Transition to IFRS
Costain Group PLC
17 August 2005
Costain Group PLC
('Costain', the 'Company' or the 'Group')
Transition to IFRS
Costain, in line with all publicly listed companies in the European Union, will
be reporting its financial results in accordance with International Financial
Reporting Standards ('IFRS') with effect from 1 January 2005. The Company's
first report under the new standards will be the announcement of its half year
results for the period ended 30 June 2005.
Ahead of these results, Costain is today presenting the impact of the transition
to IFRS. This report contains the restatement of the Group's results for the
year to 31 December 2004 and the half-year to 30 June 2004.
Having reviewed the impact of IFRS across the Group, the majority of changes are
of a presentational nature only, and the Group's core contracting businesses and
underlying cash flows are unaffected. The principal impact on the Group's
income statement is from its joint venture property development in Southern
Spain, Alcaidesa, and the timing of both revenue and profit recognition within
that operation.
Under IFRS, there is a change in the revenue recognition policy at Alcaidesa.
Revenue was previously recognised after exchange of contract and when any
outstanding conditions, principally the completion of infrastructure, were under
its control. However, IFRS is more specific about recognising revenue when there
remain any significant outstanding acts. This means that under IFRS, revenue
will be recognised when risk associated with ownership of the land is
transferred and all significant acts are complete.
The impact of this change is to defer sales recognised by the joint venture in
2004 until the associated infrastructure is complete. This has reduced the
Group's earnings for the year ended 31 December 2004 by £6.4m and for the six
months ended 30 June 2004 by £1.9m. However, it is anticipated that the
majority of these infrastructure works will be completed in 2005 and the
corresponding profit recognised accordingly.
The business strategy of Alcaidesa, which is to purchase land and then secure
the necessary planning consent before selling parcels of the land for
development, will not be affected by this change. However, the future financial
results are likely to be more volatile as future infrastructure works on land
interests may extend over a twelve month period, thereby deferring sales to the
following year. Alcaidesa is the only part of the Group affected by this
change.
The potential financial impact on the Group accounts and all presentational
changes are set out in full in this report.
Costain management will be presenting the key aspects of adopting IFRS on a
telephone conference call for analysts and investors at 08:00 today. To
participate in this call, please dial (020) 7784 1015. The presentation slides
are available on the Company's website, www.costain.com.
A replay of this conference call will also be available until Friday 19th
August. The number to dial for the replay facility is (020) 7784 1024, quoting
passcode 7490480#.
17 August 2005
ENQUIRIES:
Costain Group PLC Tel: 01628 842 444
Charles McCole, Finance Director
College Hill Tel: 020 7457 2020
Matthew Gregorowski
CONTENTS
Section Content Page
1 Introduction and overview of impact 4
2 IFRS accounting policies 6 - 11
3 Consolidated income statement reconciliations - UK GAAP to IFRS
As at 30 June 2004 12
As at 31 December 2004 13
Changes in accounting policies - income statement 14
4 Consolidated statement of recognised income and expense reconciliations - 15
UK GAAP to IFRS
5 Consolidated balance sheet reconciliations - UK GAAP to IFRS
As at 1 January 2004 16
As at 30 June 2004 17
As at 31 December 2004 18
Changes in accounting policies - balance sheet 19 - 20
6 Consolidated cash flow statement for the year to 31 December 2004 21
7 Financial Instruments - IAS 32 & IAS 39 22
SECTION 1
INTRODUCTION
In July 2002 the European Union (EU) approved a regulation (IAS Regulation EC
1606/2002) requiring all EU listed companies to prepare consolidated financial
statements in accordance with International Financial Reporting Standards
(IFRS), adopted for use in the EU (adopted IFRSs). The regulation applies to
accounting periods beginning on or after 1 January 2005. Costain Group PLC will
publish its 2005 Interim Report and 2005 Annual Report and Accounts in
accordance with recognition and measurement requirements of IFRSs in issue that
are either endorsed by the EU and effective (or available for early adoption) at
31 December 2005 or are expected to be endorsed and effective (or available for
early adoption) at 31 December 2005.
This report has been prepared in order to provide financial information showing
the impact of Costain Group PLC's transition from a UK Generally Accepted
Accounting Principles (UK GAAP) basis to an IFRS basis, in advance of the
publication of its first financial reporting under IFRS. The adoption of IFRS
will have no impact upon the underlying cash flows or trading activities of the
Group.
OVERVIEW OF IMPACT
The impact of applying IFRS on the headline 2004 financial information is
summarised below:
£million Half-year to 30 June 2004 Year to 31 Dec 2004
UK GAAP IFRS UK GAAP IFRS
Revenue 324.2 324.2 673.2 673.2
Profit of operations 7.9 4.7 18.9 9.3
Profit before tax 8.1 5.4 19.5 10.5
Profit for the period 6.4 4.5 15.2 8.8
Basic earnings per share (p) 1.8p 1.3p 4.3p 2.5p
Net assets (excl net pension liability) 23.6 20.9 32.5 25.1
Net liabilities (30.5) (33.6) (36.7) (44.5)
Areas affected by IFRS
Financial impact to 31 December 2004
• IAS 18 - Revenue: profit of joint ventures in year to 31 December 2004
reduced by £6.4m
• IFRS 2 - Share based payment: adjustment immaterial in 2004
• IAS 19 - Employee benefits: financial assets to be valued at bid price, not
mid-market price - pension liability (net) increased by £0.4m
Potential financial impact from 1 January 2005
• IAS 32 & IAS 39 - Financial Instruments (from 1 January 2005): discussed in
Section 6
Presentation/classification impact
• IAS 38 - Intangible assets: reclassification of capitalised software costs
from tangible assets
• IAS 1 - Presentation of financial statements: current/non-current asset and
liability reclassification on balance sheet and equity accounted
investments' return shown net of interest and tax below operating profit
• IAS 12 - Income taxes: pension deferred tax asset shown separately from
pension liability
• IAS 21 - The effects of changes in foreign exchange rates: currency
translation differences held within separate reserve from 1 January 2004
• IAS 19 - Employee benefits: finance income and expense shown separately on
face of income statement
Section 2 contains Costain Group PLC's IFRS accounting policies and Sections 3
to 5 contain detailed reconciliations from UK GAAP to IFRS.
SECTION 2
IFRS ACCOUNTING POLICIES
Based on the adopted and unadopted IFRSs currently in issue, the directors have
made assumptions about the accounting policies expected to be applied, when the
first annual IFRS financial statements are prepared for the year ending 31
December 2005. In particular, the directors have assumed that IAS 19 (revised)
will be adopted in sufficient time that it will be available for use in the
annual IFRS financial statements for the year ending 31 December 2005. These
policies have been consistently applied to the years presented.
In addition, the adopted IFRSs that will be effective (or available for early
adoption) in the annual financial statements for the year ending 31 December
2005 are still subject to change and to additional interpretations and therefore
cannot be determined with certainty. Accordingly, the accounting policies for
that annual period will be determined finally only when the annual financial
statements are prepared for the year ending 31 December 2005.
The preparation of financial statements in conformity with IFRS requires the
Directors to make judgments and assumptions that affect the reported amounts of
assets and liabilities and income and expense during the reported periods.
Although these judgments and assumptions are based on the Directors' best
knowledge of the amount, events or actions, actual results may differ from these
estimates.
First time adoption
IFRS 1 permits companies adopting International Financial Reporting Standards
for the first time to take exemptions from the full requirements of IFRS in the
transition period. This financial information has been prepared on the basis of
taking the following exemptions.
• Business combinations prior to 1 January 2004 have not been restated to
comply with IFRS 3 'Business Combinations'.
• All cumulative actuarial gains and losses with respect to employee benefits
have been recognised in shareholders' equity at 1 January 2004.
• Cumulative translation differences on foreign operations are deemed to be
zero at 1 January 2004. Any gains and losses recognised in the
consolidated income statement on subsequent disposals of foreign operations
will therefore exclude translation differences arising prior to the
transition date.
• The Group has elected to apply IFRS 2 only to all relevant share-based
payment transactions granted after 7 November 2002 and not vested at 1
January 2005.
• IAS 32 and IAS 39 have been adopted from 1 January 2005, with no
restatement of comparative information.
• In March 2005, the International Financial Reporting Interpretations
Committee (IFRIC) issued draft guidance on accounting for service
concession arrangements (IFRICs D12-D14). The Group has not applied the
draft interpretations, as they may change before being finalised.
The accounting policies set out below have been used to prepare the financial
information. These include the accounting policies for financial instruments
both before and after the adoption of IAS 32 and IAS 39 on 1 January 2005.
Basis of accounting
The financial statements are prepared in accordance with adopted International
Financial Reporting Standards. The following principal accounting policies have
been applied consistently in dealing with items that are considered material in
relation to the Group's financial statements.
Basis of consolidation
a) The Group financial statements include the accounts of Costain Group PLC
and subsidiaries controlled by the Group. Control exists where the Company has
the power, directly or indirectly, to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. In
assessing control, potential voting rights that presently are exercisable are
taken into account. The financial statements of subsidiaries are included in
the consolidated financial statements from the date that control commences until
the date that control ceases.
b) Associates are operations over which the Group has the power to exercise
significant influence but not control, generally accompanied by a share of
between 20% and 50% of the voting rights. Associates are accounted for using
the equity method. If the Group's share of losses in an associate equals its
investment, the Group does not recognise further losses, unless it has incurred
obligations or made payments on behalf of the associate.
c) Jointly controlled entities are those entities over whose activities
the Group has joint control, established by contractual agreement. Jointly
controlled entities are accounted for using the equity method from the date that
the jointly controlled entity commences until the date that joint control of the
entity ceases.
d) Jointly controlled operations are those joint ventures over which the
Group has joint control, established by contractual agreement, which are not
entities. The consolidated financial statements include the Group's
proportionate share of the jointly controlled operation's assets, liabilities,
revenue and expenses with items of a similar nature on a line-by-line basis from
the date that the jointly controlled operation commences until the date that
jointly controlled operation ceases.
e) Intragroup balances and transactions together with any unrealised gains
arising from intragroup transactions are eliminated in preparing the
consolidated financial statements. Unrealised gains arising from transactions
with jointly controlled entities and jointly controlled operations are
eliminated to the extent of the Group's interest in the entity. The Group's
share of unrealised gains arising from transactions with associates is
eliminated against the investment in the associate. The Group's share of
unrealised losses is eliminated in the same way as unrealised gains, but only to
the extent that there is no evidence of impairment.
Goodwill
Goodwill arising on consolidation represents the excess of the fair value of the
cost of acquisition over the Group's interest in the fair value of the
identifiable assets and liabilities of a subsidiary, jointly controlled entity
or associate at the date of acquisition.
The classification and accounting treatment of business combinations that
occurred prior to 1 January 2004 have not been reconsidered in preparing the
Group's opening IFRS balance sheet at 1 January 2004.
Positive goodwill is stated at cost less any accumulated impairment losses and
is reviewed for impairment at least annually. Any impairment is recognised
immediately in the income statement. In respect of associates, the carrying
amount of goodwill is included in the carrying amount of the investment in the
associate. Negative goodwill arising on an acquisition is recognised directly
in income statement.
Other intangible assets
Other intangible assets are carried at cost less accumulated amortisation and
impairment losses. Amortisation begins when an asset is available for use and
is calculated on a straight-line basis to allocate the cost of assets over their
estimated useful lives. Subsequent expenditure on capitalised intangible assets
is capitalised only when it increases the future economic benefits embodied in
the specific asset to which it relates. All other expenditure is expensed as
incurred.
Revenue recognition
Revenue is measured at the fair value of the consideration received or
receivable, net of value added tax. Revenue from the sale of goods is
recognised when the Group has transferred the significant risks and rewards of
ownership of the goods to the buyer, the amount of revenue can be measured
reliably and it is probable that the economic benefits associated with the
transaction will flow to the Group. Revenue includes the Group's share of
revenue of jointly controlled operations.
Revenue from construction contracts is recognised in accordance with the Group's
accounting policy on construction contracts. Rental income is recognised in the
income statement on a straight-line basis over the term of the lease. Lease
incentives are recognised as an integral part of the total rental income.
Construction contracts
Where the outcome of a construction contract can be estimated reliably and it is
probable that the contract will be profitable, revenue and costs are recognised
by reference to the stage of completion of the contract activity at the balance
sheet date, as measured by the proportion that contract costs incurred for work
performed to date bear to the estimated total contract costs.
When it is probable that total contract costs will exceed total contract
revenue, the expected loss is recognised as an expense immediately.
Where the outcome of a construction contract cannot be estimated reliably,
contract revenue is recognised to the extent of contract costs incurred that it
is probable will be recoverable.
Construction work in progress is stated at cost plus profit recognised to date
less a provision for foreseeable losses and less progress billings. Cost
includes all expenditure related directly to specific projects and an allocation
of fixed and variable overheads incurred in the Group's contract activities
based on normal operating capacity.
Currency translation
Transactions in foreign currencies are translated at the foreign exchange rate
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated to
pounds sterling at the foreign exchange rate ruling at that date. Foreign
exchange differences arising on translation are recognised in the income
statement.
Exchange differences arising from the translation of the net investment in
foreign operations and of related hedges, that have arisen since 1 January 2004,
the date of transition to IFRS, are presented as a separate component of equity.
They are released into the income statement upon disposal. Translation
differences that arose before the date of transition to IFRS in respect of all
foreign entities are not presented as a separate component.
Property, plant and equipment
Property, plant and equipment are carried at cost less accumulated depreciation
and impairment losses. Where parts of an item of property, plant and equipment
have different useful lives, they are accounted for as separate items. Cost
comprises purchase price and directly attributable costs. Freehold land is not
depreciated. For all other property, plant and equipment, depreciation is
calculated on a straight-line basis to allocate cost less residual values of the
assets over their estimated useful lives as follows:
Freehold buildings 50 years
Leasehold buildings Shorter of 50 years or lease term
Plant and equipment Remaining useful life (generally 3 - 121/2 years)
Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on the 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 and laws that
have been enacted or substantively enacted by the balance sheet date.
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. The carrying amount of deferred tax assets is reviewed at each
balance sheet date. Such assets and liabilities are not recognised if the
temporary difference arises from the initial recognition of goodwill or other
assets and liabilities (other than in a business combination) in a transaction
that affects neither the taxable profit not the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates and interest 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.
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.
Leases
Leases are classified as finance leases where substantially all the risks and
rewards of ownership are transferred to the Group. Finance leases are
capitalised at the inception of the lease at the lower of the fair value of the
leased asset and the present value of the minimum lease payments. Lease
payments are apportioned between the liability and finance charge to produce a
constant rate of interest on the finance lease balance outstanding. Assets
capitalised under finance leases are depreciated over the shorter of the useful
life of the asset or the lease term and adjusted for impairment losses. The
interest expense component of finance lease payments is recognised in the income
statement using the effective tax rate method.
Leases other than finance leases are classified as operating leases. Payments
made under operating leases are recognised as an expense in the consolidated
income statement on a straight-line basis over the lease term. Any incentives
to enter into operating leases are recognised as a reduction of rental expense
over the lease term on a straight-line basis. Operating lease income is
credited to the income statement as it is earned.
Inventories
Inventories, including land held for and in the course of development, are
stated at the lower of cost and net realisable value. Net realisable value is
the estimated selling price in the ordinary course of business, less the
estimated costs of completion and selling expenses.
Trade and other receivables
Trade and other receivables are stated at their cost less impairment loss.
Retirement benefit obligations
The Group operates a pension scheme providing benefits based on final
pensionable salary. The assets of the scheme are held separately from those of
the Group.
Pension scheme assets are measured using market values. Pension scheme
liabilities are measured using a projected unit method and discounted at the
current rate of return on a high quality corporate bond of equivalent term and
currency to the liability. The liability recognised in the balance sheet in
respect of defined benefit pension plans is the present value of the defined
benefit obligation less the fair value of scheme assets at the balance sheet
date.
The increase in the present value of the liabilities of the Group's defined
benefit pension scheme expected to arise from employee service in the period is
charged to the profit from operations. The expected return on the scheme's
assets and the increase during the period in the present value of the scheme's
liabilities arising from the passage of time are included in finance income or
finance costs respectively. Actuarial gains and losses are recognised in the
consolidated statement of recognised income and expense.
Share based payments
The Group operates various equity share option schemes. For equity settled
share options, the services received from employees are measured by reference to
the fair value of the share options. The fair value is calculated at grant date
and recognised in the consolidated income statement, together with a
corresponding increase in shareholders' equity, on a straight line basis over
the vesting period, based on an estimate of the number of options that will
eventually vest. Vesting conditions, other than market conditions, are not
taken into account when estimating the fair value.
IFRS 2 has been applied, in accordance with IFRS 1, to equity settled share
options granted after 7 November 2002 and not vested at 1 January 2005.
Provisions
A provision is recognised in the balance sheet when the Group has a legal or
constructive obligation as a result of a past event and it is probable that an
outflow of economic benefits will be required to settle the obligation. If the
effect is material, provisions are determined by discounting the expected future
cash flows at a pre-tax rate that reflects current market assessments of the
time value of money and, where appropriate, the risks specific to the liability.
A provision for onerous contracts is recognised when the expected benefits to be
derived by the Group from a contract are lower than the unavoidable cost of
meeting its obligations under the contract.
Financial instruments (accounting policy applicable for periods prior to 1
January 2005)
The Group protects the sterling value of overseas income and payments, where
appropriate, by means of forward sales and purchase contracts. Profits or
losses arising from these arrangements are accounted for in the period in which
the contracts are due to mature. Accordingly, no account is taken of unrealised
profits or losses arising on such forward contracts.
Financial instruments (accounting policy applicable from 1 January 2005)
Derivative financial instruments are measured at fair value and those utilised
by the Group's treasury operations and its associated investments include
interest rate and Retail Price Index swaps and forward foreign exchange
contracts. Certain derivative financial instruments are designated as hedges in
line with the Group's risk management policies. Hedges are classified as
follows:
(a) Fair value hedges that hedge the exposure to changes in the fair value of a
recognised asset or liability.
(b) Cash flow hedges that hedge exposure to variability in cash flows that is
either attributable to a particular risk associated with a recognised asset or
liability or a forecast transaction.
(c) Net investment hedges that hedge exposure to changes in the value of the
Group's interests in the net assets of foreign operations.
For fair value hedges, any gain or loss from re-measuring the hedging instrument
at fair value is recognised in the consolidated income statement and any gain or
loss on the hedged item is adjusted against the carrying amount of the hedged
item and similarly recognised in the consolidated income statement.
For cash flow hedges and net investment hedges, the portion of the gain or loss
on the hedging instrument that is determined to be an effective hedge is
recognised in shareholders' equity, with any ineffective portion recognised in
the consolidated income statement. When hedged cash flows result in the
recognition of a non-financial asset or liability, the associated gains or
losses previously recognised in shareholders' equity are included in the initial
measurement of the asset or liability. For all other cash flow hedges, the
gains or losses that are recognised in shareholders' equity are transferred to
the consolidated income statement in the same period in which the hedged cash
flows affect the consolidated income statement.
Any gains or losses arising from changes in fair value of derivative financial
instruments not designated as hedges are recognised in the consolidated income
statement. Borrowings are measured at amortised cost except where they are part
of an effective fair value hedge relationship, in which case the carrying value
is adjusted to reflect the fair value movements associated with the hedged risk.
Where borrowings are used to hedge the foreign currency risk of the Group's
interests in the net assets of foreign operations, the portion of the foreign
currency gain or loss on the borrowings that is determined to be an effective
hedge is recognised in shareholders' equity.
Other financial assets are measured as follows:
(a) At fair value for available for sale financial assets. Gains and losses are
recognised as a separate component of shareholders' equity except for impairment
losses, interest and dividends arising from these assets, which are recognised
in the consolidated income statement.
(b) At amortised cost for held to maturity financial assets. Trade and other
receivables are measured at amortised cost less any provision for impairment.
Trade and other receivables are discounted when the time value of money is
considered material.
SECTION 3
As set out in section 2 above, the adopted IFRSs that will be effective (or
available for early adoption) in the annual financial statements for the year
ending 31 December 2005 are still subject to change and to additional
interpretations and therefore cannot be determined with certainty. Accordingly,
the accounting policies for that annual period will be determined finally only
when the annual financial statements are prepared for the year ending 31
December 2005.
The primary statements within the financial information contained in this
document have been presented substantially in accordance with IAS1 'Presentation
of Financial Statements'. However, the format and presentation may require
modification in the event that further guidance is issued and as practice
develops.
Reconciliations - UK GAAP to IFRS
CONSOLIDATED INCOME STATEMENT
Half year ended 30 June 2004
Impact of transition to IFRS
Under UK Alcaidesa Joint Ventures/ Financing Under
GAAP Associates IFRS
Notes (page 11) A B C
£m £m £m £m £m
Revenue 324.2 324.2
Cost of sales (309.8) (309.8)
Gross profit 14.4 14.4
Administrative expenses (9.9) (9.9)
Group operating profit 4.5 4.5
Group share of joint ventures 3.4 (2.4) (1.0)
operating results
Share of profit of joint ventures 0.2 0.2
and associates
Profit of operations 7.9 (2.4) (0.8) 4.7
Other finance charges (0.5) 0.5
Net interest 0.7 0.5 (1.2)
Finance income 11.9 11.9
Finance costs (11.2) (11.2)
Profit before tax 8.1 (2.4) (0.3) - 5.4
Taxation (1.7) 0.5 0.3 - (0.9)
Profit for the period 6.4 (1.9) - - 4.5
Attributable to:
Equity holders of the parent 6.4 (1.9) - - 4.5
Minority interests - - - - -
Earnings per share - basic 1.8p (0.5p) - - 1.3p
Earnings per share - diluted 1.8p (0.5p) - - 1.3p
CONSOLIDATED INCOME STATEMENT
Year ended 31 December 2004
Impact of transition to IFRS
Under UK GAAP Alcaidesa Joint Financing Under IFRS
Ventures/
Associates
Notes (page 11) A B C
£m £m £m £m £m
Revenue 673.2 673.2
Cost of sales (645.0) (645.0)
Gross profit 28.2 28.2
Administrative expenses (18.0) (18.0)
Group operating profit 10.2 10.2
Group share of joint ventures 8.9 (9.2) 0.3
operating results
Group share of associates (0.2) 0.2
operating results
Share of profit of joint (0.9) (0.9)
ventures and associates
Profit from operations 18.9 (9.2) (0.4) 9.3
Other finance charges (1.1) 1.1
Net interest 1.7 0.6 (2.3)
Finance income 22.9 22.9
Finance costs (21.7) (21.7)
Profit before tax 19.5 (9.2) 0.2 - 10.5
Taxation (4.3) 2.8 (0.2) - (1.7)
Profit for the period 15.2 (6.4) - - 8.8
Attributable to:
Equity holders of the parent 15.2 (6.4) - - 8.8
Minority interests - - - - -
Earnings per share - basic 4.3p (1.8p) - - 2.5p
Earnings per share - diluted 4.3p (1.8p) - - 2.5p
Changes in Accounting Policies - Income Statement
Explanatory notes on the impact of IFRS adjustments to the consolidated income
statement
A IAS 18 Revenue Recognition
Alcaidesa, the Group's Spanish property development interest, has sold parcels
of land that were subject to the completion of certain infrastructure. Sales
and profits in respect of such developments were recognised on exchange of
contract with costs to complete on the infrastructure element recognised
accordingly.
Under IFRS, these developments fall within the scope of IAS 18, where reference
is specifically made to situations where the seller is obliged to perform
substantial acts to complete under the contract. Revenue and thus profit in
respect of such acts should be recognised only when the act is performed.
Given the specific circumstances existing within these developments we consider
that the appropriate treatment under IFRS is to view these arrangements, where
separable, as two transactions, firstly the sale of the land and secondly the
provision of the infrastructure. In such circumstances, revenue and profit are
recognised on the land sale element of each transaction on exchange of legal
title and when all conditions for revenue recognition under IAS 18 are met. In
respect of the infrastructure, the proportion of revenue and profit related to
the provision of these facilities is deferred until such works are complete.
The impact of IAS 18 has been to defer the amount of profit shown within the
Group's share of profits from joint ventures and associates. Profit after tax
for the six months to 30 June 2004 and 12 months to 31 December 2004 has reduced
by £1.9m and £6.4m respectively.
B IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures
Under UK GAAP, the group share of operating profits of associates was presented
on the face of the income statement after group operating profit. The group
share of interest and tax of associates was included within the relevant Group
totals. Under IFRS, the Group share of profit after tax of associates is
presented on the face of the income statement after Group operating profit.
C IAS 1 Income Statement Reclassifications and IAS 19 Retirement Benefit
Obligations
There are a number of reclassifications between income statement and balance
sheet captions that arise from the application of various IFRS. Under IFRS the
expected return on assets of the pension scheme and interest income are shown as
finance income and the interest on pension scheme liabilities and interest and
finance charges payable are shown as finance costs.
SECTION 4
CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE
Half year ended 30 June 2004
Under UK GAAP Alcaidesa Under
IFRS
Notes (page 11) A
£m £m £m
Exchange differences on (1.2) (1.2)
translation of foreign operations
Actuarial losses on defined - -
benefit pension schemes (net of
tax)
Net expense recognised directly in (1.2) (1.2)
equity
Profit for the period 6.4 (1.9) 4.5
Total recognised income and 5.2 (1.9) 3.3
expense in the period
Attributable to:
Equity holders of the company 5.2 (1.9) 3.3
Equity minority interests - - -
CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSE
Year ended 31 December 2004
Under UK GAAP Alcaidesa Under IFRS
Notes (page 11) A
£m £m £m
Exchange differences on (0.2) (0.2) (0.4)
translation of foreign
operations
Actuarial losses on defined (16.0) (16.0)
benefit pension schemes (net of
tax)
Net expense recognised directly (16.2) (0.2) (16.4)
in equity
Profit for the period 15.2 (6.4) 8.8
Total recognised income and (1.0) (6.6) (7.6)
expense in the period
Attributable to:
Equity holders of the company (1.0) (6.6) (7.6)
Equity minority interests - - -
SECTION 5
CONSOLIDATED BALANCE SHEET
As at 1 January 2004 (Transition)
Impact of transition to IFRS
Under UK Reclassified Pension Translation Intangible P&L Under
GAAP Reserve Assets Reserves IFRS
Notes (pages 16-17) A B/C D E F
£m £m £m £m £m £m £m
ASSETS
Non-current assets
Property, plant & equipment 4.9 (0.2) 4.7
Intangible assets 0.2 0.2
Other debtors 3.2 3.2
Deferred tax assets 2.6 23.5 26.1
Investments in associates
Investments in jointly 17.6 (0.8) 16.8
controlled entities
Loans to jointly controlled 2.5 2.5
entities
Loans to associates
Other investments 1.0 1.0
Total non-current assets 26.0 5.8 23.5 - - (0.8) 54.5
Current assets
Inventories 1.6 1.6
Trade and other receivables 122.4 (5.8) 116.6
Cash & short term deposits 72.0 72.0
Total current assets 196.0 (5.8) - - - - 190.2
Total assets 222.0 - 23.5 - - (0.8) 244.7
EQUITY
Share capital 34.5 34.5
Share premium 119.4 119.4
Cum. translation reserve
Retained earnings (190.6) (0.4) (0.8) (191.8)
Minority interest 0.1 0.1
Total equity (36.6) - (0.4) - - (0.8) (37.8)
LIABILITIES
Non-current liabilities
Interest bearing loans and 0.9 0.9
borrowings
Retirement benefit 54.5 23.9 78.4
obligations
Other payables 1.7 1.7
Non current tax liabilities
Long term provisions 3.8 3.8
Total non-current 57.1 3.8 23.9 - - 84.8
liabilities
Current liabilities
Trade and other payables 193.9 193.9
Interest bearing loans and 0.5 0.5
borrowings
Provisions and other 7.1 (3.8) 3.3
liabilities
Total current liabilities 201.5 (3.8) - - - - 197.7
Total liabilities 258.6 - 23.9 - - - 282.5
Total equity and liabilities 222.0 - 23.5 - - (0.8) 244.7
CONSOLIDATED BALANCE SHEET
As at 30 June 2004
Impact of transition to IFRS
Under UK Reclassified Pension Translation Intangible P&L Under
GAAP Reserve Assets Reserves IFRS
Notes (pages 16-17) A B/C D E F
£m £m £m £m £m £m £m
ASSETS
Non-current assets
Property, plant & equipment 4.5 (0.2) 4.3
Intangible assets 0.2 0.2
Other debtors 5.9 5.9
Deferred tax assets 2.0 23.5 25.5
Investments in associates
Investments in jointly 19.1 (2.7) 16.4
controlled entities
Loans to jointly controlled 2.5 2.5
entities
Loans to associates
Other investments 1.0 1.0
Total non-current assets 27.1 7.9 23.5 - - (2.7) 55.8
Current assets
Inventories - -
Trade and other receivables 150.4 (7.9) 142.5
Cash and short term deposits 66.8 66.8
Total current assets 217.2 (7.9) - - - - 209.3
Total assets 244.3 - 23.5 - - (2.7) 265.1
EQUITY
Share capital 35.3 35.3
Share premium 119.5 119.5
Cum. translation reserve (1.2) (1.2)
Retained earnings (185.4) (0.4) 1.2 (2.7) (187.3)
Minority interest 0.1 0.1
Total equity (30.5) - (0.4) - - (2.7) (33.6)
LIABILITIES
Non-current liabilities
Interest bearing loans and 0.7 0.7
borrowings
Retirement benefit 54.1 23.9 78.0
obligations
Other payables
Non current tax liabilities
Long term provisions 4.2 4.2
Total non-current 54.8 4.2 23.9 - - - 82.9
liabilities
Current liabilities
Trade and other payables 211.8 211.8
Interest bearing loans and 0.4 0.4
borrowings
Provisions and other 7.8 (4.2) 3.6
liabilities
Total current liabilities 220.0 (4.2) - - - 215.8
Total liabilities 274.8 - 23.9 - - 298.7
Total equity and liabilities 244.3 - 23.5 - (2.7) 265.1
CONSOLIDATED BALANCE SHEET
As at 31 December 2004
Impact of transition to IFRS
Under UK Reclassified Pension Translation Intangible P&L Under IFRS
GAAP Reserve Assets Reserves
Notes (pages 16-17) A B/C D E F
£m £m £m £m £m £m £m
ASSETS
Non-current assets
Property, plant & equipment 5.4 (0.5) 4.9
Intangible assets 0.5 0.5
Other debtors 5.7 5.7
Deferred tax assets 1.7 29.9 31.6
Investments in associates
Investments in jointly 19.0 (7.4) 11.6
controlled entities
Loans to jointly controlled 2.6 2.6
entities
Loans to associates 2.7 2.7
Other investments 1.0 1.0
Total non-current assets 30.7 7.4 29.9 - - (7.4) 60.6
Current assets
Inventories 1.0 1.0
Trade and other receivables 159.7 (7.4) 152.3
Cash and short term deposits 64.1 64.1
Total current assets 224.8 (7.4) - - - - 217.4
Total assets 255.5 - 29.9 - - (7.4) 278.0
EQUITY
Share capital 35.3 35.3
Share premium 119.5 119.5
Cum. translation reserve (0.2) (0.2) (0.4)
Retained earnings (191.6) (0.4) 0.2 (7.2) (199.0)
Minority interest 0.1 0.1
Total equity (36.7) - (0.4) - - (7.4) (44.5)
LIABILITIES
Non-current liabilities
Interest bearing loans and 0.5 0.5
borrowings
Retirement benefit 69.2 30.3 99.5
obligations
Other payables 3.0 3.0
Non current tax liabilities
Long term provisions 3.1 3.1
Total non-current 72.7 3.1 30.3 - - - 106.1
liabilities
Current liabilities
Trade and other payables 214.3 214.3
Interest bearing loans and 1.0 1.0
borrowings
Provisions and other 4.2 (3.1) 1.1
liabilities
Total current liabilities 219.5 (3.1) - - - - 216.4
Total liabilities 292.2 - 30.3 - - - 322.5
Total equity and liabilities 255.5 - 29.9 - - (7.4) 278.0
Changes in Accounting Policies - Balance Sheet
Explanatory notes on the impact of IFRS adjustments to the consolidated balance
sheet at 31 December 2004
A IAS 1 Current/non current assets and liabilities
An entity must present current and non-current assets and current and
non-current liabilities as separate classifications on the face of the balance
sheet in accordance with IAS 1.
Non-current receivables have been reclassified on the face of the balance sheet
as non-current assets and provisions have been reallocated to non-current
liabilities.
A distinction between current and non-current assets and liabilities arising
from post-employment benefits is not required. In practice assets and
liabilities relating to defined benefit plans generally are classified as
non-current (IAS 19). Assets and liabilities relating to defined
contribution plans normally are current and are classified as such.
B IAS 19 Employee benefits
Costain Group PLC adopted early the amendments to FRS 17 for UK GAAP reporting
and has recognised the defined benefit pension plan liability (based on the
projected unit credit method) in full as at 31 December 2003. The Group has
nominated to recognise any actuarial gains or losses in the statement of
recognised income and expense. There are no significant accounting differences
between FRS 17 and IAS 19 in relation to accounting for defined benefit pension
liabilities where the company has nominated to recognise actuarial losses
directly in equity. However, the finance cost on the pension plan liabilities
will be shown separately as a finance cost and the expected return on plan
assets will be shown as finance income.
The Group intends to have actuarial updates at each half-year for the defined
benefit pension plan and a full actuarial review at least every 2 years as
required by the trust deed.
IAS 19 requires employee benefit schemes' financial assets to be valued at fair
value. For relevant financial assets this means the bid price whereas FRS 17
specifies using mid market price. This has the effect of reducing asset values
and thereby increasing the deficit by £0.6m.
C IAS 12 Income taxes
Costain Group has a significant defined benefit pension scheme liability. Under
UK GAAP this has given rise to a deferred tax asset based on the company's UK
corporation tax rate, which has been netted against the defined benefit pension
scheme liability. IAS 12 requires that the deferred tax asset be grouped with
other deferred tax assets.
Deferred tax assets relating to retirement benefit obligations have been
reclassified from non-current liabilities to non-current assets.
D IAS 21 The effects of changes in foreign exchange rates
UK GAAP requires exchange differences on a monetary item forming part of a
reporting entity's net investment in a foreign operation to be taken to the
STRGL. Under IFRS, IAS 21 requires such exchange differences to be recognised in
a separate component of equity in the reporting entity's consolidated financial
statements.
Cumulative translation differences on foreign operations are deemed to be zero
at 1 January 2004 (as per transitional options of IFRS 1 detailed in Section 2).
A £0.2m exchange difference relating to 2004 has been moved from retained
reserves to a cumulative translation reserve.
E IAS 38 Intangible assets
Under UK GAAP, computer software costs attributable to major business systems
implementations and material software licenses were capitalised as property,
plant and equipment. Under IFRS, software development, purchased software and
software licences should be classified as an intangible asset.
At 31 December 2004, under IFRS, computer software of £0.5m has been
reclassified from property, plant and equipment to intangible assets.
F IAS 18 Reserve Movement
The income statement IFRS adjustment required for Alcaidesa revenue recognition
(as explained in Section 3A) causes a reduction in the carrying value of joint
venture net assets of £0.8m at 1 January 2004, £2.7m at 30 June 2004 and £7.4m
at 31 December 2004.
Others - no financial impact in comparative periods
IFRS 2 Share based payments
Under UK GAAP, a provision was recognised for cash settled options based on
intrinsic value at the balance sheet date.
Costain Group has long-term incentive plans for several directors and key
employees under which share options have been issued and, subject to certain
performance conditions, will vest to the relevant option holders over a period
of 3 years. The Group also has Save-As-You-Earn schemes under which options
were granted to UK employees. In accordance with IFRS 2, the Group is required
to recognise an expense for options granted after 7 November 2002 that have not
vested as at 1 January 2005.
The options have been valued at the date of grant and an expense recognised over
the period that the service benefit is to be provided by the employees under the
terms of the schemes.
At 31 December 2004, under IFRS, the charge for equity settled options is
immaterial and charges will commence in 2005.
SECTION 6
CONSOLIDATED CASH FLOW STATEMENT
For the year to 31 December 2004
Impact of
transition to IFRS
Under UK GAAP Alcaidesa Under IFRS
£m £m £m
Cash flows from operating activities
Profit for the period 15.2 (6.4) 8.8
Adjustments for:
Depreciation 1.1 1.1
Investment income (22.9) (22.9)
Interest expense 22.3 22.3
Share of profit of associates (8.7) 6.4 (2.3)
Tax expense 4.3 4.3
Operating profit before changes in working 11.3 - 11.3
capital and provisions
(Increase)/decrease in inventories 0.6 0.6
Decrease/(increase) in receivables (38.3) (38.3)
(Decrease)/increase in payables 18.8 18.8
Decrease in provisions (2.9) (2.9)
Cash generated from the operations (10.5) - (10.5)
Interest paid (0.3) (0.3)
Net cash from operating activities (10.8) - (10.8)
Cash flows from investing activities
Interest received 2.6 2.6
Acquisition of plant (1.7) (1.7)
Additions to investments (0.4) (0.4)
Capital repayments by investments 0.2 0.2
Dividends received 4.4 4.4
Amounts invested in joint ventures (2.8) (2.8)
Net cash from investing activities 2.3 - 2.3
Cash flows from financing activities
Issue of ordinary share capital by Costain 0.9 0.9
Group PLC
Net cash from financing activities 0.9 - 0.9
Net (decrease) in cash and cash equivalents (7.6) - (7.6)
Cash and cash equivalents at beginning of year 70.6 - 70.6
Effect of foreign exchange rate changes (0.4) (0.4)
Cash and cash equivalents at end of year 62.6 - 62.6
SECTION 7
FINANCIAL INSTRUMENTS - IAS 32 & IAS 39
Applicable from 1 January 2005
Costain Group PLC will not be adopting IAS 32 'Financial Instruments: Disclosure
and presentation' and IAS 39 'Financial Instruments: Recognition and
measurement' until 1 January 2005 as allowed under the transition rules for
IFRS.
There are several financial instruments that have either been entered into prior
to 2005 (and in place) that were not previously recognised (or had differential
treatment) in the prime financial statements under UK GAAP.
These include:
1) Forward sales and purchases of foreign currency
2) Interest rate swaps
3) Inflation swaps
The forward sales and purchases of foreign currency will be required to be
marked-to-market (fair value) under IAS 39 and will be revalued at each period
end. At 31 December 2004, the unrecognised gain on these instruments was £0.3m
and an adjustment will be made at 1 January 2005 to recognise this gain.
Interest rate swaps exist to fix the interest cost on variable rate financing on
specific PFI projects and it will be a requirement to fair value these swaps
under IAS 39. The cash flow hedging treatment is available (provided there is an
effective risk match and appropriate hedging documentation is in place)
resulting in fair value movements on these derivatives being recognised directly
in equity (rather than through the income statement, which would be the case if
'cash flow' hedge accounting were not to apply).
Inflation swaps exist to hedge the risks associated with index-linked bond
financing on specific PFI projects and are classed as derivatives under IAS 39
and need to be fair valued. Hedge accounting will be sought as these items are
considered 'hedge instruments' of the inflation rate risk indentured in the
bond. This will mean that changes in the fair value of these derivatives will
be recognised directly in equity (as opposed to through the income statement,
which would be the case if 'cash flow' hedge accounting were not available to
apply).
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