Restatement under IFRS
Smiths Group PLC
21 November 2005
Smiths Group: Transition to
International Financial Reporting Standards (IFRS)
Smiths Group is today publishing information about its IFRS accounting policies
and restating its results for the year ended 31 July 2005 and its July 2004 and
July 2005 balance sheets in order to enable an understanding of the effect of
IFRS on the Company's financial reporting. This information updates and
supplements the IFRS information previously published by Smiths Group on 6 July
2005. Smiths Group will report under IFRS for the first time in the 2005/2006
interim results, which will be published in March 2006.
The Company is not issuing a trading statement at this time.
Highlights:
2005 IFRS UK GAAP
£m £m
Turnover 3,005 3,017
Operating profit
headline* 435 420
goodwill amortisation and impairment (11) (60)
acquired intangible asset amortisation (5) (1)
exceptional/significant items (40) (48)
379 311
Pre-tax profit
headline* 423 413
goodwill amortisation and impairment (11) (60)
acquired intangible asset amortisation (5) (1)
exceptional/significant items (40) (42)
367 310
Basic earnings per share
Headline 55.3p 54.3p
statutory basis 49.5p 39.3p
* Before goodwill amortisation (including impairment), amortisation of other
acquired intangible assets and exceptional items (under UK GAAP) and before
impairment of goodwill and amortisation of other acquired intangible assets and
significant items (under IFRS).
The full text of this release may be downloaded from
http://www.smiths-group.com/ir.
o-
Media: Investors:
Chris Fox Russell Plumley
+44 (0) 20 8457 8403 +44 (0) 20 8457 8203
chris.fox@smiths-group.com russell.plumley@smiths-group.com
Smiths Group plc
Adoption of International Financial Reporting Standards
Introduction
As a consequence of the adoption by the European Union ('EU') of International
Financial Reporting Standards ('IFRS') Smiths Group plc ('Smiths'), in common
with all companies quoted on the London Stock Exchange or other European
exchanges, is required to prepare its consolidated financial statements under
IFRS for all periods commencing on or after 1 January 2005.
Smiths will first adopt IFRS for the year commencing 1 August 2005 and ending 31
July 2006, including the Interim Statement for the six months ending 31 January
2006. However, the requirement to restate comparative figures on the same basis
as the period then under review means that Smiths has:-
i) Applied its new IFRS accounting policies to its consolidated 31 July
2004 balance sheet (previously prepared under UK Generally Accepted
Accounting Standards ('UK GAAP')), in order to determine an
appropriately adjusted opening position on transition to IFRS as at
1 August 2004 except in respect of IAS 32 and IAS 39, as explained
below; and
ii) Restated its results for the year ended 31 July 2005 and its balance
sheet as at 31 July 2005 in line with its new IFRS accounting policies
for such comparative purposes, except in respect of IAS 32 and IAS 39,
as explained below.
The impact of IFRS on the Smiths consolidated financial statements will be
two-fold:-
a) Presentation
The format and descriptions used in the balance sheet and income statement
will change to accord with the new reporting requirements, and
b) Measurement
The recognition and measurement of certain assets, liabilities, income and
expenses will change in order to comply with the new standards.
This document sets out the changes that are required to the previously reported
2004 balance sheet and the 2005 full year results in order to comply with IFRS,
and the underlying reasons for those changes. Also included are the
consolidated Income Statement and Balance Sheet for the six months ended 31
January 2005 under IFRS. The financial information represents the Company's
current best estimates, and may need to be revised subsequently due to changes
in IFRS, or to the interpretation of its provisions. The appendices to this
document contain reconciliations of the 1 August 2004 opening Balance Sheet, and
the 31 July 2005 Balance Sheet and Income Statement and Cash Flow Statement, and
the 31 January 2005 Balance Sheet and Income Statement, from a UK GAAP to an
IFRS basis and revised accounting policies under IFRS. A further balance sheet
has been prepared as at 1 August 2005 to illustrate the effect of adopting IAS
32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial
Instruments: Recognition and Measurement as of that date.
Summary of IFRS Impact - Balance Sheet (unaudited)
The impact of IFRS on the Smiths Group plc consolidated shareholders' funds may
be summarised as follows:-
1 August 2004 31 July 2005 1 August 2005*
£m £m £m
Shareholders' funds under UK GAAP 1,122.5 1,204.8 1,204.8
Add: Development expenditure 65.1 111.3 111.3
capitalised
Goodwill amortisation and - 45.9 45.9
impairment
Dividend reversal 102.5 111.3 111.3
Deferred tax (2.9) (18.3) (15.4)
Other adjustments (6.2) (2.7) (2.7)
Adoption of IAS 39 - - (9.7)
Shareholders' funds under IFRS 1,281.0 1,452.3 1,445.5
*Smiths has elected to adopt IAS 32 Financial Instruments: Disclosure and
Presentation and IAS 39 Financial Instruments: Recognition and Measurement from
1 August 2005 with no restatement of comparative information.
Changes in the presentational format of the consolidated balance sheets to
accord with the new IFRS requirements are set out in Appendices D (1 August
2004), F (31 July 2005) and I (31 January 2005).
An analysis of UK GAAP - IFRS adjustments by category of assets and liabilities
in the new IFRS format are set out in Appendices E (1 August 2004), G (31 July
2005), H (1 August 2005) and J (31 January 2005).
Summary of IFRS Impact - 2005 Income Statement (unaudited)
Following restatement of the Smiths Group plc consolidated balance sheet at 1
August 2004, the results for the year ended 31 July 2005 have been revised to
conform with IFRS rules. The impact on the previously reported UK GAAP pre-tax
profit is summarised as follows:-
Headline* Total
£m £m
UK GAAP profit before tax 412.6 309.8
Add: Development expenditure capitalised
(net of amortisation) 36.3 36.3
Stock revaluation on acquisition (14.0) (14.0)
Goodwill amortisation and impairment - 48.4
Amortisation of acquired intangible - (3.4)
assets
Share based payment (6.3) (6.3)
Financing losses (4.5) (4.5)
Other (1.6) 0.7
IFRS adjusted profit before tax 422.5 367.0
IFRS taxation (111.4) (88.7)
IFRS adjusted profit after taxation 311.1 278.3
EPS - Basic 55.3p 49.5p
* Before goodwill amortisation (including impairment), amortisation of other
acquired intangible assets and exceptional items (under UK GAAP) and before
impairment of goodwill and amortisation of other acquired intangible assets and
significant items (under IFRS). Exceptional items in the year ended 31 July
2005 comprised restructuring costs of £33.3m, costs of £14.9m incurred in
respect of the settlement of a patent dispute relating to the Cozmonitor insulin
pump, gains on disposal of businesses of £8.7m and the write down of goodwill on
anticipated future disposals of £2.3m. Under IFRS all of these items are
significant items, with the exception of the write down of goodwill on
anticipated future disposals. Under IFRS no such charge is recognised.
Headline basic earnings per share (EPS) improves from 54.3p under UK GAAP to
55.3p on an IFRS basis, and on a statutory basis from 39.3p under UK GAAP to
49.5p on an IFRS basis.
A restatement of the 2005 Income Statement and analysis of UK GAAP - IFRS
adjustments is set out in Appendix A.
Basis of preparation
The unaudited financial information contained in this document has been prepared
using IFRS policies based on IFRS expected to be applicable to the Company and
adopted formally by the EU as of 31 July 2006. As permitted, Smiths has adopted
early the amendment to IAS 19 Employee Benefits published in December 2004,
which is still pending endorsement by the EU.
At this stage in the development of IFRS, matters such as the interpretation and
application surrounding it are continuing to evolve. In addition IFRS currently
in issue and endorsed by the EU are subject to interpretation by IFRIC and
further standards may be issued by the IASB that will be endorsed by the EU
before 31 July 2006. These uncertainties could result in the need to change the
basis of accounting or presentation of certain financial information from that
presented in this document.
Smiths is required to establish its IFRS accounting policies for the year ended
31 July 2006, and apply these retrospectively to determine its opening IFRS
balance sheet at the transition date of 1 August 2004 and the comparative
financial information for the year ending 31 July 2005. However advantage has
been taken of certain exemptions afforded by IFRS 1 First Time Adoption of
International Financial Reporting Standards as follows:-
1.Business combinations
Business combinations prior to 1 August 2004, and in particular the merger with
TI Group plc, which took place on 4 December 2000, have not been restated to
comply with IFRS 3 Business Combinations, which requires acquisition accounting
for all business combinations. The merger reserve of £235m will remain as a
permanent item within shareholders' equity.
2. Cumulative translation differences
IAS 21 The Effects of Changes in Foreign Exchange Rates requires annual
translation differences arising on the opening net assets and net profit or loss
of each foreign subsidiary to be treated as a separate component of
shareholders' equity, and the cumulative net surplus / deficit for each
subsidiary carried forward and added to / subtracted from any gains / losses on
the future disposal of that subsidiary. Smiths has taken the option to set these
cumulative gains / losses at zero as at the date of transition to IFRS. Any
gains and losses recognised in the income statement on subsequent disposals of
foreign operations will therefore include only those translation differences
arising after 1 August 2004, the IFRS transition date.
3. Share-based payment
Smiths has applied IFRS 2 Share-based Payment retrospectively only to
equity-settled awards made after 7 November 2002 that had not vested at 1
January 2005.
4. Financial Instruments
Smiths has elected to adopt IAS 32 Financial Instruments : Disclosure and
Presentation and IAS 39 Financial Instruments : Recognition and Measurement from
1 August 2005 with no restatement of comparative information. Consequently, the
relevant comparative financial
information for the six months ended 31 January 2005 and the year ended 31 July
2005 will not reflect the impact of these standards, but will include financial
instruments accounted for on a UK GAAP basis. Appendix H sets out the impact of
these standards on the balance sheet as at 1 August 2005.
Appendix L sets out the new Accounting Policies to be adopted by the company
under IFRS.
Smiths Group plc
Consolidated Income Statement for the year ended 31 July 2005 (unaudited)
Year ended 31 July 2005
As IFRS Total
Reported Format Adjustments IFRS
(UK GAAP) (UK GAAP) to IFRS Basis
£m £m £m £m
Continuing operations
Turnover 3,016.8
Revenue 3,016.8 (11.4) 3,005.4
Cost of sales (1,804.9) (9.8) (1,814.7)
Gross profit 1,211.9 (21.2) 1,190.7
Sales and distribution costs (283.3) (283.3)
Administrative expenses (617.4) 39.4 (578.0)
Development costs - IFRS adjustment 41.2 41.2
Profit on disposal of businesses 8.7 8.7
Write-down of goodwill on anticipated future (2.3) 2.3
disposal **
Operating profit 311.2 317.6 61.7 379.3
After Amortisation and impairment of
charging:
goodwill (59.8) (59.8) 48.4 (11.4)
Amortisation of acquired
intangible
assets (1.2) (1.2) (3.4) (4.6)
Exceptional costs * (48.2) (48.2) (48.2)
Profit on disposal of 8.7 8.7
businesses
Write-down of goodwill on
anticipated
future disposal ** (2.3) 2.3
Non-operating exceptional items
- profit on disposal of businesses 8.7
- write-down of goodwill on anticipated (2.3)
future disposal **
Profit before interest and tax 317.6 317.6 61.7 379.3
Interest receivable 15.0 15.0 15.0
Interest payable (48.0) (48.0) (48.0)
Financing gains 10.1 10.1 (4.5) 5.6
Other finance income - retirement benefits 15.1 15.1 15.1
Profit before taxation 309.8 309.8 57.2 367.0
Taxation (89.0) (89.0) 0.3 (88.7)
Profit for the period 220.8 220.8 57.5 278.3
An analysis of the above adjustments is provided in Appendix A.
Segmental analysis of revenue, profits and assets under IFRS is provided in
Appendix B.
Exceptional and significant items
* Exceptional costs in the year ended 31 July 2005 charged against operating
profit comprised restructuring costs of £33.3m and costs of £14.9m incurred in
respect of the settlement of a patent dispute relating to the Cozmonitor insulin
pump.
** The write-down of goodwill on anticipated future disposal relates to the
post-balance sheet disposal of an acquisition made before 1 August 1998, the
goodwill arising thereon having previously been set directly against reserves.
Under IFRS all of these items are significant items, with the exception of the
write down of goodwill on anticipated future disposals. Under IFRS no such
charge is recognised.
Smiths Group plc
Consolidated Income Statement for the six months ended 31 January 2005
(unaudited)
6 months ended 31 January 2005
As IFRS Total
Reported Format adjustments IFRS
(UK GAAP) (UK GAAP) to IFRS Basis
£m £m £m £m
Continuing operations
Turnover 1,344.4
Revenue 1,344.4 (6.8) 1,337.6
Cost of sales (812.0) 4.5 (807.5)
Gross profit 532.4 (2.3) 530.1
Sales and distribution costs (145.0) (0.4) (145.4)
Administrative expenses (264.0) 19.2 (244.8)
Development costs - IFRS adjustment 18.5 18.5
Operating profit 123.4 123.4 35.0 158.4
After charging: Amortisation of goodwill (22.1) (22.1) 22.1
Operational restructuring (7.6) (7.6) (7.6)
Interest receivable 10.9 10.9 10.9
Interest payable (16.8) (16.8) (16.8)
Financing gains 2.2 2.2
Other finance income - retirement benefits 7.5 7.5 7.5
Profit before taxation 125.0 125.0 37.2 162.2
Taxation (35.7) (35.7) (6.9) (42.6)
Profit for the period 89.3 89.3 30.3 119.6
An analysis of the above adjustments is provided in Appendix C.
Smiths Group plc
Consolidated Balance Sheet at 1 August 2004 (unaudited)
UK GAAP Adjustments IFRS
(IFRS Format) To IFRS Basis
Total Total Total
2004 2004 2004
£m £m £m
Non-current assets
Goodwill 728.2 (0.5) 727.7
Other intangible assets 129.7 129.7
Property, plant and equipment 423.5 (12.2) 411.3
Financial Assets:
TI Automotive Limited preference shares 325.0 325.0
Other trade investments 2.3 2.3
Retirement benefit assets 103.9 103.9
Deferred tax assets 116.4 (13.7) 102.7
Trade and other receivables 9.2 (0.9) 8.3
1,708.5 102.4 1,810.9
Current assets
Inventories 423.5 (3.8) 419.7
Trade and other receivables 620.4 5.1 625.5
Cash and cash equivalents 449.2 449.2
Total assets 3,201.6 103.7 3,305.3
Non-current liabilities
Provisions for liabilities and charges (22.6) (22.6)
Retirement benefit obligations (351.2) (1.8) (353.0)
Deferred tax liabilities (49.4) 10.8 (38.6)
Financial liabilities:
Borrowings (446.5) (446.5)
Other payables (53.1) (41.6) (94.7)
Current liabilities
Provisions for liabilities and charges (79.2) (79.2)
Trade and other payables (665.9) 87.4 (578.5)
Financial liabilities:
Borrowings (275.4) (275.4)
Current tax payable (135.8) (135.8)
Total liabilities (2,079.1) 54.8 (2,024.3)
Net assets 1,122.5 158.5 1,281.0
Shareholders' equity
Share capital 140.3 140.3
Share premium account 183.0 183.0
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 562.7 158.5 721.2
Total shareholders' equity 1,122.5 158.5 1,281.0
An analysis of the reclassifications required to represent the UK GAAP balance sheet in
an IFRS format is provided in Appendix D, and the adjustments required to re-measure
the UK GAAP balance sheet on an IFRS basis in Appendix E.
Smiths Group plc
Consolidated Balance Sheet at 31 July 2005 (unaudited)
31 July 2005
UK GAAP Adjustments IFRS
(IFRS Format) To IFRS Basis
Total Total Total
2005 2005 2005
£m £m £m
Non-current assets
Goodwill 1,167.0 (15.8) 1,151.2
Other intangible assets 58.6 267.5 326.1
Property, plant and equipment 525.8 (22.7) 503.1
Financial Assets:
TI Automotive Limited preference shares 325.0 325.0
Other trade investments 3.5 3.5
Retirement benefit assets 134.6 134.6
Deferred tax assets 174.0 25.1 199.1
Trade and other receivables 9.9 14.8 24.7
2,398.4 268.9 2,667.3
Current assets
Inventories 570.0 (5.7) 564.3
Trade and other receivables 727.2 (7.6) 719.6
Cash and cash equivalents 60.9 60.9
Total assets 3,756.5 255.6 4,012.1
Non-current liabilities
Provisions for liabilities and charges (26.4) (26.4)
Retirement benefit obligations (369.4) (1.8) (371.2)
Deferred tax liabilities (52.2) (43.4) (95.6)
Financial liabilities:
Borrowings (937.7) (937.7)
Other payables (74.4) (58.8) (133.2)
Current liabilities
Provisions for liabilities and charges (64.1) (64.1)
Trade and other payables (812.7) 95.9 (716.8)
Financial liabilities:
Borrowings (54.0) (54.0)
Current tax payable (160.8) (160.8)
Total liabilities (2,551.7) (8.1) (2,559.8)
Net assets 1,204.8 247.5 1,452.3
Shareholders' equity
Share capital 140.9 140.9
Share premium account 197.5 197.5
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 629.9 247.5 877.4
Total shareholders' equity 1,204.8 247.5 1,452.3
An analysis of the reclassifications required to represent the UK GAAP balance
sheet in an IFRS format is provided in Appendix F, and the adjustments required
to re-measure the UK GAAP balance sheet on an IFRS basis in Appendix G.
Smiths Group plc
Consolidated Balance Sheet at 1 August 2005 (unaudited)
Restated under Financial Restated under
IFRS at 31 July instruments IFRS at 1 August
2005 2005
Total Total Total
2005 2005 2005
£m £m £m
Non-current assets
Goodwill 1,151.2 1,151.2
Other intangible assets 326.1 326.1
Property, plant and equipment 503.1 503.1
Financial Assets:
TI Automotive Limited preference shares 325.0 325.0
Other trade investments 3.5 3.5
Retirement benefit assets 134.6 134.6
Deferred tax assets 199.1 3.0 202.1
Trade and other receivables 24.7 1.3 26.0
2,667.3 4.3 2,671.6
Current assets
Inventories 564.3 564.3
Trade and other receivables 719.6 9.1 728.7
Cash and cash equivalents 60.9 664.5 725.4
Total assets 4,012.1 677.9 4,690.0
Non-current liabilities
Provisions for liabilities and charges (26.4) (26.4)
Retirement benefit obligations (371.2) (371.2)
Deferred tax liabilities (95.6) (0.1) (95.7)
Financial liabilities:
Borrowings (937.7) (5.6) (943.3)
Other payables (133.2) (5.6) (138.8)
Current liabilities
Provisions for liabilities and charges (64.1) (64.1)
Trade and other payables (716.8) (7.8) (724.6)
Financial liabilities:
Borrowings (54.0) (665.6) (719.6)
Current tax payable (160.8) (160.8)
Total liabilities (2,559.8) (684.7) (3,244.5)
Net assets 1,452.3 (6.8) 1,445.5
Shareholders' equity
Share capital 140.9 140.9
Share premium account 197.5 197.5
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 877.4 (3.5) 873.9
Cash flow hedge reserve (3.3) (3.3)
Total shareholders' equity 1,452.3 (6.8) 1,445.5
An analysis of the above adjustments is provided in Appendix H.
Smiths Group plc
Consolidated Balance Sheet at 31 January 2005 (unaudited)
31 January 2005
UK GAAP Adjustments IFRS
(IFRS Format) to IFRS Basis
Total Total Total
2005 2005 2005
£m £m £m
Non-current assets
Goodwill 748.6 21.3 769.9
Other intangible assets 150.7 150.7
Property, plant and equipment 434.6 (14.0) 420.6
Financial Assets:
TI Automotive Limited preference shares 325.0 325.0
Other trade investments 2.9 2.9
Retirement benefit assets 110.6 110.6
Deferred tax assets 113.5 (8.7) 104.8
Trade and other receivables 8.0 (0.9) 7.1
1,743.2 148.4 1,891.6
Current assets
Inventories 484.9 (3.3) 481.6
Trade and other receivables 620.4 620.4
Cash and cash equivalents 343.0 343.0
Total assets 3,191.5 145.1 3,336.6
Non-current liabilities
Provisions for liabilities and charges (25.5) (25.5)
Retirement benefit obligations (342.2) (1.8) (344.0)
Deferred tax liabilities (51.0) 3.0 (48.0)
Financial liabilities:
Borrowings (442.6) (442.6)
Other payables (48.1) (44.2) (92.3)
Current liabilities
Provisions for liabilities and charges (72.8) (72.8)
Trade and other payables (633.0) 39.1 (593.9)
Financial liabilities:
Borrowings (292.0) (292.0)
Current tax payable (120.1) (120.1)
Total liabilities (2,027.3) (3.9) (2,031.2)
Net assets 1,164.2 141.2 1,305.4
Shareholders' equity
Share capital 140.6 140.6
Share premium account 190.4 190.4
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 596.7 141.2 737.9
Total shareholders' equity 1,164.2 141.2 1,305.4
An analysis of the reclassifications required to represent the UK GAAP balance
sheet in an IFRS format is provided in
Appendix I, and the adjustments required to re-measure the UK GAAP balance sheet
on an IFRS basis in Appendix J.
Smiths Group plc
Consolidated Cash-flow Statement (unaudited)
Year ended 31 July 2005
UK GAAP Adjustments IFRS
(IFRS Format) to IFRS Basis
Total Total Total
2005 2005 2005
£m £m £m
Cash flows from operating activities
Profit before taxation 309.8 57.2 367.0
Net interest payable 22.9 4.5 27.4
Other finance income - retirement benefits (15.1) (15.1)
Operating profit 317.6 61.7 379.3
Exceptional restructuring - charged against profits 48.2 48.2
- expended (35.2) (35.2)
during year
Amortisation and impairment of goodwill and other
intangible assets
61.0 (45.0) 16.0
Write-down of goodwill on anticipated future 2.3 (2.3)
disposal
Profit on disposal of businesses (8.7) (8.7)
Depreciation of property plant and equipment 77.0 77.0
Share based payment expense 6.3 6.3
Retirement benefits (16.5) (16.5)
Amortisation of capitalised development expenditure 24.6 24.6
(net)
Increase in inventories (91.2) 1.9 (89.3)
Increase in trade and other receivables (53.6) (0.1) (53.7)
Increase in trade and other payables 48.8 6.3 55.1
Other non cash movements 14.0 14.0
Cash generated from operations 349.7 67.4 417.1
Interest paid (19.9) (19.9)
Tax paid (77.9) (77.9)
Net cash inflow from operating activities 251.9 67.4 319.3
Cash flows from investing activities
Capitalisation of development expenditure (67.4) (67.4)
Acquisition of subsidiaries (410.0) (410.0)
Disposals of businesses 0.5 0.5
Purchases of property, plant and equipment (114.2) (114.2)
Disposals of property, plant and equipment 9.3 9.3
Net cash flow used in investing activities (514.4) (67.4) (581.8)
Cash flows from financing activities
Proceeds from issue of ordinary share capital 14.6 14.6
Dividends paid to equity shareholders (154.5) (154.5)
Increase in other borrowings 38.4 38.4
Net cash flow used in financing activities (101.5) (101.5)
Net decrease in cash and cash equivalents (364.0) (364.0)
Cash and cash equivalents at 1 August 2004 421.0 421.0
Exchange differences (45.1) (45.1)
Cash and cash equivalents at 31 July 2005 11.9 11.9
Cash and cash equivalents at 31 July 2005 comprise:
Cash at bank and in hand 51.1 51.1
Deposits 9.8 9.8
Bank overdrafts (49.0) (49.0)
11.9 11.9
An analysis of the above adjustments is provided in
Appendix K.
Principal Impact of IFRS
The key differences between UK GAAP and IFRS that will impact the Group are set
out below.
1. Research and development
Under UK GAAP Smiths wrote off research and development expenditure, other than
that recoverable from third parties, in the year in which it was incurred.
Under IAS 38 Intangible Assets, the company is required to capitalise the cost
of developments which meet certain recognition criteria, including the technical
feasibility of, and probable future economic benefits arising from, the project.
This expenditure is then amortised over the anticipated future life of the
economic benefits arising.
Customer-funded and unfunded development projects are treated on a similar
basis, although the increased risk implicit in most funded development projects
means that the criteria for capitalisation are less likely to be met. Where
costs are capitalised on funded development contracts, the associated funding is
held as a deferred liability on the balance sheet, and released to the income
statement in step with the amortisation of the capitalised intangible asset.
Research costs, and development costs which do not meet the relevant
capitalisation criteria, are written off in the year in which they are incurred.
As a result of this policy, net assets (before the associated deferred tax
adjustment) have increased by £65.1m and £111.3m as at 1 August 2004 and 31 July
2005 respectively. Operating profits have increased by £36.3m for the year
ended 31 July 2005, represented by the capitalisation of £67.4m of costs
previously written off under UK GAAP, offset by £31.1m of amortisation of
amounts capitalised (net of deferred income).
2. Business combinations
Under UK GAAP the difference between the consideration paid for an acquisition
and the fair value of the identifiable net assets of the acquired subsidiary at
the date of acquisition is recognised as goodwill. Identifiable net assets
include intangible assets which are capable of separate disposal without
disposing of the related business. Under IFRS intangible assets of an acquired
subsidiary are separately recognised from goodwill if their fair value can be
measured reliably. Intangible assets include trademarks, customer relationships
and contracts and patented technologies.
Intangible assets recognised are amortised over their useful life. Under the
transition rules the Company is not required to identify any acquired intangible
assets in respect of acquisitions completed prior to 1 August 2004. As a result
of acquisitions made during the year ended 31 July 2005, intangible assets of
£71.8m have been reclassified out of goodwill arising on acquisition, with an
associated increase in the intangible asset amortisation charge of £3.4m for the
year ended 31 July 2005.
Under UK GAAP the fair value of acquired stock is stated at the lower of cost or
net realisable value. Under IFRS the fair value of acquired inventory is based
on selling price, less the sum of costs to complete, costs of disposal and a
reasonable profit allowance for the completing and selling effort based on
profit for similar finished goods. As a result an adjustment of £14.0m was made
to the acquisition balance sheet of Medex. As at 31 July 2005 the uplifted
inventory had been traded through the income statement, resulting in a £14.0m
decrease in profit before taxation for the year ended 31 July 2005.
3. Goodwill
Under UK GAAP goodwill on businesses acquired by the Group after 1 August 1998
is capitalised and amortised on a straight-line basis over its anticipated
future life up to a maximum of 20 years. Goodwill in respect of businesses
acquired prior to 1 August 1998 was set off against reserves in the year of
acquisition. On subsequent disposal of a business acquired prior to 1 August
1998 purchased goodwill previously set off against reserves is recycled and
included in the profit or loss on disposal of the business.
Under IFRS, from 1 August 2004 onwards, goodwill will no longer be amortised,
but will instead be subject to annual impairment review. The amortisation
charge under UK GAAP for goodwill for the year ended 31 July 2005 of £53.3m has
been reversed from the income statement, resulting in a corresponding increase
in the net book value of goodwill. On disposal of a business acquired before 1
August 1998 goodwill set off against reserves will no longer be recycled as part
of the profit or loss on disposal of that business. The exceptional write down
of goodwill on anticipated future disposals of £2.3m recognised under UK GAAP
has been reversed from the income statement.
4. Dividends
Under UK GAAP dividends relating to an accounting period but declared after the
balance sheet date are recognised as a liability even if the approval of that
dividend took place after the balance sheet date.
Under IFRS, proposed dividends do not meet the definition of a liability until
such time as they have been declared, and in the case of the final dividend,
approved by shareholders at the Annual General Meeting. This has resulted in a
balance sheet reclassification from current liabilities to retained profit of
£102.5m and £111.3m as at 1 August 2004 and 31 July 2005 respectively.
5. Share-based payment
Smiths operates a number of share-based incentive schemes (both awards of
options and awards of shares) that are impacted by IFRS 2 Share-based Payment.
Under UK GAAP Smiths recognises an expense based on the intrinsic value of the
options (the difference between the exercise price and the market value at the
date of the award), other than for Save-As-You-Earn schemes for which UK GAAP
includes an exemption from recognising an expense.
Under IFRS the cost of all share-based payments, based on the fair value of the
options or shares at the date of grant and calculated using an appropriate
pricing model, is recognised over the vesting period of the award. Accordingly
an adjustment has been recognised to reflect an additional charge of £6.3m in
the year ended 31 July 2005.
6. Retirement benefits
Under UK GAAP the company had already adopted FRS 17 Retirement Benefits. Under
FRS 17 the assets and liabilities of the Group's defined benefit pension schemes
are recognised at fair value in the balance sheet and the operating and
financing costs of defined benefit pension schemes are recognised in the profit
and loss account as operating costs and finance costs respectively. Variations
from expected costs arising from the experience of the plans or changes in
actuarial assumptions are recognised immediately in the Statement of Total
Recognised Gains and Losses.
The change to IAS 19 Employee Benefits does not give rise to any significant
change in the basis of accounting for pensions, as Smiths will adopt early the
option allowed under IAS 19 to take actuarial gains and losses immediately and
directly to equity through the Statement of Recognised Income and Expense.
Changes are largely confined to presentation, in that retirement benefit scheme
surpluses and deficits must be aggregated separately on the face of the balance
sheet, and shown gross, rather than net, of deferred taxation. The deferred
tax balance under UK GAAP related to pensions amounted to assets of £116.4m and
liabilities of £31.2m as at 1 August 2004 and assets of £127.3m and liabilities
of £40.4m as at 31 July 2005.
7. Deferred taxation
Under UK GAAP deferred tax is recognised in respect of all timing differences
that have originated but not reversed at the balance sheet date where
transactions or events have occurred at that date that will result in an
obligation to pay more, or a right to pay less or to receive more tax.
Under IFRS, deferred tax is recognised on all taxable temporary differences
between the tax base and the accounting base of balance sheet items included in
the balance sheet of the Group, except to the extent that such temporary
differences arise on initial recognition of an asset or liability. This means
that deferred tax is recognised on certain temporary differences that would not
have given rise to deferred tax under UK GAAP. The most significant differences
between UK GAAP and IFRS relate to the following:
• Deferred tax provisions relating to tax deductible goodwill set off
against reserves prior to 1 August 1998 under UK GAAP and not reinstated under
IFRS are written back. For goodwill on which deductions are still to be
claimed, deferred tax assets, where recoverable, have been recognised on
transition to IFRS and are being amortised to offset the timing of the tax
benefit. The amortisation of the asset under IFRS corresponds to the build up
of the liability under UK GAAP; and
• Under IFRS deferred tax is provided on temporary differences arising
on investments in subsidiaries and associates (principally in respect of
unremitted earnings), except where the Group is able to control the timing of
the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
In addition to these adjustments the carrying values of deferred tax assets and
liabilities in the balance sheet have been adjusted to reflect the restatement
of newly recognised assets and liabilities arising from the adoption of IFRS.
8. Computer software
Under UK GAAP all capitalised computer software was classified within tangible
fixed assets. IFRS requires capitalised software that is not an integral part of
the hardware to be treated as an intangible asset. This has resulted in balance
sheet reclassifications of approximately £12m and £23.0m respectively at 1
August 2004 and 31 July 2005.
9. Financial instruments
A summary of the impact of the principal differences and adjustments resulting
from the adoption of IAS 32 and IAS 39 as they apply to the Group's balance
sheet as at 1 August 2005 is set out below:
i) Forward foreign exchange contracts and currency options - Smiths uses
forward foreign exchange contracts and currency options for the
purposes of hedging all material contractually committed and forecast
foreign currency denominated future sales and purchases. Under UK
GAAP a form of hedge accounting was applied to these forward foreign
exchange contracts and currency options meaning that some derivatives
were held off balance sheet for at least part of their lives. Under
IFRS the fair value of all forward foreign exchange contracts and
currency options is recognised on the balance sheet. IAS 39 places
significant restrictions on the use of hedge accounting and changes
the hedge accounting methodology. As a result, from 1 August 2005,
Smiths will recognise all forward foreign exchange contracts and
currency options on the balance sheet at fair value and will apply the
new hedge accounting methodology to all significant qualifying
relationships. Net assets increased by £0.4m at 1 August 2005.
ii) Interest rate swaps - under UK GAAP only accrued interest in respect
of interest rate swaps was recognised on the balance sheet. Under
IFRS the fair value of interest rate swaps is also recognised on
the balance sheet. Net assets decreased by £0.6m as at 1 August 2005.
iii) Borrowings - under UK GAAP borrowings were recognised at initial
proceeds received, comprising face values adjusted for issue fees,
discounts and premia. Issue fees, discounts and premia were amortised
over the life of the related borrowing and accrued interest was
classified separately to the borrowing. Under IFRS, where hedge
accounting has been applied the borrowings balance is adjusted for the
fair value movement in the hedged risk and accrued interest is
included within the value of the borrowing.
iv) Embedded derivatives - under UK GAAP embedded derivatives were not
recognised. Under IFRS the fair value of embedded derivatives not
closely related to their host contract is recognised. A net
derivative financial liability of £9.5m has been recognised at 1
August 2005.
v) 'Gross up' of cash and overdrafts - under UK GAAP cash and overdraft
balances within Smiths' UK and Euro cash pools are presented in the
consolidated accounts on a 'net' basis. This notional pooling does not
meet the strict off-set rules under IAS 32, and as a result the cash
and overdraft balances must be reported 'gross' on the balance sheet.
This has resulted in an increase in cash and overdrafts of £664.5m.
Appendix A
Smiths Group plc
Consolidated Income Statement for the year ended 31 July 2005 (unaudited)
Adjustments to IFRS
Continuing operations
As IFRS Goodwill Amortisation
reported format amortisation Share- of acquired
(UK (UK GAAP) Development and based intangible Other IFRS
GAAP) costs impairment payment assets
adjustments basis
£m £m £m £m £m £m £m £m
Turnover 3,016.8
Revenue 3,016.8 (11.4) 3,005.4
Cost of sales (1,804.9) 6.5 (16.3) (1,814.7)
Gross profit 1,211.9 (4.9) (16.3) 1,190.7
Sales and distribution costs (283.3) (283.3)
Administrative expenses (617.4) 48.4 (6.3) (3.4) 0.7 (578.0)
Development costs - IFRS 41.2 41.2
adjustment
Profit on disposal of businesses 8.7 8.7
Write down of goodwill on
anticipated
future disposal (2.3) 2.3
Operating profit 311.2 317.6 36.3 48.4 (6.3) (3.4) (13.3) 379.3
After Amortisation and
charging:
impairment of
goodwill (59.8) (59.8) 48.4 (11.4)
Amortisation of
acquired intangible
assets (1.2) (1.2) (3.4) (4.6)
Exceptional items (48.2) (48.2) (48.2)
Profit on disposal of
businesses 8.7 8.7
Write down of
goodwill on
anticipated future
disposal (2.3) 2.3
Non-operating exceptional items
- profit on disposal of 8.7
businesses
- write down of goodwill on
anticipated
future disposal (2.3)
Profit before interest and tax 317.6 317.6 36.3 48.4 (6.3) (3.4) (13.3) 379.3
Interest receivable 15.0 15.0 15.0
Interest payable (48.0) (48.0) (48.0)
Financing gains 10.1 10.1 (4.5) 5.6
Other finance income - retirement 15.1 15.1 15.1
benefits
Profit before taxation 309.8 309.8 36.3 48.4 (6.3) (3.4) (17.8) 367.0
Taxation (89.0) (89.0) (13.4) 3.1 2.0 1.3 7.3 (88.7)
Profit for the period 220.8 220.8 22.9 51.5 (4.3) (2.1) (10.5) 278.3
Appendix B
Smiths Group plc
Year ended 31 July 2005
Segmental analysis of revenue, profits and assets under IFRS
Measurement changes to IFRS
UK GAAP Development Stock Share Other s IFRS
-based
2005 costs revaluation payment adjustment 2005
on
acquisition
£m £m £m £m £m
Revenue
Market
Aerospace 1,157.6 (11.4) 1,146.2
Detection 366.5 366.5
Medical 563.3 563.3
Specialty Engineering 466.2 466.2
John Crane 463.2 463.2
3,016.8 (11.4) 3,005.4
Geographical origin
United Kingdom 821.4 (3.0) 818.4
North America 1,744.6 (8.4) 1,736.2
Europe 514.7 514.7
Other overseas 245.2 245.2
Inter-company (309.1) (309.1)
3,016.8 (11.4) 3,005.4
Headline * operating profit
Market
Aerospace 117.9 31.6 (2.4) 0.4 147.5
Detection 66.8 2.4 (0.8) 0.1 68.5
Medical 108.2 2.3 (14.0) (1.2) (1.9) 93.4
Specialty Engineering 64.5 (1.0) 63.5
John Crane 63.0 (0.9) (0.2) 61.9
420.4 36.3 (14.0) (6.3) (1.6) 434.8
Geographical origin
United Kingdom 62.9 8.1 (0.6) (5.3) (3.7) 61.4
North America 249.6 27.7 (9.7) (1.0) 5.8 272.4
Europe 74.6 0.5 (3.0) (3.2) 68.9
Other overseas 33.3 (0.7) (0.5) 32.1
420.4 36.3 (14.0) (6.3) (1.6) 434.8
* Before goodwill amortisation
and
exceptional items
Assets Cumulative Final Goodwill Share - Other
development dividend based
reversal amortisation payment
expenditure and
(net of impairment
deferred
tax)
Market
Aerospace 661.0 65.2 31.2 9.9 8.1 777.6
2.2
Detection 356.7 4.0 17.7 16.3 2.6 397.3
Medical 869.4 5.0 28.6 11.2 3.9 (5.3) 912.8
Specialty Engineering 287.6 17.1 7.6 3.2 315.5
John Crane 108.8 16.7 0.9 3.2 129.6
2,283.5 74.2 111.3 45.9 21.0 (3.1) 2,532.8
Net borrowings (930.8) (930.8)
Retirement net liabilities
benefits - (net of
deferred tax) (147.9) (1.8) (149.7)
1,204.8 74.2 111.3 45.9 21.0 (4.9) 1,452.3
Geographical origin
United Kingdom 349.8 29.3 111.3 2.4 21.0 (13.0) 500.8
North America 1,562.1 44.5 29.6 8.7 1,644.9
Europe 285.1 0.4 12.8 (0.5) 297.8
Other overseas 86.5 1.1 1.7 89.3
2,283.5 74.2 111.3 45.9 21.0 (3.1) 2,532.8
Appendix C
Smiths Group plc
Consolidated Income Statement for the 6 months ended 31 January 2005 (unaudited)
Adjustments to IFRS
Continuing operations As IFRS Format Development Goodwill Share-based Other IFRS
reported
(UK GAAP) (UK GAAP) costs amortisation payment adjustments Basis
£m £m £m £m £m £m £m
Turnover 1,344.4
Revenue 1,344.4 (6.8) 1,337.6
Cost of sales (812.0) 4.5 (807.5)
Gross profit 532.4 (2.3) 530.1
Sales and distribution costs (145.0) (0.4) (145.4)
Administrative expenses (264.0) 22.1 (3.0) 0.1 (244.8)
Development costs - IFRS 18.5 18.5
adjustment
Operating profit 123.4 123.4 16.2 22.1 (3.0) (0.3) 158.4
After Amortisation of (22.1) (22.1) 22.1
charging: goodwill
Operational (7.6) (7.6) (7.6)
restructuring
Interest receivable 10.9 10.9 10.9
Interest payable (16.8) (16.8) (16.8)
Financing gains 2.2 2.2
Other finance income - 7.5 7.5 7.5
retirement benefits
Profit before taxation 125.0 125.0 16.2 22.1 (3.0) 1.9 162.2
Taxation (35.7) (35.7) (5.7) (2.2) 0.9 0.1 (42.6)
Profit for the period 89.3 89.3 10.5 19.9 (2.1) 2.0 119.6
Appendix D
Smiths Group plc
Consolidated Balance Sheet as at 1 August 2004 - Reclassification to IFRS Format
(unaudited)
UK GAAP Reclassification UK GAAP
Format changes IFRS Format
Total Employee Total
2004 Benefits Other 2004
£m £m £m £m
Non-current assets
Intangible assets 728.2 728.2 Goodwill
Other intangible assets
Tangible assets 423.5 423.5 Property, plant and
equipment
Investments and advances: Financial assets
TI Automotive Limited preference shares 325.0 TI Automotive Limited
preference
325.0 Shares
Other 2.3 2.3 Other trade investments
103.9 103.9 Retirement benefit assets
116.4 116.4 Deferred tax assets
9.2 9.2 Trade and other receivables
1,479.0 220.3 9.2 1,708.5
Current assets
Stocks 423.5 423.5 Inventories
Debtors - amounts falling due within one 620.4 620.4 Trade and other receivables
year
- amounts falling due after more 9.2 (9.2)
than one year
Cash at bank and on deposit 449.2 449.2 Cash and cash equivalents
Non-current liabilities
Provisions for liabilities and charges (120.0) 97.4 (22.6) Provisions for liabilities
and charges
Retirement benefit liabilities (234.8) (116.4) (351.2) Retirement benefit
obligations
Pension assets 72.7 (72.7)
(31.2) (18.2) (49.4) Deferred tax liabilities
Creditors - amounts falling due after more (499.6) 499.6
than one year
(446.5) (446.5) Borrowings
(53.1) (53.1) Other payables
Current liabilities
Creditors - amounts falling due within one (1,077.1) 1,077.1
year
(79.2) (79.2) Provisions for liabilities
and charges
(665.9) (665.9) Trade and other payables
(275.4) (275.4) Borrowings
(135.8) (135.8) Current tax payable
1,122.5 1,122.5
Shareholders' equity
Share capital 140.3 140.3 Share capital
Share premium account 183.0 183.0 Share premium account
Revaluation reserve 1.7 1.7 Revaluation reserve
Merger reserve 234.8 234.8 Merger reserve
Retained earnings 562.7 562.7 Retained earnings
Total shareholders' equity 1,122.5 1,122.5
The reconciliation above shows the changes to the presentation of the balance
sheet that are required as a result of the adoption of IFRS. It does not deal
with the measurement changes that are required in moving from UK GAAP to IFRS,
which are shown in Appendix E.
Appendix E
Smiths Group plc
Consolidated Balance Sheet at 1 August 2004 (unaudited)
Measurement changes to IFRS
UK GAAP IFRS
(IFRS Basis
Format)
Total Development Share-based Dividend Total
2004 costs payments reversal Other 2004
£m £m £m £m £m £m
Non-current assets
Goodwill 728.2 (0.5) 727.7
Other intangible assets 116.6 13.1 129.7
Property, plant and equipment 423.5 (12.2) 411.3
Financial Assets:
TI Automotive Limited
preference
Shares 325.0 325.0
Other trade investments 2.3 2.3
Retirement benefit assets 103.9 103.9
Deferred tax assets 116.4 4.3 (18.0) 102.7
Trade and other receivables 9.2 (0.9) 8.3
1,708.5 116.1 4.3 (18.0) 1,810.9
Current assets
Inventories 423.5 (3.8) 419.7
Trade and other receivables 620.4 5.1 625.5
Cash and cash equivalents 449.2 449.2
Total assets 3,201.6 116.1 4.3 (16.7) 3,305.3
Non-current liabilities
Provisions for liabilities and (22.6) (22.6)
charges
Retirement benefit obligations (351.2) (1.8) (353.0)
Deferred tax liabilities (49.4) (21.9) 32.7 (38.6)
Financial liabilities:
Borrowings (446.5) (446.5)
Trade and other payables (53.1) (41.4) (0.2) (94.7)
Current liabilities
Provisions for liabilities and (79.2) (79.2)
charges
Trade and other payables (665.9) (9.6) 102.5 (5.5) (578.5)
Financial liabilities:
Borrowings (275.4) (275.4)
Current tax payable (135.8) (135.8)
Total liabilities (2,079.1) (72.9) 102.5 25.2 (2,024.3)
Net assets 1,122.5 43.2 4.3 102.5 8.5 1,281.0
Shareholders' equity
Share capital 140.3 140.3
Share premium account 183.0 183.0
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 562.7 43.2 4.3 102.5 8.5 721.2
Total shareholders' equity 1,122.5 43.2 4.3 102.5 8.5 1,281.0
The reconciliation above starts with the 1 August 2004 UK GAAP balance sheet
presented in IFRS format, as set out in Appendix D.
It then plots the measurement changes required in moving from UK GAAP to IFRS.
Appendix F
Smiths Group plc
Consolidated Balance Sheet as at 31 July 2005 - Reclassification to IFRS Format
(unaudited)
UK GAAP Reclassification UK GAAP
Format changes IFRS Format
Total Employee Total
2005 Benefits Other 2005
£m £m £m £m
Non-current assets
Goodwill 1,167.0 1,167.0 Goodwill
Other intangible assets 58.6 58.6 Other intangible assets
Tangible assets 525.8 525.8 Property, plant and equipment
Investments and advances:
TI Automotive Limited preference shares 325.0 325.0 TI Automotive Limited
preference shares
Other 3.5 3.5 Other trade investments
134.6 134.6 Retirement benefit assets
127.3 46.7 174.0 Deferred tax assets
9.9 9.9 Trade and other receivables
2,079.9 261.9 56.6 2,398.4
Current assets
Stocks 570.0 570.0 Inventories
Debtors - amounts falling due within one 727.2 727.2 Trade and other receivables
year
- amounts falling due after more 56.6 (56.6)
than one year
Cash at bank and on deposit 60.9 60.9 Cash and cash equivalents
Total assets 3,494.6 261.9 3,756.5
Non-current liabilities
Provisions for liabilities and charges (102.3) 75.9 (26.4) Provisions for liabilities and
charges
Retirement benefit liabilities (242.1) (127.3) (369.4) Retirement benefit obligations
Pension assets 94.2 (94.2)
(40.4) (11.8) (52.2) Deferred tax liabilities
Creditors - amounts falling due after more (1,012.1) 1,012.1
than one year
(937.7) (937.7) Borrowings
(74.4) (74.4) Other payables
Current liabilities
Creditors - amounts falling due within one (1,027.5) 1,027.5
year
(64.1) (64.1) Provisions for liabilities and
charges
(812.7) (812.7) Trade and other payables
(54.0) (54.0) Borrowings
(160.8) (160.8) Current tax payable
Total liabilities (2,289.8) (261.9) (2,551.7)
Net assets 1,204.8 1,204.8
Shareholders' equity
Share capital 140.9 140.9 Share capital
Share premium account 197.5 197.5 Share premium account
Revaluation reserve 1.7 1.7 Revaluation reserve
Merger reserve 234.8 234.8 Merger reserve
Retained earnings 629.9 629.9 Retained earnings
Total shareholders' equity 1,204.8 1,204.8
The reconciliation above shows the changes to the presentation of the balance
sheet that are required as a result of the adoption of IFRS. It does not deal
with the measurement changes that are required in moving from UK GAAP to IFRS,
which are shown in Appendix G.
Appendix G
Smiths Group plc
Consolidated Balance Sheet at 31 July 2005 (unaudited)
Adjustments to IFRS
UK GAAP
(IFRS
IFRS
Format) Goodwill Basis
Total Development amortisation Business Share-based Dividend Total
2005 costs and Combinations Payments reversal Other 2005
impairment
£m £m £m £m £m £m £m £m
Non-current assets
Goodwill 1,167.0 (2.9) 45.9 (58.8) 1,151.2
Other intangible assets 58.6 171.7 71.8 24.0 326.1
Property, plant and 525.8 (22.7) 503.1
equipment
Financial Assets:
TI Automotive Limited 325.0 325.0
preference shares
Other trade investments 3.5 3.5
Retirement benefit assets 134.6 134.6
Deferred tax assets 174.0 22.3 2.8 199.1
Trade and other receivables 9.9 14.8 24.7
2,398.4 168.8 45.9 13.0 22.3 18.9 2,667.3
Current assets
Inventories 570.0 (5.7) 564.3
Trade and other receivables 727.2 (0.8) (6.8) 719.6
Cash and cash equivalents 60.9 60.9
Total assets 3,756.5 168.0 45.9 13.0 22.3 6.4 4,012.1
Non-current liabilities
Provisions for liabilities (26.4) (26.4)
and charges
Retirement benefit (369.4) (1.8) (371.2)
obligations
Deferred tax liabilities (52.2) (37.1) (23.2) 16.9 (95.6)
Financial liabilities:
Borrowings (937.7) (937.7)
Other payables (74.4) (45.4) (1.3) (12.1) (133.2)
Current liabilities
Provisions for liabilities (64.1) (64.1)
and charges
Trade and other payables (812.7) (11.3) 111.3 (4.1)
(716.8)
Financial liabilities:
Borrowings (54.0) (54.0)
Current tax payable (160.8) (160.8)
Total liabilities (2,551.7) (93.8) (23.2) (1.3) 111.3 (1.1) (2,559.8)
Net assets 1,204.8 74.2 45.9 (10.2) 21.0 111.3 5.3 1,452.3
Shareholders' equity
Share capital 140.9 140.9
Share premium account 197.5 197.5
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 629.9 74.2 45.9 (10.2) 21.0 111.3 5.3 877.4
Total shareholders' equity 1,204.8 74.2 45.9 (10.2) 21.0 111.3 5.3 1,452.3
The reconciliation above starts with the 31 July 2005 UK GAAP balance sheet
presented in IFRS format. It then plots the measurement changes required in
moving from UK GAAP to IFRS, except for the impact of IAS 32 and IAS 39, dealt
with in Appendix H.
Appendix H
Smiths Group plc
Consolidated Balance Sheet at 1 August 2005 (unaudited)
Impact of adoption of IAS 32 and IAS 39
IFRS Interest Forward foreign Embedded Other IFRS
rate
At 31 July swaps exchange derivatives At 1
2005 contracts August
2005
Total Total
£m £m £m £m £m £m
Non-current assets
Goodwill 1,151.2 1,151.2
Other intangible assets 326.1 326.1
Property, plant and equipment 503.1 503.1
Financial Assets:
TI Automotive Limited preference shares 325.0 325.0
Other trade investments 3.5 3.5
Retirement benefit assets 134.6 134.6
Deferred tax assets 199.1 3.0 202.1
Trade and other receivables 24.7 1.3 26.0
2,667.3 1.3 3.0 2,671.6
Current assets
Inventories 564.3 564.3
Trade and other receivables 719.6 8.6 0.5 728.7
Cash and cash equivalents 60.9 664.5 725.4
Total assets 4,012.1 9.9 3.5 664.5 4,690.0
Non-current liabilities
Provisions for liabilities and charges (26.4) (26.4)
Retirement benefit obligations (371.2) (371.2)
Deferred tax liabilities (95.6) (0.1) (95.7)
Financial liabilities:
Borrowings (937.7) (5.6) (943.3)
Trade and other payables (133.2) (3.1) (2.5) (138.8)
Current liabilities
Provisions for liabilities and charges (64.1) (64.1)
Trade and other payables (716.8) (0.6) 0.3 (7.5) (724.6)
Financial liabilities:
Borrowings (54.0) (1.1) (664.5) (719.6)
Current tax payable (160.8) (160.8)
Total liabilities (2,559.8) (0.6) (9.5) (10.1) (664.5) (3,244.5)
Net assets 1,452.3 (0.6) 0.4 (6.6) 1,445.5
Shareholders' equity
Share capital 140.9 140.9
Share premium account 197.5 197.5
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 877.4 (0.6) 3.7 (6.6)
873.9
Cash flow hedge reserve (3.3) (3.3)
Total shareholders' equity 1,452.3 (0.6) 0.4 (6.6) 1,445.5
The reconciliation above starts with the 31 July 2005 IFRS balance sheet ( which
excludes the impact of IAS 32 and IAS 39 ). It then plots the changes required
in respect of the adoption of IAS 32 and IAS 39.
Appendix I
Smiths Group plc
Consolidated Balance Sheet as at 31 January 2005 - Reclassification to IFRS
Format (unaudited)
UK GAAP UK GAAP
Format IFRS Format
Total Employee Total
2005 benefits Other 2005
£m £m £m £m
Non-current assets
Intangible assets 748.6 748.6 Goodwill
Other intangible assets
Tangible assets 434.6 434.6 Property, plant and equipment
Investments and advances:
TI Automotive Limited preference shares 325.0 325.0 TI Automotive Limited
preference shares
Other 2.9 2.9 Other trade investments
110.6 110.6 Retirement benefit assets
113.5 113.5 Deferred tax assets
8.0 8.0 Trade and other receivables
1,511.1 224.1 8.0 1,743.2
Current assets
Stocks 484.9 484.9 Inventories
Debtors - amounts falling due within one 620.4 620.4 Trade and other receivables
year
- amounts falling due after more 8.0 (8.0)
than one year
Cash at bank and on deposit 343.0 343.0 Cash and cash equivalents
Total assets 2,967.4 224.1 3,191.5
Non-current liabilities
Provisions for liabilities and charges (116.1) 90.6 (25.5) Provisions for liabilities and
charges
Retirement benefit liabilities (228.7) (113.5) (342.2) Retirement benefit obligations
Pension assets 77.4 (77.4)
(33.2) (17.8) (51.0) Deferred tax liabilities
Creditors - amounts falling due after more
than one
year (490.7) 490.7
(442.6) (442.6) Borrowings
(48.1) (48.1) Other payables
Current liabilities
Creditors - amounts falling due within one (1,045.1) 1,045.1
year
(72.8) (72.8) Provisions for liabilities and
charges
(633.0) (633.0) Trade and other payables
(292.0) (292.0) Borrowings
(120.1) (120.1) Current tax payable
Total liabilities (1,803.2) (224.1) (2,027.3)
Net assets 1,164.2 1,164.2
Shareholders' equity
Share capital 140.6 140.6 Share capital
Share premium account 190.4 190.4 Share premium account
Revaluation reserve 1.7 1.7 Revaluation reserve
Merger reserve 234.8 234.8 Merger reserve
Retained earnings 596.7 596.7 Retained earnings
Total shareholders' equity 1,164.2 1,164.2
The reconciliation above shows the changes to the presentation of the balance
sheet that are required as a result of the adoption of IFRS. It does not deal
with the measurement changes that are required in moving from UK GAAP to IFRS,
which are shown in Appendix J.
Appendix J
Smiths Group plc
Consolidated Balance Sheet at 31 January 2005 (unaudited)
Adjustments to IFRS
UK GAAP IFRS
(IFRS Format) Basis
Total Development Share-based Dividend Total
2005 costs payments reversal Other 2005
£m £m £m £m £m £m
Non-current assets
Goodwill 748.6 (0.5) 21.8 769.9
Other intangible assets 136.3 14.4 150.7
Property, plant and equipment 434.6 (14.0) 420.6
Financial Assets:
TI Automotive Limited preference shares 325.0 325.0
Other trade investments 2.9 2.9
Retirement benefit assets 110.6 110.6
Deferred tax assets 113.5 9.6 (18.3) 104.8
Trade and other receivables 8.0 (0.9) 7.1
1,743.2 135.8 9.6 3.0 1,891.6
Current assets
Inventories 484.9 (3.3) 481.6
Trade and other receivables 620.4 620.4
Cash and cash equivalents 343.0 343.0
Total assets 3,191.5 135.8 9.6 (0.3) 3,336.6
Non-current liabilities
Provisions for liabilities and charges (25.5) (25.5)
Retirement benefit obligations (342.2) (1.8) (344.0)
Deferred tax liabilities (51.0) (27.8) 30.8 (48.0)
Financial liabilities:
Borrowings (442.6) (442.6)
Other payables (48.1) (43.3) (0.9) (92.3)
Current liabilities
Provisions for liabilities and charges (72.8) (72.8)
Trade and other payables (633.0) (11.3) (0.3) 52.0 (1.3) (593.9)
Financial liabilities:
Borrowings (292.0) (292.0)
Current tax payable (120.1) (120.1)
Total liabilities (2,027.3) (82.4) (0.3) 52.0 26.8 (2,031.2)
Net assets 1,164.2 53.4 9.3 52.0 26.5 1,305.4
Shareholders' equity
Share capital 140.6 140.6
Share premium account 190.4 190.4
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 596.7 53.4 9.3 52.0 26.5 737.9
Total shareholders' equity 1,164.2 53.4 9.3 52.0 26.5 1,305.4
The reconciliation above starts with the 31 January 2005 UK GAAP balance sheet
presented in IFRS format. It then plots the measurement changes required in
moving from UK GAAP to IFRS.
Appendix K
Smiths Group plc
Consolidated Cash Flow Statement for the year ended 31 July 2005
UK GAAP
(IFRS
Format)
Goodwill IFRS
amortisation Amortisation Stock Basis
of revaluation 2005
Development and intangible on Share-based
2005 Total Costs impairment assets acquisition Payments Other Total
£m £m £m £m £m £m £m £m
Cash flows from operating
activities
Profit before taxation 309.8 36.3 48.4 (3.4) (14.0) (6.3) 3.8) 367.0
Net interest payable 22.9 4.5 27.4
Other finance income -
retirement
benefits (15.1) (15.1)
Operating profit 317.6 36.3 48.4 (3.4) (14.0) (6.3) 0.7 379.3
Exceptional - charge 48.2 48.2
restructuring
- (35.2) (35.2)
expended
Amortisation of intangible 61.0 (48.4) 3.4 16.0
assets
Write-down of goodwill on
anticipated
future disposal 2.3 (2.3)
Profit on disposal of (8.7) (8.7)
businesses
Depreciation of property
plant and
equipment 77.0 77.0
Share based payment expense 6.3 6.3
Retirement benefits (16.5) (16.5)
Amortisation of development
expenditure
(net) 24.6
24.6
Increase in inventories (91.2) 1.9 (89.3)
Increase in trade and other (53.6) (0.1) (53.7)
receivables
Increase in trade and other 48.8 6.5 (0.2) 55.1
payables
Other non cash movements 14.0 14.0
Cash generated from 349.7 67.4 417.1
operations
Interest paid (19.9) (19.9)
Tax paid (77.9) (77.9)
Net cash inflow from 251.9 67.4 319.3
operating activities
Cash flows from investing
activities
Capitalisation of development (67.4) (67.4)
expenditure
Acquisitions (410.0) (410.0)
Disposals of businesses 0.5 0.5
Purchases of property, plant
and
equipment (114.2) (114.2)
Disposals of property, plant
and
equipment 9.3 9.3
Net cash flow used in (514.4) (581.8)
investing activities
Cash flows from financing
activities
Proceeds from issue of
ordinary share
capital 14.6 14.6
Dividends paid to equity (154.5) (154.5)
shareholders
Increase in other borrowings 38.4 38.4
Net cash flow used in (101.5) (101.5)
financing activities
Net decrease in cash and cash
equivalents (364.0) (364.0)
Cash and cash equivalents at
1 August
2004 421.0 421.0
Exchange differences (45.1) (45.1)
Cash and cash equivalents at 11.9 11.9
31 July 2005
Cash and cash equivalents at
31 July 2005
comprise:
Cash at bank and in hand 51.1 51.1
Deposits 9.8 9.8
Bank overdrafts (49.0) (49.0)
11.9 11.9
Appendix L
Smiths Group plc
Significant IFRS Accounting Policies - to be adopted 1 August 2005
These accounting policies comply with International Financial Reporting
Standards issued up to the date of this announcement and applicable to the
company for the period under review. All relevant International Financial
Reporting Standards have been endorsed by the European Union, with the exception
of an amendment to IAS 19 Retirement Benefits allowing actuarial gains and
losses to be recognised immediately within equity. As explained on page 3 of
this document, there are uncertainties surrounding the development of IFRS which
mean that these polices may change before 31 July 2006, when the Company will
present its first full financial statements under IFRS.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and its subsidiaries.
Subsidiaries are all entities over which the Company has the power to govern the
financial and operating policies generally accompanying a shareholding of more
than one half of the voting rights. Subsidiaries are fully consolidated from
the date on which control is transferred to the Company. They are
de-consolidated from the date that control ceases.
Foreign currencies
The Company's presentational currency is sterling. The results and financial
position of all subsidiaries and associates that have a functional currency
different from sterling are translated into sterling as follows:
• Assets and liabilities are translated at the closing rate at the date of
that balance sheet;
• Income and expenses are translated at average rates; and
• All resulting exchange differences are recognised as a separate component
of equity.
On consolidation, exchange differences arising from the translation of the net
investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to shareholders equity.
When a foreign operation is sold, the cumulative amount of such exchange
differences is recognised in the income statement as part of the gain or loss on
sale.
Revenue
Revenue comprises the fair value for the sale of goods and services, net of
trade discounts and sales related taxes, and the value of work undertaken during
the year on long-term contracts. Revenue is recognised when the risks and
rewards of the underlying sale have been transferred to the customer, which is
usually where title passes.
Long-term funded contracts
Where the outcome of a contract can be estimated reliably, revenue and costs are
recognised by reference to the stage of completion of the contract activity at
the balance sheet date. The Group uses the 'percentage of completion method' to
determine the appropriate amount to recognise in a given period. The assessment
of the stage of completion is dependent on the nature of the contract, but will
generally be based on the extent to which the Company has obtained the right to
consideration in exchange for performance under the contract. If a contract is
expected to be loss-making, a provision is recognised for the entire loss.
Employee benefits
Pension obligations and post-retirement benefits
The Company has both defined benefit and defined contribution plans.
For defined benefit plans the liability for each scheme recognised in the
balance sheet is the present value of the defined benefit obligation at the
balance sheet date less the fair value of plan assets. The defined benefit
obligation is calculated annually by independent actuaries using the projected
unit credit method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using interest
rates of high-quality corporate bonds that are denominated in the currency in
which the benefits will be paid, and that have terms to maturity approximating
to the terms of the related pension liability. Actuarial gains and losses
arising from experience adjustments and changes in actuarial assumptions are
recognised in full in the period in which they occur, outside of the income
statement and are presented in the statement of recognised income and expense.
Past service costs are recognised immediately in income, unless the changes to
the pension plan are conditional on the employees remaining in service for a
specified period of time (the vesting period). In this case, the past service
costs are amortised on a straight-line basis over the vesting period.
For defined contribution plans, the Group pays contributions to publicly or
privately administered pension insurance plans on a mandatory, contractual or
voluntary basis. Contributions are expensed as incurred.
Share based compensation
The Company operates a number of equity settled share based compensation plans.
The fair value of the employee services received in exchange for the grant of
shares or share options is recognised as an expense. The total amount to be
expensed over the vesting period is determined by reference to the fair value of
the shares or share options granted, excluding the impact of any non-market
vesting conditions (for example profitability and sales growth targets). Fair
value is determined by reference to option pricing models, principally Binomial
models.
The Company has applied the requirements of IFRS 2 Share-based Payment. In
accordance with the transitional provisions, IFRS 2 has been applied only to
grants of equity instruments after 7 November 2002 that had not vested as at 1
January 2005. The intrinsic value of earlier grants remain charged to the income
statement, as previously required under UK GAAP.
Significant items
Items which are non-recurring and sufficiently material are presented separately
within their relevant consolidated income statement category. The separate
reporting of such items helps provide a better indication of the Company's
underlying business performance. Events which may give rise to such items
include the restructuring of businesses; gains and losses on their sale; and
asset impairments.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value
of the Company's share of the identifiable net assets of the acquired subsidiary
at the date of acquisition.
Goodwill arising from acquisitions of subsidiaries after 1 August 1998 is
included in intangible assets, is not amortised but is tested annually for
impairment and carried at cost less accumulated impairment losses. Gains and
losses on the disposal of an entity include the carrying amount of goodwill
relating to the entity sold.
Goodwill arising from acquisitions of subsidiaries before 1 August 1998, which
was set against reserves in the year of acquisition under UK GAAP, has not been
reinstated and is not included in determining any subsequent profit or loss on
disposal of the related entity.
Goodwill is tested for impairment at least annually or whenever there is an
indication that the asset may be impaired. Any impairment is recognised
immediately in the income statement. Subsequent reversals of impairment losses
for goodwill are not recognised.
Research and development
Expenditure on research and development is charged to the profit and loss
account in the year in which it is incurred with the exception of:
• amounts recoverable from third parties; and
• expenditure incurred in respect of the development of certain major new
product projects where the outcome of those projects is assessed as being
reasonably certain as regards viability and technical feasibility. Such
expenditure is capitalised and amortised over the expected useful life of
the development, being the estimated period of sale for each product,
commencing in the year sales of the product are first made.
Other intangible assets
The identifiable net assets acquired as a result of a business combination may
include intangible assets other than goodwill. Any such intangible assets are
amortised over their expected future lives unless they are regarded as having an
indefinite life, in which case they are not amortised, but subjected to annual
impairment testing in a similar manner to goodwill.
Property plant and equipment
Property, plant and equipment is stated at historical cost less accumulated
depreciation and any recognised impairment losses.
Land is not depreciated. Depreciation is provided on other assets estimated to
write off the depreciable amount of relevant assets by equal annual instalments
over their estimated useful lives. In general, the rates used are: Freehold and
long leasehold buildings - 2%, Short leasehold property - over the period of the
lease, Plant, machinery, etc. - 10% to 20%, Motor vehicles - 25%, Tools and
other equipment - 10% to 33%.
Fixed assets held under finance leases are capitalised and depreciated in
accordance with the Company's depreciation policy, or over the lease term, if
shorter.
The assets' residual values and useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.
An asset's carrying amount is written down immediately to its recoverable amount
if the asset's carrying amount is greater than its estimated recoverable amount.
Leases
Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases are charged to the income statement on a straight-line basis
over the period of the lease.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the first-in, first-out (FIFO) method. The cost of finished
goods and work in progress comprises raw materials, direct labour, other direct
costs and related production overheads (based on normal operating capacity). It
excludes borrowing costs. Net realisable value is the estimated selling price
in the ordinary course of business, less applicable variable selling expenses.
Trade and other receivables
Trade and other receivables are stated at cost after deducting adequate
provision for doubtful debts.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand, highly liquid
interest-bearing securities with maturities of three months or less, and bank
overdrafts.
Provisions
Provisions for service guarantees and product liability, disposal indemnities,
restructuring costs, vacant leasehold property and legal claims are recognised
when; the Company has a legal or constructive obligation as a result of a past
event; it is probable that an outflow of resources will be required to settle
the obligation; and the amount has been reliably estimated. Provisions are not
recognised for future operating losses.
Where there are a number of similar obligations, for example where a service
guarantee has been given, the likelihood that an outflow will be required in
settlement is determined by considering the class of obligations as a whole. A
provision is recognised even if the likelihood of an outflow with respect to any
one item included in the same class of obligations may be small.
Where a leasehold property is vacant, or sub-let under terms such that the
rental income is insufficient to meet all outgoings, provision is made for the
anticipated future shortfall up to termination of the lease, or the termination
payment, if smaller.
Taxation
The charge for taxation is based on profits for the year and takes into account
taxation deferred because of temporary differences between the treatment of
certain items for taxation and accounting purposes.
Deferred tax is provided in full using the balance sheet liability method. A
deferred tax asset is recognised where it is probable that future taxable income
will be sufficient to utilise the available relief. Tax is charged or credited
to the income statement except when it relates to items charged or credited
directly to equity, in which case the tax is also dealt with in equity.
Deferred tax is provided on temporary differences arising on investments in
subsidiaries and associates, except where the timing of the reversal of the
temporary differences is controlled by the Company and it is probable that the
temporary difference will not reverse in the foreseeable future.
Financial assets
Financial assets are initially recognised at fair value (i.e. original cost plus
transaction costs). They are no longer recognised when the right to receive cash
flows from the assets have expired or have been transferred, and the Company has
transferred substantially all of the risks and rewards of ownership.
The subsequent measurement of financial assets depends on their classification.
They are classified as either loans and receivables; held to maturity
investments; available-for-sale financial assets; or financial assets where
changes in fair value are charged (or credited) to the income statement. The
classification depends on the purpose for which the financial assets were
acquired. Management determines the classification of financial assets at
initial recognition and re-evaluates their designation at each reporting date.
Loans and receivables and held-to-maturity investments are subsequently measured
at amortised cost using the effective interest method. Available-for-sale
financial assets and financial assets where changes in fair value are charged
(or credited) to the income statement are subsequently measured at fair value.
Realised and unrealised gains and losses arising from changes in the fair value
of the 'financial assets at fair value through profit and loss' category are
included in the income statement in the period in which they arise. Unrealised
gains and losses arising from changes in the fair value of non-monetary
securities classified as available-for-sale are recognised in equity. When
securities classified as available-for-sale are sold or impaired, the
accumulated fair value adjustments are included in the income statement as gains
or losses from investment securities.
Financial liabilities
Borrowings made by the Company are initially recognised at the amount received,
net of related transaction costs. These transaction costs and any discount or
premium on issue are subsequently amortised through the income statement as
interest over the life of the loan, and added to the liability disclosed in the
balance sheet.
Borrowings are classified as current liabilities unless the Company has an
unconditional right to defer settlement of the liability for at least one year
after the balance sheet date.
Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative
contract is entered into and are subsequently re-measured at their fair value.
The method of recognising any resulting gain or loss depends on whether the
derivative is designated as a hedging instrument, and if so, the nature of the
item being hedged.
Fair value hedge
Changes in the fair value of derivatives that are designated and qualify as fair
value hedges are recorded in the income statement, together with any changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges are recognised in equity. The gain
or loss relating to any ineffective portion is recognised immediately in the
income statement.
Amounts accumulated in equity are recycled in the income statement in the
periods when the hedged item will affect profit or loss (for instance when the
forecast sale that is hedged takes place). However, when a forecast transaction
that is hedged results in the recognition of a non-financial asset (for example,
inventory) or a liability, the gains and losses previously deferred in equity
are transferred from equity reserves and included in the initial measurement of
the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets
the criteria for hedge accounting, any cumulative gain or loss existing in
equity at that time remains in equity and is recognised when the forecast
transaction is ultimately recognised in the income statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or loss that was
reported in equity is immediately transferred to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for similarly to
cash flow hedges. Any gain or loss on the hedging instrument relating to the
effective portion of the hedge is recognised in equity; the gain or loss
relating to any ineffective portion is recognised immediately in the income
statement.
Gains and losses accumulated in equity are included in the income statement when
the foreign operation is disposed of.
Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting. Changes in
the fair value of any derivative instruments that do not qualify for hedge
accounting are recognised in the profit and loss account.
Derivatives embedded in other financial instruments or other host contracts are
treated as separate derivatives when their risks and characteristics are not
closely related to those of the host contracts and the host contracts are not
carried at their fair value. Unrealised gains and losses on these embedded
derivatives are recognised in the profit and loss account.
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