IFRS Statement
Molins PLC
30 June 2005
30 JUNE 2005 FOR RELEASE AT 07.00
MOLINS PLC
PREPARATIONS FINALISED FOR ADOPTION OF IFRS
Molins PLC, the international specialist engineering company, has finalised its
preparations to adopt International Financial Reporting Standards (IFRS) and
announces the impact of IFRS on the reported results of the Group.
To date Molins has prepared its financial statements in compliance with UK
Generally Accepted Accounting Practice (UK GAAP). European Union (EU)
regulations require the Group to adopt IFRS (which include International
Accounting Standards (IAS)) in its financial statements from 2005, the first set
of such accounts being for the year ended 31 December 2005. Such adoption
requires the results for the year to 31 December 2004 to be restated so as to
provide an appropriate comparative set of results.
A summarised analysis of the main aspects of IFRS that impact on the financial
statements of the Group is set out on pages 2 to 6. In addition a set of
restated 2004 financial statements, excluding detailed notes, are set out on
pages 7 to 10 of this release, together with a restatement of the Group's
accounting policies under IFRS in Appendix 1*. Reconciliations between UK GAAP
and IFRS balance sheets and income statements for the periods ended 31 December
2004, 30 June 2004 and 1 January 2004 are provided in Appendix 2*.
The restatements of the Group's 2004 results are unaudited, but the Group's
auditors, KPMG Audit Plc, have agreed the principles that have been adopted by
the Group.
Key points
• Shareholders' funds at 31 December 2004 decreased to £29.2m, from
£51.5m as previously reported. This has arisen substantially from the new
requirements for accounting for pensions which were referred to in note 8 to
the 2004 published accounts.
• 2004 underlying earnings per share (excluding net pension credit and
reorganisation costs) increased by 0.8p, from 1.1p reported under UK GAAP,
to 1.9p under IFRS.
• Volatility in the level of distributable profits increases, mainly from
the changes in accounting for pensions.
• No effect on the Group's trading cash flows.
• No effect on the Group's management of its businesses.
Enquiries: Molins PLC
David Cowen , Group Finance Director Tel: 01908 219000
* Appendices 1 & 2 can be found on the Group's website at www.molins.com/
corporate.html as part of the full announcement.
Principal areas that affect the financial statements of the Group
1. Pensions and other post-retirement benefits
UK GAAP: Pension costs were accounted for under SSAP 24 Accounting for pension
costs, whereby the costs of providing pensions were charged to the profit and
loss account based on a percentage of employees pay, with any variations in
regular costs, interest and changes to actuarial gains and losses amortised over
the expected average remaining service lives of current employees. Any
differences between the amounts charged to the profit and loss account and cash
payments made to the pension schemes were recognised in the balance sheet.
IFRS (as required by IAS 19 revised, but closely in line with the disclosures
already made in the notes to the accounts under FRS 17): Current and past
service costs of the Group's pension schemes, the expected return on the
scheme's assets and any interest costs relating to the present value of the
scheme's liabilities are charged to the income statement, with any actuarial
gains and losses being recognised through the statement of recognised income and
expense (SORIE). Any surplus in the fair value of the pension scheme's assets
over the present value of the liabilities is recorded as an asset in the balance
sheet, and any deficit as a liability.
The change in the accounting treatment of the Group's pension arrangements will
have no impact on their funding. The EU has not yet endorsed the revisions to
IAS 19 which allows actuarial gains or losses to be recognised through the
SORIE. However this is expected to occur before the year end.
Accounting impact in 2004:
• Income statement: A decrease to reported pre tax profits of £1.3m,
mainly arising as a result of £1.4m of pension augmentation costs on
redundancies. These are past service costs and are recognised immediately under
IFRS.
• Balance sheet: A decrease to shareholders' funds of £29.8m after
deferred tax, being the elimination of the net pension prepayment under SSAP 24
of £16.8m and the creation of a net pension liability, after deferred tax, of
£13.0m.
2. Research and development costs
UK GAAP (as applied by Molins): Research and development costs were charged
against profits as incurred, unless specifically chargeable to and recoverable
from customers under agreed contract terms.
IFRS (as required by IAS 38): A portion of development costs, as defined by
specific criteria, must be capitalised as intangible assets. Broadly, these
criteria will apply where the relevant spending can be reliably identified with
development rather than research and is likely to generate earnings - conditions
that will generally be met on most product development programmes where the
intellectual property rights are retained by the Group. The resulting asset
will be amortised on a straight-line basis over its economic life (which will be
up to a maximum of five years); it will also be re-assessed each year (in an '
impairment test') to ensure that the recorded value is supported by the
estimated value of related future earnings.
Accounting impact in 2004:
• Income statement: An increase to reported pre tax profits of £0.4m, as
the cost of amortising capitalised research and development costs was less than
the amount previously expensed.
• Balance sheet: An increase to shareholders' funds of £2.2m after
deferred tax, classified as Intangible assets.
3. Amortisation of purchased goodwill
UK GAAP: Goodwill was amortised over a period of 20 years and was subject to
testing for impairment when circumstances indicated that the carrying value may
not be recoverable.
IFRS (as required by IFRS 3 and also by concession under IFRS 1): Goodwill is
not amortised but is tested annually for impairment. This applies to all
goodwill arising on acquisitions after 1 January 2004. IFRS 1 First time
adoption of IFRS, permits goodwill on acquisitions made before this date to be
brought on to the balance sheet at 1 January 2004 at its carrying value under UK
GAAP.
Accounting impact in 2004:
• Income statement: Profit before tax increased by £0.9m in 2004,
being the amount amortised in 2004 under UK GAAP.
• Balance sheet: An increase to shareholders' funds of £0.9m, as
purchased goodwill remains at its 1 January 2004 carrying value.
4. Property valuation
UK GAAP: Properties were recorded at their historical cost, except where
revalued on a regular basis, in which case they may have been held in the
balance sheet at their revalued amount on an existing use basis. When FRS 15
Tangible fixed assets, was introduced in 2000, Molins applied the option to
freeze its previously revalued properties at their 'modified historical cost'.
IFRS (as required by IAS 16 and also by concession under IFRS 1): Properties are
recorded at cost. IFRS 1 requires all assets and liabilities to be brought onto
the balance sheet at their deemed cost at the date of transition or, by
concession in the first year of implementation, at their 'fair value', where
fair value is market value (including existing planning consents). The Group
has taken advantage of this concession to include certain properties at their
open market value.
Accounting impact in 2004:
• Income statement: There is no impact as most of the '
revaluation' relates to land values, which are not subject to depreciation.
• Balance sheet: An increase to shareholders' funds of £4.6m,
after deferred tax.
5. Share-based payments
UK GAAP: The charge to the profit and loss account of the Group's Long-term
incentive plan (LTIP) was based on the market value of the shares at the date of
grant. The charge was recognised over the life of the award and was adjusted
where achievement of the performance criteria varied from the plan.
IFRS (as required by IFRS 2): An expense is recognised in the income statement
on all share-based payment schemes granted after 7 November 2002. Awards made
before this date are not accounted for under IFRS 2, as permitted under the
transitional rules of IFRS 1. For awards made after 7 November 2002 the charge
is based on the fair value to the employee of the option granted, calculated
using an option pricing model. In addition, performance criteria based on '
market conditions', such as a total shareholder return measure, are not adjusted
for when performance outcomes differ from the plan; this is factored into the
option model in determining the fair value of the shares at the date of grant.
Accounting impact in 2004:
• Income statement: A decrease to reported profit before tax of
£0.3m, as under UK GAAP the 2004 profit and loss account was credited with a
write-back of previously written off costs relating to pre 7 November 2002
non-performing LTIP awards.
• Balance sheet: The balance sheet treatment of the ordinary
shares held by the employee trust is unchanged.
6. Preference shares
UK GAAP: Preference shares were treated as capital and associated servicing
charges were treated as dividends.
IFRS (as required by IAS 32): Preference shares with an obligation to transfer
economic benefit are treated as financial liabilities (debt) and not as capital.
The costs of servicing preference shares are disclosed as interest.
Accounting impact in 2004:
• Income statement: A decrease to reported profit before tax of
£0.1m. At a retained profit level, there is no change.
• Balance sheet: Net assets and equity decrease by £0.9m, and net
debt increases by the same amount.
7. Deferred tax
UK GAAP: Deferred tax was provided on timing differences between accounting and
tax profits. No provision for the tax effect on the potential disposal of
revalued properties was accounted for.
IFRS (as required by IAS 12): Deferred tax is provided on all temporary
differences between accounting and tax book values, including the requirement to
account for the tax effect of any future property disposals. In addition there
have been deferred tax adjustments to account for the tax effect of other IFRS
changes, including product development, pensions and share-based payments.
Accounting impact in 2004:
• Income statement: An increase to reported profit after tax of
£0.4m, mainly attributable to the expected tax relief on the pension
augmentation costs of redundancies. On an underlying basis, the main impact is
in respect of the capitalisation of product development.
• Balance sheet: Net assets and equity increase by £9.4m, which is
mainly attributable to the elimination of a deferred tax liability on the SSAP
24 pension prepayment and creation of a deferred tax asset on the IAS 19 pension
liability, offset by the deferred tax effect in respect of product development
and properties.
8. Other adjustments
Smaller adjustments have also been made to reflect IFRS reclassifications and
profit and loss adjustments relating to certain other employee benefits, lease
premiums, exchange on foreign denominated goodwill and the treatment of proposed
dividends at 1 January 2004.
Summarised reconciliations from UK GAAP to IFRS
1. 2004 income statement (before pension costs, reorganisation costs & tax)
Underlying profit before tax under UK GAAP £0.9m
Development costs £0.4m
Share-based payments £(0.3)m
Other employee benefits £0.1m
Interest on preference shares £(0.1)m
Underlying profit before tax under IFRS £1.0m
2. 2004 income statement (after pension costs, reorganisation costs & tax)
Loss after tax under UK GAAP £(11.2)m
Development costs £0.3m
Share-based payments £(0.3)m
Other employee benefits £0.1m
Pensions and post-retirement benefits £(0.9)m
Deferred tax £0.1m
Goodwill - amortisation £0.9m
Loss after tax under IFRS £(11.0)m
3. 2004 net assets
Net assets under UK GAAP £51.5m
Development costs (net of deferred tax) £2.2m
Deferred tax £0.2m
Other employee benefits £0.3m
Property valuation (net of deferred tax) £4.6m
Pensions and post-retirement benefits (net of deferred tax) £(29.8)m
Goodwill - amortisation £0.9m
Goodwill - foreign exchange £0.2m
Preference shares £(0.9)m
Net assets under IFRS £29.2m
4. 2003 net assets (at 1 January 2004)
Net assets under UK GAAP £64.0m
Development costs (net of deferred tax) £1.9m
Deferred tax £0.1m
Other employee benefits £0.3m
Property valuation (net of deferred tax) £4.4m
Pensions and post-retirement benefits (net of deferred tax) £(31.4)m
Goodwill - foreign exchange £0.1m
Proposed dividend £1.4m
Preference shares £(0.9)m
Net assets under IFRS £39.9m
Detailed reconciliations are included in Appendix 2*.
Basis of preparation
The financial information has been prepared in accordance with the IFRS
standards expected to be adopted by the EU at 31 December 2005. These standards
are still subject to change. The accounting policies applied are set out in
Appendix 1*.
Transitional arrangements
The rules for first time adoption of IFRS are set out in IFRS 1. In general a
company is required to determine its IFRS accounting policies and apply these
retrospectively to determine its opening balance sheet under IFRS. IFRS 1
allows a number of exceptions to this general requirement. The accounting for
goodwill, share-based payments and property at market value has already been
noted above. In addition, the Group has adopted the exemption that IAS 32 and
IAS 39, both relating to financial instruments, need not be applied to the
comparative periods. Under IAS 21 The effects of changes in foreign exchange
rates, cumulative translation differences arising on consolidation of
subsidiaries should be held in a separate reserve, rather than included in the
profit and loss reserve; the Group has applied the exemption not to adopt this
retrospectively and the reserve has been deemed to be £nil on 1 January 2004.
Presentation of financial statements
The Group's financial statements have been presented in accordance with IAS 1
Presentation of financial statements. Except for the reclassification of
preference dividends as interest, there is no impact on reported profit before
tax as a consequence of IAS 1. Where IAS 1 does not provide definitive guidance
on presentation, for example in relation to aspects of the income statement, the
Group has adopted a format consistent with UK GAAP requirements. This assists
with comparing results with prior years. The format of the balance sheet has
been amended to include items required by IAS 1 to be presented on the face of
the balance sheet, including the requirement to analyse all assets and
liabilities, including provisions, between current and non-current, and present
deferred tax assets separately from deferred tax liabilities, rather than as a
single net amount.
Appendix 2* includes reconciliations from UK GAAP formats to IFRS format. The
IFRS adjustments referred to above are then applied to these revised formats.
Distributable profits
The Company may only make distributions to its shareholders out of profits that
are available for that purpose (s 263 Companies Act 1985) at the time such
distribution is to be made. In summary, such profits are the Company's
accumulated realised profits less its accumulated realised losses. Whilst the
concept of distributable profits is derived from company law and not accounting
standards, the adoption of IFRS has led to a major change in the amounts of such
profits and losses and in particular, in Molins case, from the change in
accounting for pensions.
At 31 December 2004 the Company had distributable profits under IFRS of £0.6m,
significantly reduced from the £27.4m it had under UK GAAP.
As the value of the Company's pension scheme assets changes on a daily basis, as
does the valuation of its liabilities (as a consequence of changes to market
yields for high quality fixed rate corporate bonds), and with a low level of
distributable profits at 31 December 2004, there is a possibility that
distributable profits could be less than £nil at a particular point in time, and
therefore the Company might not legally be in a position to pay dividends to its
ordinary and preference shareholders. The Company is assessing options to give
it more certainty as to its ability to pay dividends in the future.
Interim results
Molins will report its interim results for the six months to 30 June 2005 under
IFRS in September 2005.
Consolidated income statement
12 months to 31 December 2004 6 months to 30 June 2004
Before Before
reorganisation Reorganisation reorganisation Reorganisation
costs costs Total costs costs Total
£m £m £m £m £m £m
Revenue 122.9 - 122.9 57.7 - 57.7
Cost of sales (92.5) (7.2) (99.7) (42.7) (3.6) (46.3)
Gross profit 30.4 (7.2) 23.2 15.0 (3.6) 11.4
Other operating income 0.1 - 0.1 - - -
Distribution expenses (8.4) (0.3) (8.7) (4.9) (0.1) (5.0)
Administrative (18.2) (2.4) (20.6) (10.0) (0.3) (10.3)
expenses
Other operating (1.6) (1.4) (3.0) (0.2) (0.1) (0.3)
expenses
Operating (loss)/ 2.3 (11.3) (9.0) (0.1) (4.1) (4.2)
profit
Loss on closure of - (1.6) (1.6) - (1.8) (1.8)
associate
(Loss)/profit before
financing costs 2.3 (12.9) (10.6) (0.1) (5.9) (6.0)
Financial income 0.3 - 0.3 0.1 - 0.1
Financial expenses (1.5) - (1.5) (0.6) - (0.6)
Net financing costs (1.2) - (1.2) (0.5) - (0.5)
(Loss)/profit before 1.1 (12.9) (11.8) (0.6) (5.9) (6.5)
tax
Income tax credit/ (0.7) 1.5 0.8 (0.2) 0.3 0.1
(expense)
(Loss)/profit for the 0.4 (11.4) (11.0) (0.8) (5.6) (6.4)
period
Basic (loss)/earnings
per ordinary share 2.3p (63.4)p (61.1)p (4.7)p (30.7)p (35.4)p
Diluted (loss)/
earnings per ordinary 2.3p (63.4)p (61.1)p (4.7)p (30.7)p (35.4)p
share
Consolidated balance sheet
31 Dec 30 June 31 Dec
2004 2004 2003
£m £m £m
Non-current assets
Intangible assets 19.6 19.1 17.6
Property, plant and equipment 29.7 30.0 29.3
Investment in associate - - 1.8
Trade and other receivables 1.0 1.7 4.2
Employee benefits 1.4 2.8 2.8
Deferred tax assets 6.8 7.5 8.0
58.5 61.1 63.7
Current assets
Inventories 35.2 40.0 40.3
Income tax receivable 1.9 0.4 0.3
Trade and other receivables 25.5 28.1 36.7
Cash and cash equivalents 5.1 5.4 7.0
67.7 73.9 84.3
Current liabilities
Bank overdraft (0.9) (1.0) (2.1)
Interest-bearing loans and borrowings (0.8) (2.0) (1.9)
Trade and other payables (32.4) (37.5) (44.9)
Income tax payable (0.9) (0.6) (1.1)
Provisions (5.4) (2.0) (1.7)
(40.4) (43.1) (51.7)
Net current assets 27.3 30.8 32.6
Total assets less current liabilities 85.8 91.9 96.3
Non-current liabilities
Interest-bearing loans and borrowings (29.4) (30.1) (25.4)
Employee benefits (22.6) (24.6) (26.3)
Deferred tax liabilities (4.6) (4.7) (4.7)
(56.6) (59.4) (56.4)
Net assets 29.2 32.5 39.9
Capital and reserves
Issued capital 5.0 5.0 5.0
Share premium 25.9 25.9 25.9
Reserves (0.1) 0.1 0.8
Retained earnings (1.6) 1.5 8.2
Shareholders' funds 29.2 32.5 39.9
Consolidated statement of recognised income and expense
12 months 6 months
to 31 Dec to 30 June
2004 2004
£m £m
Currency translation movements arising on foreign
currency net investments (1.0) (0.8)
Actuarial gains and losses 2.5 1.0
Net income recognised directly in equity 1.5 0.2
Loss for the period (11.0) (6.4)
Total recognised income and expense for the period (9.5) (6.2)
Consolidated statement of cash flows
12 months 6 months
to 31 Dec to 30 June
2004 2004
£m £m
Cash flows from operating activities
Loss for the period (11.0) (6.4)
Amortisation 0.8 0.4
Depreciation 2.9 1.4
Investment income (0.3) (0.1)
Interest expense 1.5 0.6
Write-down of non-current assets 0.2 0.4
Equity-settled share-based payments 0.1 0.1
Income tax credit (0.8) (0.1)
Other movements (0.1) -
Working capital movements
- Decrease/(Increase) in inventories 4.8 (0.8)
- Decrease in trade and other receivables 13.8 10.2
- Decrease in trade and other payables (12.3) (6.7)
- Increase in provisions and employee benefits 4.6 0.5
Cash generated from operations 4.2 (0.5)
Income taxes paid (0.8) (0.6)
Net cash from operating activities 3.4 (1.1)
Cash flows from investing activities
Proceeds from sale of plant and equipment 0.4 0.2
Net proceeds from closure of associate 0.2 -
Interest paid (1.6) (0.7)
Interest received 0.4 0.2
Acquisition of property, plant and equipment (3.8) (2.5)
Development expenditure (1.2) (0.5)
Net cash from investing activities (5.6) (3.3)
Cash flows from financing activities
Increase in borrowings 2.9 5.5
Dividends paid (1.4) (1.4)
Net cash from financing activities 1.5 4.1
Net increase in cash and cash equivalents (0.7) (0.3)
Cash and cash equivalents at 1 January 4.9 4.9
Effect of exchange rate fluctuations on cash held - (0.2)
Cash and cash equivalents at period end 4.2 4.4
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