Doc re. IFRS

Victrex PLC 07 June 2005 7 June 2005 Victrex plc The effects of International Financial Reporting Standards Introduction The purpose of this document is to give guidance on how International Financial Reporting Standards ('IFRS') will impact Victrex's financial results when adopted for the year ending 30 September 2006. This document is for guidance only and the effects detailed may be amended as a result of further interpretive guidance from the International Accounting Standards Board ('IASB') or ongoing review. The financial information presented in this document is unaudited. Background Victrex plc currently prepares its financial statements under UK Generally Accepted Accounting Practice ('UK GAAP'). For the year ending 30 September 2006 the Group will be required to prepare its interim and annual reports, including the comparative year ending 30 September 2005, under IFRS. This document details the principal differences arising from this transition on the opening balance sheet as at 1 October 2004 ('date of transition') and on the income statement (previously the profit and loss account under UK GAAP) and balance sheet for the six months ended 31 March 2005 as announced to the Stock Exchange today. Impact Half year ended 31 March 2005 UK GAAP IFRS Variance £m £m £m Profit before tax 17.4 17.5 0.1 Closing equity shareholders' funds 84.2 81.2 (3.0) Earnings per share 14.6p 14.6p - Summary of principal differences The principal differences for Victrex between reporting on the basis of IFRS compared to current UK GAAP are as follows: 1. Proposed dividends which have not been declared at the balance sheet date can no longer be recognised in the financial statements; 2. The deferred tax provision will have to be adjusted as a result of: a. Discounting no longer being permitted; b. IFRS being more prescriptive regarding the recognition of deferred tax assets; and c. Changes in accounting for employee benefits (see note 4 below); 3. Amortisation of goodwill is no longer permitted; 4. The deficit in the defined benefit section of Victrex's principal pension scheme has to be recognised on the balance sheet both at the date of transition and as at 31 March 2005. The movement in the deficit as a result of current service cost, contributions and other finance income has to be recognised in the income statement with all other movements (predominantly actuarial gains and losses) reflected through the statement of recognised income and expense. It should be noted that these changes would largely have been required under UK GAAP once FRS17 became fully applicable (currently the information is given in the notes to the accounts); and 5. The fair value of forward foreign currency contracts will have to be recognised on the balance sheet. Victrex will continue to hedge account, and hence this adjustment is not expected to have any material impact on the income statement. Further details of each of these differences follow and are summarised in tabular form in the following appendices: Appendix 1 Reconciliation of Group equity at 1 October 2004 (date of transition to IFRS) Appendix 2 Reconciliation of Group profit for the six months ended 31 March 2005 Appendix 3 Reconciliation of Group equity at 31 March 2005 Principal differences explained 1. Dividend recognition Under current UK GAAP, proposed dividends are recognised in the financial results for the period to which they relate. However, under IFRS, a dividend can only be recognised if it has been formally declared during the accounting period being reported. The Victrex Board declare interim and final dividends after the end of each accounting period at the same time as approving the interim and annual reports. Hence, we will no longer accrue proposed dividends in the financial period to which they relate. Consequently the final dividend for 2004 is not recognised as a liability in the opening balance sheet (£5.0m) and the proposed interim dividend will not be recognised as a liability in the balance sheet as at 31 March 2005 (£2.2m). 2. Deferred taxation Under UK GAAP the option to calculate deferred tax on a discounted basis was adopted by Victrex. However, under IAS 12 - Income taxes, this discounted basis is not permitted and hence the deferred tax provision has to be stated at the gross amount. The effect on the opening balance sheet is an increase in the deferred tax provision of £1.7m, the impact on the first half results is an increased deferred tax charge £0.5m and the resulting adjustment to the closing balance as at 31 March 2005 is an increase of £2.2m. In addition, IAS 12 requires separate recognition of deferred tax assets and liabilities on the Group balance sheet. IAS 12 is also more prescriptive than UK GAAP and hence an additional deferred tax asset of £0.7m has been recognised in the opening balance sheet. The impact on the first half results is a decreased deferred tax charge of £0.3m and the resulting effect as at 31 March 2005 is £1.0m. The combined impact on the income statement is an increased deferred tax charge of £0.2m. The specific deferred taxation impact of changes in accounting for employee benefits is set out in section 4 below. 3. Goodwill amortisation Under UK GAAP, goodwill is amortised by equal instalments over its estimated useful economic life. However, under IFRS 3 - Business combinations, amortisation of goodwill is prohibited but is replaced by a requirement for annual impairment testing. Victrex has decided to take advantage of the IFRS 1 exemption whereby IFRS 3 can be applied prospectively from the date of transition, hence removing the need to restate previous business combinations. The carrying value of goodwill in the opening IFRS balance sheet has therefore been restricted to that £3.5m net carrying amount previously reported under UK GAAP. The profit impact of this adjustment in the first half of 2005 is a credit of £0.3m, being the reversal of amortisation previously charged under UK GAAP on the goodwill which arose on the acquisition of the DFDPM business from Laporte in 1999 (note that there is no change in the treatment of the knowhow arising from that transaction). On 1 April 2005 Victrex announced the purchase of certain operations from Degussa AG. This included the purchase of goodwill which, in accordance with IFRS, will not be amortised, but will be subject to annual impairment testing. 4. Pensions Under UK GAAP, Victrex has accounted for pensions in accordance with SSAP 24, which spreads the costs of the defined benefit section of Victrex's principal scheme over the employees' working lives within the Group. Victrex has also made additional disclosures giving details of the pension fund deficit, liabilities and operating charges on the valuation methodologies in accordance with FRS 17. IAS 19 - Employee benefits requires the actuarial deficit arising under the defined benefit pension scheme to be recognised in the balance sheet based on fair valuations of the assets and liabilities at the balance sheet date. The movement in deficit as a result of current service cost, contributions and other finance income have to be recognised in the income statement and it is Victrex's intention to take advantage of the option under IAS 19 to recognise actuarial gains and losses through the statement of recognised income and expense as opposed to the income statement. Note that similar adjustments would have been required under UK GAAP once FRS17 becomes fully applicable. Consequently, a deficit of £8.2m and a corresponding deferred tax asset of £2.5m have been recognised on the balance sheet at the date of transition and a deficit of £7.6m and a deferred tax asset of £2.3m as at 31 March 2005. The movement during the period as a result of current service cost, contributions and other finance income of £0.2m has been recognised in the income statement with all other movements in the deficit (predominantly actuarial gains/losses) reflected through the statement of recognised income and expense. 5. Accounting for foreign currency transactions & financial instruments Victrex has a policy of taking out forward foreign currency contracts to cover forecast foreign currency income streams providing medium term predictability in its results. Under UK GAAP Victrex uses the effective exchange rates from the forward contracts for translation of its foreign currency transactions and where appropriate the consolidation of its overseas entities. Under IFRS, Victrex will continue to hedge account (as defined by IAS 39 - Financial Instruments: Recognition and Measurement) resulting in largely unchanged profit and loss recognition. However, IAS does require changes to the mechanics of how this is achieved: •Under IAS 21 - Effects of Changes in Foreign Exchange Rates, all transactions and consolidations are recognised using spot rates; •Under IAS 39 the fair value of forward foreign currency contracts have to be recognised on the balance sheet. Victrex has adopted hedge accounting and therefore the movement in fair value can be deferred in a hedging reserve until the associated transaction occurs at which point the cumulative movement is released to the income statement. Whilst the above does not affect overall profitability, there are minor changes in categorisation within the detail with a reduction of turnover of £0.3m offset by a reduction in cost of sales of £0.1m and indirect overheads of £0.2m. The opening balance sheet as at 30 September 2004 recognises a financial asset of £1.5m and a financial liability £0.4m, which account for the fair value of derivative financial instruments (forward contracts). The corresponding hedging reserve is £0.5m which reflects the fair value of forward contracts relating to future transactions as at the balance sheet date. These effects are offset by the effect of revaluing all balance sheet categories to closing spot rate. The balance sheet as at 31 March 2005 recognises a financial asset of £1.7m and a financial liability £0.3m and a corresponding hedging reserve of £1.0m. Reconciliation of Group Equity at 1 October 2004 (date of transition to IFRSs) - Appendix 1 Previously Dividend Deferred Goodwill Pensions Accounting for Restated under reported under recognition taxation amortisation foreign currency IFRS UK GAAP transactions and financial instruments 30 Sept 04 30 Sept 04 ASSETS £m £m £m £m £m £m £m ASSETS -------- -------- -------- -------- --------- Non-current Non-current assets 1 2 3 4 5 assets -------- -------- -------- -------- --------- Property, Property, plant and plant and equipment 49.3 49.3 equipment Goodwill 3.5 3.5 Goodwill Other Other intangible intangible assets 3.2 3.2 assets Investment in Investment in Japanese Japanese joint joint venture venture - share of - share of gross assets 2.1 (0.2) 1.9 gross assets - share of - share of gross liabilities (1.8) 0.2 (1.6) gross liabilities Deferred tax assets 0.2 0.7 2.5 3.4 Deferred tax assets ------- -------- 56.5 59.7 ------- -------- Current assets Current assets Inventories 18.8 18.8 Inventories Trade and other Trade and receivables 10.6 (0.5) 10.1 other receivables Derivative financial Derivative instruments 0.0 1.5 1.5 financial instruments Cash and cash Cash and equivalents 17.0 (0.2) 16.8 cash equiv. ------- -------- 46.4 47.2 ======= ======== Total assets 102.9 106.9 Total assets ------- -------- LIABILITIES LIABILITIES Current liabilities Current liabilities Derivative financial Derivative instruments 0.0 (0.4) (0.4) financial instruments Other creditors (22.7) 5.0 0.1 (17.6) OtherCreditors ------- -------- (22.7) (18.0) ------- -------- Non-current Non-current liabilities liabilities Deferred tax Deferred tax liabilities (6.2) (1.7) (7.9) liabilities Retirement Retirement benefit benefit obligations 0.0 (8.2) (8.2) obligations Provisions 0.0 0.0 Provisions Other liabilities 0.0 0.0 Other liabilities ------- -------- (6.2) (16.1) ======= ======== Total liabilities (28.9) (34.1) Total liabilities ------- -------- ------- -------- -------- -------- -------- --------- -------- Total assets Total assets less total less total liabilities 74.0 5.0 (1.0) 0.0 (5.7) 0.5 72.8 liabilities ======= ======== ======== ======== ======== ========= ======== EQUITY EQUITY Capital and Capital and reserves reserves attributable attributable to equity to equity holders holders Share 0.8 0.8 Share capital capital Share premium Share premium account 13.4 13.4 account Hedging reserve 0.0 0.5 0.5 Hedging reserve Retained earnings 59.8 5.0 (1.0) (5.7) 58.1 Retained ------- -------- -------- -------- -------- --------- -------- earnings Equity Equity shareholders' shareholders' funds 74.0 5.0 (1.0) 0.0 (5.7) 0.5 72.8 funds ======= ======== ======== ======== ======== ========= ======== Reconciliation of Group profit for six months ended 31 March 2005 - Appendix 2 UK GAAP Unaudited half Dividend Deferred Goodwill Pensions Accounting for Unaudited half IFRS year ended 31 recognition taxation amortisation foreign year ended 31 format Mar 05 currency Mar05 restated reported under transactions under IFRS UK GAAP and financial instruments £m £m £m £m £m £m £m -------- -------- -------- -------- --------- 1 2 3 4 5 -------- -------- -------- -------- --------- Revenue 49.3 (0.3) 49.0 Revenue Cost of sales (21.7) 0.1 (21.6) Cost of sales ------- -------- -------- -------- -------- --------- -------- Gross profit 27.6 0.0 0.0 0.0 0.0 (0.2) 27.4 Gross profit Sales, Sales, marketing and marketing administrative and expenses (10.8) 0.3 (0.2) 0.2 (10.5) admin. expenses ------- -------- -------- -------- -------- --------- -------- Group operating operating profit 16.8 0.0 0.0 0.3 (0.2) 0.0 16.9 profit Interest receivable 0.3 0.3 Finance income Interest payable and Finance other similar charges (0.1) (0.1) costs Share of operating Share of profit of Japanese operating joint venture 0.4 0.4 profit of Japanese joint venture ------- -------- -------- -------- -------- --------- -------- Profit on ordinary Profit activities before before tax 17.4 0.0 0.0 0.3 (0.2) 0.0 17.5 tax Taxation on profit of ordinary Tax activities expense (5.7) (0.2) (5.9) expenses ------- -------- -------- -------- -------- --------- -------- Profit on ordinary Profit activities after tax 11.7 0.0 (0.2) 0.3 (0.2) 0.0 11.6 for the attributable to equity Equity dividends ======== ======== ======== ========= ======== paid and proposed (2.1) 2.1 ------- -------- Retained profit for the financial year 9.6 2.1 ======= ======== Basic earnings Basic per share (pence) 14.6 0.0 (0.0) 0.0 (0.0) 0.0 14.6 earnings earnings per share (pence) ======= ======== ======== ======== ======== ========= ======== Diluted earnings Diluted per share (pence) 14.5 0.0 (0.0) 0.0 (0.0) 0.0 14.5 earnings ======= ======== ======== ======== ======== ========= ======== per share (pence) Reconciliation of Group Equity at 31 March 2005 - Appendix 3 Reported under Dividend Deferred Goodwill Pensions Accounting for Restated under UK GAAP recognition taxation amortisation foreign IFRS 31 Mar 05 currency 31 Mar 05 Unaudited transactions Unaudited and financial instruments ASSETS £m £m £m £m £m £m £m ASSETS -------- -------- -------- -------- --------- Non-current assets 1 2 3 4 5 Non-current -------- -------- -------- -------- --------- assets Property, plant and Property, equipment 49.5 49.5 plant and equipment Goodwill 3.2 0.3 3.5 Goodwill Other intangible Other assets 2.8 2.8 intangible assets Investment in Investment in Japanese joint Japanese joint venture venture - share of gross assets 2.7 (0.1) 2.6 - share of gross assets - share of gross liabilities(2.6) 0.2 (2.4) - share of gross liabilities Derivative Derivative financial financial instruments 0.0 0.1 0.1 instruments Deferred tax Deferred tax assets 0.2 1.0 2.3 3.5 assets ------- -------- 55.8 59.6 ------- -------- Current assets Current assets Inventories 18.5 18.5 Inventories Trade and Trade and other other receivables 14.7 (0.5) 14.2 receivables Derivative Derivative financial financial instruments 0.0 1.7 1.7 instruments Cash and cash Cash and cash equivalents 20.3 (0.2) 20.1 equivalents ------- -------- 53.5 54.5 ======= ======== Total assets 109.3 114.1 Total assets ------- -------- LIABILITIES LIABILITIES Current Current liabilities liabilities Derivative Derivative financial financial instruments 0.0 (0.3) (0.3) instruments Other Other creditors (18.5) 2.2 0.1 (16.2) creditors ------- -------- (18.5) (16.5) ------- -------- Non-current Non-current liabilities liabilities Deferred tax Deferred tax liabilities (6.6) (2.2) (8.8) liabilities Retirement Retirement benefit benefit obligations 0.0 (7.6) (7.6) obligations Provisions 0.0 0.0 Provisions Other Other liabilities 0.0 0.0 liabilities ------- -------- (6.6) (16.4) ======= ======== Total Total liabilities (25.1) (32.9) liabilities ======= ======== Total assets Total assets less total less total liabilities 84.2 2.2 (1.2) 0.3 (5.3) 1.0 81.2 liabilities ======= ======== ======== ======== ======== ========= ======== EQUITY EQUITY Capital and Capital and reserves reserves attributable attributable to equity to equity holders holders Share capital 0.8 0.8 Share capital Share premium Share premium account 13.9 13.9 account Hedging reserve 0.0 1.0 1.0 HedgingReserve Retained earnings 69.5 2.2 (1.2) 0.3 (5.3) 65.5 Retained ------- -------- -------- -------- -------- --------- -------- earnings Equity Equity shareholders' shareholders' funds 84.2 2.2 (1.2) 0.3 (5.3) 1.0 81.2 funds ======= ======== ======== ======== ======== ========= ======== This information is provided by RNS The company news service from the London Stock Exchange

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