Statement re IFRS Transition
Croda International PLC
07 June 2005
7 June 2005
CRODA INTERNATIONAL Plc
STATEMENT ON THE TRANSITION TO INTERNATIONAL ACCOUNTING STANDARDS AND
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Introduction
Croda International Plc ('Croda') will be reporting its financial results in
accordance with International Accounting Standards (IAS) and International
Financial Reporting Standards (IFRS) with effect from 1 January 2005. This
unaudited statement presents the results for the six months ended 30 June 2004
and the year ended 31 December 2004 restated to an IFRS basis.
2004 Full Year Highlights
• Continuing operations' operating profit* of £47.1m compared to £47.3m
under UK GAAP
• Profit before tax from continuing operations* of £45.2m, the same as under
UK GAAP
• Pre-exceptional EPS under IFRS up to 22.8 pence from 22.2 pence under UK
GAAP
• Basic EPS up to 23.3 pence under IFRS compared to 20.1 pence under UK GAAP
• UK GAAP net assets of £170.9m reduced to £89.6m under IFRS, principally
due to the inclusion of the IAS 19 accounting deficit on the pension fund,
resulting in gearing increasing to 17.0% from 8.7%
• No change to Group cashflows.
*Under IFRS the Group's share of the profits of associates is stated after tax,
thereby including an element of tax in what are apparently pre-tax numbers.
There is a corresponding reduction in the taxation figure in the income
statement.
Commenting on the statement, Barbara Richmond, Group Finance Director of Croda,
said:
'The main impact of the transition to IFRS is on the Group's balance sheet and
its gearing. Primarily as a result of the change in pension fund accounting,
Group net assets under IFRS are lower than their UK GAAP equivalent,
consequently gearing rises to 17.0%. The impact of IFRS on the Group's income
statement is very small, with underlying profits under IFRS almost unchanged
from those reported under UK GAAP. The Group's underlying strong cash inflow
clearly remains unchanged.'
For further information, please contact:
Barbara Richmond, Group Finance Director Tel: 01405 860 551
Andrew Dowler, Financial Dynamics Tel: 0207 831 3113
Charles Watenphul, Financial Dynamics
Restatement of financial information for International Accounting Standards and
International Financial Reporting Standards
Introduction
Croda historically prepared its primary financial statements for the years to 31
December 2004 under UK Generally Accepted Accounting Practice (UK GAAP). For the
year to 31 December 2005 the Group is required to prepare its consolidated
financial statements in accordance with International Accounting Standards (IAS)
and International Financial Reporting Standards (IFRS)* and Interpretations as
adopted by the European Union (EU). The first results prepared under IFRS will
be the Group's interim results for the six months ending 30 June 2005. The
Group's first Annual Report under IFRS will be for 2005.
Basis of preparation
The restated financial information has been prepared in accordance with IFRS
under the assumption that all existing standards in issue from the International
Accounting Standards Board (IASB) will be fully endorsed by the EU. The failure
of the EU to endorse all of these standards for financial reporting in 2005, the
issue of any new or revised standards, or the publishing of further
interpretation guidance, could result in changes to the financial information
presented in this document. The financial information for the six months ended
30 June 2004 and for the full year ended 31 December 2004, as prepared on the
above basis, is unaudited.
IFRS 1 exemptions
IFRS 1 'First Time Adoption of International Financial Reporting Standards',
determines that the transition date for Croda will be 1 January 2004. It permits
those companies adopting IFRS for the first time to take certain exemptions from
the full requirements of IFRS during the transition period.
Croda has taken the following key exemptions:
• Business combinations - the Group has not restated business combinations
prior to the transition date to an IFRS basis.
• Financial Instruments - the Group has taken the exemption not to restate
comparatives for IAS 32 and IAS 39. As a result, the information in this
restatement and the comparative information in the 2005 financial statements
will be presented on the existing UK GAAP basis.
• Cumulative translation differences - under IAS 21, on disposal of a
business, the cumulative amount of exchange differences previously
recognised directly in equity for that business is charged or credited to
the income statement as part of the profit or loss on disposal. The Group
has adopted the exemption allowing these cumulative translation differences
to be reset to zero at the transition date.
* References to IFRS throughout this document refer to the application of
International Accounting Standards and International Financial Reporting
Standards.
Accounting policy changes
(a) IFRS 2 Share Based Payments
In accordance with IFRS 2, Croda is required to recognise a charge to operating
profit representing the fair value of (i) equity-settled share options granted
to employees after 7 November 2002 that had not vested by 1 January 2005 and
(ii) cash-settled share options vesting after the transition date. The fair
value has been calculated using recognised valuation models and is charged to
the income statement over the relevant vesting period. The charge is adjusted to
reflect actual and expected levels of vesting, and for the expected achievement
of any non-market performance conditions attached to each option. The impact in
2004 is a charge of £0.3 million for the six months ended 30 June 2004 and £0.6
million for the year ended 31 December 2004 at the operating profit level, with
a corresponding small tax credit.
(b) IAS 19 Employee Benefits
Croda has historically accounted for retirement benefits in accordance with SSAP
24 and has made disclosure only of the impact of FRS 17 'Retirement Benefits' in
accordance with the transitional requirements of that standard. The application
of IAS 19, which in many respects is similar to FRS 17, represents a significant
shift in Croda's accounting for such benefits and will lead to the figures
similar to those disclosed in Croda's 2004 Annual Report in respect of FRS 17
being brought into the accounts.
Accordingly, the current SSAP 24 balance sheet prepayment (£32.5m at 31 December
2004 net of amounts provided overseas) will be replaced with the IAS 19 deficit
which compares the pension fund assets, measured at fair value, and liabilities,
measured on an actuarial basis and discounted to present value (£104.1m at 31
December 2004). The discount rate applied to the liabilities is prescribed in
the standard and gives rise to higher liabilities than the actuarial valuations
which, typically, use higher discount rates.
In the income statement, the current SSAP 24 charge, £6.1m for the 2004 full
year, will be replaced with a net IAS 19 charge made up of the current service
cost, interest cost on scheme liabilities and expected return on pension fund
assets totalling £5.1m for 2004. Hence, 2004 reported profits under IAS 19 will
be £1m higher than under UK GAAP before tax. Deferred tax will then be charged
at the rate prevailing in the reporting territory (see note (f) below).
In addition, there will be a further charge or credit in respect of the
unrealised actuarial movement arising from the actuarial revaluation of fund
assets and liabilities at each year end. Croda's policy is to recognise any
actuarial gains and losses in full immediately in the statement of recognised
income and expense. Whilst this is at odds with IAS 19 as originally drafted,
which proposed a 'corridor' approach with recognition only of actuarial gains
and losses in excess of a de-minimis threshold, there is an option to account
for actuarial gains and losses in full within the IASB exposure draft 'Actuarial
Gains and Losses, Group Plans and Disclosures'. The draft was adopted by the
IASB in December 2004 and is effective from 1 January 2006 with earlier adoption
allowed. Croda will apply the revised standard voluntarily from the transition
date.
(c) IFRS 3 Business Combinations
IFRS 3 prohibits merger accounting and the amortisation of goodwill. The
standard requires goodwill to be carried at cost with an annual impairment
review.
Under the transitional arrangements of IFRS 1:
• All prior business combination accounting is frozen at the transition date;
and
• The value of goodwill is frozen at 1 January 2004 (£6.5m) and treated as cost
from that date.
The impact of removing the amortisation charge is to increase operating profit
by £0.4 million in the year ended 31 December 2004 and by £0.2 million for the
six months ended 30 June 2004.
IFRS 3 also prohibits an entity from recognising goodwill previously written off
to reserves in the profit and loss account when it disposes of the business to
which the goodwill relates. Under UK GAAP, the Group's 2004 profit and loss
account included a charge of £3.4m to discontinued operations in respect of such
goodwill. Under IFRS, discontinued operations' profit after tax thus increases
by £3.4m.
(d) IAS 32 and IAS 39 Financial Instruments
IAS 32 and IAS 39 cover the accounting for, and reporting of, financial
instruments. IAS 32 covers disclosure and presentation whilst IAS 39 covers
recognition and measurement. The general principle of IAS 39 is that financial
assets should be recognised at fair value and financial liabilities should be
recognised at amortised cost. Accounting for the movements in fair value is
dependent on the designation of the relevant financial instrument and whether
hedge accounting is applied. Under the transitional rules of IFRS 1, Croda will
adopt IAS 32 and IAS 39 with effect from 1 January 2005.
These standards could impact Croda in the following areas:
(i) Transactional hedging
Croda uses short term forward foreign currency contracts to hedge transaction
exposures where appropriate. A documentation process has been put in place from
1 January 2005 which should enable Croda to qualify for hedge accounting.
However, at 30 June 2004 and 31 December 2004 the fair value of such contracts
was immaterial and therefore there would have been no adjustment to the reported
results in applying IAS 39 for transactional hedging.
(ii) Interest rate hedging
Croda manages its interest rate portfolio by utilising interest rate swaps where
appropriate. At present Croda has one such instrument to swap a portion of its
fixed rate US Dollar debt to a floating rate of interest. This hedging
instrument is designated as a fair value hedge of the exposure to changes in the
fair value of the fixed rate debt as interest rates change. Once classified as a
hedge, changes in the fair value of the hedged and hedging item should offset
each other and thus have no net effect on the income statement. IFRS requires
formal documentation of the hedge and regular monitoring to ensure that the
hedge is effective for hedge accounting to be available.
(iii) Embedded derivatives
Embedded derivatives arise in loan instruments, leases or commercial contracts
that incorporate either implicit or explicit terms that behave like a
derivative. Where a contract includes an embedded derivative which is not
closely related to the host contract, the derivative element must be accounted
for separately from the host contract.
Croda has reviewed material contracts for evidence of such embedded derivatives
and there are no instances which would have required restatement of previously
reported results had IAS 32 and IAS 39 been required to be applied.
(e) IAS 38 Intangible Assets
Under IAS 38 Croda is required to recognise certain expenditure as an intangible
asset subject to certain specified criteria being met. The Group's policy under
UK GAAP in respect of research and development expenditure was to expense such
costs. Under IAS 38, research and development expenditure must be divided
between separate research and development phases, with research covering costs
incurred in gaining new scientific or technical knowledge, such cost being
expensed, whilst development costs are those incurred in applying this
knowledge, such costs being capitalised.
To qualify as development expenditure there are a number of criteria the
expenditure must satisfy, covering the nature of the costs and the likelihood of
specific future benefits. Having reviewed the Group's R&D expenditure profile,
we are satisfied that none of our previous expenditure meets all the criteria,
notably those of being able to reliably measure the costs attributable to the
intangible asset and demonstrating the likelihood of future economic benefits
with sufficient certainty. Accordingly the Group is likely to continue to
expense all R&D expenditure.
(f) IAS 12 Income taxes
IAS 12 requires that deferred tax be provided in respect of revaluation gains on
non-monetary assets. Accordingly, a deferred tax provision has been established
in respect of the Group's revaluation reserve. Upon subsequent disposal of a
revalued property, the deferred tax provision relating to the revaluation
surplus on the disposed property is released to the profit and loss account.
Accordingly, the Group's discontinued operations' profit after tax is increased
by £0.1m in 2004, being the deferred tax provided under IAS 12 on the
revaluation gains of the Group properties disposed of in 2004.
In addition, the rules relating to the provision of deferred tax on inter
company profit on stock are different under IAS 12, in that deferred tax should
be provided at the receiving company's tax rate not, as is the case under UK
GAAP, the supplying company's rate. In total, this change reduces the Group's
tax charge by £0.1m in 2004.
The Group's deferred tax liability at 31 December 2004 is increased by a net
£2.8m as a result of the above and the inclusion of a £1m deferred tax provision
in relation to unremitted earnings of overseas subsidiaries.
As a consequence of the changes brought about by the implementation of IAS 19 as
discussed at (b) above, and the requirement under IAS 12 that deferred tax
assets and liabilities be shown separately on the face of the balance sheet, the
Group's balance sheet under IFRS includes a significant deferred tax asset
balance, £34.1m at 31 December 2004.
(g) IAS 14 Segmental Reporting
In future Croda will no longer use its previous Oleochemicals and Other segments
but will instead analyse the business between those of Consumer Care and
Industrial Specialities. In the light of IFRS we reviewed our reporting and
concluded that the new segments should reflect risk and return profiles in the
long term. For a number of years we have analysed the turnover of the Group into
markets of Personal and Health Care, Home Care and Plastics Additives,
Industrial Specialities, and Other. The Consumer Care segment combines the
Personal, Health and Home Care markets. All other markets comprise the
Industrial Specialities segment.
(h) IAS 10 Events after the balance sheet date
Under IAS 10, if dividends are declared after the balance sheet date, the
dividends are not recognised as a liability at the balance sheet date. In
addition, given that interim dividends are approved only by resolution of the
board, and are thus revocable and discretionary, such interim dividends should
only be recognised when paid. In summary, dividends on equity instruments should
thus be recognised as liabilities as follows:
• Final dividends - when authorised in general meeting by shareholders.
• Interim dividends - when paid.
The Group's net assets at 31 December 2004 are increased by £16.3m as a result
of adding back the 2004 final dividend not authorised until after the year end
and the 2004 interim dividend not paid until after the year end.
(i) IAS 18 Revenue
IAS 18 provides more specific guidance than was previously available under UK
GAAP for revenue recognition. One of the standard's five conditions for revenue
to be recognised is that the significant risks and rewards of ownership have
been transferred to the buyer. The main potential impact of this on Croda is in
respect of goods awaiting shipment where the insurance risk remains with the
Group. Although the goods have left Croda premises, there remains with Croda a
significant risk and accordingly the sale cannot be recognised until the
significant risk is no longer with the Group. The above has no impact on
reported results for 2004.
(j) IAS 17 Leases
IAS 17 provides for a more qualitative assessment than UK GAAP of whether a
lease arrangement qualifies as a finance lease. The Group has reviewed all
significant lease agreements and one such agreement has been reclassified as a
finance lease under IFRS. This reclassification has no significant impact on
reported profits for 2004, but both fixed assets and net debt increase as a
consequence of the restatement (by £0.3m and £0.4m respectively).
(k) IAS 33 Earnings per share (EPS)
IAS 33 requires disclosure on the face of a published IFRS income statement of
basic and diluted EPS for the total Group and separately for continuing
operations, the disclosure of continuing operations' EPS was not required under
UK GAAP. The summary income statement below includes continuing operations' EPS
for 2004.
Other disclosure changes
IAS 1 'Presentation of financial statements' defines the presentational
requirements for published financial statements prepared under IFRS. In most
respects the requirements are in line with UK GAAP, with primary statements
covering profit and loss, balance sheet, cashflow and changes in equity.
However, there are some items which are mandatory on the face of IFRS primary
statements which have not been previously separately disclosed under UK GAAP.
These requirements give rise to the 'reclassify' column on the income statement
and balance sheet reconciliations which are, in summary:
• Associate's profit - under IFRS the Group's share of associate's profit as
disclosed on the face of the income statement must be shown net of tax,
under UK GAAP the Group's share of operating profit and tax were shown
separately. As a consequence, Group operating profit and tax charge for the
year ended December 2004 are both reduced by £0.8m.
• Deferred tax - assets and liabilities must be disclosed separately to each
other and distinct from provisions. Therefore, before any of the adjustments
discussed above, provisions at 31 December 2004 are reduced by the net UK
GAAP deferred tax provision of £20.4m, this balance is then disclosed as a
liability of £23.3m and a separate asset of £2.9m.
• Current liabilities - financial liabilities and current taxation
liabilities must be separately disclosed on the face of the IFRS balance
sheet. Therefore, at 31 December 2004, current financial liabilities of
£15.5m, non-current financial liabilities of £31.7m and current taxation
liabilities of £4.8m are separated from other liabilities.
• Retirement benefit obligations - all obligations, whether UK or overseas,
are disclosed as retirement benefit obligations on the face of the balance
sheet. Accordingly, at 31 December 2004, £3.1m previously disclosed under
accruals in respect of overseas pension provision is reclassified as a
retirement benefit obligation.
• Assets classified as held for sale - IFRS 5 specifies that any non-current
asset whose carrying value will be recovered through a sale transaction as
opposed to continuing use should be reclassified as a current asset 'held
for sale' subject to certain criteria covering the availability of the asset
for sale and the likelihood of the sale. During the first half of 2004, the
Group disposed of a number of redundant properties which would have met the
criteria for reclassification as assets held for sale at the previous year
end. As a result, £0.7m, being the net book value of the properties at 31
December 2003, has been removed from property, plant and equipment at the
date of transition and reclassified as the value of assets held for sale
under current assets.
Further presentational changes to the income statement are required in respect
of discontinued operations. These are explained in detail in Appendix 2.
For completeness and to aid familiarisation we have also taken the opportunity
to present the cash flow, changes in equity, and recognised income and expense
statements in an IFRS format in Appendix 3.
Conclusion
The financial information included in this announcement has been prepared in
line with the principles outlined above. These principles are in line with
current IFRS pronouncements, however, as noted above, the current suite of IFRS
has yet to be fully endorsed by the EU. Accordingly, the financial information
should not be used as an indicator of future adjustments between UK GAAP and
IFRS due to the risk and uncertainty surrounding events in the standard setting
environment in the future.
That said, assuming the standards are endorsed, then the information provided
represents the best possible indication of the impact of IFRS on Croda's
reported results. Whilst the impact on the balance sheet is significant, largely
due to the inclusion of the pension fund deficit, it should be noted that the
impact on the income statement and on the Group's cash position is minimal and
that there is no impact whatsoever on the Group's underlying cashflows.
IFRS Financial Statements
Summarised Consolidated Income Statement
2004 2004
Unaudited £m First half Full year
Continuing operations
Turnover 146.5 291.1
Operating profit 23.5 47.1
Net finance costs (1.1) (1.9)
Profit before tax 22.4 45.2
Taxation (7.5) (15.2)
Profit after tax from continuing operations 14.9 30.0
Discontinued operations 0.5 0.7
Minority interest and preference dividends (0.2) (0.2)
Profit attributable to ordinary shareholders 15.2 30.5
Earnings per share Pence per share Pence per share
Basic
UK GAAP 8.7 20.1
IFRS - total 11.6 23.3
IFRS - continuing operations 11.3 22.8
Basic before exceptionals
UK GAAP 11.0 22.2
IFRS - total 11.2 22.8
IFRS - continuing operations 11.3 22.8
Diluted
UK GAAP 8.7 19.9
IFRS - total 11.6 23.1
IFRS - continuing operations 11.3 22.7
Diluted before exceptionals
UK GAAP 11.0 22.1
IFRS - total 11.2 22.6
IFRS - continuing operations 11.3 22.7
Segmental Information £m 2004 First half 2004 Full year
Turnover
Consumer Care 93.9 187.3
Industrial Specialities 52.6 103.8
146.5 291.1
Operating profit
Consumer Care 20.3 40.7
Industrial Specialities 3.2 6.4
23.5 47.1
IFRS Financial Statements (continued)
Summarised Consolidated Balance Sheet
June December
Unaudited £m 2004 2004
Assets
Non-current assets
Property, plant and equipment 130.1 127.4
Intangible assets 6.5 6.5
Investments 11.2 10.9
Deferred tax assets 32.4 34.1
180.2 178.9
Current assets
Inventories 52.1 52.0
Trade and other receivables 59.0 54.9
Cash and cash equivalents 28.2 32.4
139.3 139.3
Liabilities
Current liabilities
Trade and other payables (51.7) (42.1)
Borrowings and other financial liabilities (17.9) (15.9)
Current tax liabilities (6.1) (4.8)
(75.7) (62.8)
Net current assets 63.6 76.5
Non-current liabilities
Borrowings and other financial liabilities (30.6) (31.7)
Other payables (0.9) (0.9)
Provisions (14.0) (13.6)
Retirement benefit obligations (99.9) (104.1)
Deferred tax liabilities (13.9) (15.5)
(159.3) (165.8)
Net assets 84.5 89.6
Equity shareholders' funds 83.3 88.8
Minority interests 1.2 0.8
Total equity 84.5 89.6
Reconciliation of reported profits for the half year ended 30 June 2004
Unaudited £m 2004 Reclassify IAS 19 IFRS 2 IFRS 3 IAS 12 2004
First half Employee Share Business Income First half
as reported benefits based combinations taxes restated
under UK payments under IFRS
GAAP*
Continuing operations
Turnover 146.5 - - - - - 146.5
Operating profit 23.7 (0.5) 0.4 (0.3) 0.2 - 23.5
Net finance costs (1.2) - 0.1 - - - (1.1)
Profit before tax 22.5 (0.5) 0.5 (0.3) 0.2 - 22.4
Taxation (7.9) 0.5 (0.2) 0.1 - - (7.5)
Profit after tax from continuing 14.6 - 0.3 (0.2) 0.2 - 14.9
operations
Discontinued operations (3.0) - - - 3.4 0.1 0.5
Minority interest and preference (0.2) - - - - - (0.2)
dividends
Profit attributable to ordinary 11.4 - 0.3 (0.2) 3.6 0.1 15.2
shareholders
* the figures 'as reported under UK GAAP' have been reclassified from the UK
GAAP headings to give a format consistent with that required under IFRS.
Appendix 2 provides an explanation of these classification differences.
Reconciliation of reported profits for the year ended 31 December 2004
Unaudited £m 2004 Reclassify IAS 19 IFRS 2 IFRS 3 IAS 12 2004
Full year Employee Share Business Income Full year
as reported benefits based combination taxes restated
under UK payments under IFRS
GAAP*
Continuing operations
Turnover 291.1 - - - - - 291.1
Operating profit 47.3 (0.8) 0.8 (0.6) 0.4 - 47.1
Net finance costs (2.1) - 0.2 - - - (1.9)
Profit before tax 45.2 (0.8) 1.0 (0.6) 0.4 - 45.2
Taxation (15.9) 0.8 (0.4) 0.2 - 0.1 (15.2)
Profit after tax from continuing 29.3 - 0.6 (0.4) 0.4 0.1 30.0
operations
Discontinued operations (2.8) - - - 3.4 0.1 0.7
Minority interest and preference (0.2) - - - - - (0.2)
dividends
Profit attributable to ordinary 26.3 - 0.6 (0.4) 3.8 0.2 30.5
shareholders
* the figures 'as reported under UK GAAP' have been reclassified from the UK
GAAP headings to give a format consistent with that required under IFRS.
Appendix 2 provides an explanation of these classification differences.
Reconciliation of opening IFRS balance sheet
Unaudited £m 2003 Reclassify IAS 19 IFRS 2 IFRS 3 IAS 12 IAS 10 IAS 17 2003
year end year end
as Employee Share based Business Income Post Leases as
reported benefits payments combinations taxes balance reported
under UK sheet under
GAAP events IFRS
Assets
Non-current assets
Property, plant and 132.9 (0.7) - - - - - 0.4 132.6
equipment
Intangible assets 6.5 - - - - - - - 6.5
Investments 10.9 - - - - - - - 10.9
Deferred tax assets - 2.8 29.6 0.1 - - - - 32.5
150.3 2.1 29.6 0.1 - - - 0.4 182.5
Current assets
Inventories 51.8 - - - - - - - 51.8
Trade and other 57.3 - - - - - - - 57.3
receivables
Cash and cash equivalents 27.8 - - - - - - - 27.8
Assets classified as held - 0.7 - - - - - - 0.7
for sale
136.9 0.7 - - - - - - 137.6
Liabilities
Current liabilities
Trade and other payables (86.9) 29.0 - (0.2) - - 15.5 - (42.6)
Borrowings and other - (20.1) - - - - - (0.5) (20.6)
financial liabilities
Current tax liabilities - (5.2) - - - - - - (5.2)
(86.9) 3.7 - (0.2) - - 15.5 (0.5) (68.4)
Net current assets 50.0 4.4 - (0.2) - - 15.5 (0.5) 69.2
Non-current liabilities
Borrowings and other - (36.7) - - - - - - (36.7)
financial
liabilities
Other payables (37.6) 36.7 - - - - - - (0.9)
Provisions (32.2) 18.2 - - - - - - (14.0)
Retirement benefit 33.1 (3.7) (130.2) - - - - - (100.8)
obligations
Deferred tax liabilities - (21.0) 10.0 - - (3.0) - - (14.0)
(36.7) (6.5) (120.2) - - (3.0) - - (166.4)
Net assets 163.6 - (90.6) (0.1) - (3.0) 15.5 (0.1) 85.3
Equity shareholders' 162.4 - (90.6) (0.1) - (3.0) 15.5 (0.1) 84.1
funds
Minority interests 1.2 - - - - - - - 1.2
Total equity 163.6 - (90.6) (0.1) - (3.0) 15.5 (0.1) 85.3
Reconciliation of balance sheet at 30 June 2004
Unaudited £m June Reclassify IAS 19 IFRS 2 IFRS 3 IAS 12 IAS 10 IAS 17 June
2004 as 2004 as
reported Employee Share based Business Income Post Leases reported
under UK benefits payments combinations taxes balance under
GAAP sheet IFRS
events
Assets
Non-current assets
Property, plant and 129.7 - - - - - - 0.4 130.1
equipment
Intangible assets 6.3 - - - 0.2 - - - 6.5
Investments 11.2 - - - - - - - 11.2
Deferred tax assets - 2.8 29.4 0.2 - - - - 32.4
147.2 2.8 29.4 0.2 0.2 - - 0.4 180.2
Current assets
Inventories 52.1 - - - - - - - 52.1
Trade and other 59.0 - - - - - - - 59.0
receivables
Cash and cash equivalents 28.2 - - - - - - - 28.2
139.3 - - - - - - - 139.3
Liabilities
Current liabilities
Trade and other payables (83.9) 27.2 - (0.4) - - 5.4 - (51.7)
Borrowings and other - (17.4) - - - - - (0.5) (17.9)
financial
liabilities
Current tax liabilities - (6.1) - - - - - - (6.1)
(83.9) 3.7 - (0.4) - - 5.4 (0.5) (75.7)
Net current assets 55.4 3.7 - (0.4) - - 5.4 (0.5) 63.6
Non-current liabilities
Borrowings and other - (30.6) - - - - - - (30.6)
financial liabilities
Other payables (31.5) 30.6 - - - - - - (0.9)
Provisions (32.2) 18.2 - - - - - - (14.0)
Retirement benefit 33.5 (3.7) (129.7) - - - - - (99.9)
obligations
Deferred tax liabilities - (21.0) 10.0 - - (2.9) - - (13.9)
(30.2) (6.5) (119.7) - - (2.9) - - (159.3)
Net assets 172.4 - (90.3) (0.2) 0.2 (2.9) 5.4 (0.1) 84.5
Equity shareholders' 171.2 - (90.3) (0.2) 0.2 (2.9) 5.4 (0.1) 83.3
funds
Minority interests 1.2 - - - - - - - 1.2
Total equity 172.4 - (90.3) (0.2) 0.2 (2.9) 5.4 (0.1) 84.5
Reconciliation of balance sheet at 31 December 2004
Unaudited £m 2004 year Reclassify IAS 19 IFRS 2 IFRS 3 IAS 12 IAS 10 IAS 17 2004
end as year end
reported Employee Share Business Income Post Leases as
under UK benefits based combinations taxes balance reported
GAAP payments sheet under
events IFRS
Assets
Non-current assets
Property, plant and 127.1 - - - - - - 0.3 127.4
equipment
Intangible assets 6.1 - - - 0.4 - - - 6.5
Investments 10.9 - - - - - - - 10.9
Deferred tax assets - 2.9 30.8 0.3 - 0.1 - - 34.1
144.1 2.9 30.8 0.3 0.4 0.1 - 0.3 178.9
Current assets
Inventories 52.0 - - - - - - - 52.0
Trade and other 54.9 - - - - - - - 54.9
receivables
Cash and cash equivalents 32.4 - - - - - - - 32.4
139.3 - - - - - - - 139.3
Liabilities
Current liabilities
Trade and other payables (81.5) 23.4 - (0.3) - - 16.3 - (42.1)
Borrowings and other financial - (15.5) - - - - - (0.4) (15.9)
liabilities
Current tax liabilities - (4.8) - - - - - - (4.8)
(81.5) 3.1 - (0.3) - - 16.3 (0.4) (62.8)
Net current assets 57.8 3.1 - (0.3) - - 16.3 (0.4) 76.5
Non-current liabilities
Borrowings and other - (31.7) - - - - - - (31.7)
financial liabilities
Other payables (32.6) 31.7 - - - - - - (0.9)
Provisions (34.0) 20.4 - - - - - - (13.6)
Retirement benefit 35.6 (3.1) (136.6) - - - - - (104.1)
obligations
Deferred tax liabilities - (23.3) 10.7 - - (2.9) - - (15.5)
(31.0) (6.0) (125.9) - - (2.9) - - (165.8)
Net assets 170.9 - (95.1) - 0.4 (2.8) 16.3 (0.1) 89.6
Equity shareholders' 170.1 - (95.1) - 0.4 (2.8) 16.3 (0.1) 88.8
funds
Minority interests 0.8 - - - - - - - 0.8
Total equity 170.9 - (95.1) - 0.4 (2.8) 16.3 (0.1) 89.6
Appendix 1
Croda International Plc IFRS Accounting Policies
Appendix 1 provides a summary of Croda's new Group accounting policies under
IFRS. Where policies have changed under IFRS, this is indicated by an asterisk.
Accounting Policies
Basis of accounting
As set out in the Basis of Preparation, the restated financial information for
the half year to 30 June 2004, the full year to 31 December 2004 and the opening
balance sheet at 1 January 2004, have been prepared in accordance with
International Accounting Standards (IAS) and International Financial Reporting
Standards (IFRS) issued by the International Accounting Standards Board (IASB).
The accounting policies assume that all existing standards in issue from the
IASB will be fully endorsed by the EU.
Early adoption of standards
In 2005, the Group has early adopted the amended version of IAS 19 'Employee
Benefits' issued by the IASB in December 2004. The early adoption enables the
Group to recognise actuarial gains and losses in respect of its defined benefit
pension plans immediately in full in the statement of recognised income and
expense. This approach is in line with UK GAAP under FRS 17 and will be applied
to all published figures commencing with the 2005 Interim Report.
Group accounts
Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the Group
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 are presently exercisable or convertible
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.
Associates
Associated undertakings are those companies in which the Group has a beneficial
interest of between 20% and 50% in the equity capital and where the Group
exercises significant influence over commercial and financial policy decisions.
The consolidated income statement includes the Group's share of post-acquisition
profits, the consolidated statement of recognised income and expense includes
the Group's share of other recognised gains and losses, and the consolidated
balance sheet includes the Group's share of the underlying net tangible assets
of associated undertakings.
Intangible assets*
Goodwill*
On the acquisition of a business, fair values are attributed to the net assets
acquired. Goodwill arises where the fair value of the consideration given for a
business exceeds such net assets. Goodwill arising on acquisitions is
capitalised and subject to impairment review, both annually and when there are
indications that the carrying value may not be recoverable. Goodwill is
allocated to income generating units for the purpose of this impairment testing.
Goodwill arising on acquisitions after 31 December 1997 and prior to 1 January
2004 was amortised over its estimated useful life; such amortisation ceased on
31 December 2003. Goodwill arising on acquisitions made prior to 31 December
1997 was written off directly to reserves in the year of acquisition, as a
matter of accounting policy, and under IFRS 1 and IFRS 3 such goodwill will
remain eliminated against reserves and will not be written back to the profit
and loss account in the event of disposal.
Research and development*
Research expenditure, undertaken with the prospect of gaining new scientific or
technical knowledge and understanding, is charged to income in the year in which
it is incurred. Internal development expenditure, whereby research findings are
applied to a plan for the production of new or substantially improved products
or processes, is charged to income in the year in which it is incurred unless it
meets the recognition criteria of IAS 38 'Intangible Assets'. Measurement and
other uncertainties generally mean that such criteria are not met. Where,
however, the recognition criteria are met, intangible assets are capitalised and
amortised over their useful economic lives from product launch. Intangible
assets relating to products in development are subject to impairment testing at
each balance sheet date or earlier upon indication of impairment. Any impairment
losses are written off immediately to income.
Computer software
Acquired computer software licences covering a period of greater than one year
are capitalised on the basis of the costs incurred to acquire and bring to use
the specific software. These costs are amortised over their estimated useful
lives (three to five years).
Revenue recognition*
Sales of goods
Turnover comprises the fair value for the sale of goods, excludes inter-company
sales and value-added taxes and represents net invoice value less estimated
rebates, returns and settlement discounts. Group sales are recognised as
turnover in the period in which the significant risks and rewards of ownership
have been transferred to a third party.
Interest and dividend income
Interest income is recognised on a time-proportion basis using the effective
interest method.
Dividend income is recognised when the right to receive payment is established.
Employee Benefits*
Pension obligations
The Group accounts for pensions and similar benefits under IAS 19 'Employee
Benefits'. In respect of defined benefit plans (pension plans that define an
amount of pension benefit that an employee will receive on retirement, usually
dependent on one or more factors such as age, years of service and
compensation), obligations are measured at discounted present value whilst plan
assets are recorded at fair value. The liability recognised in the balance sheet
in respect of defined benefit pension plans is the net of the plan obligations
and assets. No allowance is made in the past service liability in respect of
either the future expenses of running the schemes or for non-service related
death in service benefits which may arise in the future. The operating and
financing costs of such plans are recognised separately in the income statement;
service costs are spread systematically over the lives of employees and
financing costs are recognised in the periods in which they arise. Actuarial
gains and losses are recognised immediately in the statement of recognised
income and expense. Payments to defined contribution schemes (pension plans
under which the Group pays fixed contributions into a separate entity) are
charged as an expense as they fall due.
Other post-retirement benefits
Some Group companies provide post-retirement healthcare benefits to their
retirees. The entitlement to these benefits is usually conditional on the
employee remaining in service up to retirement age and the completion of a
minimum service period. The expected costs of these benefits are accrued over
the period of employment using an accounting methodology similar to that for
defined benefit pension plans. Actuarial gains and losses are recognised
immediately in the statement of recognised income and expense. These obligations
are valued annually by independent qualified actuaries.
Share based payments*
The fair value of employee share option plans is calculated using the
Black-Scholes or binomial model as appropriate. In accordance with IFRS 2
'Share-based Payments' the resulting cost is charged to the income statement
over the vesting period of the options. The value of the charge is adjusted to
reflect expected and actual levels of options vesting as the Group does not use
market-based performance criteria.
Currency translations
Functional and presentation currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates ('the functional currency'). The consolidated financial
statements are presented in sterling, which is the Company's functional and
presentation currency.
Transactions and balances
Assets and liabilities are translated at the exchange rates ruling at the end of
the financial period. Exchange profits or losses on trading transactions are
included in the Group income statement except when deferred in equity as
qualifying cash flow hedges and qualifying net investment hedges, which, along
with other exchange differences arising from non-trading items are dealt with
through reserves.
Currency translations (continued)
Group companies
The results and financial position of all the Group entities that have a
functional currency different from the presentation currency are translated into
the presentation currency as follows:
(i) assets and liabilities for each balance sheet presented are translated at
the closing rate at the date of that balance sheet;
(ii) income and expenses for each income statement are translated at average
exchange rates
(unless this average is not a reasonable approximation of the cumulative effect
of the rates prevailing on the transaction dates, in which case income and
expenses are translated at the dates of the transactions); and
(iii) all resulting exchange differences are recognised as a separate component
of equity.
On consolidation, exchange differences arising from the translation of the net
investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to shareholders' equity.
When a foreign operation is sold, such exchange differences are recognised in
the income statement as part of the gain or loss on sale.
Taxation*
The charge for taxation is based on the profits for the year and takes into
account taxation deferred because of temporary differences between the treatment
of certain items for taxation and for accounting purposes. Temporary differences
arise from the inclusion of profits and losses in the accounts in different
periods from which they are recognised in tax assessments and primarily arise as
a result of the difference between tax allowances on tangible fixed assets and
the corresponding depreciation charge, and upon the pension fund deficit. Full
provision is made for the tax effects of these differences. No provision is made
for unremitted earnings of foreign subsidiaries where there is no commitment to
remit such earnings. Similarly, no provision is made for temporary differences
relating to investments in subsidiaries since realisation of such differences
can be controlled and is not probable in the foreseeable future.
Tangible fixed assets
The Group's policy is to write off the difference between the cost of all
tangible fixed assets, except freehold land, and their residual value on a
straight line basis over their estimated useful lives. Reviews are made annually
of the estimated remaining lives and residual values of individual productive
assets, taking account of commercial and technological obsolescence as well as
normal wear and tear, and adjustments are made where appropriate. Under this
policy it becomes impractical to calculate average assets lives exactly.
However, the total lives range from approximately 15 to 40 years for buildings,
and 3 to 15 years for plant and equipment. All tangible fixed assets are
reviewed for impairment when there are indications that the carrying value may
not be recoverable.
Leases
Assets acquired under finance leases are included in the balance sheet under
tangible fixed assets at an amount reflecting the fair value of the asset and
are depreciated over the shorter of the lease terms and their estimated useful
lives as above. The capital element of future lease rentals is included in
creditors. Finance charges are allocated to the profit and loss account each
year in proportion to the capital element outstanding. The cost of operating
leases is charged to the profit and loss account as incurred.
Derivative financial instruments*
The Group uses derivative financial instruments to hedge its exposure to
interest rates and short-term currency rate fluctuations. Financial instruments
are recorded initially at cost. Subsequent measurement depends on the
designation of the instrument as either: (i) a hedge of the fair value of
recognised assets or liabilities or a firm commitment (fair value hedge); or
(ii) a hedge of highly probable forecast transactions (cash flow hedge);
(i) Fair value hedge
Changes in the fair value of derivatives, for example interest rate swaps and
foreign exchange contracts, that are designated and qualify as fair value hedges
are recorded in the income statement, together with any changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk.
(ii) Cash flow hedge
The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges are recognised in equity. The gain or
loss relating to the ineffective portion is recognised immediately in the income
statement. Amounts accumulated in equity are recycled in the income statement in
the periods when the hedged item will affect profit or loss (for instance when
the forecast sale that is hedged takes place). However, when the forecast
transaction that is hedged results in the recognition of a non-financial asset
(for example, inventory) or a liability, the gains and losses previously
deferred in equity are transferred from equity and included in the initial
measurement of the cost of the asset or liability. When a hedging instrument
expires or is sold, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss existing in equity at that time remains
in equity and is recognised when the forecast transaction is ultimately
recognised in the income statement. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was reported in equity is
immediately transferred to the income statement.
Certain derivative instruments do not qualify for hedge accounting. Changes in
the fair value of any derivative instruments that do not qualify for hedge
accounting are recognised immediately in the income statement.
Inventories
Stocks are stated at the lower of cost and net realisable amount on a first in
first out basis. Cost comprises all expenditure, including related production
overheads, incurred in the normal course of business in bringing the stock to
its location and condition at the balance sheet date. Net realisable amount is
the estimated selling price in the ordinary course of business less any
applicable variable selling costs. Provision is made for obsolete, slow moving
and defective stock where appropriate. Profits arising on intra Group sales are
eliminated in so far as the product remains in Group stock at the year end.
Environmental provisions
The Group is exposed to environmental liabilities relating to its operations.
Provisions are made immediately where a constructive or legal obligation is
identified, can be quantified and it is regarded as more likely than not that an
outflow of resources will be required to settle the obligation.
Investment in own shares
Employee Share Ownership Trusts
Shares acquired by the Trustees, funded by the Company and held for the
continuing benefit of the Company are shown as a reduction in shareholders'
funds. Movements in the year arising from additional purchases by the Trustees
of shares or the receipt of funds due to the exercise of options by employees
are accounted for within reserves and shown as a movement in shareholders' funds
in the year. Administration expenses of the trusts are charged to the Company's
profit and loss account as incurred.
Treasury shares
Where any Group company purchases the Company's equity share capital as Treasury
shares, the consideration paid, including any directly attributable incremental
costs (net of income taxes) is deducted from equity attributable to the
Company's equity holders until the shares are cancelled, reissued or disposed
of. Where such shares are subsequently sold or reissued, any consideration
received, net of any directly attributable incremental transaction costs and the
related income tax effects, is included in equity attributable to the Company's
equity holders.
IFRS transitional arrangements
When preparing the Group's IFRS balance sheet at 1 January 2004, the date of
transition, the following optional exemptions from full retrospective
application of IFRS accounting policies have been adopted:
• Business combinations - the provisions of IFRS 3 have been applied
prospectively from 1 January 2004
• Financial instruments - the Group has taken the exemption not to
restate comparative information with respect to IAS 32 and IAS 39
• Cumulative translation differences - the Group has taken the exemption
allowing all cumulative translation differences for all foreign operations to be
set to zero at the transition date.
Appendix 2
Reconciliation of results previously disclosed in UK GAAP format to IFRS format
Discontinued operations
£m 2004 first half 2004 full year
Continuing Discontinued Total Continuing Discontinued Total
Turnover 146.5 2.9 149.4 291.1 3.3 294.4
Operating profit 23.7 (0.2) 23.5 47.3 (0.2) 47.1
Exceptional items - (2.5) (2.5) - (3.3) (3.3)
Net interest payable (1.2) - (1.2) (2.1) - (2.1)
Profit before tax 22.5 (2.7) 19.8 45.2 (3.5) 41.7
Taxation (7.9) (0.3) (8.2) (15.9) 0.7 (15.2)
Profit after tax 14.6 (3.0) 11.6 29.3 (2.8) 26.5
Minority interests and preference (0.2) (0.2)
dividends
Profit attributable to ordinary shareholders 11.4 26.3
The above table summarises Croda's results as disclosed under UK GAAP in the
unaudited 2004 interim report for the half year ending 30 June 2004 and in the
audited financial statements for the year ending 31 December 2004.
With the exception of the analysis of the taxation charge between continuing and
discontinued operations (shown in italics above) all of the above figures were
disclosed on the face of the Group profit and loss account in the relevant
published document.
IAS 1 'Presentation of financial statements' defines the formatting requirements
for financial statements prepared under IFRS and stipulates that the results of
discontinued operations, shown as a separate column with entries down to
operating profit under UK GAAP, must be disclosed under IFRS as a single line
item representing discontinued operations' profit after tax. Accordingly, the
discontinued operations' losses shown above of £3.0m for the half year and £2.8m
for the full year are disclosed as separate line items on the relevant profit
reconciliations.
Appendix 3
Reconciliation of reported cash flows for the year ended 31 December 2004
2004 Reclassify IAS 19 IFRS 2 IFRS 3 IAS 12 2004
Full year Employee Share based Business Income Full year
as benefits payments combinations taxes restated
reported under
under UK
GAAP IFRS
Unaudited £m
Cash flows from operating
activities
Profit before tax and exceptionals 45.0 (45.0) - - - - -
Profit before tax for continuing - 44.4 1.0 (0.6) 0.4 - 45.2
operations
Discontinued operations - (4.2) - - 3.4 0.1 (0.7)
Net financing cost 2.1 - (0.2) - - - 1.9
Depreciation and loss on disposal 14.5 - - - - - 14.5
of fixed assets
Goodwill amortisation 0.4 - - - (0.4) - -
Share based payments non cash - - - 0.4 - 0.4
movements
Profit on business and surplus - 3.3 - - (3.4) - (0.1)
asset disposals
Changes in working capital (1.2) - 0.5 - - - (0.7)
Pension fund prepayment (2.5) - 2.5 - - - 0.0
Pension fund contributions in - - (3.8) - - - (3.8)
excess of service cost
Share of profit of associated (2.6) 0.8 - - - - (1.8)
undertaking
Dividend received from associated 1.9 1.9
undertaking
Discontinued operations tax - 0.7 - - - (0.1) 0.6
Cash generated from operations 57.6 - - (0.2) - - 57.4
Interest paid (3.4) (3.4)
Tax paid (12.5) (12.5)
Net cash from operating activities 41.7 41.5
Cash inflows from investing
activities
Purchases of property, plant and (14.9) (14.9)
Equipment
Proceeds from sale of property, 1.3 1.3
plant
and equipment
Proceeds from sale of businesses 4.6 4.6
(net
of costs)
Interest received 1.1 1.1
Net cash used in investing (7.9) (7.9)
activities
Cash flows from financing
activities
Repayment of borrowings (3.3) - (3.3)
Net purchases of own shares (4.9) 0.2 (4.7)
Dividends paid to equity (15.5) - (15.5)
shareholders
Dividends paid to preference (0.1) - (0.1)
Shareholders
Dividends paid to minority (0.4) - (0.4)
shareholders
Net cash used in financing (24.2) 0.2 (24.0)
activities
Net increase in cash and cash 9.6 9.6
Equivalents
Cash and cash equivalents at 1 8.5 8.5
January
2004
Exchange differences (0.6) (0.6)
Cash and cash equivalents at 31 17.5 17.5
December 2004
Cash and cash equivalents at 31 December 2004
comprise
Cash at bank and in hand 32.4 32.4
Bank overdrafts (14.9) (14.9)
17.5 17.5
Appendix 3 (continued)
Reconciliation of changes in shareholders' equity for the year ended 31 December
2004
2004 IAS 19 IFRS 2 IFRS 3 IAS 12 IAS 10 IAS 17 2004
Full year Employee Share based Business Income Post Leases Full
benefits payments Combinations taxes balance year
as reported sheet restated
under UK events under
GAAP IFRS
Unaudited £m
At 1 January 2004 162.4 (90.6) (0.1) - (3.0) 15.5 (0.1) 84.1
Exchange differences (0.8) 0.1 - - - - - (0.7)
Actuarial movement on - (7.8) - - - - - (7.8)
retirement benefit
obligations
Deferred tax on actuarial
movement on retirement
benefit obligations - 2.6 - - - - - 2.6
Share based payments - - 0.3 - - - - 0.3
Total movement recognised (0.8) (5.1) 0.3 - - - - (5.6)
directly in shareholders'
equity
Profit attributable to 26.3 0.6 (0.4) 3.8 0.2 - - 30.5
ordinary shareholders
Transactions in own shares (4.9) - 0.2 - - - - (4.7)
Ordinary dividends on (16.3) - - - - 0.8 - (15.5)
equity shares
Goodwill in reserves 3.4 - - (3.4) - - - -
written back
At 31 December 2004 170.1 (95.1) - 0.4 (2.8) 16.3 (0.1) 88.8
Reconciliation of consolidated statement of recognised income and expense for
the year ended 31 December 2004
2004 IAS 19 IFRS 2 IFRS 3 IAS 12 2004
Full year as Employee Share based Business Income Full
reported benefits payments combinations taxes year
under UK restated
GAAP under
IFRS
Unaudited £m
Profit attributable to ordinary 26.3 0.6 (0.4) 3.8 0.2 30.5
shareholders
Exchange differences (0.8) 0.1 - - - (0.7)
Actuarial movement on retirement benefit - (7.8) - - - (7.8)
Obligations
Deferred tax on actuarial movement on - 2.6 - - - 2.6
retirement benefit obligations
Total recognised income and expense for 25.5 (4.5) (0.4) 3.8 0.2 24.6
the period
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