International Financial Reporting Standards
8th March 2005
ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
Reckitt Benckiser plc (RB.L) announces that it has adopted International
Financial Reporting Standards (IFRS) with effect from 1 January 2005. Group
results will be published under IFRS commencing with the first quarter of 2005,
to be released on 26 April 2005. This press release describes the impact of the
conversion from UK GAAP to IFRS on the group's results for 2004 and sets out
the restated comparatives that are expected to form the base for 2005
performance.
Impact at a glance
2004
UK GAAP IFRS Change Change
£m £m £m %
Net Revenues 3,871 3,871 - -
Operating Profit 759 749 (10) -1.3%
Net Income 586 577 (9) -1.5%
Fully diluted EPS 78.3p 77.1p (1.2p) -1.5%
Net Assets (Dec 2004) 1,676 1,698 22 1.3%
* Net revenues are not impacted by the change of accounting basis. Changes to
KPIs are minor and financial targets are unchanged despite the reduction in
operating margin.
* Operating profit is predominately impacted by the adoption of :
* IFRS 2 (Share-based Payment) for the cost of share awards
* IAS 19 (Employee Benefits) for the cost of pensions and other employee
benefits
* IFRS 3 (Business Combinations) for the cessation of goodwill amortisation.
Detailed schedules and explanatory notes can be found in the attached
appendices.
Commenting on this accounting change, Colin Day, Chief Financial Officer, said
'Reckitt Benckiser is adopting the new international framework of accounting
for 2005 reporting. The net impact of the change to both the profit and loss
account and the balance sheet is minor and we do not expect the change to have
a material impact on the reporting of business performance in 2005 and beyond.
'The Group reiterates its financial targets for 2005 of net revenue growth of
5-6% at constant exchange and for low double digit net income growth at
constant exchange off a base of £563m (reported 2004 net income of £586m less
one-off tax credits of £14m and IFRS adjustments of £9m).'
For further information Reckitt Benckiser plc +44 (0)1753 217 800
Tom Corran SVP Investor Relations & Corporate Communications
Mark Wilson Corporate Controller and Investor Relations Manager
Appendices
page
A Basis of Preparation 2
B Key Performance Indicators and Financial Targets 2
C Group Income Statement 3
D Reconciliation of Net Income 3
E Segmental Analysis 4
F Group Balance Sheets 5
G Reconciliation of Key Balance Sheet Items 6
H Group Cash Flow Statement 7
I Statement of Changes in Equity 8
J Earnings per Ordinary Share 8
K Description of IFRS adjustments 8
A. Basis of Preparation
The unaudited financial statement extracts are prepared on the basis of current
IFRS as it applies to the group and are based on a transition date of 1 January
2004. This basis is subject to amendment by the International Accounting
Standards Board (IASB) and is dependent on endorsement by the European
Commission (EC). Accordingly, the information presented and the format of
presentation may be subject to change as new guidance is issued or as practice
develops. The group will publish its first audited IFRS Financial Statements
within its Annual Report and Accounts for 2005, in early 2006.
The group has adopted IFRS 1: First-time adoption of international financial
reporting standards and has applied all of the optional exemptions from full
retrospective application with two exceptions. First, the group has applied the
requirements of IFRS 2: Share-based payment to all awards that had not vested
as at 1 January 2005. Second, the Group has applied IAS 32: Financial
Instruments: Disclosure and Presentation and IAS 39: Financial Instruments:
Recognition and Measurement with effect from the transition date. In adopting
current IFRS, the Group has assumed that the EC will endorse the December 2004
amendment to IAS 19: Employee Benefits.
B. Key Performance Indicators and Financial Targets
The following table describes the impact of the conversion to IFRS on the
Group's KPIs and financial targets, both for 2005 and ongoing as announced on 9
February 2005:
KPI UK GAAP Target Impact IFRS Target
Net revenue 5% - 6% growth in 2005, No change to KPI or target. 5% - 6% growth in 2005,
growth at constant exchange. at constant exchange.
Operating Margin At least 20% by 2006, One time adjustment to 2004, At least 20% by 2006,
reported 19.6% for reducing operating margin by reported 19.3% for
2004. 30bps, no change to target. 2004.
Net Income growth Low double digit growth One time adjustment to 2004, Low double digit growth
and EPS growth in 2005, at constant reducing net income. No in 2005, at constant
exchange off a base of change to growth target but exchange, off £563m
£586m excluding one-off off new base. base.
tax credit of £14m and
after IFRS adjustments.
C. Group Income Statement prepared under IFRS (unaudited)
2004
Q1 Q2 Q3 Q4 Full Year
Notes £m £m £m £m £m
Net revenues 920 953 976 1,022 3,871
Cost of sales (426) (424) (443) (457) (1,750)
Gross profit 494 529 533 565 2,121
Net operating expenses 1,2,4 (350) (358) (337) (327) (1,372)
Total operating profit 144 171 196 238 749
Net financial (expense)/income 3,5 (4) - 8 5 9
Profit on ordinary activities before taxation 140 171 204 243 758
Tax on profit on ordinary activities (37) (44) (54) (46) (181)
Profit on ordinary activities after taxation 103 127 150 197 577
Attributable to equity minority interests 0 0 0 0 0
Profit for the period 103 127 150 197 577
Ordinary dividends 3,8 - (99) (117) - (216)
Retained profit for the period 103 28 33 197 361
Earnings per ordinary share:
On profit for the period 14.6p 18.0p 20.8p 27.1p 80.7p
On profit for the period, diluted 13.9p 17.2p 19.7p 26.5p 77.1p
Average shares outstanding (millions):
Basic 707.9 704.3 720.7 726.3 714.9
Diluted 761.4 757.4 752.2 747.4 754.5
D. Reconciliation of Net Income (unaudited)
2004
Q1 Q2 Q3 Q4 Full Year
Notes £m £m £m £m £m
Net Income under UK GAAP 105 129 151 201 586
Adjustments (inclusive of taxation):
IFRS 2: Share awards 1 (2) (2) (2) (3) (9)
IFRS 3: Goodwill amortisation 4 1 - 1 - 2
IAS 19: Employee benefits 2 - (1) - - (1)
IAS 39: Fair value of derivative instruments 5 (1) 1 - (1) (1)
Net Income under IFRS 103 127 150 197 577
E. Segmental Analysis prepared under IFRS (unaudited)
Primary Segment: Geographical Area 2004
Q1 Q2 Q3 Q4 Full Year
Net revenues - by geographical area £m £m £m £m £m
Europe 492 505 509 526 2,032
North America & Australia 276 288 304 328 1,196
Developing Markets 152 160 163 168 643
Total 920 953 976 1,022 3,871
Operating profit - by geographical area
Europe 96 113 113 136 458
North America & Australia 41 42 66 88 237
Developing Markets 4 10 11 13 38
Corporate 3 6 6 1 16
Total 144 171 196 238 749
Operating margin - by geographical area
Europe 19.5% 22.4% 22.2% 25.9% 22.5%
North America & Australia 14.9% 14.6% 21.7% 26.8% 19.8%
Developing Markets 2.6% 6.3% 6.7% 7.7% 5.9%
Total 15.7% 17.9% 20.1% 23.3% 19.3%
Secondary Segment: Product Segment
Net revenues
Fabric Care 256 261 279 268 1,064
Surface Care 184 181 196 212 773
Dishwashing 140 128 132 142 542
Home Care 133 131 148 152 564
Health & Personal Care 138 166 145 150 599
Core Business 851 867 900 924 3,542
Other Household 33 37 33 36 139
Household and Health & Personal Care 884 904 933 960 3,681
Food 36 49 43 62 190
Total 920 953 976 1,022 3,871
Additional Information: Profit by class of business
Operating profit
Household and Health & Personal Care 139 156 181 214 690
Food 2 9 9 23 43
Corporate 3 6 6 1 16
Total 144 171 196 238 749
Operating margin
Household and Health & Personal Care 15.7% 17.3% 19.4% 22.3% 18.7%
Food 5.6% 18.4% 20.9% 37.1% 22.6%
Total 15.7% 17.9% 20.1% 23.3% 19.3%
F. Group Balance Sheets prepared under IFRS (unaudited)
31 December 1 January
2004 2004
Notes £m £m
ASSETS
Non-current assets:
Property, plant and equipment 6,7 481 508
Goodwill and intangible assets 4,7 1,663 1,749
Deferred tax assets 2,11 58 14
Other receivables 2 10 22
2,212 2,293
Current assets:
Inventories 258 224
Trade and other receivables 5 504 490
Short term investments 10 570 609
Cash and cash equivalents 10 308 174
1,640 1,497
Total assets 3,852 3,790
LIABILITIES
Current liabilities:
Borrowings 6 (86) (176)
Provisions 11 (4) (5)
Other liabilities 5,8 (1,283) (1,196)
Convertible capital bonds 3 (31) -
(1,404) (1,377)
Non-current liabilities:
Borrowings 3,6 (129) (138)
Convertible capital bonds 3 - (147)
Deferred tax liabilities 1,2,11 (231) (218)
Retirement benefit obligations 2 (253) (205)
Provisions 11 (11) (15)
Other liabilities 2 (126) (155)
(750) (878)
Total liabilities (2,154) (2,255)
Net assets 1,698 1,535
EQUITY
Capital and reserves:
Share capital 3 76 74
Share premium account 405 227
Equity component of convertible bonds 3 9 45
Merger reserve 142 142
Capital redemption reserve 2 -
Profit and loss account 1,2,4,5,8 1,061 1,043
1,695 1,531
Equity minority interest 11 3 4
Total equity 1,698 1,535
G. Reconciliation of Key Balance Sheet Items (unaudited)
Net Assets 31 December 1 January
2004 2004
Notes £m £m
Net Assets under UK GAAP 1,676 1,470
Adjustments (inclusive of taxation):
IFRS 2: Deferred taxation on share award 1 16 8
reserve
IAS 19: Employee benefits 2 (130) (84)
IAS 32: Convertible bond 3 9 45
IAS 32: Preference shares 3 (5) (5)
IFRS 3: Goodwill amortisation 4 2 -
IAS 39: Fair value of derivative instruments 5 (4) (2)
IAS 10: Final dividend 8 131 99
IAS 1: Reclassification of minority interest 11 3 4
Net Assets under IFRS 1,698 1,535
Net Working Capital *
Notes
Net Working Capital under UK GAAP (645) (578)
IAS 19: Employee benefits 2 (3) (1)
IAS 39: Fair value of derivative instruments 5 (4) (2)
IAS 10: Events after the balance sheet date 8 131 99
Net Working Capital under IFRS (521) (482)
* Net working capital is defined as inventories, short term receivables and
short term liabilities, excluding borrowings, convertible capital bonds and
provisions.
Net Funds
Notes
Net Funds under UK GAAP 638 292
IAS 32: Convertible bond 3 9 45
IAS 32: Preference shares 3 (5) (5)
IAS 17: Leases 6 (10) (10)
Net Funds under IFRS 632 322
H. Group Cash Flow Statement prepared under IFRS (unaudited)
31 December 2004
£m
CASH FLOWS FROM OPERATING ACTIVITIES
Cash generated from operations:
Operating profit 749
Depreciation 85
Amortisation and impairment 12
Loss on sale of property, plant and equipment 8
Other non-cash movements 4
Increase in inventories (36)
Increase in trade and other receivables (3)
Increase in payables and provisions 95
Cash generated from operations 914
Interest paid (30)
Interest received 38
Tax paid (189)
Net cash generated from operating activities 733
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of intangible assets (5)
Purchase of property, plant and equipment (78)
Disposal of property, plant and equipment 9
Acquisitions of businesses (1)
Maturity of short term investments 38
Net cash used in investing activities (37)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of ordinary shares 30
Share repurchases (283)
Repayments of borrowings (87)
Dividends paid to the Company's shareholders (216)
Net cash used in financing activities (556)
Net increase in cash and cash equivalents 140
Cash and cash equivalents at beginning of period 163
Exchange gains/(losses) (2)
Cash and cash equivalents at end of period 301
Cash and cash equivalents comprise
Cash and cash equivalents 308
Overdrafts (7)
301
Reconciliation to net cash flow from ordinary operations
Net cash generated from operating activities 733
Net purchase of property, plant and equipment (69)
Net cash flow from ordinary operations 664
Management uses net cash flow from ordinary operations as a performance
measure.
I. Statement of Changes in Equity prepared under IFRS (unaudited)
2004
Note £m
Balance at 1 January 2004 1,535
Profit for the year 577
Dividends 8 (216)
Own shares repurchased (283)
Ordinary shares allotted on conversion of convertible capital 152
bonds
Reduction in equity component of convertible bond upon 3 (36)
conversion
Ordinary shares allotted on exercise of options 30
Unvested share awards 1 41
Reduction in equity minority interests 11 (1)
Actuarial gains and losses 2 (54)
Net exchange movements on foreign currency translation (47)
Balance at 31 December 2004 1,698
All items above are shown inclusive of tax.
J. Earnings per Ordinary Share prepared under IFRS (unaudited)
A reconciliation between the basic and diluted earnings per share for the full
year is set out below:
2004
Profit Average number Earnings
for the of shares per share
year £m pence
Profit attributable to shareholders 577 714.9 80.7p
Dilution for Executive options outstanding and Executive 12.9
Restricted Share Plan
Dilution for Employee Sharesave Scheme options outstanding 0.9
Dilution for convertible capital bonds outstanding 25.8
5
On a diluted basis 582 754.5 77.1p
K. Description of IFRS adjustments
1. IFRS 2: Share-based Payment
In accordance with IFRS 2, the Group has recognised an expense representing the
fair value of outstanding share awards based on a Black-Scholes calculation at
date of grant, spread over the vesting period. The Group has also adopted the
transitional arrangement which allows companies that have previously disclosed
the fair value charge to apply IFRS 2 retrospectively to all grants not vested
at 1 January 2005. This approach is encouraged by the standard and gives
consistency across reporting periods.
As a result of the above, an incremental charge to net income of £9m has been
included in 2004. The Group has recognised a share award reserve within the
profit and loss reserve in the balance sheet to reflect the cumulative charge
under IFRS 2 in respect of outstanding share awards. The deferred tax impact is
a debit to deferred tax of £8m at 1 January 2004, a debit of £16m at 31
December 2004, and a £2m credit to the income statement for 2004.
2. IAS 19: Employee Benefits
The Group has adopted IAS 19 by recognising in full the surplus/deficit on
defined benefit schemes and other employee related liabilities in the group
balance sheet at the date of transition. The group has included movements in
the surplus/deficit within the income statement and statement of movement in
equity as required by IFRS. This is similar to the requirements of FRS 17,
whose disclosures have been provided in the Group's Annual Report & Accounts
since 2001. The Group has also early-adopted the amendment to IAS 19 issued on
16 December 2004 allowing all actuarial gains and losses to be taken to equity
in the year in which they arise.
In reversing the SSAP 24 accounting treatment and adopting IAS 19, the group
balance sheet is credited with £84m (being £109m less deferred tax of £25m) at
1 January 2004 and £130m (being £184m less deferred tax of £54m) at 31 December
2004. The impact on the income statement from reversing the SSAP 24 charge and
including the IAS 19 charges is £2m in 2004, which is included within operating
costs. Actuarial losses of £76m less tax of £22m are shown in the statement of
movement in equity.
3. IAS 32: Financial Instruments: Disclosure and Presentation
IAS 32 requires that where financial instruments contain both liability and
equity components, the components are classified separately on the balance
sheet. The group's Convertible Capital Bond is such an instrument and
accordingly £45m and £9m representing the split between debt and equity
components has been reclassified from debt to equity in the balance sheets of 1
January 2004 and 31 December 2004 respectively. These amounts are based on the
fair value of the components on issue.
Additionally under IAS 32, the group's 5% cumulative preference shares fall to
be classified as debt in the balance sheet and the dividends classified as
financial expense in the income statement. Accordingly, a balance sheet
adjustment of £5m is reflected at 1 January 2004 and 31 December 2004, while £
0.2m is reclassified in the income statement from dividends to net financial
income.
4. IFRS 3: Business Combinations
IFRS prohibits the amortisation of goodwill, requiring at least annual
impairment reviews to be undertaken. Accordingly, goodwill balances at 1
January 2004 are no longer subject to amortisation, resulting in a credit to
net operating expenses in 2004 of £4m and an equivalent debit to goodwill at 31
December 2004.
5. IAS 39: Financial Instruments: Recognition and Measurement
Under IAS 39 and IFRS 1, the Group's policy is to recognise the fair value of
financial derivative instruments on the balance sheet with effect from 1
January 2004. Accordingly, financial assets of £1m and financial liabilities of
£3m have been recognised on the balance sheet as at 1 January 2004. As at 31
December 2004, financial liabilities of £4m were recognised, resulting in a £2m
charge to financial income in 2004.
6. IAS 17: Leases
The Group has applied the requirements of IAS 17 to its leases and accordingly
has reclassified certain leases from operating to finance leases to reflect the
substance of the transaction according to IFRS. The total amount of assets and
liabilities added to the balance sheet in respect of finance leases is £10m
each, at both 1 January 2004 and 31 December 2004.
7. IAS 38: Intangible Assets
Computer software that is not an integral part of related hardware is
classified as an intangible asset under IFRS, whereas such assets were
classified under tangible assets under UK GAAP. Reclassifications of £4m and £
2m have been made between tangible and intangible assets at 1 January 2004 and
31 December 2004 respectively.
8. IAS 10: Events After the Balance Sheet Date
In accordance with IAS 10, dividends declared after the balance sheet date are
not recognised as a liability in the financial statements, as there is no
present obligation at the balance sheet date, as defined by IAS 37: Provisions,
Contingent Liabilities and Contingent Assets. Accordingly the final dividends
for 2003 of £99m and for 2004 of £131m are de-recognised in the balance sheets
for 2003 and 2004 respectively. Dividends payable presented with the income
statement for 2004 is adjusted by £32m to reflect these timing adjustments.
9. IAS 14: Segment reporting
In accordance with IAS 14, the group has defined its primary segment as
geographical and its secondary segment as product category. Analysis of net
revenues and operating profit by geographical area (primary segment) and of net
revenues by product category (secondary segment) are set out above. While not
required by IAS 14, the group additionally discloses operating profit by
product class.
10. IAS 7: Cash Flow Statements
The Cash Flow Statement is presented in accordance with IAS 7. The Group's cash
and investments balances are not impacted by the change of accounting basis.
However, the Group has presented short term investments separately from cash
and cash equivalents as required by IAS 7. Short term investments represent
those deposits with a maturity of over three months from inception.
A reconciliation is provided to 'Net cash flow from ordinary operations', which
management use as a performance measure. This is not impacted by the change of
accounting basis.
11. Other Adjustments
Under IFRS, provisions are required to be analysed as those expected to be
utilised within one year and after more than one year. Accordingly, £5m and £4m
is reclassified from non-current liabilities to current liabilities as at 1
January 2004 and 31 December 2004 respectively.
For presentational purposes, minority interest has been reclassified to equity
on the face of the balance sheet.
Taxation is provided on the conversion adjustments at the appropriate rate and
is separately described above where material.
The IFRS restatement of preliminary results for the year ended 31 December 2004
are unaudited. The financial information set out in the announcement does not
constitute the Company's statutory accounts for the years ended 31 December
2004. The UK GAAP balance sheet as at 1 January 2004 is derived from the
statutory accounts for the year ended 31 December 2003 which have been
delivered to the Registrar of Companies. The auditors reported on those
accounts; their report was unqualified and did not contain a statement under
either Section 237 (2) or Section 237 (3) of the Companies Act 1985. The
statutory accounts for the year ended 31 December 2004 will be finalised on the
basis of the financial information presented by the directors in the UK GAAP
preliminary announcement of 9th February 2004 and will be delivered to the
Registrar of Companies following the Company's Annual General Meeting.
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