: Freehold buildings 2% to 4% Short leasehold buildings period of lease Machinery, plant and equipment 10% to 30% Items of property, plant and equipment are stated at cost or deemed cost less accumulated depreciation. Certain items of property that had been revalued to fair value on or prior to 1 January 2004, the date of transition to IFRS, are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation. Leases Where fixed assets are financed by leasing agreements, which give rights approximating to ownership, the assets are treated as if they had been purchased and the capital element of the leasing commitments is shown as obligations under finance leases. Assets acquired under finance leases are initially recognised at the present value of the minimum lease payments. The rentals payable are apportioned between interest, which is charged to the income statement, and liability, which reduces the outstanding obligation so as to give a constant rate of charge on the outstanding lease obligations. Costs in respect of operating leases are charged on a straight-line basis over the term of the lease in arriving at the operating profit. Taxation Income tax on the profit for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or subsequently enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profits, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Inventory and work in progress Inventory and work in progress is valued at the lower of cost, on a 'first in, first out' basis, and net realisable value. In respect of work in progress and finished goods, cost includes all production overheads and the attributable proportion of indirect overhead expenses which are required to bring inventories to their present location and condition. Cash and cash equivalents Cash and cash equivalents comprise cash balances and short-term (with an original maturity less than three months) deposits. Bank overdrafts that are repayable on demand form part of cash and cash equivalents for the purpose of the statement of cash flows. Share capital Equity comprises issued capital, share premium and reserves and for the purposes of these accounts, preference shares. IAS32 will be applied from 1 January 2005 and at that time the preference shares will be reclassified as debt. When issued capital recognised as equity is repurchased, the amount paid, including directly attributable costs, is recognised as a change in equity. Repurchased shares are classified as treasury shares and presented as a deduction from retained earnings. Provisions A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty cost data, known issues and management expectations of future costs. Employee benefits i) Pension plans The Group operates a number of defined benefit pension schemes and contributes to these schemes in accordance with qualified actuaries' recommendations. All actuarial gains and losses as at 1 January 2004, the date of transition to IFRS, were recognised. In respect of all actuarial gains and losses that arise after that date in calculating the Group's obligation in respect of the plan, these are recognised in equity. Interest on pension scheme liabilities has been recognised within financing expenses and the expected return on scheme assets within financing income in the consolidated income statement. The Group also operates a number of defined contribution pension schemes. The costs for these schemes are recognised in the income statement as incurred. ii) Share-based payment transactions The Rotork Share Option Scheme allows certain employees to acquire shares in Rotork plc. This scheme is now closed and the last grant of new options took place in 2004. Details of the scheme are given in note 19. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which employees become unconditionally entitled to the options. The fair value of the options granted is measured using a binomial model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest. The Rotork Sharesave Plan, introduced in 2004, offers certain employees the opportunity to purchase shares in Rotork plc at a discounted price compared with the market price at the time of grant. Details of the scheme are given in note 19. The fair value of the right / option is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period between grant and maturity. The right / option reaches maturity when the employee becomes unconditionally entitled. The fair value of the grant is measured using a Black-Scholes model, taking into account the terms and conditions upon which the rights were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest. The Rotork Long-Term Share Incentive Plan grants awards of shares to executive directors and senior managers. These awards may vest after a period of four years dependent upon both market and non-market performance conditions being met. Details of the grants are given in note 19. This plan gives share awards or cash awards (of equivalent value to the share awards) dependent upon the employees country of residence at date of grant. The fair value of the award is measured at grant date, using a Monte Carlo simulation model which takes into account the market based performance criteria, and spread over the vesting period. The fair value of the award is recognised as an employee expense with a corresponding increase in equity for the share settled award and a provision within employee benefits for the cash settled award. The amount recognised as an expense is adjusted to exclude options that do not vest as a result of non-market performance conditions not being met. Accruals in respect of scheme years pre-dating the implementation of IFRS2 are held in employee benefits. iii) Long-term service leave The Group's net obligation in respect of long-term service leave is the amount of future benefit that employees have earned in return for their service in the current and prior periods. iv) Other employee incentive schemes In addition to the above schemes the Group offers a number of other bonus and incentive schemes to employees around the world. The costs of these schemes are recognised in the income statement as incurred. This includes the Share Incentive Plan and Overseas Profit Linked Share Scheme both of which are a known liability at the year end. Derivative financial instruments The Group uses forward exchange contracts to hedge its exposure to foreign exchange risk arising from operational and financing activities. These are the only form of derivative financial instruments used by the Group. In accordance with its treasury policy, the Group does not hold or issue forward exchange contracts for trading purposes. However, forward contracts that do not qualify for hedge accounting are accounted for as trading instruments. In these special purpose accounts, since IAS39 has not been applied, forward exchange contracts are held at cost (usually zero). Gains and losses on foreign currency hedges are recognised in the income statement when the hedged transaction is recognised. As from 1 January 2005 the following policy will apply. Forward exchange contracts are recognised initially at cost and then subsequently re-measured at fair value. Where a forward exchange contract is designated as a hedge of the variability in cash flows of a recognised liability, a firm commitment or a highly probable forecasted transaction, the effective part of any gain or loss on the forward contract is recognised directly in equity. The cumulative gain or loss is removed from equity and recognised in the income statement at the same time as the hedged transaction. The ineffective part of any gain or loss is recognised in the income statement immediately. When a hedging instrument or hedge relationship is terminated but the hedged transaction still is expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss held in equity is recognised in the income statement immediately. Notes to the Financial Statements 2. Analysis of turnover, profit and net assets The primary format used for segmental reporting is by business segment as this reflects the internal management structure and reporting of the Group. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated expenses comprise corporate expenses and unallocated assets and liabilities comprise cash, borrowings tax assets and liabilities respectively. Inter group trading is determined on an arm's length basis. Business segments The Group comprises the following business segments: Electrics - the design, manufacture and sale of electric valve actuators Gears - the design, manufacture and sale of gearboxes, adaption and ancillaries for the valve industry Fluid system - the design, manufacture and sale of heavy duty pneumatic and hydraulic valve actuators Geographic segments Rotork has a worldwide presence in all three business segments through its subsidiary selling offices and through an agency network. A full list of locations can be found at www.rotork.com. Analysis by operation: Electrics Gears Fluid system Eliminations Consolidated Revenue from external 109,345 13,736 23,802 - 146,883 customers Inter-segment revenue - 4,070 - (4,070) - Total revenue 109,345 17,806 23,802 (4,070) 146,883 Segment result 26,054 3,203 3,016 - 32,273 Unallocated expenses (1,841) Profit from operations 30,432 Net financing income 1,074 Income tax expense (10,508) Net profit for the 20,998 year Electrics Gears Fluid system Unallocated Consolidated Segment assets 60,665 9,927 21,542 34,463 126,597 Segment liabilities 40,451 2,467 7,497 7,928 58,343 Depreciation 1,881 284 412 - 2,577 Non-cash items 39 9 57 332 437 Capital expenditure 2,628 177 294 - 3,099 Analysis by Geographical segment Europe Americas Rest of the Unallocated Consolidated World Revenue from external customers by 66,036 41,704 39,143 - 146,883 location of customer Segment assets by location of assets 63,651 20,146 8,337 34,463 126,597 Capital expenditure by location of 2,380 201 518 - 3,099 assets All of the activities of the Group in the year arise from continuing operations. 3. Acquisition of subsidiary Acquisitions On 13 January 2004 the Group acquired all of the business and assets of Deanquip Valve Automation Pty Ltd for £818,000 from Deanquip Sales Pty Ltd. £692,000 was paid on completion and the remaining £126,000 paid in January 2005. Deanquip Valve Automation Pty Ltd was renamed Rotork Fluid System Pty Ltd in January 2005. The company markets and sell pneumatic and hydraulic actuators, controls and associated products in Australia. The acquisition was accounted for using the purchase method of consolidation. In the 12 months to 31 December 2004 the subsidiary contributed £1,622,000 to Group revenue and £43,000 to the consolidated net profit for the year. The value of intangibles is based on an assessment by management. Goodwill has arisen on this acquisition as a result of the synergies Rotork will derive from the business being part of the Group rather than an independent distributor. Effect of acquisitions and disposals The acquisition had the following effect on the Group's assets and liabilities. Recognised Fair value Carrying values adjustments amounts Property, plant and equipment 32 - 32 Intangible assets - 349 349 Deferred tax assets 17 - 17 Inventories 248 - 248 Employee liabilities (56) - (56) _____ _____ _____ 241 349 590 Goodwill on acquisition 322 _____ Consideration paid, satisfied in cash (including £94k expenses) 912 ==== 4. Other income Gain on disposal of plant and equipment 80 Other 56 _____ 136 ==== 5. Other expenses Losses on sale of fixed assets 8 Other 28 _____ 36 ==== 6. Personnel expenses Wages and salaries (including bonus and incentive plans) 29,243 Compulsory social security contributions 2,950 Current service cost for defined benefit plans 1,502 Contributions to defined contribution plans 533 Share based payments (note 19) 390 Increase in liability for long-service leave 15 _____ 34,633 ==== A total of £208,000 of the above are equity settled, comprising £41,000 for the share option scheme, £8,000 for the Sharesave plan and £160,000 of the Long-term incentive plan. The cash settled portion (£181,000) all related to the Long-term incentive plan. No. During the year, the average weekly number of employees, analysed by business activity, was: Electrics 865 Gears 124 Fluid system 151 _____ 1,140 ==== UK 419 Overseas 721 _____ 1,140 ==== 7. Net financing income Interest income 849 Expected return on assets in the pension schemes 3,477 Net foreign exchange gain 440 _____ 4,766 ==== Interest expense (136) Interest charge on pension schemes liabilities (3,556) _____ (3,692) ==== 8. Profit before tax Profit before tax is stated after charging / (crediting) the following: Notes: Depreciation and other amounts written off tangible fixed assets: owned assets a 2,497 assets held under finance lease contracts a 80 Amortisation of intangibles b 392 Research and development expenditure b 2,332 Hire of plant and machinery a 538 Other operating lease rentals a 619 Exchange differences realised c (411) Auditors: b audit fees and expenses 206 other fees paid to KPMG Audit Plc and its associates analysed between: further assurance services 15 taxation services 41 other 61 The auditors' remuneration in respect of the Company was £34,000. These costs can be found under the following headings in the Consolidated income statement: a) Both within cost of sales and administrative expenses b) Within administrative expenses c) Within financing income and expenses 9. Income tax expense Recognised in the income statement Current tax: UK Corporation tax on profits for the year 6,258 Double tax relief (1,995) Adjustment in respect of prior years 156 _____ 4,419 _____ Overseas tax on profits for the year 5,879 Adjustment in respect of prior years 21 _____ 5,900 _____ Total current tax 10,319 _____ Deferred tax: Origination and reversal of other timing differences 129 Adjustment to estimated recoverable amounts of deferred tax assets arising in 60 previous periods _____ Total deferred tax 189 _____ Tax charge on profit on ordinary activities 10,508 ==== Effective tax rate (based on profit before tax) 33.4% Profit before tax 31,506 Profit on ordinary activities multiplied by standard rate of corporation tax in the 9,452 UK of 30% Effects of: Non deductible expenses 150 Unrelieved losses 25 Higher tax rates on overseas earnings 644 Adjustments to tax charge in respect of prior periods 237 _____ Current tax charge for period 10,508 ==== Deferred tax of £175,000 in respect of share based payments has been recognised directly in equity. The Group continues to expect its effective rate of corporation tax to be slightly higher than the standard UK rate due to higher rates of tax in the US, Canada, France, Germany, Italy and India. No deferred tax is recognised on the unremitted earnings of overseas subsidiaries. As the unremitted earnings are continually reinvested by the Group, no tax is expected to be payable on them in the foreseeable future. There is an unrecognised deferred tax liability for temporary timing differences associated with investments in subsidiaries. Rotork plc controls the dividend policies of its subsidiaries and subsequently the timing of the reversal of the temporary differences. It is not practical to quantify the unrecognised deferred tax liability as acknowledged within paragraph 40 of IAS12. 10. Property, plant and equipment Land and Plant and buildings equipment Total Cost At 1 January 2004 10,490 17,544 28,034 Exchange differences (158) (221) (379) Additions 939 2,307 3,246 Disposals (173) (882) (1,055) Acquisition through business combinations - 32 32 _____ _____ _____ At 31 December 2004 11,098 18,780 29,878 ===== ===== ===== Depreciation At 1 January 2004 3,078 11,316 14,394 Exchange differences (23) (132) (155) Charge for year 333 2,244 2,577 Disposals (24) (791) (815) _____ _____ _____ At 31 December 2004 3,364 12,637 16,001 ===== ===== ===== Net book value 7,734 6,143 13,877 at 31 December 2004 ===== ===== ===== The net book value of the Group's plant and machinery includes £186,000 in respect of assets held under finance leases. On conversion to IFRS the fair value of fixed assets held at a valuation was deemed to be their cost. The aggregate of adjustments from carrying value under previous GAAP was nil. 11. Intangible assets Goodwill Development Acquired Total costs intangibles Cost Balance at 1 January 25,919 1,610 - 27,529 Exchange differences (269) - - (269) Internally developed during the year - 102 - 102 Acquisition through business combinations 322 - 349 671 _____ _____ _____ ____ Balance at 31 December 25,972 1,712 349 28,033 Amortisation and impairment losses Balance at 1 January 6,862 618 - 7,480 Exchange differences (8) - - (8) Amortisation for the year - 322 70 392 _____ _____ _____ _____ Balance at 31 December 6,854 940 70 7,864 Carrying amount at 31 December 19,118 772 279 20,169 ===== ===== ===== ===== Carrying amount at 1 January 19,057 992 - 20,049 ===== ===== ===== ===== The amortisation charge is recognised in the following lines of the income statement: Cost of sales 50 Administrative expenses 342 _____ 392 ===== Impairment tests for cash generating units containing goodwill The following businesses have significant carrying amounts of goodwill: Rotork Fluid System Srl 6,476 Exeeco Ltd 4,776 Jordan Controls Inc 3,769 Rotork Gears BV 2,014 _____ 17,035 Multiple businesses without significant goodwill 2,083 _____ 19,118 ===== The recoverable amounts of all cash-generating units are based on value in use calculations. These calculations use cash flow projections and are based on actual operating results and the latest Group three-year plan. The three-year plan is based on management's view of the future and experience of past performance. Cash flows for the remainder of the next twenty years are extrapolated using a two per cent growth rate which reflects the long-term nature of many of the markets the Group serves. This rate has been consistently bettered in the past so is believed to represent a prudent estimate. A pre-tax discount rate of 9%, being the Groups weighted average cost of capital, has been used in discounting the projected cash flows. On this basis no impairment write downs are required. 12. Recognised deferred tax assets and liabilities Assets Liabilities Net Property, plant and equipment 47 (1,054) (1,007) Intangible assets 21 (231) (210) Employee benefits 6,234 - 6,234 Provisions 897 - 897 Other items 116 (197) (81) _____ _____ _____ Net tax assets/ (liabilities) 7,315 (1,482) 5,833 Set off of tax (327) 327 - _____ _____ _____ 6,988 (1,155) 5,833 ===== ===== ===== A deferred tax asset of £6,988,000 has been recognised at 31 December 2004. This asset principally relates to other differences in the defined benefit pension schemes. The directors are of the opinion, based on recent and forecast trading that the level profits in the current and future years make it more likely than not that the asset will be recovered. Details of the movement in deferred tax assets and liabilities are shown in note 28. Deferred tax assets have not been recognised in respect of the following items: Tax losses 2,259 Tax credits 468 _____ 2,727 ===== A deferred tax asset of £2,727,000 has not been recognised in relation to capital losses and certain tax credits, tax losses and other timing differences. These assets may be recovered if sufficient taxable or capital profits are made in future in the companies concerned. 13. Inventories Raw materials and consumables 14,590 Work in progress 3,585 Finished goods 2,840 _____ 21,015 ===== 14. Trade and other receivables Current assets: Corporation tax 2,176 _____ Current tax 2,176 ===== Other non trade receivables 1,345 Prepayments and accrued income 1,180 _____ Other receivables 2,525 ===== 15. Cash and cash equivalents Bank balances 7,415 Cash in hand 54 Short-term deposits 17,829 _____ Cash and cash equivalents 25,298 Bank Overdrafts (473) _____ Cash and cash equivalents in the statement of cash flows 24,825 ===== 16. Capital and reserves Share Preference Share Translation Capital Retained Total capital shares premium reserve redemption earnings reserve Balance at 1 January 2004 4,292 50 4,543 - 1,634 60,567 71,086 Profit for the financial year 20,998 20,998 Other items in the statement (1,212) (5,555) (6,767) of recognised income and expense Equity settled transactions 228 228 net of tax Share options exercised by 8 450 458 employees Own ordinary shares acquired (691) (691) Own ordinary shares awarded 702 702 under share schemes Own preference shares acquired (3) 3 (5) (5) Dividends to shareholders (17,755) (17,755) _____ _____ _____ _____ _____ _____ _____ Balance at 31 December 2004 4,300 47 4,993 (1,212) 1,637 58,489 68,254 ===== ===== ===== ===== ===== ===== ===== Share capital and share premium Number of shares (000) 5p Ordinary shares 5p Ordinary shares £1 Non-redeemable Authorised Issued and full paid 9.5% Preference shares 2004 2004 2004 On issue at 1 January 5,449 4,292 50 Purchased for cash and cancelled - - (3) Issued under employee share schemes - 8 - _____ _____ _____ On issue at 31 December - fully paid 5,449 4,300 47 ===== ===== ===== Number of shares 108,990 85,944 ===== ===== The ordinary shareholders are entitled to receive dividends as declared and are entitled to vote at meetings of the Company. The preference shareholders take priority over the ordinary shareholders when there is a distribution upon winding-up the Company or on a reduction of equity involving a return of capital. The holders of preference shares are entitled to vote at a general meeting of the Company if a preference dividend is in arrears for six months or the business of the meeting includes the consideration of a resolution for winding-up the Company or the alteration of the preference shareholders' rights. When IAS32 is applied for the 2005 year end the preference shares will be reclassified as debt because interest payments cannot be deferred and an ordinary dividend still paid. The only ordinary shares issued during the year were 161,137 under The Rotork Employee Share Option Schemes at prices between 192p and 328p. No shares were issued under The Rotork Share Incentive Plan or under The Overseas Profit-Linked Share Scheme during 2004. On 1 May 2004 options over 166,015 shares exercisable after three years (subject to satisfying performance criteria) at 3.87p were granted under The Rotork Employee Share Option Scheme (1995). On 8 October 2004 options over 162,357 shares were granted under the Rotork Sharesave Scheme at 319.6p. Of these options, 63,336 were exercisable after 3 years and 99,021 after 5 years. There were 528,941 outstanding options under The Rotork Employee Share Option Schemes at 31 December 2004, exercisable at various prices between 192p and 387p per ordinary share and between 2005 and 2014. Within the retained earnings reserve are own shares held. The investment in own shares represents 130,671 ordinary shares of the Company held in trust for the benefit of directors and employees for future payments under the Share Incentive Plan and Long-Term Incentive Plan. The market value of these shares at 31 December 2004 was £540,000. The dividends on these shares have been waived. Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations that are not integral to the operations of the Company. Dividends After the balance sheet date the following dividends were proposed by the directors. The dividends have not been provided for and there are no corporation tax consequences. 9.7p per qualifying ordinary share 8,303 ===== 17. Earnings per share Basic earnings per share Earnings per share is calculated for both the current and previous years using the profit attributable to the ordinary shareholders for the year. The earnings per share calculation is based on 85.8 million shares being the weighted average number of ordinary shares in issue for the year. Net profit attributable to ordinary shareholders Net profit for the year 20,998 Dividends on non-redeemable cumulative preference shares (4) _____ Net profit attributable to ordinary shareholders 20,994 ===== Weighted average number of ordinary shares Issued ordinary shares at 1 January 85,832 Effect of own shares held (127) Effect of shares issued under options 96 _____ Weighted average number of ordinary shares at 31 December 85,801 ===== Diluted earnings per share Diluted earnings per share is based on the profit for the year attributable to the ordinary shareholders and 86.4 million shares. The number of shares is equal to the weighted average number of ordinary shares in issue adjusted to assume conversion of all dilutive potential ordinary shares. The Company has two categories of dilutive potential ordinary shares: those share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year and contingently issuable shares awarded under the Long-Term Incentive Plan. Net profit attributable to ordinary shareholders (diluted) Net profit attributable to ordinary shareholders 20,994 ===== Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares at 31 December 85,801 Effect of share options on issue 86 Effect of LTIP shares on issue 482 _____ Weighted average number of ordinary shares (diluted) at 31 December 86,369 ===== 18. Interest-bearing loans and borrowings This note provides information about the contractual terms of the Group's interest-bearing loans and borrowings. For more information about the Group's exposure to interest rate and currency risk, see note 22. Non-current liabilities Bank loans 169 Finance lease liabilities 99 _____ 268 ===== Bank loans are secured by accepted letters of credit and corporate guarantees. Current liabilities Bank loans 165 Finance lease liabilities 88 _____ 253 ===== Finance lease liabilities Finance lease liabilities are payable as follows: Minimum Interest Principal lease payments Less than one year 95 7 88 Between one and five years 105 6 99 More than five years - - - _____ _____ _____ 200 13 187 ===== ===== ===== 19. Employee benefits Recognised liability for defined benefit obligations: Present value of unfunded obligations 74,486 Fair value of plan assets (54,650) _____ 19,836 Defined contribution scheme liabilities 502 Employee bonus and incentive plan 1,663 Long-term incentive plan 1,075 Employee indemnity provision 356 Liability for long-service leave 137 _____ 23,569 ===== Liability for defined benefit obligations The Group makes a contribution to three defined benefit plans to provide benefits for employees upon retirement. Movements in the net liability recognised in the balance sheet 2004 Net liability at 1 January 19,503 Contributions received (7,040) Expense recognised in the income statement (see below) 1,581 Actuarial loss 5,792 _____ Net liability at 31 December 19,836 ===== Expense recognised in the income statement 2004 Current service costs 1,502 Interest on obligation 3,556 Expected return on plan assets (3,477) _____ 1,581 ===== The expense is recognised in the following line items in the income statement 2004 Cost of sales 382 Administrative expenses 1,120 Net financing income 79 _____ 1,581 ===== Actual return on plan assets 884 ===== Liability for defined benefit obligations The principal actuarial assumptions at the balance sheet date (expressed as weighted averages) UK scheme US scheme Average (% per annum) (% per annum) (% per annum) 2004 2003 2002 2004 2003 2002 2004 2003 2002 Discount rate 5.30 5.45 5.65 5.66 6.10 6.60 5.32 5.48 5.70 Rate of increase in 3.9 3.8 3.3 4.5 4.5 5.0 3.93 3.84 3.39 salaries Rate of increase in 2.9 2.8 2.3 0.0 0.0 0.0 2.78 2.66 2.19 pensions (post May 2000) Rate of increase in 4.5 4.5 4.5 0.0 0.0 0.0 4.31 4.28 4.28 pensions (pre May 2000) Rate of price 2.9 2.8 2.3 3.5 3.5 4.0 2.93 2.84 2.39 inflation The expected rates of return were: Expected rate of return % 2004 2003 2002 Equities 7.90 8.20 8.30 Bonds 4.90 5.10 5.00 Other 4.90 4.90 4.44 US deposit administration contract 6.00 6.00 6.00 Total Volatility assumptions for equity based payments The expected volatility of all equity compensation benefits is based on the historic volatility (calculated based on the weighted average remaining life of each benefit), adjusted for any expected changes to future volatility due to publicly available information. a) Share option scheme At 1 January 1995 the Group established a share option programme for employees. The allocation of options was linked to the completion of 5 years service. In accordance with the programme, once vested the options grant the right to purchase shares at the market price they were at the date of grant. Exercise prices range from 192p to 387p. Options vest after three years and expire ten years after being granted. Only the 2003 and 2004 grant occurred after 7 November 2002, the start date for recognition under IFRS2. Therefore only charges in respect of these grants have been made to the accounts in accordance with IFRS2 and the relevant disclosures made below. Additionally, six share option arrangements granted before 7 November 2002 exist. The recognition and measurement principles in IFRS2 have not been applied to these grants in accordance with the transitional provisions in IFRS1 and IFSR2. 2003 grant 2004 grant Grant date 11 April 03 1 May 2004 Exercise price / Share price at grant date of all options £2.78 £3.87 Number of employees 20 118 Shares under option 78,045 163,102 Vesting period 3 years 3 years Expected volatility 23% 23% Option life taken as expected life 3 - 10 years 3 - 10 years Risk free rate 4.0% 4.8% Expected dividends expressed as a dividend yield 4.6% 3.7% Probability of ceasing employment before vesting 20% 20% Expectation of meeting performance criteria 100% 100% Fair value £0.64 £0.94 Option (exercise price) Outstanding at Granted during Exercised Lapsed during Outstanding at start of year year during year year end of year * exercisable at end of year 1996 grant (£1.92)* 12,361 - (3,645) - 8,716 1997 grant (£2.59)* 8,480 - (8,480) - - 1998 grant (£3.28)* 14,747 - (8,992) - 5,755 1999 grant (£3.62)* 81,274 - - - 81,274 2000 grant (£2.85)* 289,093 - (134,772) (5,066) 149,255 2001 grant (£2.98)* 22,752 - (5,248) - 17,504 2002 grant (£3.72) 17,311 - - (2,422) 14,889 2003 grant (£2.78) 78,045 - - - 78,045 2004 grant (£3.87) - 163,102 - (5,537) 157,565 524,063 163,102 (161,137) (13,025) 513,003 Weighted average exercise £2.97 £3.87 £2.80 £3.44 £3.29 price Weighted average contractual 7 years life remaining The 2001 grant vested during the year. The intrinsic value of shares vested as at 31 December 2004 is £278,000. The Group received proceeds of £458,000 in respect of the 161,137 options exercised during the year: £8,000 was credited to share capital and £450,000 to share premium (see note 16). The options were exercised throughout the year at prices between 192p and 328p. b) Long-term Incentive Plan Following shareholder approval of the LTIP at the Company's Annual General Meeting on 18 May 2000, awards over shares were made to executive directors and senior managers in each year from 2000 to 2004. The performance period for the 2001 Award ended at 31 December 2004. Messrs Hewitt Bacon and Woodrow as independent actuaries have certified to the Remuneration Committee that there was a 100% vesting of this Award as the Company's position relative to the comparator group at the end of the relevant performance period was above the 75th percentile position and the Company's earnings per share growth has exceeded the growth in the Retail Price Index plus 2% per annum. The awards will vest during 2005. The LTIP is a performance share or cash unit plan under which shares or cash units are conditionally allocated to selected members of senior management at the discretion of the Remuneration Committee on an annual basis. No shares or cash units will normally be released to participants unless they are still in the Group's service following completion of four year performance periods and the Company's relative TSR against a comparator group of companies places it in at least the 50th percentile position in the comparator group at the end of the relevant performance period. TSR measures the change in value of a share and reinvested dividends over the period of measurement. The actual number of shares or cash units transferred will be determined by the number of shares or cash units initially allocated multiplied by a vesting percentage which will be 40% at the 50th percentile rising to 100% at the 75th percentile with each percentile position above the 50th adding 2.4% to the vesting percentage. The Company's earnings per share is also monitored during the relevant performance period to ensure it meets a minimum average annual growth equal to the rise in the Retail Price Index plus 2% per annum. Failure to meet the 'RPI' requirement will result in nil vesting. Share scheme Grant date 29 March 2004 24 March 2003 Share price at grant date £3.87 £2.68 Number of employees 10 9 Shares / Share equivalents under scheme 223,370 148,174 Vesting period 4 years 4 years Expected volatility 22% 22% Risk free rate 4.6% 4.0% Expected dividends expressed as a dividend yield 4.3% 5.8% Probability of ceasing employment before vesting Zero Zero Fair value £2.27 £1.45 Cash scheme Grant date 29 March 2004 24 March 2003 28 March 2002 Share price at grant date £3.87 £2.68 £3.84 Number of employees 18 20 20 Shares / Share equivalents under scheme 123,091 91,244 54,313 Vesting period 4 years 4 years 4 years Expected volatility 22% 22% 22% Risk free rate 4.4% 4.4% 4.5% Expected dividends expressed as a dividend yield 3.6% 3.6% 3.6% Probability of ceasing employment before vesting Zero Zero Zero Fair value £2.42 £2.35 £2.29 Share based scheme Outstanding at Granted during Vested during Lapsed during Outstanding at start of year year year year end of year 2001 Award 112,615 - - - 112,615 2002 Award 100,111 - - - 100,111 2003 Award 148,174 - - - 148,174 2004 Award - 223,370 - - 223,370 360,900 223,370 - - 584,270 Cash based scheme Outstanding at Granted during Vested during Lapsed during Outstanding at start of year year year year end of year 2001 Award 66,970 - - - 66,970 2002 Award 54,313 - - - 54,313 2003 Award 91,244 - - - 91,244 2004 Award - 123,091 - - 123,091 212,527 123,091 - - 335,618 c) Sharesave plan Following shareholder approval of the Sharesave plan at the Company's Annual General Meeting on 18 May 2000, the first offer was made to employees in 2004. UK employees are invited to join the Sharesave plan when an offer is made each year. The offer for 2004 was made at a 20% discount to market price at the time. There are no performance criteria for the Sharesave plan. Employees are given the option of joining either the 3 year plan or the 5 year plan. 2004 Award 3 year scheme 5 year scheme Grant date 8 October 2004 8 October 2004 Share price at grant date £4.00 £4.00 Exercise price £3.20 £3.20 Shares / Share equivalents under scheme 63,336 99,021 Vesting period 3 years 5 years Expected volatility 23% 23% Risk free rate 4.6% 4.6% Expected dividends expressed as a dividend yield 3.5% 3.5% Probability of ceasing employment before vesting 20% 20% Fair value £1.06 £1.13 3 year plan Outstanding at Granted during Vested during Lapsed during Outstanding at start of year year year year end of year 2004 Award - 63,336 - - 63,336 5 year plan Outstanding at Granted during Vested during Lapsed during Outstanding at start of year year year year end of year 2004 Award - 99,021 - - 99,021 d) Employee expenses The employee expense included in the income statement can be analysed as follows: Share options granted 2003 13 Share options granted 2004 28 Long-term incentive plan - cash settled 181 Long-term incentive plan - equity settled 160 Sharesave plan - 3 year 4 Sharesave plan - 5 year 4 _____ Total expense recognised as employee costs (note 6) 390 ===== 20. Provisions Warranty Balance at 1 January 2004 1,725 Exchange differences (30) Provisions used during the year (362) Charged in the year 230 _____ Balance at 31 December 2004 1,563 ===== Non-current 521 Current 1,042 _____ 1,563 ===== The provision is based on estimates made from historical warranty data associated with similar products and services. The provision relates mainly to products sold during the last twelve months, the typical warranty period is now eighteen months. 21. Other Payables Trade creditors 15,363 Bills of exchange 246 _____ Trade payables 15,609 ===== Corporation tax 5,779 _____ Current tax 5,779 ===== Other taxes and social security 1,709 Non trade payables and accrued expenses 7,965 _____ Other payables 9,674 ===== 22. Financial instruments Financial risk and treasury policies The treasury department maintains liquidity, manages relations with the Group's bankers, identifies and manages foreign exchange risk and provides a treasury service to the Group's businesses. Treasury dealings such as investments, borrowings and foreign exchange are conducted only to support underlying business transactions. The Group has clearly defined policies for the management of foreign exchange and interest rate risk. Group treasury is not a profit centre and, therefore, does not undertake speculative foreign exchange dealings for which there is no underlying exposure. Exposures resulting from sales and purchases in foreign currency are matched where possible and the net exposure may be hedged by the use of forward exchange contracts. The numerical disclosures in this note deal with financial assets and financial liabilities as defined in Financial Reporting Standard 13: 'Derivatives and Other Financial Instruments: Disclosures' (FRS13). Certain financial assets such as investments in subsidiary and associated companies are excluded from the scope of these disclosures. As permitted by FRS13, short-term debtors and creditors have been excluded from the disclosures, other than the currency disclosures. Interest rate risk profile Financial liabilities The interest rate profile of the Group's financial liabilities at 31 December was as follows: Fixed rate Floating rate Total of interest of interest Euro 187 473 660 Yen 102 66 168 Other - 166 166 _____ _____ _____ 289 705 994 ===== ===== ===== The floating rate financial liabilities comprise bank loans / overdrafts bearing interest rates fixed by reference to the relevant LIBOR or equivalent rate. The weighted average interest rate of the fixed rate financial liabilities is 3.5% per annum. The weighted average period for which interest rates on the fixed rate financial liabilities are fixed is 2 years. Financial assets The interest rate profile of the financial assets held as part of the financing arrangements of the Group at 31 December was as follows: Fixed rate cash Other cash Sterling 14,314 662 US dollar 2,258 3,264 Euro 940 1,859 Other 317 1,684 _____ _____ 17,829 7,469 ===== ===== All cash deposits are held on fixed rates of interest. All other cash amounts are on floating rates or overnight rates based on the relevant LIBOR or equivalent rate. Further analysis of the interest rate profile at 31 December is as follows: Fixed rate Weighted average Weighted average interest rate period for fixed rate (months) (%) Sterling 4.8 0 US dollar 2.3 1 Euro 2.1 1 Other - - _____ _____ Group 4.5 1 ==== ==== Currency exposures The table below shows the Group's balance sheet currency exposures that give rise to the net currency gains and losses recognised in the income statement. Such exposures comprise the monetary assets and monetary liabilities of the Group that were not denominated in the operating (or 'functional') currency of the operating unit involved. At 31 December these exposures were as follows: Net foreign currency monetary assets / (liabilities) Functional currency of Group operation Sterling US dollar Euro Other Total Sterling - (1,585) (434) (2,644) (4,663) US dollar 588 - 18 3,689 4,295 Euro 1,415 165 - (55) 1,525 Other 503 - (1) 529 1,031 _____ _____ _____ _____ _____ Total 2,506 (1,420) (417) 1,519 2,188 ===== ===== ===== ===== ===== The amounts shown above take into account the effect of any forward contracts entered into to manage these currency exposures. Maturity of financial liabilities The maturity profile of the Group's financial liabilities at 31 December was as follows: In one year or less 726 In more than one year but not more than two years 126 In more than two years but not more than five years 142 In more than five years - _____ Total 994 ===== The Group had no undrawn committed borrowing facilities at 31 December 2004. Fair values The table below shows a comparison by category of book values and fair values of the Group's financial assets and liabilities at 31 December Book value Fair value Primary financial instruments held or issued to finance the Group's operations: Short-term financial liabilities and current proportion of long-term borrowings (726) (726) Long-term borrowings (268) (268) Cash deposits 17,829 17,829 Other cash balances 7,469 7,469 Derivative financial instruments held to manage the currency profile: Forward foreign currency contracts - 277 Gains and losses on hedges The Group enters into forward foreign currency contracts to eliminate the currency exposures that arise on sales denominated in foreign currencies. Changes in the fair value of instruments used as hedges are not recognised in the financial statements until the hedged position matures. Gains Losses Total Unrecognised gains and losses on hedges At 1 January 2004 684 (54) 630 Amounts arising in previous years that were recognised (684) 54 (630) during the year _____ _____ _____ Amounts arising before 1 January 2004 that were not - - - recognised during the year Amounts arising in the year that were not recognised during the year 373 (96) 277 _____ _____ _____ At 31 December 2004 373 (96) 277 ===== ===== ===== Of which: Gains / (losses) expected to be recognised in less than 297 (96) 201 one year Gains / (losses) expected to be recognised in more than 76 - 76 one year 23. Operating leases Non-cancellable operating lease rentals are payable as follows: Less than one year 177 Between one and five years 1,355 More than five years 170 _____ 1,702 ===== Of the £1.7m, £0.8m relates to property and the balance to plant and equipment. The largest single lease commitment is for less than £0.3m. 24. Capital commitments Capital commitments at 31 December for which no provision has been made in these accounts were: Contracted 332 25. Contingencies Performance guarantees and indemnities 3,466 The UK banking arrangements are subject to cross-guarantees between the Company and its UK subsidiaries. These accounts are subject to a right of set-off. The performance guarantees and indemnities have been entered into in the normal course of business. A liability would only arise in the event of the Group failing to fulfil its contractual obligations. 26. Related parties The Group has a related party relationship with its subsidiaries and with its directors. A list of subsidiaries is shown on pages 63 and 64 of the full 2004 financial statement. Transactions between two subsidiaries for the sale and purchase of products or the subsidiary and parent for management charges are priced on an arms length basis. Directors' interests The interests of the directors in the ordinary share capital of the Company according to the register required to be kept by section 325 of the Companies Act 1985, at 31 December were as follows: No. RC Lockwood - JW Matthews 10,600 A Walker 5,000 GE Malcolm 29,430 WH Whiteley 87,478 RE Slater 20,911 RH Arnold 14,384 All interests were beneficial and include directors' directly held and family share interests. The beneficial interests at 31 December included the following ordinary shares held under the Rotork Share Incentive Plan (SIP), and the Rotork Overseas Profit-Linked Share Plan (OPLSS) in trust: GE Malcolm 3,693 WH Whiteley 4,159 RE Slater 3,623 *RH Arnold 2,841 *RH Arnold participates in the Rotork Overseas Profit-Linked Share Scheme (OPLSS), and the figures shown for RH Arnold for 2004 and the prior year relate solely to OPLSS. Details of directors remuneration and allocations to directors in 2004 and further details of the SIP and OPLSS schemes are provided in the remuneration report included in the filed 2004 financial statements. The only changes in the directors interests post year end relate to shares purchased by the UK based directors monthly under the Rotork SIP partnership plan to a maximum £125 per month. Save as disclosed, no director or his family had any interest in the shares of the Company at 31 December 2004. 27. Subsequent event Subsequent to the balance sheet date, the Group purchased the trade and assets of PC Intertechnik GmbH. The total consideration for the transaction is €9.8m all payable in cash. A sum of €2m is deferred in tranches with full release over 12 months subject to performance and no relevant warranty claims by the purchaser. 28. Explanation of transition to IFRS Balance sheets 1 January 2004 31 December 2004 Previous Effect of IFRS Previous Effect of IFRS GAAP transition GAAP transition to to IFRS IFRS Notes Assets Property, plant and equipment 13,640 - 13,640 13,877 - 13,877 Intangible assets a, c 19,057 992 20,049 18,174 1,995 20,169 Deferred tax assets b - 6,605 6,605 - 6,988 6,988 Other receivables 486 - 486 489 - 489 _____ _____ _____ _____ _____ _____ Total non-current assets 33,183 7,597 40,780 32,540 8,983 41,523 Inventories 18,570 - 18,570 21,015 - 21,015 Trade receivables 28,973 - 28,973 34,060 - 34,060 Current tax receivable 1,226 - 1,226 2,176 - 2,176 Other receivables b 2,767 (954) 1,813 3,442 (917) 2,525 Cash and cash equivalents 32,253 - 32,253 25,298 - 25,298 _____ _____ _____ _____ _____ _____ Total current assets 83,789 (954) 82,835 85,991 (917) 85,074 _____ _____ _____ _____ _____ _____ Total assets 116,972 6,643 123,615 118,531 8,066 126,597 ===== ===== ===== ===== ===== ===== Equity Issued capital 4,292 - 4,292 4,300 - 4,300 Preference shares 50 - 50 47 - 47 Share premium 4,543 - 4,543 4,993 - 4,993 Reserves d 4,039 (2,405) 1,634 4,042 (3,617) 425 Retained earnings 49,569 10,998 60,567 44,753 13,736 58,489 _____ _____ _____ ______ ______ ______ Total equity 62,493 8,593 71,086 58,135 10,119 68,254 _____ _____ _____ ----______ ----______ ----______ Liabilities Interest-bearing loans and 129 - 129 268 - 268 borrowings Employee benefits e 13,653 9,113 22,766 13,885 9,684 23,569 Deferred tax liabilities f 128 665 793 275 880 1,155 Provisions e 1,612 (1,037) 575 1,159 (638) 521 _____ _____ _____ ______ ______ ______ Total non-current liabilities 15,522 8,741 24,263 15,587 9,926 25,513 Bank overdraft 119 - 119 473 - 473 Interest bearing loans and 118 - 118 253 - 253 borrowings Trade payables 12,460 - 12,460 15,609 - 15,609 Current tax payable 5,020 - 5,020 5,779 - 5,779 Other payables e , g 20,090 (10,691) 9,399 21,653 (11,979) 9,674 Provisions 1,150 - 1,150 1,042 - 1,042 _____ _____ _____ ______ ______ ______ Total current liabilities 38,957 (10,691) 28,266 44,809 (11,979) 32,830 Total liabilities 54,479 (1,950) 52,529 60,396 (2,053) 58,343 _____ _____ _____ ______ ______ ______ Total equity and liabilities 116,972 6,643 123,615 118,531 8,066 126,597 ===== ===== ===== ===== ===== ===== Notes to the explanation of transition to IFRS a) Intangible assets No amortisation of goodwill is charged to the income statement in the year under IFRS. Under UK GAAP £1,293,000 was charged during the year so this has been reversed. Development costs of £992,000 at 1 January 2004 and £772,000 at 31 December 2004 that qualified for recognition as an intangible asset under IFRSs had not been recognised under UK GAAP. They are recognised under IFRS at the date of transition and at 31 December 2004 respectively. During 2004 £322,000 of development expenditure was amortised and £102,000 of costs expensed under UK GAAP were capitalised. b) Deferred tax assets Under UK GAAP the defined benefit pension scheme liability was reflected in the financial statements net of deferred taxation. On transition to IFRS this has been shown in the accounts as a deferred tax asset. The deferred tax asset on accumulated actuarial gains and losses at 1 January 2004 was £5,850,000, the tax charge in the year was £101,000 resulting in an asset of £5,951,000 at 31 December 2004. All other deferred tax assets which were shown within debtors have been transferred to non-current assets and deferred tax has been provided on the share based payments: 1 January 2004 Movement 31 December 2004 Deferred tax asset Previously in pension liabilities 5,850 101 5,951 Previously in debtors 954 (37) 917 Previously in deferred tax liabilities - 253 253 Amortisation of intangibles - 21 21 Share based payments 155 18 173 Set off of tax (354) 27 (327) _____ _____ _____ Total 6,605 383 6,988 ===== ===== ===== c) Acquisition of subsidiary The acquisition of Deanquip Valve Automation in January 2004 has been restated under IFRS3. As a consequence of applying IFRS3 the acquisition has been re-examined with a view to identifying specific intangibles. As a result intangibles previously treated as goodwill and amortised over 20 years are now being held on the balance sheet and are amortised over their estimated useful lives. The intangible assets identified and the charge to the accounts in 2004 in respect of these intangibles is as follows: Intangible at Amortisation acquisition charge in 2004 Company name 31 21 Customer relationships 233 15 Order backlog at acquisition 25 25 Agency agreements 60 12 Currency adjustment - (3) _____ _____ 349 70 Goodwill 322 - _____ _____ 671 70 ===== ===== The intangible amortisation for the year has been charged partly in cost of sales (£50,000) and partly in administration expenses (£20,000). d) Reserves A number of reserves are required under IFRS which were not recorded under UK GAAP. The breakdown of this movement is as follows: UK GAAP Adjustment IFRS Capital redemption reserve 1,637 - 1,637 Revaluation reserve 2,405 (2,405) - Translation reserve - (1,212) (1,212) _____ _____ _____ Total 4,042 (3,617) 425 ===== ===== ===== The revaluation reserve is eliminated under IFRS as on first time adoption the value at which the assets are held is deemed to be cost. The translation reserve historically under UK GAAP has been included in the retained earnings reserve. e) Employee benefits Rotork adopted FRS17 for the 2004 year end under UK GAAP. Liabilities under the Group defined benefit pension schemes were shown on the face of the balance sheet but were stated net of the associated deferred tax asset. Under IFRS the deferred tax has been transferred to non-current assets (see note b above) and the pension liability shown gross under employee liabilities. At 1 January 2004 the liability was £19,503,000 and at 31 December 2004, £19,836,000. Under IFRS certain liabilities have been reclassified as employee benefits from payables and provisions. These are: 1 January 2004 Movement 31 December 2004 UK GAAP employee liabilities 13,653 232 13,885 Transfer to deferred tax assets (see note b) 5,850 101 5,951 Transfer from provisions 1,037 (399) 638 Transfer from other payables - non share based payment 1,447 573 2,020 accruals Transfer from other payables - share based payment accruals 1,102 516 1,618 Adjustment of share based payments to IFRS (323) (220) (543) _____ _____ _____ Total 22,766 803 23,569 ===== ===== ===== f) Deferred taxation liabilities Under UK GAAP certain properties had been revalued. This revaluation was shown within reserves as a separate reserve but under IFRS this has been consolidated into retained earnings. On transition, following IFRS1 the revaluations have been deemed cost. As a consequence deferred tax of £722,000 has been provided on the balance at 1 January and 31 December 2004. In addition, the capitalisation of development costs has led a reduction in the historic charge to the income statement and requires the creation of a deferred tax liability. The liability at 1 January 2004 was £297,000 reducing by £65,000 during the year to £232,000 at 31 December 2004. 1 January 2004 Movement 31 December 2004 Deferred tax liability UK GAAP deferred tax liabilities 128 147 275 Previously in deferred tax assets - 253 253 Revaluation reserve tax liability 722 - 722 Capitalised development costs liability 297 (65) 232 Set off of tax (354) 27 (327) _____ _____ _____ Total 793 362 1,155 ===== ===== ===== g) Other payables Under UK GAAP dividends are accounted for once proposed but IFRS only reports dividends as a charge to the accounts once paid. Reversal of the proposed dividend has reduced other payables by £8,341,000. Together with the £3,638,000 transfer in respect of UK GAAP employee benefits noted above this accounts for the £11,979,000 reduction in other payables. Income statement Notes Previous Effect of IFRS GAAP transition to IFRS Revenue 146,883 - 146,883 Cost of sales c, h (79,030) (67) (79,097) _____ _____ _____ Gross profit 67,853 (67) 67,786 Other income j 631 (495) 136 Distribution expenses (1,816) - (1,816) Administration expenses a, c, h (36,720) 1,082 (35,638) Other expenses j (91) 55 (36) _____ _____ _____ Profit from operations 29,857 575 30,432 Net financing income j 634 440 1,074 _____ _____ _____ Profit before tax 30,491 1,015 31,506 Tax expense i (10,591) 83 (10,508) _____ _____ _____ Net profit for the year 19,900 1,098 20,998 ===== ===== ===== Basic earnings per share 23.2p 1.3p 24.5p Diluted earnings per share 23.0p 1.3p 24.3p h) Employee share schemes The Group applied IFRS2 to its active share based payment arrangements at 1 January 2004 except for those granted before 7 November 2002. The effect of accounting for equity settled share based payment transactions at fair value is to increase cost of sales by £17,000 and reduce administration expenses by £29,000. The reduction in administration expenses reflects the reversal of provisions made under UK GAAP for the Long-Term Incentive Plan. i) Income tax expense The income tax charge in the income statement has changed as a result by the tax effect of some of the UK GAAP to IFRS adjustments. The analysis of the net change is: Amortisation of intangibles (see note b) 21 Cash settled share based payments (see note b) 18 Capitalised development costs (see note f) 65 Equity settled share based payments (21) _____ 83 ===== j) Exchange gains and losses Under UK GAAP exchange gains and losses were reported in operating profit. Under IFRS any gains and losses resulting from retranslation of currency deposits are shown in net financing income which has resulted in Other income being reduced by £495,000 and other expenses being reduced by £54,000, the net result of £440,000 now being presented as a credit in net financing income. This information is provided by RNS The company news service from the London Stock Exchange

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