IFRS
EMBARGOED UNTIL 0700 HOURS: THURSDAY 23 JUNE 2005
BODYCOTE INTERNATIONAL PLC
ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AND TRADING
UPDATE
Bodycote International plc, the metallurgical services and materials testing
company will be speaking with analysts later today to provide guidance on the
effects of restating its 31 December 2004 financial results under International
Financial Reporting Standards (IFRS).
As an EU-listed Group, Bodycote is required to prepare consolidated financial
statements under IFRS from 1 January 2005 applying all those standards and
interpretations endorsed by the European Commission. The endorsement programme
is ongoing and the Commission has yet to endorse certain standards issued by
the IASB. During 2004/2005, the Group undertook a project, overseen by the
Audit Committee, to manage the transition to IFRS. This involved an analysis of
each standard to identify the differences between the Group's accounting
policies under UK GAAP and those to be adopted under IFRS and the consequential
impact on the business and on reported results. The adoption of IFRS will first
apply to the Group's interim report for the six months ending 30 June 2005.
Previously Bodycote reported under UK generally accepted accounting principles
(UK GAAP).
The restatement of 2004 results has been prepared by management using its best
knowledge, judgement and interpretation of the expected standards, related
interpretations and accounting policies that will be applied when the Group
prepares its first complete set of IFRS financial statements as at 31 December
2005 and has been audited by Deloitte & Touche LLP. Therefore any changes to
IFRS endorsed by the European Commission or related interpretations subsequent
to the date of this announcement may result in adjustment to the information
presented here. It should be noted that only a complete set of financial
statements comprising an income statement, a balance sheet, a cash flow
statement, a statement of changes in equity together with comparative financial
information and explanatory notes can provide a fair presentation of the
Group's financial position and operating performance.
Bodycote intends to report its interim results for the six months ending 30
June 2005, under IFRS, on Tuesday 23 August 2005.
The transition to IFRS will leave:
* Bodycote's underlying financial and operating performance unaffected
* Turnover unchanged
* Operating Profit and Profit Before Tax improved, primarily due to revised
accounting for goodwill
* Cash flows unchanged
* Dividend policy and ability to pay dividends unchanged
* Shareholders' funds reduced slightly due to the recognition of pension
scheme deficits and recording deferred tax liabilities in full without
discounting to present value, partly offset by only recognising dividends
when declared or paid
* Basic EPS improved primarily due to revised accounting for goodwill
* Banking arrangements unaffected
A restated Income Statement and Balance Sheet for 2004 including a
reconciliation to UK GAAP are included in Appendix 1. An analysis of the
adjustments between UK GAAP and IFRS for 2004 are included in Appendix 2.
Impact of IFRS
For guidance, the adoption of IFRS will cause the following changes to the
Group's reported results for 2004:
UK GAAP IFRS Change
(audited) (audited) £m
£m £m
Turnover 457.2 457.2 -
Operating Profit before amortisation of 52.1 53.1 +1.0
goodwill
Operating Profit 43.6 53.1 +9.5
Net Interest 7.9 8.8 +0.9
Restructuring Costs/Loss on Disposal 11.2 11.2 -
(Exceptional Items)
Profit Before Tax 24.5 33.1 +8.6
Taxation 5.6 4.7 -0.9
Profit After Tax 18.9 28.4 +9.5
Free Cash Flow 57.1 57.1 -
Non Current Assets 572.4 579.5 +7.1
Current Assets 257.8 253.3 -4.5
Non Current Assets held for sale - 6.9 +6.9
Current Liabilities 118.7 106.6 -12.1
Non Current Liabilities 275.6 311.1 +35.5
Equity 435.9 422.0 -13.9
Net Debt 88.5 90.3 +1.8
Gearing 20% 21%
Headline EPS* 11.3 11.7
Basic EPS 6.1 9.3
* Expressed before amortisation of goodwill (UK GAAP: £8.5m, IFRS: Nil) and
restructuring costs/loss on disposal (UK GAAP: £11.2m, IFRS: £11.2m)
Operating profit before the amortisation/impairment of goodwill is increased by
£1.0m. Of this £0.9m is due to pension accounting adjustments and a further £
0.2m due to the reclassification of certain equipment leases as finance rather
than operating, but is reduced by £0.1m due to share based payments.
Along with the above mentioned items, operating profit is further increased by
£8.5m as goodwill is no longer to be amortised. A review of carrying values was
undertaken which indicated that no impairment of goodwill had occurred during
2004.
Net interest cost is increased by £0.9m due to the aforementioned changes in
accounting for pension costs and leases.
The reported tax charge for 2004 is reduced by £0.9m due to changes in deferred
tax, as a result of no longer discounting the expected liability to present
value and in relation to pension scheme deficits.
There is no impact on the cash flow of the Group. However, net debt at 31
December 2004 increases by £1.8m due to the reclassification of certain
equipment leases as finance rather than operating.
Pension scheme deficits, net of deferred taxation, primarily for the closed UK
final salary scheme, amounting to £15.8m (gross deficit £22.3m), have been
included in non-current liabilities and reduce shareholders funds accordingly.
The requirements of IAS 19 are broadly the same as FRS 17 and in Bodycote's
case there are no significant differences at 31 December 2004 between the
values to be recognised under the two standards. Details of assumptions and
values calculated under the provisions of FRS 17 may be found in note 24 of the
Group's 2004 Report and Accounts.
The Group has in the past made awards of options over the ordinary shares of
the Company, the value of which, under IFRS, must be charged to the Income
Statement over the period during which such options vest. Only one such issue,
in September 2003, falls under IFRS accounting rules and the charge now
recognised in 2004 is £0.1m. The Remuneration Committee of the Board is
currently considering what share based payment arrangements may be appropriate
for the future.
The final dividend for 2004, of £12.4m, was declared on 25 May 2005 and under
IAS 10 must, therefore, be recognised in 2005 and not 2004 as is the case under
UK GAAP.
IAS 12, unlike FRS 19, does not allow a deferred tax liability to be recorded
at present value, resulting in an increase of £18.5m. This is partially offset
by recognising a deferred tax asset (£6.5m) in respect of the pension scheme
deficits. The reported deferred tax liability is therefore increased by £12.0m
net.
Non-current assets held for sale amount to £6.9m at 31 December 2004.
The Group has previously capitalised certain accounting and commercial software
and is currently installing new ERP software in a number of its businesses.
Such software is amortised over five years and at 31 December 2004 the net book
value was £1.4m. This amount will now be reported under the heading `other
intangible assets'.
Maintenance spares with a net book value of £4.4m have been reclassified from
inventory to tangible fixed assets at 31 December 2004.
Additional equipment finance leases with an asset value of £1.5m at 31 December
2004 have been included in tangible fixed assets.
Equity is reduced by £13.9m (3.2%), whilst net debt is increased by £1.8m.
Consequently gearing is increased to 21% compared to 20% under UK GAAP.
The changes to the Group's accounting policies and hence reported figures as a
result of the adoption of IFRS are:
1. Goodwill is no longer to be amortised (previously the Group amortised
goodwill over twenty years) but will be subject to an annual impairment review
(IFRS 3)
2. Pension scheme charges to be split between current service costs (charged to
operating profit), net finance costs (charged to interest) and actuarial gains/
losses (recognised in the Statement of Recognised Income and Expense) (IAS 19)
3. Pension scheme deficits to be recognised in the Group Balance Sheet (IAS 19)
4. The cost of share based payments to be charged to operating profit (IFRS 2)
5. Dividends are not to be recognised until declared or paid (IAS 10)
6. Deferred taxation to be fully provided, with no discounting of the expected
liability to present value (IAS 12)
7. Non-current assets held for sale (e.g. closed plant buildings) to be
disclosed separately from other non-current assets (IFRS 5)
8. Maintenance spares to be treated as non-current assets rather than
inventory, due to their long term nature (IAS 16)
9. Certain software assets to be shown separately as intangible fixed assets in
the Group Balance Sheet (IAS 38)
10. Certain leases formerly recorded as operating leases to be reclassified as
finance leases (IAS 17)
Depreciation - following review of IAS 16 `Property Plant and Equipment', the
Group has not identified the need for any changes to current policy. IAS 16
states that each part of an item of property, plant and equipment with a cost
that is significant in relation to the total cost of the item shall be
depreciated separately. This is the case when the component assets have
different useful lives or provide benefits to the enterprise in a different
pattern thus necessitating use of different depreciation rates and methods.
This treatment is required under current UK GAAP, where there are two or more
major components with substantially different useful economic lives, and the
Group has followed this methodology for several years. Thus components in
furnaces such as hot zones are typically depreciated over four years, whilst
the furnace body is amortised over 20 years. Other components are depreciated
over the relevant useful life.
The rules for first time adoption of IFRS are set out in IFRS 1 `First-Time
Adoption of International Financial Reporting Standards'. In general a company
is required to define its IFRS accounting policies and apply these
retrospectively to determine its opening balance sheet under IFRS. The standard
allows a number of optional exemptions to this general principle to assist
companies as they make the transition to reporting under IFRS.
Bodycote has made the following elections under the IFRS 1 provisions for
optional exemptions:
1. The Group has elected not to account under IFRS 3 for business combinations
made prior to 1 January 2004. Consequently the value of goodwill recorded under
UK GAAP at that date will be brought onto the opening IFRS balance sheet at the
same value and will be subject to an annual review for possible impairment.
2. The Group has elected not to measure items of property, plant and equipment
at fair value at the date of transition to IFRS but will use UK GAAP net book
values at that date.
3. The Group has elected to recognise in full all actuarial gains and losses
related to liabilities under any employee benefit arrangement (IAS 19) in
opening equity under IFRS. In future, actuarial gains and losses will be
recognised in the Statement of Recognised Income and Expense.
4. The Group has elected not to calculate retrospective foreign currency
translation differences (IAS 21) in respect of foreign operations. On adoption
of IFRS, therefore, such differences will be set at zero and translation gains
and losses will only be included from the date of transition.
5. The Group will only apply the provisions of IFRS 2 `Share Based Payments' to
equity instruments issued after 7 November 2002.
6. The Group will take up the exemption related to financial instruments (IAS
32 and IAS 39) that allows it not to present comparative information in
compliance with those standards (but will continue to comply with UK GAAP in
this respect) for instruments in place during the year ended 31 December 2004.
The Group will comply fully with IAS 32 and IAS 39 from 1 January 2005.
Trading Update
There has been no change in the trading conditions experienced by the Group
since the 2005 Annual General Meeting on 25 May 2005 when a detailed statement
on trading was issued.
A conference call for analysts, hosted by David Landless, Group Finance
Director, will take place today at 11.30 am BST. The dial-in number is +44 (0)
1452 569 393. A replay of this conference call will be available for people
unable to join the conference. Details may be obtained from Financial Dynamics
(contact details below).
For further information, please contact:
David Landless, Group Finance Director
Bodycote International PLC Tel no: 01625 505300
Jon Simmons
Sally Lewis
Financial Dynamics Tel no: 020 7831 3113
APPENDIX 1
BODYCOTE INTERNATIONAL PLC
INCOME STATEMENT - UK GAAP AND IFRS RECONCILIATION
YEAR ENDED 31 DECEMBER 2004
IFRS
UK GAAP ADJ IFRS
£'m £'m £'m
Revenue 457.2 - 457.2
Profit from operations before exceptional 43.6 9.5 53.1
items
Exceptional items (11.2) - (11.2)
Profit from operations after exceptional 32.4 9.5 41.9
items
Investment income 4.7 - 4.7
Finance costs (12.6) (0.9) (13.5)
Net Interest (7.9) (0.9) (8.8)
Profit before tax 24.5 8.6 33.1
Tax (5.6) 0.9 (4.7)
Profit for the year 18.9 9.5 28.4
Attributable to:
Equity holders of the parent 18.7 9.5 28.2
Minority interest 0.2 - 0.2
18.9 9.5 28.4
Memo:
Dividends paid and approved (19.6) 2.5 (17.1)
BODYCOTE INTERNATIONAL PLC
BALANCE SHEET - UK GAAP AND IFRS RECONCILIATION
AT 31 DECEMBER 2004
UK GAAP IFRS IFRS
ADJ.
£'m £'m £'m
Non-current assets
Goodwill 131.4 8.5 139.9
Other intangible assets - 1.4 1.4
Property, plant and equipment 428.7 (2.8) 425.9
Interests in associates 5.8 - 5.8
Other investments 0.4 - 0.4
Other receivables 6.1 - 6.1
572.4 7.1 579.5
Current assets
Inventories 13.4 (4.5) 8.9
Trade and other receivables 102.3 - 102.3
Cash and cash equivalents 142.1 - 142.1
257.8 (4.5) 253.3
Non-current assets classified as held - 6.9 6.9
for sale
Total assets 830.2 9.5 839.7
Current liabilities
Trade and other payables 106.5 (12.4) 94.1
Tax liabilities 2.5 - 2.5
Obligations under finance leases 1.2 0.3 1.5
Bank overdrafts and loans 7.0 - 7.0
Short term provisions 1.5 - 1.5
118.7 (12.1) 106.6
Net current assets 139.1 7.6 146.7
Non-current liabilities
Bank loans 219.5 - 219.5
Retirement benefit obligation - 24.2 24.2
Deferred tax liabilities 41.4 12.0 53.4
Obligations under finance leases 2.9 1.5 4.4
Other payables 11.8 (2.2) 9.6
Long-term provisions - - -
275.6 35.5 311.1
Liabilities directly associated with - - -
non-current assets classified as held
for sale
TOTAL LIABILITIES 394.3 23.4 417.7
NET ASSETS 435.9 (13.9) 422.0
EQUITY
Share capital 32.1 - 32.1
Share premium account 300.0 - 300.0
Currency and other reserves 17.1 (0.2) 16.9
Retained earnings 85.7 (13.7) 72.0
Equity attributable to equity holders 434.9 (13.9) 421.0
of the parent
Minority interest 1.0 - 1.0
TOTAL 435.9 (13.9) 422.0
APPENDIX 2
BODYCOTE INTERNATIONAL PLC
INCOME STATEMENT - IFRS ADJUSTMENTS
YEAR ENDED 31 DECEMBER 2004
IFRS 2 IFRS3 IAS IAS IAS IAS Total
10 12 17 19 Adj
£'m £'m £'m £'m £'m £'m £'m
Revenue -
Profit from operations before (0.1) 8.5 - - 0.2 0.9 9.5
exceptional items
Exceptional items -
Profit from operations after (0.1) 8.5 - - 0.2 0.9 9.5
exceptional items
Investment income -
Finance costs (0.2) (0.7) (0.9)
Net Interest - - - - (0.2) (0.7) (0.9)
Profit before tax (0.1) 8.5 - - - 0.2 8.6
Tax 0.9 0.9
Profit for the year (0.1) 8.5 - 0.9 - 0.2 9.5
Attributable to:
Equity holders of the parent (0.1) 8.5 - 0.9 - 0.2 9.5
Minority interest - - - - - - -
(0.1) 8.5 - 0.9 - 0.2 9.5
Memo:
Dividends paid and approved 2.5 2.5
Standard Impact
IFRS 2 Share-Based Payment - Costs to be charged to operating
profit
IFRS 3 Business Combinations - Goodwill no longer to be amortised
IFRS 5 Non-current Assets Held for Sale - Such assets to be disclosed
and Discontinued Operations separately from other non-current
assets
IAS 10 Events After the Balance Sheet - Dividends not to be recognised until
Date declared or paid
IAS 12 Income Taxes - Deferred taxation to be fully
provided with no discounting of the
expected liability to present value
IAS 16 Property Plant and Equipment - Maintenance spares to be treated as
non-current assets rather than
inventory
IAS 17 Leases - Certain leases formerly recorded as
operating leases to be reclassified as
finance leases
IAS 19 Employee Benefits - Pension Scheme charges to be split
between current service costs (charged
to operating profit), net finance costs
(charged to interest) and actuarial
gains/losses (recognised in the
Statement of Recognised Income and
Expense). Pension scheme deficits to be
recognised in the Balance Sheet
IAS 38 Intangible Assets - Capitalised software to be
reclassified as intangible assets.
BODYCOTE INTERNATIONAL PLC
BALANCE SHEET - IFRS ADJUSTMENTS
AT 31 DECEMBER 2004
IFRS IFRS IFRS IAS 10 IAS 12 IAS IAS IAS 19 IAS Total
2 3 5 16 17 38 Adj
£'m £'m £'m £'m £'m £'m £'m £'m £'m £'m
Non-current
assets
Goodwill 8.5 8.5
Other intangible 1.4 1.4
assets
Property, plant (7.3) 4.4 1.5 (1.4) (2.8)
and equipment
Interests in -
associates
Other -
investments
Other -
receivables
- 8.5 (7.3) - - 4.4 1.5 - - 7.1
Current assets
Inventories (0.1) (4.4) (4.5)
Trade and other - -
receivables
Cash and cash -
equivalents
- - (0.1) - - (4.4) - - - (4.5)
Non-current 6.9 6.9
assets
classified as
held for sale
Total assets - 8.5 (0.5) - - - 1.5 - - 9.5
Current
liabilities
Trade and other - (12.4) (12.4)
payables
Tax liabilities -
Obligations 0.3 0.3
under finance
leases
Bank overdrafts -
and loans
Short term -
provisions
- - - (12.4) - - 0.3 - - (12.1)
Net current - - (0.1) 12.4 - (4.4) (0.3) - - 7.6
assets
Non-current
liabilities
Bank loans -
Retirement 24.2 24.2
benefit
obligation
Deferred tax 18.5 (6.5) 12.0
liabilities
Obligations 1.5 1.5
under finance
leases
Other payables (0.1) (2.1) (2.2)
Long-term -
provisions
- - (0.1) - 18.5 - 1.5 15.6 - 35.5
Liabilities -
directly
associated with
non-current
assets
classified as
held for sale
TOTAL - - (0.1) (12.4) 18.5 - 1.8 15.6 - 23.4
LIABILITIES
NET ASSETS - 8.5 (0.4) 12.4 (18.5) - (0.3) (15.6) - (13.9)
EQUITY
Share capital -
Share premium -
account
Currency and 0.2 (0.4) (0.2)
other reserves
Retained (0.2) 8.5 (0.4) 12.4 (18.1) (0.3) (15.6) (13.7)
earnings
Equity - 8.5 (0.4) 12.4 (18.5) - (0.3) (15.6) - (13.9)
attributable to
equity holders
of the parent
Minority -
interest
TOTAL - 8.5 (0.4) 12.4 (18.5) - (0.3) (15.6) - (13.9)
Non-statutory financial statements
The financial information set out above does not constitute the Group's
statutory financial statements for the year ended 31 December 2004 but is
derived from those financial statements. Statutory financial statements for
2004 have been delivered to the Register of Companies. The auditors have
reported on those accounts; their report was unqualified and did not contain
any statement under Section 237(2) or (3) of the Companies Act 1985.
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