IFRS Transition
Intermediate Capital Group PLC
16 September 2005
INTERMEDIATE CAPITAL GROUP PLC
TRANSITIONAL STATEMENT TO INTERNATIONAL
FINANCIAL REPORTING STANDARDS
For further details please contact:
John Curtis, ICG 020 7628 9898
Paul Piper, ICG 020 7628 9898
CONTENTS
Page
number
Introduction
and Summary 3
SECTION 1 Results for the year to 31 January 2005 under IFRS, 5
excluding IAS
32 and 39
Statutory Consolidated Balance Sheet at 1 February 5
2004
prepared under IFRS
Statutory Consolidated Balance Sheet at 31 July 2004 6
prepared
under IFRS
Statutory Consolidated Balance Sheet at 31 January 7
2005
prepared under IFRS
Statutory Consolidated Income Statement at 31 July 2004 8
and 31
January 2005 prepared under IFRS
SECTION 2 IFRS restatement of the Balance Sheet at 1 February 9
2005
Reconciliation of UK GAAP reserves to Statutory IFRS 12
reserves
SECTION 3 Pro-forma Income Statement for the year to 31 January 13
2005 under
IFRS including IAS 32 and 39
SECTION 4 Key differences in accounting treatment between IFRS 16
and UK
GAAP
APPENDIX 1: Principal IFRS accounting policies 20
APPENDIX 2: Report of Independent Auditors 23
Introduction and Summary
This document sets out our approach to International Financial Reporting
Standards ('IFRS') and also explains the impact that the introduction of these
standards is expected to have on our results.
IFRS applies to the financial statements of all UK listed groups whose financial
year commences on or after 1 January 2005. We have a year-end of 31 January and
therefore the first financial statements that we need to prepare under IFRS will
be for the period commencing 1 February 2005, with the comparative figures for
the previous year being restated as necessary. Our interim results for the six
months to 31 July 2005 will also required to be prepared under IFRS, with a
restatement of the comparatives.
There are a number of changes that result:-
As with most other financial services businesses, we have not adopted IAS 32
'Financial Instruments: Disclosure and Presentation' ('IAS 32') and IAS 39
'Financial Instruments; Recognition and Measurement' ('IAS 39') for the year to
31 January 2005. However, had we adopted these standards for this period, our
unaudited proforma results would show an increase in Core Income of £1.4m and an
increase in Net Capital Gains of £10.1m (both these terms are defined on page
15).
These increases are primarily due to the earlier recognition of capital profits
and non-cash interest and from the valuation of certain financial instruments,
including warrants, shares and derivatives. The earlier recognition of capital
gains and non-cash interest is likely to lead to increased volatility in our
profits going forward.
Although, in the long term, there will be no change to the quantum of such
profits, we believe that this change in accounting policies is potentially less
prudent than those applied under UK GAAP. Such policies are addressed in more
detail in Section 4.
Our audited restated opening reserves at 1 February 2004 increase under IFRS by
£17m. This is primarily due to the exclusion of the dividends declared after the
balance sheet date.
Our audited restated statutory accounts for the year to 31 January 2005 show a
decrease in profits after tax of £0.5m. This is due to the expense relating to
fair valuing the unexercised share options.
The audited restated opening reserves at 1 February 2005, which includes the
adoption of IAS 32 and IAS 39 for the first time, show an increase of £40m. This
movement is detailed in the reconciliation of reserves on page 12.
IFRS restatements
Our opening balance sheet as at 1 February 2004 and our statutory results for
year ended 31 January 2005 are presented for the first time under IFRS in
Section 1, together with our statutory results for the six months ended 31 July
2004. This excludes IAS 32 and IAS 39 as we have, along with other financial
services businesses, elected to take advantage of the provisions of IFRS 1,
First-time Adoption of International Financial Reporting Standards, ('IFRS 1')
not to restate comparatives.
Section 2 contains the IFRS restatement of our opening balance sheet as at 1
February 2005, including the impact of adopting IAS 32 and IAS 39.
Section 3 contains our pro-forma income statement for the year to 31 January
2005. This has been prepared on the basis that IAS 32 and IAS 39 had been
applied throughout this period in order to provide a more meaningful comparison
of the full effects of IFRS, compared to the statutory results for the full year
2005.
Section 4 explains the key differences between UK GAAP and IFRS, as applicable
to ICG, and their impact on our financial statements.
The principle accounting policies that we expect to adopt under IFRS are
included in Appendix 1. The accounting policies and disclosures adopted in this
document reflect our view of the standards that will be in force for the period
commencing 1 February 2005, which may, of course, be subject to change.
SECTION 1
Results for the year to 31 January 2005, prepared under IFRS
Under the transitional rules, set out in IFRS 1, we are required to produce an
opening balance sheet as at 1 February 2004 and comparative balances for the
year to 31 January 2005 (as part of our 2006 Annual Report and Accounts) and the
six months to 31 July 2004 (as part of our interim results as at 31 July 2005).
The purpose of this section is to set out these comparative figures and how they
will be presented.
As we have taken advantage of the option not to apply IAS 32 and IAS 39 in the
comparative period, the impacts of IFRS are restricted to dividends and share
based payments as detailed on page 16.
Statutory Consolidated Balance Sheet as at 1 February 2004 - Restated Statutory
Comparatives (excluding IAS 32/39)
UK GAAP Effect of IFRS Notes
As at transition to As at
31 January IFRS (excl 1 February 2004
2004 IAS 32 and (Audited)
(Audited) IAS 39) £m
£m £m
Non current assets
Property, plant and 1.4 - 1.4
equipment
Financial assets; loans
and 1093.9 - 1093.9
Investments
Deferred tax assets - 1.0 1.0 1
Current assets
Trade and other 19.2 - 19.2
receivables
Financial assets; loans
and 27.5 - 27.5
Investments
Cash and cash equivalents 38.6 - 38.6
85.3 - 85.3
Total assets 1,180.6 1.0 1,181.6
Capital and reserves
Called up share capital 13.8 - 13.8
Share premium account 170.0 - 170.0
Capital redemption 1.4 - 1.4
reserve
Reserve for share based
payments - 0.2 0.2 1
Retained earnings 137.6 17.4 155.0 1, 2
Equity shareholders' 322.8 17.6 340.4
funds
Non current liabilities
Financial liabilities 730.0 730.0
Current Liabilities
Trade and other payables 51.2 (16.6) 34.6 2
Financial liabilities 61.2 61.2
Liabilities for current 15.4 15.4
tax
Total capital and 1,180.6 1.0 1,181.6
liabilities
Notes
1. Under UK GAAP no charge has been made to profit for the cost of share
options, as ICG grants all such options at the then ruling market price. IFRS 2
requires the fair value of share option awards to be expensed in the income
statement over the vesting period of the options, with a corresponding amount
recorded in the 'Reserve for share-based payments'. A deferred tax asset has
been recognised for the future tax deductions in respect of share awards.
2. Under UK GAAP, dividends are recorded in the year to which they relate. IAS
10 requires that dividends are recorded in the year that they are declared.
Statutory Consolidated Balance Sheet as at 31 July 2004 - Restated Statutory
Comparatives (excluding IAS 32/39)
UK GAAP Effect of IFRS Notes
As at transition to As at
31 July 04 IFRS (excl. 31July 04
(Unaudited) IAS 32 and (Unaudited)
£m IAS 39) £m
£m
Non current assets
Property, plant and 1.3 - 1.3
equipment
Financial assets; loans and
Investments 1,033.5 - 1,033.5
Deferred tax assets - 0.9 0.9 1
Current assets
Trade and other receivables 25.5 - 25.5
Financial assets; loans and
Investments 1.4 - 1.4
Cash and cash equivalents 83.3 - 83.3
110.2 - 110.2
Total assets 1,145.0 0.9 1,145.9
Capital and reserves
Called up share capital 13.9 - 13.9
Share premium account 172.4 - 172.4
Capital redemption reserve 1.4 - 1.4
Reserve for share based - 0.5 0.5 1
payments
Retained earnings 157.0 8.6 165.6 1, 2
Equity shareholders' funds 344.7 9.1 353.8
Non current liabilities
Financial liabilities 649.3 - 649.3
Current liabilities
Trade and other payables 65.1 (8.2) 56.9 2
Financial liabilities 69.1 - 69.1
Liabilities for current tax 16.8 - 16.8
Total capital and 1,145.0 0.9 1,145.9
liabilities
Notes
1. Under UK GAAP no charge has been made to profit for the cost of share
options, as ICG grants all such options at the then ruling market price. IFRS 2
requires the fair value of share option awards to be expensed in the income
statement over the vesting period of the options, with a corresponding amount
recorded in the 'Reserve for share-based payments'. A deferred tax asset has
been recognised for the future tax deductions in respect of share awards.
2. Under UK GAAP, dividends are recorded in the year to which they relate. IAS
10 requires that dividends are recorded in the year that they are declared.
Statutory Consolidated Balance Sheet as at 31 January 2005 - Restated Statutory
Comparatives (excluding IAS 32/39)
UK GAAP Effect of IFRS Notes
As at transition to As at
31 January IFRS (excl 31 January
05 IAS 32 and 05
(Audited) IAS 39) (Audited)
£m £m £m
Non current assets
Property, plant and equipment 1.3 - 1.3
Financial assets; loans and
Investments 1,182.8 - 1,182.8
Deferred tax assets 0.8 0.8 1
Current assets
Trade and other receivables 20.2 - 20.2
Financial assets; loans and
Investments 40.9 - 40.9
Cash and cash equivalents 55.6 - 55.6
116.7 - 116.7
Total assets 1,300.8 0.8 1,301.6
Capital and reserves
Called up share capital 13.9 - 13.9
Share premium account 172.5 - 172.5
Capital redemption reserve 1.4 - 1.4
Reserve for share based - 0.7 0.7 1
payments
Retained earnings 171.7 19.7 191.4 1, 2
Equity shareholders' funds 359.5 20.4 379.9
Non current liabilities
Financial liabilities 711.4 - 711.4
Current Liabilities
Trade and other payables 78.5 (19.6) 58.9 2
Financial liabilities 131.5 - 131.5
Liabilities for current tax 19.9 19.9
Total capital and liabilities 1,300.8 0.8 1,301.6
Notes
1. Under UK GAAP no charge has been made to profit for the cost of share
options, as ICG grants all such options at the then ruling market price. IFRS 2
requires the fair value of share option awards to be expensed in the income
statement over the vesting period of the options, with a corresponding amount
recorded in the 'Reserve for share-based payments'. A deferred tax asset has
been recognised for the future tax deductions in respect of share awards.
2. Under UK GAAP, dividends are recorded in the year to which they relate. IAS
10 requires that dividends are recorded in the year that they are declared.
Consolidated Income Statement - Restated Statutory Comparatives (excluding IAS
32/39)
Statutory Consolidated Income Statement for the six months ended 31 July 2004
UK GAAP Effect of IFRS Notes
Six months transition to Six months
ended IFRS (excl ended
31 July 04 IAS 32 and 31 July 04
(unaudited) IAS 39) (unaudited)
£m £m £m
Interest and dividend income 46.9 - 46.9
Capital gains 23.7 - 23.7
Fee and other operating 12.5 - 12.5
income
83.1 - 83.1
Interest payable and similar
charges (11.8) - (11.8)
Provisions against loans and
investments (13.0) - (13.0)
Administrative expenses (17.5) (0.3) (17.8) 1
Profit on ordinary
activities 40.8 (0.3) 40.5
before taxation
Tax on profit on ordinary
activities (13.2) - (13.2)
Profit on ordinary
activities
after taxation and 27.6 (0.3) 27.3
attributable
to shareholders
Earnings per share 39.9p 39.3p
Statutory Consolidated Income Statement for the year ended 31 January 2005
UK GAAP Effect of IFRS Notes
Year transition to Year
ended IFRS (excl ended
31 January 05 IAS 32 and 31 January 05
(Audited) IAS 39) (Audited)
£m £m £m
Interest and dividend 101.6 - 101.6
income
Capital gains 62.9 - 62.9
Fee and other operating 27.4 - 27.4
income
191.9 - 191.9
Interest payable and
similar (26.5) - (26.5)
charges
Provisions against loans
and (28.2) - (28.2)
investments
Administrative expenses (41.7) (0.5) (42.2) 1
Profit on ordinary
activities 95.5 (0.5) 95.0
before taxation
Tax on profit on
ordinary (33.5) - (33.5)
activities
Profit on ordinary
activities
after taxation and 62.0 (0.5) 61.5
attributable to
shareholders
Earnings per share 89.4p 88.6p
Diluted earnings per 88.7p 88.0p
share
Notes
1 IFRS 2 requires the fair value of share option awards to be expensed in the
income statement over the vesting period of the options, with a corresponding
amount recorded in the 'Reserve for share-based payments'.
SECTION 2
IFRS Restatement of the Balance Sheet at 1 February 2005
This section sets out the full impact of the adoption of IFRS, including IAS 32
and IAS 39 on the opening balance sheet as at 1 February 2005 together with a
reconciliation of the movement on reserves.
The primary differences on the adoption of IAS 32 and IAS 39 compared to current
accounting treatment under UK GAAP are set out below:
• Mezzanine loans and loan stock will be held on balance sheet at
amortised cost using the effective interest rate ('EIR') method.
Underwriting and agency fees will be reclassified to interest income and
included in the EIR calculation as part of amortised cost. Under UK GAAP,
loans are held at cost plus capitalised interest less provisions. The
related fees are currently recognised when received.
• Impairment will be recognised when there is objective evidence that an
event has occurred which will result in reduced future cash flows. Once an
impairment event has occurred, an amended amortised cost will be calculated
by discounting the revised expected future cash flows by the original
effective interest rate. Under UK GAAP, a specific provision is made against
the principal amount of any loan whose value is impaired or uncertain.
• Under IFRS, shares are classified as available-for-sale assets and
warrants are included as derivatives (see below). Shares will be measured at
fair value when this can be reliably determined. Movements in their value
will be taken to reserves until realisation or impairment, at which point
they will be recycled through the income statement. Under UK GAAP,
investments are largely recorded at cost less provisions for impairment and
gains or losses are recorded only on realisation.
• All derivatives, including warrants, will be recorded on the balance
sheet at fair value (unless fair value cannot be reliably measured).
Movements in fair value will be recorded directly in the income statement.
Under UK GAAP, derivatives are held at either the same basis as the
underlying hedged item or valued at cost.
These differences are explained more fully in Section 4.
Statutory Consolidated Balance Sheet at 1 February 2005 (including IAS 32 and
IAS 39)
UK GAAP Effect of Notes Effects of Notes IFRS
As at transition to Implementing As at
31 January IFRS (excl IAS 32 and 1 February 05
05 IAS 32 and IAS 39 (incl IAS 32
(Audited) IAS 39) £m and 39)
£m £m (Audited)
£m
Non current
assets
Property,
plant 1.3 - - 1.3
and equipment
Financial
assets;
loans and 1,182.8 - 70.7 3, 5, 1253.5
Investments 6, 7
Current
assets
Trade and
other 20.2 - (9.8) 3 10.4
receivables
Financial
assets;
loans and 40.9 - 1.0 3 41.9
Investments
Cash and cash
equivalents 55.6 - - 55.6
116.7 - (8.8) 107.9
Total 1,300.8 - 61.9 1,362.7
assets
Capital and
reserves
Called up
share 13.9 - - 13.9
capital
Share premium
account 172.5 - - 172.5
Capital
redemption
reserve 1.4 - - 1.4
Equity - 0.7 1 - 0.7
reserve
Retained 171.7 19.7 1, 2 20.1 9 211.5
earnings
Equity
shareholders'
funds 359.5 20.4 20.1 400.0
Non current
liabilities
Financial
liabilities 711.4 - 25.5 4, 7 736.9
Deferred tax
liabilities - (0.8) 1 16.8 8 16.0
711.4 (0.8) 42.3 752.9
Current
Liabilities
Trade and
other 78.5 (19.6) 2 3.1 4 62.0
payables
Financial
liabilities 131.5 - (3.6) 4, 7 127.9
Liabilities
for 19.9 - - 19.9
current tax
Total capital
and 1,300.8 - 61.9 1,362.7
liabilities
Notes
Non IAS 32 and 39 amendments
1. Under UK GAAP no charge has been made to profit for the cost of share
options, as ICG grants all such options at the then ruling market price. IFRS 2
requires the fair value of share option awards to be expensed in the income
statement over the vesting period of the options, with a corresponding amount
recorded in the 'Reserve for share-based payments'. Deferred tax has been
calculated on the taxable value of the share options.
2. Under UK GAAP, dividends are recorded in the year to which they relate. IAS
10 requires that dividends are recorded in the year that they are declared.
IAS 32 and 39 amendments
EIR calculation
3 Accrued cash interest receivable forms part of the EIR calculation under IFRS
and, therefore, is now included in the value of loans and investments. EIR
calculations have increased the value of mezzanine loans in comparison to the
recognition of assets under UK GAAP.
4 Accrued cash interest payable forms part of the EIR calculation under IFRS
and, therefore, is now included in the value of financial liabilities; . Also
includes the net impact of EIR calculations on borrowings and IFRS 1 fair value
hedging adjustment relating to the hedging of borrowings for currency and
interest rate risk.
Valuation of investments
5 Increase in fair value of warrants and the fair value of quoted and unquoted
investments;
Impairment of assets
6.The difference between the effect of discounting the expected future cash
flows on impaired assets under IFRS and provisions made under UK GAAP.
Derivatives
7. IFRS requires that derivatives are recorded at fair value rather than being
accounted for in the same way as the underlying hedged item.
Taxation and reserves
8 Impact of IFRS on deferred tax provision
9 The reconciliation of reserves as detailed on page 12
Reconciliation of Retained Earnings from UK GAAP to IFRS including IAS 32 and 39
31 January Notes
2005
£m
Retained Earnings under UK GAAP 171.7
Share based payments (0.7) 9
Proposed dividend 19.6 10
Deferred taxation 0.8
Retained Earnings under IFRS (excl IAS 32/39) 191.4
EIR effect on mezzanine loans 9.3 1
EIR effect on borrowings (8.0) 2
MTIS on non-cash interest (2.7) 3
Impairment of loans and investments (0.5) 4
MTIS on increased value of warrants (2.0) 5
Fair value and EIR effect on investments 18.7 6
Increased value of warrants 13.0 7
Fair value of derivatives 9.1 8
Tax effect of above adjustments (16.8) 11
Retained Earnings under IFRS 211.5
Notes
EIR calculation
1. The increase in value of mezzanine loans is due to the change in income
recognition policy as part of the EIR calculation.
2. Net impact of EIR calculations on borrowings and IFRS 1 fair value hedging
adjustment relating to the hedging of borrowings for currency and interest rate
risk.
3. As the value of non-cash interest has increased under IFRS, an increase in
the accrual for bonus on the non-cash interest is required.
Impairment of assets
4.The difference between the effect of discounting the expected future cash
flows on impaired assets under IFRS and provisions made under UK GAAP.
Valuation of investments
5. The increased charge for the Medium Term Incentive Scheme due to increase in
warrants in the year
6. Investments are held at their fair value or on an amortised cost basis under
IFRS rather than cost. This increase relates primarily to quoted shares.
7. Under IFRS warrants (and warrants now held as shares) previously valued at
cost are now fair valued where this can be reliably measured.
Derivatives
8. IFRS requires that derivatives are recorded at fair value rather than being
accounted for in the same way as the underlying hedged item.
Non IAS 32/IAS 39 adjustments
9. IFRS 2 requires the fair value of share option awards to be expensed in the
income statement over the vesting period of the options, with a corresponding
amount recorded in the 'Reserve for share-based payments'.
10. Under UK GAAP, dividends are recorded in the year to which they relate. IAS
10 requires that dividends are recorded in the year that they are declared.
Taxation
11. The net impact on taxation of the above adjustments
SECTION 3
Pro-forma Income Statement under IFRS for the year to 31 January 2005
This section contains a pro-forma income statement for the year to 31 January
2005 as if IFRS, including both IAS 32 and IAS 39, had been in force throughout
the period. This has been prepared to provide a more meaningful comparison of
the full effects of IFRS, compared to the statutory results for the full year
2005. The impact of any volatility arising from derivatives, other than
warrants, being recorded at fair value has not been shown in the income
statement for the year ended 31 January 2005.
Pro-forma Income Statement for the year to 31 January 2005 under IFRS
Notes UK GAAP Effective Impairment Other IFRS
Year Interest £m £m Year
ended rate ended
31 January £m 31 January
2005 2005
(Audited) (Unaudited)
£m £m
Interest and
dividend 1, 2 101.6 13.7 - - 115.3
income
Realised
capital
gains and 7 62.9 - - 10.5 73.4
changes in
warrant
valuations
Fee and other
operating 3 27.4 (3.6) - - 23.8
income
191.9 10.1 - 10.5 212.5
Interest
payable and 4 (26.5) (0.3) - - (26.8)
similar
charges
Impairment of
loans 5 (28.2) - (3.5) - (31.7)
and
investments
Administrative
expenses 6, 8 (41.7) (2.7) - (2.6) (47.0)
Profit on
ordinary
activities 95.5 7.1 (3.5) 7.9 107.0
before
taxation
Tax on profit
on 9 (33.5) (2.8) 1.0 (3.2) (38.5)
ordinary
activities
Profit on
ordinary
activities 62.0 4.3 (2.5) 4.7 68.5
after
taxation
Earnings per 89.4p - - - 98.7p
share
Diluted
earnings per 88.7p - - - 98.0p
share
Notes
EIR calculation
1 The application of EIR calculations has increased mezzanine loan related
income and investment income on loan stock.
2 Write back of prior year provision against interest has increased interest
income as this is now included as part of the impairment calculations.
3 Write back of underwriting fee income in the year, which is now included in
EIR calculations.
4 Increase in interest expense due to EIR calculation of private placements and
securitisation notes.
Impairment of assets
5 Increase in provisions owing to inclusion of interest in impairment
calculation, formerly netted within interest income.
Valuation of investments
6 Impact on MTIS of applying new IFRS policies.
7 Increase in fair value of warrants where the value can be reliably measured.
Non IAS 32/IAS 39 adjustments
8 Increase in administrative expenses relating to the fair valuing of share
option awards using the Black Scholes model.
Taxation
9 Increase in tax charge for IFRS adjustments.
Dividends
10 Difference between the May 2004 declared dividend and May 2005 declared
dividend
Reconciliation of Pro-Forma Income Statement for the year ended 31 January 2005
CORE INCOME
Year ended 31.01.05 UK GAAP Effective Impairment Other IFRS
(Note) interest Proforma
rate
£m £m £m £m £m
Interest and dividend 101.6 12.5 (5.2) 1.2 110.1
income
Fee and other operating
income 27.4 (3.6) - - 23.8
129.0 8.9 (5.2) 1.2 133.9
Less:related expenses
Interest payable and
similar (26.5) (0.3) - - (26.8)
charges
Administrative
expenses-salaries and
benefits (12.8) - - (0.5) (13.3)
Operating expenses (8.3) - - - (8.3)
Medium Term Incentive (6.3) (2.7) - - (9.0)
Scheme
Core Income 75.1 5.9 (5.2) 0.7 76.5
Core Income is the key component of ICG's profitability and consists of net
interest income plus
fees less related administrative expenses.
CAPITAL RELATED ITEMS
The other component of ICG's profitability consists of items of a capital nature
which are shown below:-
Year ended 31.01.05 UK GAAP Effective Impairment Other IFRS
(Note) interest Proforma
rate
£m £m £m £m £m
Realised capital gains and
changes in warrant
valuations 62.9 - - 10.5 73.4
Medium Term Incentive (14.3) - - (2.1) (16.4)
Scheme
Net capital gains 48.6 - - 8.4 57.0
Provisions for impairment
of (28.2) - 1.7 - (26.5)
assets
Net capital profits 20.4 - 1.7 8.4 30.5
Profit before tax 95.5 5.9 (3.5) 9.1 107.0
SECTION 4
Key differences for ICG between UK GAAP and IFRS
This section includes additional information on the key impacts of IFRS on us as
detailed previously in Sections 1, 2 and 3 and provides a comparison to the
current accounting treatment under UK GAAP. This information has not been
audited and is provided for information purposes only.
1) Share Based Payments
Under UK GAAP no charge has been made to profit for the cost of share options,
as ICG grants all such options at the then ruling market price.
Under IFRS, IFRS 2 has been applied to all grants of options after 7 November
2002 that had not vested by 31 January 2005. The options have been valued using
the Black Scholes pricing model. The fair value of the options expected to vest
is expensed on a straight line basis over the vesting period.
2) Loans and Investments
There are a number of different elements of mezzanine finance and to the income
that it produces.
At the commencement of a transaction, a fee is normally charged which is, in
part, an arranging fee (if we arrange the transaction) and, in part, an
underwriting/participation fee. Where ICG is the mezzanine agent, it also is
entitled to receive an annual agency fee.
The mezzanine loan normally has a cash interest element and a rolled-up interest
element (which is not payable until the repayment of the loan), although not all
loans have both features. As part of the mezzanine transaction, ICG usually
receives an equity interest in the borrower which may be in the form of
warrants, shares and / or (convertible) loan stock. Virtually all of the
companies to which ICG lends are private companies.
The main differences between UK GAAP and IFRS as they relate to the lending
activities are set out below:-
(i) Mezzanine loans and loan stock recognition of interest income
UK GAAP
Mezzanine Loans
Loans are held in the balance sheet at cost, plus capitalised interest accrued
to date, less provisions.
All interest is accounted for on the accruals basis. Where it is considered
unlikely that interest will be received on the due date, a reserve is made
against such interest.
Loan Stock and Convertible Loan Stock
Loan stock and convertible loan stock are considered to be quasi-equity and
therefore interest is generally reserved against and not recognised until such
time as the cash is received.
IFRS
Mezzanine loans and (convertible) loan stock are measured on the amortised cost
basis.
Under amortised cost accounting, interest is not accrued for separately from the
loan. Expected cash flows on the loan, including all costs and fees integral to
the loan, are recognised on an effective yield basis with the carrying value of
the loan being the present value of these cash flows discounted at this
effective yield.
(ii) Mezzanine loans and loan stock - Provisions and Impairment
UK GAAP
Under UK GAAP, a provision is made in whole or in part against the principal of
a loan if, in the opinion of the directors, the value of that loan is impaired
and ICG will not receive back its original investment in full.
IFRS
Under IFRS, a provision for impairment may only be made following the
identification of objective evidence of an event which causes a decrease in the
expected cash flows on an asset. Once an impairment event has occurred, the
revised future expected cash flows, and an amended fair value is calculated
using the EIR model and the same discount rate as the original model.
The reduction in the fair value of the asset as a result of its impairment is
taken through the income statement under the heading of impairment with no
differentiation between principal and interest.
(iii) Mezzanine loans and loan stock - fee income
UK GAAP
Arranging and underwriting fees, which are received at the commencement of the
transaction, are taken to profit when received. Agency fees are accounted for on
the accruals basis.
IFRS
The arranging portion of the fee is taken to profit at the commencement of the
transaction. The underwriting fee and the agency fee are included in the
Effective Interest Rate ('EIR') calculation and are taken to profit over the
expected life of the loan.
(iv) Valuation of shares and warrants and Capital Gains
ICG holds a portfolio of unquoted shares and warrants as an integral part of its
business, from which is derived the capital profit on each transaction. Such
shares or warrants are usually granted as part of the overall mezzanine loan
transaction and, although some of these instruments could technically be traded,
ICG has never traded them.
UK GAAP
Capital Gains
Capital gains upon the sale of investment are accounted for when received.
Shares in listed companies
Unsold shares acquired as the result of a flotation of an investee company are
held in the balance sheet at cost less provisions for impairment. Profits and
losses are only taken when the shares have been sold.
Unquoted shares and warrants
Unquoted shares and warrants are held in the balance sheet at cost which in most
cases, is nominal, less provisions for impairment. A directors' valuation
utilising the guidelines from the BVCA is carried out on a semi-annual basis and
this is shown as a note to the annual accounts. Capital gains are only taken to
the profit and loss account as and when the shares and/or warrants are realised
and cash has been received.
IFRS
Under IFRS, shares and warrants are valued, where a reliable valuation is
possible, at fair value, with the movements being accounted for as follows:-
Shares in listed companies
These are marked to market, with the movement going through reserves. Once the
shares are sold, or there is objective evidence of impairment, the profit or
loss is recycled through the income statement.
Shares in unquoted companies
These are valued at their fair value where it is considered possible to
reasonably measure this value, otherwise these are held at cost. As with listed
shares, movements in fair value are taken to reserves, with any profit or loss
on realisation, or where there is objective evidence of impairment, being
recycled through the income statement.
Warrants in unquoted companies
Warrants are shown at their fair value although, in common with shares in
unquoted companies, such value can be difficult to establish and where these
cannot be reliably measured they are held at cost. All movements in fair value
are taken through the income statement.
3) Derivatives
As part of the funding of its mezzanine activities, the company enters into
various financial derivatives, primarily interest rate swaps and forward foreign
exchange contracts, to ensure that it is not exposed to interest rate or
currency movements on its asset or liability base.
UK GAAP
Under UK GAAP, interest on interest rate swaps and the premium/discount on
forward foreign exchange contracts are accounted for on the accruals basis in
line with the underlying hedged item.
All forward foreign exchange contracts are revalued into Sterling at the end of
each month, with any resulting profit or loss being taken to the profit and loss
account. This will be equal and opposite to the profit or loss on the
revaluation of the hedged asset or liability.
IFRS
Although ICG is hedged economically, we are unable to obtain hedge accounting
under IFRS on the majority of derivatives. This is because these hedges are
denominated in US Dollars and swapped into Euros, neither of which are sterling,
our functional currency, and therefore hedge accounting is not permitted.
The impact of any volatility arising from certain financial liabilities being
recorded at amortised cost with the associated derivatives being recorded at
fair value has not been shown in the proforma income statement for the year
ended 31 January 2005.
4) Debt funding - recognition of interest expense
UK GAAP
Interest expense has been accounted for on the accruals basis. Upfront fees on
the arrangement of such debt are amortised over the expected maturity period of
the debt.
IFRS
All interest expense, including upfront fees, is accounted for using the EIR
method.
5) Consolidation
This transitional statement covers ICG and its subsidiary companies. It does not
include third party funds managed by the group as ICG does not have the power to
control such funds with a view to obtaining benefits from their activities.
6) Taxation
A provisional tax calculation has been made of the effect of all the adjustments
to reserves of IFRS.
APPENDIX 1
PRINCIPAL IFRS ACCOUNTING POLICIES
Basis of preparation
The preliminary consolidated comparative financial information has been prepared
in accordance with International Financial Reporting Standards (IFRS) for the
first time. The accounting policies and disclosures adopted reflect our current
view of best practice, and the accounting standards that will be in force and
endorsed by the EU for the period commencing 1 February 2005. They are therefore
subject to change.
The date of transition to IFRS and the date of the opening IFRS balance sheet
was 1 February 2004. On initial adoption of IFRS, the following exemptions were
applied from the requirements of IFRS and from their retrospective application
as permitted by IFRS 1 'First-time Adoption of International Financial Reporting
Standards' (IFRS 1):
Implementation of IAS 32, IAS 39 and IFRS 4 - as allowed by IFRS 1, our 2004
consolidated income statement and balance sheet has not been restated to comply
with IAS 32 and IAS 39.
Derecognition -the derecognition requirements of IAS 39 to transactions
occurring on or after 1 February 2005 has been applied.
Share based payments - IFRS 2 'Share-based Payment' has been applied to equity
instruments
granted after 7 November 2002.
Accounting convention
The Group prepares its accounts under the historical cost convention, except for
the revaluation of loans and investments, available-for-sale financial assets,
financial assets at fair value through profit or loss and all derivative
contracts.
Basis of consolidation
The group financial statements incorporate the financial statements of the
company and its subsidiaries.
Interest income and expenses
Interest income and expense on financial assets and liabilities held at
amortised cost are measured using the effective interest rate ('EIR') method,
which allocates the interest income or interest expense over the relevant
period. The EIR is the rate that discounts estimated future cash payments or
receipts through the expected life of the financial instrument.
Fee and commission income
Arrangement fees are generally recognised at the time they are received.
Underwriting and agency fees form part of the EIR calculation.
Fees from fund management are recognised on an accruals basis.
Fees payable
Arrangement fees on Balance Sheet funding are recognised in interest expense as
part of the EIR calculation.
Other fees are expensed as incurred.
Share-based payments
The group issues equity-settled share options to certain employees. These are
measured at fair value at date of grant using a Black Scholes option pricing
model. The fair value is expensed on a straight line basis over the vesting
period, based on an estimate of the number of shares that will ultimately vest.
Dividends
Dividend income from investments is recognised when the shareholders' rights to
receive payment have been established.
Pension costs
Pension liabilities are provided by payments to insurance companies or to
individuals for employees' private pension plans. The amount charged to the
profit and loss account represents a percentage of the current payroll cost paid
to defined contribution schemes.
Value added tax
Irrecoverable VAT is written off on items of expenditure relating to the profit
and loss account. VAT on tangible fixed assets is capitalised and written off
over a similar period to the asset to which it relates.
Foreign currencies
Foreign currency monetary transactions are translated into sterling using the
exchange rates prevailing at the dates of the transactions. Monetary assets and
liabilities are re-translated at year end exchange rates. Foreign exchange gains
and losses are recognised in the income statement.
Taxation
Provision is made for taxation at the current enacted rates on taxable profits,
arising in income or in equity, taking into account relief for overseas taxation
where appropriate. Deferred taxation is accounted for in full for all temporary
differences between the carrying amount of an asset or liability for accounting
purposes and its carrying amount for tax purposes. Deferred tax assets are only
recognised to the extent that it is probable that they will be recovered.
Property, plant and equipment and depreciation
Depreciation is provided at rates calculated to write off the cost, less
estimated residual value, of each asset on a straight line basis over its
expected useful live as follows:
Furniture and Equipment - 20% - 33% per annum
Leasehold Premises - Over the term of the lease
Financial assets
Financial assets are classified into the following categories, as determined at
initial recognition:
(a) Financial assets at fair value through profit or loss
Derivative assets are categorised as 'at fair value through profit or loss'
unless they are designated as hedges. We have no other assets classified as fair
value through profit or loss.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market.
(c) Available-for-sale
Available-for-sale assets are financial assets not classified in (a)-(b) above.
Available-for-sale financial assets and financial assets at fair value through
profit or loss are carried at fair value. Loans and receivables and
held-to-maturity investments are carried at amortised cost using the effective
interest rate ('EIR') method.
The fair values of quoted investments in active markets are based on current bid
prices. If there is no active market then fair value is determined, where
possible, using valuation techniques.
Impairment of financial assets
A financial asset is impaired and impairment losses are incurred if, and only
if, there is objective evidence of a fall in value of that asset as a result of
events that occurred after the initial recognition of the asset and that loss
event has an impact on the estimated future cash flows.
If there is objective evidence that an impairment loss on loans and receivables
or held-to-maturity investments carried at amortised cost has occurred, the
amount of the loss is measured as the difference between the asset's carrying
amount and the present value of estimated future cash flows discounted at the
financial asset's effective interest rate.
Shares and Warrants
Where management can reliably measure the value, shares and warrants are valued
at their fair value. If the fair value cannot be reliably measured, the assets
are held at cost.
Gains and losses arising from changes in the fair value of warrants are
recognised in the income statement. Gains and losses arising from changes in the
fair value of shares are recognised directly in equity, until the shares are
de-recognised or impaired, at which time the cumulative gain or loss previously
recognised in equity is recognised in the income statement.
Assets held for the Short Term
Investments which are held for sale in the short term as current assets are
measured at fair value i.e. cost plus accrued interest.
Financial liabilities
All Balance Sheet funding liabilities are held at amortised cost. Derivative
liabilities are categorised as at fair value through profit or loss unless they
are designated as hedges.
Derivative financial instruments and hedge accounting
Derivatives, including embedded derivatives which are not considered to be
closely related to the host contract, are initially recognised at fair value on
the date on which a derivative contract is entered into, and are subsequently
remeasured at their fair value.
Derivatives can be designated as either cash flow or fair value hedges.
Cash flow hedges
A cash flow hedge is used to hedge exposures to variability in cash flows, such
as variable rate financial assets and liabilities. The effective portion of
changes in the derivative fair value is recognised in equity, and recycled to
the income statement in the periods when the hedged item will affect profit or
loss. The fair value gain or loss relating to the ineffective portion is
recognised immediately in the income statement.
Fair value hedges
A fair value hedge is used to hedge exposures to variability in the fair value
of financial assets and liabilities, such as fixed rate loans. Changes in the
fair value of derivatives 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.
If the hedge no longer meets the criteria for hedge accounting, the adjustment
to the carrying amount of the hedged item is amortised to the income statement
over the period to maturity.
If derivatives are not designated as hedges then changes in fair values are
recognised immediately in the income statement.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the
balance sheet when there is a legally enforceable right to offset the recognised
amounts and there is an intention to settle on a net basis, or realise the asset
and settle the liability simultaneously.
APPENDIX 2
REPORTS OF THE INDEPENDENT AUDITORS
INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF INTERMEDIATE CAPITAL
GROUP PLC ON THE PRELIMINARY FULL YEAR COMPARATIVE IFRS FINANCIAL INFORMATION
We have audited the preliminary full year comparative International Financial
Reporting Standards (IFRS) consolidated financial information of Intermediate
Capital Group PLC ('the Company') and its subsidiaries (together, 'the Group');
which comprises: the Statutory consolidated balance sheets as at 1 February
2004, 31 January 2005 and 1 February 2005 (as set out on pages 5, 6 and 7) and
the Statutory consolidated income statement for the year ended 31 January 2005
(as set out on page 8); and the Principal IFRS accounting policies set out on
pages 20 to 22 (together 'the full year comparative IFRS financial
information').
This report is made solely to the Board of Directors, in accordance with our
engagement letter dated 4 April 2005 and solely for the purpose of assisting
with the transition to IFRS. Our audit work has been undertaken so that we might
state to the Company's board of directors those matters we are required to state
to them in an auditors' report and for no other purpose. To the fullest extent
permitted by law, we will not accept or assume responsibility to anyone other
than the Company for our audit work, for our report, or for the opinions we have
formed.
Respective responsibilities of directors and auditors
The Company's directors are responsible for ensuring that the Company and the
Group maintains proper accounting records and for the preparation of the
preliminary full year comparative IFRS financial information on the basis set
out in the Principal IFRS accounting policies, which describe how IFRS will be
applied under IFRS 1, including the assumptions the directors have made about
the standards and interpretations expected to be effective, and the policies
expected to be adopted, when the Group prepares its first complete set of IFRS
financial statements as at 31 January 2006. Our responsibility is to audit the
preliminary full-year comparative IFRS financial information in accordance with
relevant United Kingdom legal and regulatory requirements and auditing standards
and report to you our opinion as to whether the preliminary full year
comparative IFRS financial information is prepared, in all material respects, on
the basis set out in the Principal IFRS accounting policies.
We read the other information contained in the preliminary full year comparative
IFRS financial information for the above year and consider the implications for
our report if we become aware of any apparent misstatements or material
inconsistencies with the preliminary full year comparative IFRS financial
information.
Basis of audit opinion
We conducted our audit in accordance with United Kingdom auditing standards
issued by the Auditing Practices Board. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the preliminary
full year comparative IFRS financial information. It also includes an assessment
of the significant estimates and judgements made by the directors in the
preparation of the preliminary full year comparative IFRS financial information
and of whether the accounting policies are appropriate to the circumstances of
the Group, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the preliminary full year
comparative IFRS financial information is free from material misstatement,
whether caused by fraud or other irregularity or error. In forming our opinion,
we also evaluated the overall adequacy of the presentation of information in the
preliminary full year comparative IFRS financial information.
Emphasis of matter
Without qualifying our opinion, we draw attention to the fact that the Principal
IFRS accounting policies explain that there is a possibility that the
accompanying preliminary full year comparative IFRS financial information may
require adjustment before constituting the final full year comparative IFRS
financial information. Moreover, we draw attention to the fact that, under
IFRSs, only a complete set of financial statements comprising a balance sheet,
income statement, statement of changes in equity, cash flow statement, together
with comparative financial information and explanatory notes, can provide a fair
presentation of the Group's financial position, results of operations and cash
flows in accordance with IFRSs.
Opinion
In our opinion the preliminary full year comparative IFRS financial information
has been prepared, in all material respects, on the basis set out in the
Principal IFRS accounting policies which describe how IFRS will be applied under
IFRS 1, including the assumptions the directors have made about the standards
and interpretations expected to be effective, and the policies expected to be
adopted, when the Group prepares its first complete set of IFRS financial
statements as at 31 January 2006.
Deloitte & Touche LLP
Chartered Accountants
London
15 September 2005
INDEPENDENT REVIEW REPORT TO THE BOARD OF DIRECTORS OF INTERMEDIATE CAPITAL
GROUP PLC ON THE PRELIMINARY INTERIM COMPARATIVE IFRS FINANCIAL INFORMATION FOR
THE SIX MONTHS ENDED 31 JULY 2004
We have reviewed the preliminary interim comparative International Financial
Reporting Standards (IFRS) consolidated financial information of Intermediate
Capital Group PLC ('the Company') and its subsidiaries (together 'the Group')
for the six months ended 31 July 2004 which comprises: the Statutory
consolidated balance sheet as at 31 July 2004 ( as set out on page 6) and the
Statutory consolidated income statement for the six months ended 31 July 2004
(as set out on page 8); and the Principal IFRS accounting policies set out on
pages 20 to 22 (together 'the interim comparative IFRS financial information').
This preliminary interim comparative IFRS financial information is the
responsibility of the Company's directors. It has been prepared as part of the
Group's conversion to IFRS in accordance with the basis set out in the Principal
IFRS accounting policies which describe how IFRSs have been applied under IFRS
1, including the assumptions the directors have made about the standards and
interpretations expected to be effective, and the policies expected to be
adopted, when the Group prepares its first complete set of IFRS financial
statements as at 31 January 2006. Our responsibility is to express an opinion on
this preliminary interim comparative IFRS financial information based on our
review.
Our review report is made solely to the Board of directors in accordance with
Bulletin 1999/4 issued by the Auditing Practices Board. Our work has been
undertaken so that we might state to the Company those matters we are required
to state to them in an independent review report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company, for our review work, for this report, or for
the conclusions we have formed.
Review work performed
We conducted our review in accordance with Bulletin 1999/4 issued by the
Auditing Practices Board. A review consists principally of making enquiries of
management and applying analytical procedures to the preliminary interim
comparative IFRS financial information and underlying financial data and,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review excludes audit
procedures such as tests of control and verification of assets, liabilities and
transactions. It is substantially less in scope than an audit performed in
accordance with United Kingdom auditing standards and therefore provides a lower
level of assurance than an audit. Accordingly, we do not express an audit
opinion on the preliminary interim comparative IFRS financial information.
Emphasis of matter
Without modifying our review conclusion, we draw attention to the fact that the
Principal IFRS accounting policies explain that there is a possibility that the
accompanying preliminary interim comparative IFRS financial information may
require adjustment before constituting the final interim comparative IFRS
financial information for the six months ended 31 July 2004. Moreover, we draw
attention to the fact that, under IFRSs, only a complete set of financial
statements comprising an income statement, balance sheet, statement of changes
in equity, cash flow statement, together with comparative financial information
and explanatory notes, can provide a fair presentation of the Group's financial
position, results of operations and cash flows in accordance with IFRSs.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the preliminary interim comparative IFRS financial information
for the six months ended 31 July 2004 which has been prepared in accordance with
the basis set out in the note on Principal IFRS accounting policies.
Deloitte & Touche LLP
Chartered Accountants
London
15 September 2005
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