Transition to IFRS
Yule Catto & Co PLC
08 September 2005
Yule Catto & Co plc
Transition to International Financial Reporting Standards
Introduction
Yule Catto & Co plc (Yule Catto) will be reporting its financial results in
accordance with International Financial Reporting Standards (IFRS) as adopted by
the European Union from 1 January 2005. This statement presents and explains the
conversion of the results of the Group as previously reported under UK Generally
Accepted Accounting Principles (UK GAAP) onto an IFRS basis for the year ended
31 December 2004 (audited).
Overview of Impact
• Profit before taxation(1) £33.8m (UK GAAP £31.0m)
• Earnings per share(1) 14.7p (UK GAAP 13.9p)
• Revenue unchanged at £549.4m
• Net assets £45.9m (UK GAAP £174.0m)
• Free cash flow and movement in net borrowings(1) unaffected
Commenting on the statement, Sean Cummins, Group Finance Director of Yule Catto
& Co plc, said:
'The two issues that have had the most significant impact on the restated
financial statements are the changes in pension fund accounting and the new
requirement to allocate goodwill on acquisitions to discrete income generating
units. The Group's underlying cash flow remains unaffected.'
8 September 2005
For further information, please contact:
Sean Cummins, Group Finance Director Tel: 01279 442791
Gareth David, College Hill Tel: 020 7457 2020
(1) Before special items, as defined in Section 9 glossary of terms.
Restatement of financial information for International Financial Reporting
Standards
Contents
1 Introduction 2
2 Basis of Preparation 3
3 Basis of Presentation 3
4 Transition to IFRS - first time adoption 3
5 IFRS Financial statement for the year ended 31 December 2004 5
6 Explanation of Principles 13
7 Other impacts 17
8 Changes to accounting policies resulting from the implementation of IFRS 18
9 Glossary of Terms 22
10 Audit Opinion 24
1 Introduction
Following a European Union Regulation issued in June 2002, Yule Catto and Co plc
(the 'Group') is required, as a listed company within the EU, to present its
consolidated accounts in accordance with EU-adopted International Financial
Reporting Standards ('IFRS') and International Accounting Standards ('IAS').
These standards apply from the date of transition, 1 January 2004, onwards.
For the year ended 31 December 2005, the Group will therefore adopt IFRS for the
first time. This announcement presents and explains the Group's results for the
year ended 31 December 2004 (audited) as converted from UK GAAP to IFRS.
The first results to be published under IFRS will be for the half year to 30
June 2005 which will be reported in a separate announcement issued today.
The new accounting standards which produce the most significant impact on the
consolidated statements of the Group are:
• Pension scheme deficit included on balance sheet (IAS 19)
• Goodwill is no longer amortised, but subject to an annual impairment
review (IAS 36)
• Dividends are not recognised until declared by the Directors or
approved at the Annual General Meeting (IAS 10)
• Restriction on net investment hedging (IAS 39)
• Recognition of fair value of financial instruments relating to
interest rate and cross currency swaps (IAS 39)
2 Basis of preparation
The restated financial information has been prepared in accordance with all
applicable IFRS and related interpretations in force at the date of this
announcement. The issue of any new or revised standards, or the publishing of
further interpretation guidance, could result in changes to the financial
information presented in this document. In addition, as the financial community
gains more experience, and best practice and interpretative guidance develop,
there may be consequential changes to the methodologies and approaches used in
preparing the financial information shown in this document.
The financial information for the full year ended 31 December 2004, as prepared
on the above basis and included in this document, has been audited by Deloitte &
Touche LLP, and an unqualified opinion given, as shown at section 10.
3 Basis of presentation
The financial statements included here are presented in accordance with IAS 1,
Presentation of Financial Statements. This format and presentation may require
modification in the event that further guidance is issued and as best practice
develops.
IAS 1 does not provide definitive guidance on the format of the income
statement, but states key lines that should be disclosed. It also requires
additional line items and headings to be presented on the face of the income
statement when such presentation is relevant to an understanding of the entity's
financial performance. Factors to be considered include materiality and the
nature and function of the components of income and expense.
With the above in mind, Yule Catto will highlight the following non-trading or
non-recurring items separately as 'special items', hence providing clarity on
the underlying performance of the Group:
• Profit or loss impact arising from the sale or closure of an
operation;
• Impairment of non-current assets;
• Mark to market adjustments in respect of cross currency and interest
rate derivatives used for hedging purposes where IAS 39 hedge accounting
is not applied;
• Revaluation of USD loan notes from the rate of the related cross
currency swaps to the year end rate;
• The transitional adjustment required to reflect movements in fair
value caused by variations in interest rates, and subsequent amortisation
thereof, to the extent that these constituted effective hedges under
UK GAAP; and
• Other non-operating or one-off items.
4 Transition to IFRS - first time adoption
IFRS 1 'First Time Adoption of International Financial Reporting Standards',
determines that the transition date for Yule Catto will be 1 January 2004. It
permits those companies adopting IFRS for the first time to take certain
exemptions from the full requirements of IFRS during the transition period.
Yule Catto has taken the following key exemptions:
4.1 Pensions
All cumulative actuarial gains and losses have been recognised in equity at the
transition date. This is to maintain consistency with Group policy under
IAS 19, where all actuarial gains and losses are recognised directly in reserves
via the statement of recognised income and expense.
4.2 Cumulative translation differences
Under IAS 21, on disposal of a business, the cumulative amount of exchange
differences previously recognised directly in equity for that business is
charged or credited to the income statement as part of the profit or loss on
disposal. The Group has adopted the exemption allowing these cumulative
translation differences to be reset to zero at the transition date.
4.3 Share based payments
The Group has adopted the exemption to apply IFRS 2 Share based payments only to
awards made after 7 November 2002 that had not vested by 1 January 2005. There
is no change in the treatment for options granted before 7 November 2002.
4.4 Business combinations
The Group has chosen not to restate business combinations completed prior to the
transition date on an IFRS basis.
The exemptions Yule Catto has decided not to adopt include:
4.5 IAS 32/39 Comparatives
IFRS 1 includes an exemption not to restate comparatives for IAS 32 and IAS 39.
If this exemption were to be taken, the comparative information in the 2005
financial statements will be presented on the existing UK GAAP basis and will
not be restated in line with IAS 32 and IAS 39. To present a consistent
treatment in each period, Yule Catto has decided not to take this exemption.
4.6 Fair value or revaluation at deemed cost
The Group has not adopted the exemption to restate items of property, plant and
equipment to fair value at the transition date. Such items have been maintained
at historical cost in order to maintain consistency with current Group policy.
5 IFRS Financial statements for the year ended 31 December 2004
5.1 Consolidated Income Statement for the year ended 31 December 2004
Underlying
performance Special items IFRS
£'000 £'000 £'000
audited audited audited
Continuing operations
Subsidiaries 536,567 - 536,567
Joint ventures 12,877 - 12,877
Revenue 549,444 - 549,444
Subsidiaries 44,923 - 44,923
Joint ventures 1,808 - 1,808
Profit from operations 46,731 - 46,731
Impairment of non-current assets - (1,784) (1,784)
Operating profit 46,731 (1,784) 44,947
Finance costs (12,930) (260) (13,190)
Profit before taxation 33,801 (2,044) 31,757
Taxation (11,317) - (11,317)
Profit for the year 22,484 (2,044) 20,440
Profit attributable to minority interest (1,303) - (1,303)
Profit attributable to equity shareholders 21,181 (2,044) 19,137
Earnings per share
Basic 14.7p (1.4)p 13.2p
Diluted 14.5p (1.4)p 13.1p
5.2 Reconciliation of reported profits for the year ended 31 December 2004
As reported Pensions Goodwill and Net Financial Other Restated
under UK impairments investment instruments under IFRS
GAAP hedging
£'000 £'000 £'000 £'000 £'000 £'000 £'000
audited audited audited audited audited audited audited
Continuing
operations
Subsidiaries 536,567 - - - - - 536,567
Joint ventures 12,877 - - - - - 12,877
Revenue 549,444 - - - - - 549,444
Subsidiaries 42,005 2,317 1,909 (1,833) - 525 44,923
Joint ventures 1,956 - - - - (148) 1,808
Profit from
operations 43,961 2,317 1,909 (1,833) - 377 46,731
Impairment of - - (1,784) - - - (1,784)
non-current assets
Amortisation of
goodwill (15,469) - 15,469 - - - -
Operating profit 28,492 2,317 15,594 (1,833) - 377 44,947
Finance costs (12,950) - - - (260) 20 (13,190)
Profit before 15,542 2,317 15,594 (1,833) (260) 397 31,757
taxation
Taxation (9,613) (1,832) - - - 128 (11,317)
Profit for the year 5,929 485 15,594 (1,833) (260) 525 20,440
Profit attributable
to minority interest (1,303) - - - - - (1,303)
Profit attributable
to equity
shareholders 4,626 485 15,594 (1,833) (260) 525 19,137
Profit before
taxation and special
items 31,011 2,317 1,909 (1,833) - 397 33,801
Earnings per share
Basic 3.2p 13.2p
Before special items 13.9p 14.7p
5.3 Consolidated Balance sheet as at 31.12.2004
Underlying performance Special items IFRS
£'000 £'000 £'000
audited audited audited
Non-current assets
Goodwill 231,821 (59,378) 172,443
Other intangible assets 773 - 773
Property, plant and equipment 158,899 (10,170) 148,729
Deferred tax assets 1,860 - 1,860
Investment in joint ventures 3,053 - 3,053
396,406 (69,548) 326,858
Current assets
Inventories 70,907 - 70,907
Trade and other receivables 109,517 - 109,517
Cash and cash equivalents 93,868 - 93,868
274,292 - 274,292
Current liabilities
Borrowings (102,244) - (102,244)
Derivatives at fair value - (17,152) (17,152)
Trade and other payables (123,057) 412 (122,645)
Taxation (52,512) - (52,512)
Net current assets (3,521) (16,740) (20,261)
Non-current liabilities
Borrowings (179,265) 9,104 (170,161)
Trade and other payables (436) - (436)
Deferred tax (14,279) - (14,279)
Post retirement benefits (75,802) - (75,802)
(269,782) 9,104 (260,678)
Net assets 123,103 (77,184) 45,919
Share capital 14,480 - 14,480
Share premium 31,829 - 31,829
Capital redemption reserve 949 - 949
Hedging and translation reserve (947) - (947)
Retained earnings 72,386 (77,184) (4,798)
Equity attribute to equity
shareholders 118,697 (77,184) 41,513
Minority interests 4,406 - 4,406
Total equity 123,103 (77,184) 45,919
Cash and cash equivalents 93,868 - 93,868
Current borrowings (102,244) - (102,244)
Non-current borrowings (179,265) 9,104 (170,161)
Net borrowings (187,641) 9,104 (178,537)
5.4 Reconciliation of equity and net assets as at 31.12.2004
As Pension Goodwill Financial Dividends Other Reclassi- Restated
reported and instruments fications under
under UK impairments IFRS
GAAP
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
audited audited audited audited audited audited audited audited
Non-current assets
Goodwill 216,352 - (43,909) - - - - 172,443
Other intangible
assets - - - - - 773 - 773
Property, plant and
equipment 166,440 - (12,079) - - (5,632) - 148,729
Deferred tax assets - 1,860 - - - - - 1,860
Financial assets 25 - - - - (25) - -
Investment in joint
ventures 3,053 - - - - - - 3,053
385,870 1,860 (55,988) - - (4,884) - 326,858
Current assets
Inventories 71,235 - - - - (328) - 70,907
Trade and other
receivables 109,492 - - - - 25 - 109,517
Cash and cash
equivalents 17,834 - - - - - 76,034 93,868
198,561 - - - - (303) 76,034 274,292
Current liabilities
Borrowings (26,210) - - - - - (76,034) (102,244)
Derivatives at fair
value - - - (17,152) - - - (17,152)
Trade and other
payables (122,285) (1,886) - 412 - 1,114 - (122,645)
Dividends (11,440) - - - 11,440 - - -
Taxation (44,073) - - - - - (8,439) (52,512)
Net current assets (5,447) (1,886) - (16,740) 11,440 811 (8,439) (20,261)
Non-current
liabilities
Borrowings (179,265) - - 9,104 - - - (170,161)
Trade and other
payables (222) - - - - (184) (30) (436)
Provisions (26,983) 4,235 - - - - 22,748 -
Deferred tax - - - - - - (14,279) (14,279)
Post retirement
benefits - (75,802) - - - - - (75,802)
(206,470) (71,567) - 9,104 - (184) 8,439 (260,678)
Net assets 173,953 (71,593) (55,988) (7,636) 11,440 (4,257) - 45,919
Share capital 14,480 - - - - - - 14,480
Share premium 31,829 - - - - - - 31,829
Capital redemption 949 - - - - - - 949
reserve
Revaluation reserve 2,478 - - - - (2,478) - -
Hedging and
translation reserve - - - (947) - - - (947)
Retained earnings 119,811 (71,593) (55,988) (6,689) 11,440 (1,779) - (4,798)
Equity attributable to
equity shareholders 169,547 (71,593) (55,988) (7,636) 11,440 (4,257) - 41,513
Minority interests 4,406 - - - - - - 4,406
Total equity 173,953 (71,593) (55,988) (7,636) 11,440 (4,257) - 45,919
Net borrowings (187,641) - - 9,104 - - - (178,537)
5.5 Reconciliation of equity and net assets as at 1.1.2004
As Pensions Goodwill Financial Dividends Other Reclassi-fications Restated
reported and instruments under IFRS
under UK impairments
GAAP
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
audited audited audited audited audited audited audited audited
Non-current assets
Goodwill 231,821 - (58,838) - - - - 172,983
Intangible assets - - - - - 782 - 782
Property, plant and
equipment 175,067 - (12,744) - - (6,113) - 156,210
Deferred tax assets - - - - - 5,490 - 5,490
Financial assets 38 - - - - (38) - -
Investment in joint
ventures 3,252 - - - - - - 3,252
410,178 - (71,582) - - 121 - 338,717
Current assets
Inventories 66,947 - - - - (328) - 66,619
Trade and other
receivables 100,182 - - - - (2,005) - 98,177
Cash and cash
equivalents 9,856 - - - - - 79,987 89,843
176,985 - - - - (2,333) 79,987 254,639
Current liabilities
Borrowings (34,271) - - - - - (79,987) (114,258)
Derivatives at fair
value - - - (4,595) - - - (4,595)
Trade and other
payables (127,695) - - 232 - (24) - (127,487)
Dividends (11,150) - - - 11,150 - - -
Taxation (43,271) - - - - - (10,579) (53,850)
Net current assets (39,402) - - (4,363) 11,150 (2,357) (10,579) (45,551)
Non-current
liabilities
Borrowings (152,861) - - (3,009) - - - (155,870)
Trade and other
payables (594) - - - - (175) (87) (856)
Provisions (26,757) 4,133 - - - 34,582 (11,958) -
Deferred tax - - - - - (34,582) 22,624 (11,958)
Post retirement
benefits - (80,400) - - - - - (80,400)
(180,212) (76,267) - (3,009) - (175) 10,579 (249,084)
Net assets 190,564 (76,267) (71,582) (7,372) 11,150 (2,411) - 44,082
Share capital 14,480 - - - - - - 14,480
Share premium 31,829 - - - - - - 31,829
Capital redemption
reserve 949 - - - - - - 949
Revaluation reserve 2,525 - - - - (2,525) - -
Hedging and
translation reserve - - - - - - - -
Retained earnings 137,337 (76,267) (71,582) (7,372) 11,150 114 - (6,620)
Minority interests 3,444 - - - - - - 3,444
Total equity 190,564 (76,267) (71,582) (7,372) 11,150 (2,411) - 44,082
Net borrowings (177,276) - - (3,009) - - - (180,285)
5.6 Consolidated cash flow statement for the year ended 31 December 2004
IFRS IFRS
£'000 £'000
audited audited
Operating
Cash generated from operations 49,181
Interest paid (12,381)
Total tax paid (8,504)
Net cash inflow from operating activities 28,296
Investing
Purchase of property, plant and equipment (16,920)
Sale of property, plant and equipment 186
Net capital expenditure and financial investment (16,734)
Purchase of businesses (1,358)
Sale of businesses -
Net cash impact of acquisitions and disposals (1,358)
Dividends received from joint ventures 1,854
Net cash outflow from investing activities (16,238)
Financing
Equity dividends paid (19,086)
Dividends paid to minority interests (72)
Purchase of own shares (185)
Repayment of short term borrowings (12,000)
Proceeds of long term borrowings 26,486
Net cash outflow from financing activities (4,857)
Increase in cash and cash equivalents during the year 7,201
Reconciliation of net cash flow from operating activities to movement in
net borrowings £'000
Net cash inflow from operating activities 28,296
Add:
Dividends received from joint ventures 1,854
Less:
Net capital expenditure and financial investment (16,734)
Dividends paid to minority interests (72)
Free cash flow before dividends 13,344
Net cash impact of acquisitions and disposals (1,358)
Purchase of own shares (185)
Equity dividends paid (19,086)
Exchange movements (3,080)
Movement in net borrowings (before special items) (10,365)
Selected notes to the Financial Statements for the year ended 31 December 2004
5.6.1 Segmental analysis
UK GAAP IFRS
£'000 £'000
audited audited
Revenue
Polymer Chemicals 316,108 316,108
Pharma and Fine Chemicals 96,868 96,868
Performance Chemicals 136,468 136,468
549,444 549,444
Profit from operations
Polymer Chemicals 26,907 27,663
Pharma and Fine Chemicals 16,244 16,355
Performance Chemicals 5,418 7,057
Unallocated corporate expenses (4,608) (4,344)
43,961 46,731
5.6.2 Earnings per share
UK GAAP IFRS
Earnings Earnings per Earnings Earnings per
share share
£'000 p £'000 p
audited audited audited audited
Earnings - basic 4,626 3.2 19,137 13.2
Special items
Amortisation of goodwill 15,469 10.7 - -
Impairment of non-current
assets - - 1,784 1.2
Fair value adjustments - - 260 0.2
Earnings before special items 20,095 13.9 21,181 14.7
There were no discontinued operations in the period.
Earnings per share are calculated using the weighted average number of
shares during the year of 144,563,000.
5.6.3 Finance costs
UK GAAP IFRS
£'000 £'000
audited audited
Interest payable 13,249 13,229
Interest receivable (299) (299)
Interest payable (net) 12,950 12,930
Fair value losses on interest rate swaps - 260
Finance costs 12,950 13,190
5.6.4 Reconciliation of movement in net borrowing
UK GAAP Underlying Special IFRS
performance items
£'000 £'0000 £'000 £'000
audited audited audited audited
Increase in cash and cash
equivalents during the year
7,201 7,201 - 7,201
Cash inflow/(outflow) from
decrease in debt
(14,486) (14,486) - (14,486)
Exchange movement on
retranslation of foreign currency
balances (3,080) (3,080) - (3,080)
Other movements - - 12,113 12,113
Movement in net borrowings (10,365) (10,365) 12,113 1,748
Net borrowings at 1 January (177,276) (177,276) (3,009) (180,285)
Net borrowings at 31 December (187,641) (187,641) 9,104 (178,537)
The special item is the revaluation of the loan notes in respect of the movement
in currency and interest rates since their inception. The Group is not exposed
to these movements as the risk to future cash flows has been fully mitigated by
the use of cross currency and interest rate swaps, and a corresponding value is
held in derivatives at fair value on the balance sheet.
6 Explanation of Principal IFRS adjustments
6.1 Pensions
Principal difference
Under UK GAAP, the Group measures pension commitments and other related benefits
in accordance with SSAP 24 'Accounting for Pension Costs'. Additional
disclosures are given in accordance with FRS 17 'Retirement Benefits'. Under
IFRS, the Group measures pension commitments and other related benefits in
accordance with IAS19 'Employee Benefits'. IAS 19 is similar to FRS 17 in that
it adopts a balance sheet approach, bringing the deficit/surplus of the pension/
post-retirement benefit schemes onto the balance sheet. However, FRS 17 dictates
that all actuarial gains and losses are to be recognised directly in reserves,
whereas IAS 19 also includes an alternative option allowing actuarial gains and
losses to be held on the balance sheet and released to the income statement over
a period of time. Yule Catto has elected not to adopt this alternative option
and therefore will be accounting for post-retirement benefits in a manner
consistent with FRS 17.
Transition impact
A post-retirement benefit liability of £83.8m together with a related deferred
tax asset of £5.5m has been recognised at the transition date, offset by the
reversal of provisions of £4.1m. The pension prepayment (within debtors) on the
UK GAAP balance sheet of £2.0m has also been reversed. The net effect is a
reduction in shareholder funds of £76.2m on transition.
Impact on income statement for the year ended 31 December 2004
The pension charge under IAS19 for 2004 is £2.3m lower than the charge under
SSAP 24.
Impact on net assets as at 31 December 2004
Throughout the year all movements in the deficit on pension schemes are
recognised against the liability. At the end of the year, the liability on the
balance sheet reflects the closing deficit of the pension schemes. This has been
adjusted to reflect the actuarial gain net of tax for the year of £4.1m that has
been recognised directly in reserves.
6.2 Goodwill and impairments
Principal difference
Under UK GAAP, the Group amortises goodwill on a straight line basis over the
useful economic life of the acquired asset, up to a maximum of twenty years.
Provision is made when impairment is indicated by external business factors and
is considered against the value of all businesses acquired as part of each
single acquisition. This is in accordance with FRS 10 'Goodwill and Intangible
Assets'. Under IFRS 3 'Business Combinations' annual amortisation is no longer
required, instead goodwill must be allocated to each income generating unit
acquired, and an annual impairment reviews must be performed for each discrete
unit.
The Group has performed this allocation and subsequent review. Having allocated
goodwill to specific income generating units at acquisition date it has
highlighted a number of businesses whose value has increased since acquisition,
together with some whose value has fallen. Under UK GAAP these movements would
be considered together, resulting in no change to the carrying value of
goodwill. Under IFRS the impairment to goodwill for businesses whose value has
fallen must be taken as a charge on income, with no corresponding recognition of
any increases in value elsewhere. Where the impairment exceeds the value of the
goodwill allocated to a specific business, the excess is then taken as an
impairment of property, plant and equipment.
Transition impact
An impairment of £71.6m is recognised as a reduction in total equity on
transition. Of this, £58.8m is a reduction to the carrying value of goodwill,
and a further £12.8m is a reduction to the carrying value of property, plant and
equipment.
Impact on income statement for the year ended 31 December 2004
Amortisation of goodwill is reduced from £15.5m under UK GAAP to £nil under
IFRS.
A further impairment of £1.8m has been taken in 2004 against non-current assets.
The depreciation charge under IFRS 3 for 2004 is £1.9m lower than the charge
under FRS 10 due to the reduction in net book value of the impaired property,
plant and equipment. This offsets the impact of the additional impairment in
2004.
Impact on net assets at 31 December 2004
The closing balance sheet for 2004 is therefore subject to a net reduction in
the value of non-current assets of £56.0m.
6.3 Exclusion of proposed dividend
Principal difference
IAS 10 provides that any dividends declared after the period end should not be
reflected as a liability at the balance sheet date.
Transition impact
The impact at 1 January 2004 is to derecognise the 2003 final dividend liability
of £11.1m in the transitional balance sheet.
Impact on income statement for the year ended 31 December 2004
No charge is made for the final 2004 dividend in the 2004 income statement.
Instead, it is replaced by a charge for the 2003 final dividend £11.1m. The net
impact is a £0.3m increase in retained profit in 2004 under IFRS.
No dividend payable is shown as part of the income statement but the dividends
declared in the year, the final 2003 and the interim 2004 dividend are shown as
a deduction from the retained earnings reserve.
Impact on net assets at 31 December 2004
The dividend liability of £11.4m is removed from the balance sheet.
6.4 Net investment hedging
Principal difference
The group has a number of intercompany loans that are integral to the
optimisation of the Group's internal financing structure. Some of these loans
are denominated in a foreign currency for at least one of the two parties to the
loan. As a result foreign exchange gains and losses will be recorded in the
income statements of the party concerned. Under UK GAAP, as part of the
consolidation process, all of the exchange differences on intercompany loans are
offset fully with no net charge or credit to the Group's profit.
Additionally, under UK GAAP, the Group has been able to designate foreign
currency borrowings held by holding companies in the United Kingdom as a hedge
against foreign currency denominated assets. As a result, the foreign exchange
gains and losses on the borrowings were matched against the gains and losses on
the assets, with both being recognised in reserves.
IAS 39 also permits this matching, but only when the hedging instrument is
external borrowings; it does not apply to foreign currency intercompany loans.
Therefore, within our funding structure, this results in the exchange gains and
losses on the intercompany loans being recognised in the income statement whilst
the exchange difference on the assets is taken through reserves.
Transition impact
This is a reclassification between the income statement and reserves, therefore
there is no impact on net assets.
Impact on income statement for the year ended 31 December 2004
For the full year the additional exchange difference recognised within net
finance expense in the income statement is a charge of £1.8m with a
corresponding credit of £1.8m to reserves.
Impact on balance sheet at 31 December 2004
There is no impact on the balance sheet.
Future impact
The Group has amended its internal financing arrangements to ensure that in
future the impact on the Group's profit will be minimised.
6.5 Interest risk management
Principal difference
Under IFRS certain of the Group's financial instruments are required to be
measured at fair value, in accordance with IAS 32 'Financial Instruments:
Disclosure and Presentation' and IAS 39 'Financial Instruments: Measurement and
Recognition'. The fair values of such instruments are sensitive to movements in
interest rates and currencies, and unless the instruments qualify for hedge
accounting, as permitted by IAS 39, any gains or losses in the period arising
from the movement in the fair values will be recognised in the income statement.
The Group only uses forward foreign currency contracts and interest rate swaps
to manage its exposures to fluctuations in interest and foreign exchange rates.
No derivatives are held or issued for financial trading purposes.
The majority of the Group's derivatives were taken out in relation to the US
dollar loan notes to ensure that the long term cash flows were swapped into a
Sterling exposure. Under UK GAAP the loan notes and the corresponding
derivative qualified for hedge accounting. Under IFRS none of the Group's
derivatives qualified for IAS 39 hedge accounting.
The impact of this fair value adjustment will be highlighted on the income
statement as a special item.
In addition to the inclusion of derivatives at fair value, IAS 39 requires the
revaluation of the loan notes in respect of the movement in currency and
interest rates since their inception. The Group is not exposed to these
movements as the risk to future cash flows has been fully mitigated by the use
of cross currency and interest rate swaps. As a result, the impact of this
adjustment will also be shown as a special item.
Transition impact
The cross currency and interest rate swaps are brought onto the balance sheet as
a creditor at fair value of £4.6m as at 1 January 2004. The carrying value of
the US Dollar loan notes is adjusted by £3.0m to reflect movements in currency
and interest rates since their inception. These two adjustments together with
an adjustment to the interest accrual of £0.3m produced an overall reduction in
net assets of £7.3m at transition.
Impact on income statement for the year ended 31 December 2004
Under IFRS an additional charge of £0.3m is made to net finance costs,
reflecting the impact of the movement in market interest rates. Given the nature
of this adjustment, it is shown in the income statement in the special items
column.
Impact on net assets at 31 December 2004
At 31 December 2004, the derivatives are fair valued as a liability of £17.2m.
The adjustment to the loan notes is a reduction in borrowings of £9.1m and the
interest accrual reduces by £0.5m. This produces an overall reduction in the
net assets of £7.6m.
Future impact
Where it is practical, the cross currency and interest rates swaps will be
designated as cashflow or fair value hedges as appropriate and IAS 39 hedge
accounting will be instigated. This will not eliminate all of the volatility as
not all of the Group's derivatives can meet the requirements for hedge
accounting. The intention is to maintain the existing treasury strategy and
approach, measured using traditional UK accounting in establishing the
underlying financing costs and borrowing. The adjustments necessary to produce
compliance with IFRS will be shown as 'special items'.
7. Other impacts
7.1 Intangibles
IAS 38 requires the costs incurred on development projects that meet certain
criteria to be recognised as intangible assets in the balance sheet. The Group's
policy under UK GAAP has been to expense all such costs as they are incurred. A
review of development projects currently in progress throughout the Group
indicated that under IFRS these projects do not meet the criteria for
capitalisation, and therefore no adjustment is required.
Additionally, IFRS requires computer software and other intellectual property
that is not an integral part of the related hardware to be treated as an
intangible asset. This has resulted in a balance sheet reclassification of £0.8m
from property plant and equipment to intangible assets.
7.2 Capitalised Interest
In line with UK GAAP, capitalisation of interest incurred during the
construction of plant is allowed under IFRS. However, IAS 23 imposes an
additional condition requiring construction to be financed by separately
identifiable borrowings. The Group has no specific funding of its capital
expenditure requirements and therefore the capitalised interest has been
eliminated from property, plant and equipment at transition.
7.3 Share based payments
As the costs of the Group's share option schemes were expensed to profit under
UK GAAP, the application of IFRS 2 has had a negligible impact on the income
statement. However, there is a substantial reclassification within the balance
sheet as IFRS 2 requires the amount accrued but not yet settled to be shown in
equity rather than as a creditor.
7.4 Revaluation reserve
The Group has not adopted the exemption to restate items of property to fair
value or deemed cost. Instead, to ensure consistency across the portfolio, all
property will be held at cost under IFRS. The revaluations made under UK GAAP
in 1985 have therefore been reversed.
7.5 Cash flow
The Group's underlying cash position is unaffected by the transition to IFRS.
However, there are a number of presentational differences arising in the cash
flows reported under IAS 7 'Cash flow statements'. The cash flows themselves
relate to movements in cash and cash equivalents (rather than simply cash) and
are classified under three headings (operating, investing and financing) which
results in the reordering of entries from their UK GAAP format.
7.6 Reclassifications
Various reclassifications are required in order to comply with the disclosure
requirements of the International Standards. The most significant of these are:
i) an increase in both cash and short term borrowings of £76.0m.
Although these balances are held under notional pooling arrangements, IAS 32
requires them to be shown gross;
ii) under UK GAAP, the net deferred tax liability is shown within
provisions and the net current tax liability is shown within trade creditors.
Under IFRS, no offset of tax assets and liabilities is permitted, and each of
these is shown gross separately on the face of the balance sheet; and
iii) an £8.4m reclassification from deferred tax liability to current
tax liability.
8. Changes to accounting policies resulting from the implementation of
IFRS
All accounting policies not detailed below remain consistent with their
application under UK GAAP.
8.1 Foreign currencies
Transactions in currencies other than pounds sterling are recorded at the rates
of exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities denominated in foreign currencies are
retranslated at the rates prevailing on the balance sheet date. Non-monetary
assets and liabilities carried at fair value that are denominated in foreign
currencies are translated at the rates prevailing at the date when the fair
value was determined. Gains and losses arising on retranslation are included in
net profit or loss for the period, except for exchange differences arising on
non-monetary assets and liabilities where the changes in fair value are
recognised directly in equity.
In order to hedge its exposure to certain foreign exchange risks, the group
enters into forward contracts and options (see below for details of the group's
accounting policies in respect of such derivative financial instruments).
On consolidation, the assets and liabilities of the group's overseas operations
are translated at exchange rates prevailing on the balance sheet date. Income
and expense items are translated at the average exchange rates for the period
unless exchange rates fluctuate significantly. Exchange differences arising, if
any, are classified as equity and transferred to the group's translation
reserve. Such translation differences are recognised as income or as expenses in
the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
8.2 Revenue
Revenue is measured at the fair value of the consideration received or
receivable and represents amounts receivable for goods and services provided in
the normal course of business, net of discounts, VAT and other sales-related
taxes. Sales of goods are recognised when goods are delivered and title has
passed.
8.3 Finance costs
Finance costs of debt are recognised in the income statement over the term of
such instruments at a constant rate on the carrying amount. Finance costs that
are directly attributable to the construction of tangible fixed assets are
capitalised as part of the cost of those assets in accordance with IAS 32 / 39.
All other borrowing costs are recognised in the income statement in the period
in which they are incurred.
8.4 Goodwill
Goodwill arising on consolidation represents the excess of the cost of
acquisition over the group's interest in the fair value of the identifiable
assets and liabilities of a subsidiary, associate or jointly controlled entity
at the date of acquisition. Goodwill is recognised as an asset and reviewed for
impairment at least annually. Any impairment is recognised immediately in the
income statement and is not subsequently reversed.
On disposal of a subsidiary, associate or jointly controlled entity, the
attributable amount of goodwill is included in the determination of the profit
or loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRSs has been
retained at the previous UK GAAP amounts subject to being tested for impairment
at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has
not been reinstated and is not included in determining any subsequent profit or
loss on disposal.
8.5 Intangible assets
Research and development
Research expenditure, undertaken with the prospect of gaining new scientific or
technical knowledge and understanding, is charged to income in the year in which
it is incurred. Internal development expenditure, whereby research findings are
applied to a plan for the production of new or substantially improved products
or processes, is charged to the income statement in the year in which it is
incurred unless it meets the recognition criteria of IAS 38 'Intangible Assets'.
Measurement and other uncertainties generally mean that such criteria are not
met. Where, however, the recognition criteria are met, intangible assets are
capitalised and amortised over their useful economic lives. Intangible assets
relating to products in development are subject to impairment testing at each
balance sheet date or earlier upon indication of impairment. Any impairment
losses are written off immediately to income.
Computer software
Acquired computer software licences covering a period of greater than one year
are capitalised on the basis of the costs incurred to acquire and bring to use
the specific software. These costs are amortised over their estimated useful
lives (three to five years).
8.6 Impairment of intangible assets
At each balance sheet date, the group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss (if any). Where the asset does not generate cash
flows that are independent from other assets, the group estimates the
recoverable amount of the cash-generating unit to which the asset belongs. An
intangible asset with an indefinite useful life is tested for impairment
annually and whenever there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the
asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment loss
is recognised as an expense immediately, unless the relevant asset is carried at
a revalued amount, in which case the impairment loss is treated as a revaluation
decrease.
8.7 Debt
Borrowings are recorded at the proceeds received, net of direct issue costs.
Finance charges, including premiums payable on settlement or redemption and
direct issue costs, are accounted for on an accruals basis to the income
statement using the effective interest method and are added to the carrying
amount of the instrument to the extent that they are not settled in the period
in which they arise.
8.8 Net borrowings
Net borrowings represents cash and cash equivalents together with short and long
term borrowings, as adjusted for the effect of related derivative instruments
irrespective of whether they qualify for hedge accounting.
8.9 Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates that have been
enacted or substantially enacted by the balance sheet date.
8.10 Deferred taxation
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interests in joint
ventures, except where the group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
8.11 Derivative financial instruments
The group uses derivative financial instruments to reduce exposure to foreign
exchange risk and interest rate movements. The group does not hold or issue
derivative financial instruments for speculative purposes.
The use of financial derivatives is governed by the group's policies approved by
the board of directors, which provide written principles on the use of financial
derivatives.
Financial instruments are recorded initially at cost. Subsequent measurement
depends on the designation of the instrument as either: (i) a hedge of the fair
value of recognised assets or liabilities or a firm commitment (fair value
hedge); or (ii) a hedge of highly probable forecast transactions (cash flow
hedge);
(i) Fair value hedge
Changes in the fair value of derivatives, for example interest rate swaps and
foreign exchange contracts, 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.
(ii) 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 the 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 the 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 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.
Where derivative instruments do not qualify for hedge accounting changes in
their fair value are recognised immediately in the income statement.
8.12 Retirement benefit costs
The costs of contributions to the group's pension schemes and of augmenting
existing pensions are charged to the income statement on a systematic basis over
the expected period of benefits from employees' service.
The UK defined benefit scheme is funded, with the assets of the scheme held
separately from those of the group, in separate trustee-administered funds. For
the German schemes, the assets are included within the assets of the respective
companies, as permitted under local laws. The assets of the other overseas
schemes are held separately from those of the group.
For defined benefit retirement schemes, the cost of providing benefits is
determined using the projected unit credit method, with actuarial valuations
being carried out at each balance sheet date. Actuarial gains and losses are
recognised in full in the period in which they occur.
Past service cost is recognised immediately to the extent that the benefits are
already vested, and otherwise is amortised on a straight line basis over the
average period until the benefits become vested.
The retirement benefit scheme recognised in the balance sheet represents the
present value of the defined benefit scheme obligation as adjusted for
unrecognised past service cost, and as reduced by the fair value of scheme
assets. Any asset resulting from this calculation is limited to past service
cost, plus the present value of available refunds and reductions in future
contributions to the plan.
8.13 Share based payments
The group has applied the requirements of IFRS 2 Share-based Payments. In
accordance with the transitional provisions, IFRS 2 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested as of 1
January 2005. There is no change in the treatment for options granted before 7
November 2002.
The group issues equity-settled share-based payments to certain employees.
Equity-settled share-based payments are measured at fair value at the date of
grant. The fair value determined at the grant date of the equity-settled
share-based payments is expensed on a straight-line basis over the vesting
period, based on the group's estimate of shares that will eventually vest.
9 Glossary of terms
Operating profit Operating profit represents profit before finance costs and taxation.
Profit from operations Profit from operations represents profit before non-recurring items, financing costs,
and taxation. When referring to UK GAAP values, profit from operations is also stated
before amortisation of goodwill.
Non-recurring items Non-recurring items are defined as:
• Profit or loss impact arising from the sale or closure of an operation;
• Impairment of non-current assets; and
• Other non-operating or one-off items.
Special items The following are disclosed separately as special items in order to provide a clearer
indication of the Group's underlying performance:
• Non-recurring items;
• Mark to market adjustments in respect of cross currency and interest rate
derivatives used for hedging purposes where IAS 39 hedge accounting is not applied;
• Revaluation of USD loan notes from the rate of the related cross currency
swaps to the year end rate; and
• The transitional adjustment required to reflect movements in fair value
caused by variations in interest rates, and subsequent amortisation thereof, to the
extent that these constituted effective hedges under UK GAAP.
When referring to UK GAAP numbers, special items also includes amortisation of
goodwill.
Free cash flow Free cash flow represents cash flow before cash impact of acquisitions and disposals,
purchase of own shares, equity dividends paid and exchange movements.
10 Audit opinion
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF YULE CATTO & CO PLC ON
THE PRELIMINARY COMPARATIVE IFRS FINANCIAL INFORMATION
We have audited the preliminary full year comparative International Financial
Reporting Standards (IFRS) financial information of Yule Catto & Co plc ('the
Company') and its subsidiaries (together, 'the Group'); which comprises the
consolidated balance sheet as at 31 December 2004; the consolidated income
statement and the consolidated cash flow statement for the year ended 31
December 2004; and the IFRS accounting policies set out on pages 17 to 20
(together 'the full year comparative IFRS financial information'.)
This report is made solely to the Board of Directors, in accordance with our
engagement letter dated 3 March 2005 and solely for the purpose of assisting
with the transition to IFRS. Our audit work will be undertaken so that we might
state to the company's board of directors those matters we are required to state
to them in an auditors' report and for no other purpose. To the fullest extent
permitted by law, we will not accept or assume responsibility to anyone other
than the company for our audit work, for our report, or for the opinions we have
formed.
Respective responsibilities of directors and auditors
The company's directors are responsible for ensuring that the Company and the
Group maintains proper accounting records and for the preparation of the
preliminary full year comparative IFRS financial information on the basis set
out in the IFRS accounting policies, which describe how IFRS will be applied
under IFRS 1, including the assumptions the directors have made about the
standards and interpretations expected to be effective, and the policies
expected to be adopted, when the company prepares its first complete set of IFRS
financial statements as at 31 December 2005. Our responsibility is to audit the
preliminary full year comparative IFRS financial information in accordance with
relevant United Kingdom legal and regulatory requirements and auditing standards
and report to you our opinion as to whether the preliminary comparative IFRS
financial information is prepared, in all material respects, on the basis set
out in the IFRS accounting policies.
We read the other information contained in the preliminary full year comparative
IFRS financial information for the above year and consider the implications for
our report if we become aware of any apparent misstatements or material
inconsistencies with the preliminary full year comparative IFRS financial
information.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom auditing standards
issued by the Auditing Practices Board. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the preliminary
full year comparative IFRS financial information. It also includes an assessment
of the significant estimates and judgements made by the directors in the
preparation of the preliminary full year comparative IFRS financial information
and of whether the accounting policies are appropriate to the circumstances of
the Group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the preliminary full year
comparative IFRS financial information is free from material misstatement,
whether caused by fraud or other irregularity or error. In forming our opinion,
we also evaluated the overall adequacy of the presentation of information in the
preliminary full year comparative IFRS financial information.
Adoption of IFRS
Without qualifying our opinion, we draw attention to the fact that there is a
possibility that the accompanying preliminary full year comparative IFRS
comparative financial information may require adjustment before constituting the
final full year comparative IFRS financial information. Moreover, we draw
attention to the fact that, under IFRSs, only a complete set of financial
statements comprising a balance sheet, income statement, statement of changes in
equity, cash flow statement, together with comparative financial information and
explanatory notes, can provide a fair presentation of the Group's financial
position, results of operations and cash flows in accordance with IFRSs.
Opinion
In our opinion the preliminary full year comparative IFRS financial information
has been prepared, in all material respects, on the basis set out in the IFRS
accounting policies which describe how IFRS will be applied under IFRS 1,
including the assumptions the directors have made about the standards and
interpretations expected to be effective and the policies expected to be
adopted, when the company prepares its first complete set of IFRS financial
statements as at 31 December 2005.
Deloitte & Touche LLP
Chartered Accountants
London
8th September 2005
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