Statement re Adoption of IFRS

Senior PLC 17 June 2005 SENIOR plc NEWS RELEASE Friday 17 June 2005 Adoption of International Financial Reporting Standards ('IFRS') Restatement of 2004 Financial Information Overview of Impact â€¢ Underlying trading and cash flows unaffected. â€¢ Reported profit before tax and basic earnings per share significantly improved as a result of revised accounting for goodwill on disposals and goodwill amortisation. â€¢ Net assets improved due to revised accounting for goodwill and proposed dividends. â€¢ No material changes from the effects mentioned in the 2004 Annual Report. 2004 2004 IFRS (unaudited) UK GAAP (1) Sales - continuing subsidiaries Â£306.8m Â£306.8m Operating profit - continuing subsidiaries Â£16.8m Â£11.8m Profit before tax - continuing subsidiaries Â£12.9m Â£7.7m Loss from discontinued operations (Â£4.4m) (Â£12.9m) Profit / (loss) for the year Â£6.9m (Â£6.9m) Basic earnings / (loss) per share 2.25p (2.25p) Adjusted earnings per share (2) 3.65p 3.65p Net assets Â£83.8m Â£75.3m (1) The UK GAAP numbers are as reported in the 2004 Annual Report reformatted in line with the IFRS presentational requirements. (2) Adjusted earnings per share is calculated on earnings before goodwill amortisation, profit / (loss) on sale of operations and fixed assets and foreign exchange gains / (losses) on long-term intercompany loans. Contact For further information please contact: Mark Rollins, Group Finance Director 01923 714738 This announcement, together with other information on Senior plc may be found at: www.seniorplc.com 1.Introduction The purpose of this statement is to provide a detailed update on the impact of the transition to International Financial Reporting Standards (IFRS) on the 2004 published consolidated financial statements of Senior plc. A brief commentary on the expected impact was included in the Finance Director's Review contained in the Group's 2004 Annual Accounts. Whilst this statement provides greater detail on the transition to IFRS, the adjustments are consistent with the previous commentary. The information has been prepared by management using its best knowledge, judgement and interpretation of the expected standards and accounting policies that will be adopted when the Group prepares its first complete set of IFRS financial statements as at 31 December 2005. It is unaudited. It should be noted that only a complete set of financial statements comprising an income statement, a balance sheet, a cash flow statement, a statement of changes in equity together with comparative financial information and explanatory notes can provide a fair presentation of the Group's financial position and operating performance. This statement contains no information in respect of the Group's 2005 performance under IFRS. Senior intends to report its interim accounts, covering the six months to 30 June 2005, under IFRS, on Thursday 4 August 2005. 2.Transition to International Financial Reporting Standards Companies listed on security exchanges within the European Union are required to adopt IFRS for accounting periods beginning on or after 31 December 2004. The adoption of IFRS will, therefore, first apply to the Group's financial statements with effect from 1 January 2005. Comparative figures are required and consequently, for Senior, the transition date is 1 January 2004, as determined in accordance with IFRS 1 First-time Adoption of International Accounting Standards. During 2004/05 the Group undertook a project, overseen by the Audit Committee, to manage the transition to IFRS. This involved an analysis of each standard to identify the differences between the Group's accounting policies under UK GAAP and those to be adopted under IFRS. The additional data required to restate the Group's results and its financial position in accordance with IFRS with effect from the transition date has been collected and the ongoing reporting and consolidation systems are being modified to meet IFRS requirements. The differences between UK GAAP and IFRS that have been identified as having the most significant effect on the Group's reported results are those arising from the implementation of IFRS 3 Business Combinations, the treatment of proposed dividends and presentational differences of the financial statements. These, along with some of the more minor changes, are discussed below: Section 3 covers the Group Income Statement; Section 4, the Group Balance Sheet and Section 5, the Group Cash Flow Statement. The exemptions adopted by Senior in the transition to IFRS, as permitted by IFRS 1, are explained at Section 10 and the Accounting Policies to be adopted by the Group under IFRS in Section 11. 3.Group Income Statement UK GAAP Adjustment IFRS Note Reformatted 2004 2004 2004 Â£m Â£m Â£m Continuing Operations 3.1 Revenue 306.8 306.8 --------- -------- ------- Trading profit 16.4 (0.1) 16.3 3.2, 3.3 Profit on sale of fixed assets 0.5 0.5 3.4 Amortisation of goodwill (5.1) 5.1 - 3.6 --------- -------- ------- Operating profit 11.8 5.0 16.8 3.2 --------- -------- ------- FX gains on long-term intercompany loans 0.2 0.2 3.5 Interest receivable 2.2 (0.1) 2.1 3.7 Interest payable and similar charges (5.1) 0.1 (5.0) 3.7 Finance cost of net pension liability (1.2) (1.2) --------- -------- ------- Profit before taxation 7.7 5.2 12.9 Taxation (1.7) 0.1 (1.6) --------- -------- ------- Profit for the period from continuing operations 6.0 5.3 11.3 --------- -------- ------- Discontinued Operations Profit from operations before taxtation 0.4 0.1 0.5 3.2 Taxation (0.1) (0.1) Loss on disposal (13.3) 8.5 (4.8) 3.8 --------- -------- ------- Loss for the period from discontinued operations (12.9) 8.5 (4.4) --------- -------- ------- --------- -------- ------- (Loss) / profit for the period (6.9) 13.8 6.9 3.9 --------- -------- ------- The profit for the period is wholly attributable to equity holders of the parent. Earnings / (loss) per share 3.10 Total Group Basic (2.25)p 2.25p Diluted (2.25)p 2.22p Continuing operations Basic 3.69p Diluted 3.64p 3.1 Format of the Income Statement The proforma IFRS income statement is structured differently to the layout previously adopted. In particular the analysis between continuing and discontinued operations is shown differently, permitting a greater focus on the continuing operations. The format used above is based on a current interpretation of IFRS. It is subject to modification as standard practice amongst UK listed entities evolves. 3.2 Trading and operating profit These headings have been created to highlight the performance of continuing operations from trading activities (trading profit) and also the total performance prior to charges in respect of financing and taxation (operating profit). The reconciling items between trading profit and operating profit will be any profit or loss arising on sale of fixed assets (see 3.4 below) and items such as the costs of a major restructuring exercise. Trading profit is consistent with amounts previously disclosed as operating profit before goodwill amortisation under UK GAAP. The segmental analysis will be based on operating profit as financing and taxation charges are considered to be of a Group nature and not allocable to individual segments. Furthermore, operating costs of a Group nature that are not directly attributable to segments will be disclosed separately, rather than being allocated to the operating segments as they were under UK GAAP. As a result, Â£0.1m of central cost previously allocated to discontinued operations has been re-allocated to the continuing operations. The impact of any profit or loss arising on the sale of fixed assets will be shown on a segmental basis in order to permit the underlying trading performance to be fully understood. 3.3 Share based payments Share based payment arrangements exist in relation to share and share option schemes offered to senior management. Share options were issued in March 2003 and it is considered that these may ultimately vest. No cost was included in UK GAAP accounts as the intrinsic value was nil. A cost of under Â£0.1m has been included in the IFRS accounts. This expense has been based on the fair value at the date of the award, as calculated according to the Black-Scholes pricing model. 3.4 Profit on sale of fixed assets Whilst this ultimately forms part of operating profit, it has been highlighted on the basis that significant disposals of fixed assets occur on an infrequent basis and may give rise to profits or losses. As such it is considered that readers will have a better understanding of the underlying performance of the operations if the impact of this item is separately identified. 3.5 Foreign exchange gains or losses on long-term intercompany loans This has been highlighted as a separate significant item in the income statement because of its inter-group nature and its potential future volatility. The Group has a range of funding arrangements in place at both Group and subsidiary level. In many instances a significant source of subsidiary funding is an inter-group loan. Under both UK GAAP and IFRS the exchange differences that arise on the re-translation of these loans is taken to the income statement unless the loan can be designated as part of the net investment in the subsidiary, in which case the difference is dealt with through reserves. However, IFRS specifically disallows this latter treatment if the loans are in a currency different to that of either counterparty or if the loan is between two subsidiaries where one does not have an investment, either directly or indirectly, in the other. Consequently, a net translation gain of Â£0.2m has been transferred from equity to the income statement in 2004 in respect of such loans. 3.6 Goodwill amortisation Under UK GAAP, goodwill arising on acquisitions subsequent to 1 January 1998 was capitalised and amortised over a period of up to 20 years. Under IFRS, goodwill is held at its carrying value (the UK GAAP net book value as at 31 December 2003) and subjected to annual impairment testing. Hence the goodwill amortisation charge of Â£5.1m for 2004 under UK GAAP has been reversed for IFRS purposes. 3.7 Interest receivable and interest payable A benefit of Â£0.1m arising from interest rate swap agreements was previously shown as interest receivable. This has now been offset against the related interest payable amount. 3.8 Loss on disposal of discontinued operations Under UK GAAP, goodwill arising on acquisitions prior to 1 January 1998 was written off directly to equity. When such a company was subsequently disposed, the goodwill was 'recycled' through the income statement as part of the profit or loss on disposal. There is no such requirement under IFRS. Hence, the UK GAAP loss is reduced by Â£8.7m. Additionally, IFRS requires cumulative translation differences to be recognised in the disposal transaction. These amount to Â£0.2m, making the aggregate adjustment Â£8.5m. 3.9 Dividends Under UK GAAP, any dividends paid or proposed in respect of a year are recognised in the income statement. Under IFRS, they are recognised as distributions from equity. Hence the dividends of Â£6.1m, paid and proposed in 2004, have been excluded from the income statement under IFRS. This is a format change only. 3.10 Earnings per share Basic earnings per share will be presented on the face of the income statement. In accordance with IAS33 ('Earnings per Share') this amount is required to be split between continuing and discontinued businesses. Adjusted earnings per share will now be shown in the notes to the accounts (see section 9 below). It is intended that the definition of adjusted earnings per share will follow that which was previously adopted under UK GAAP, except that it will also exclude the impact of foreign exchange gains and losses arising on long-term intercompany loans. 4.Group Balance Sheet UK GAAP Adjustment IFRS Note Reformatted 2004 2004 2004 Â£m Â£m Â£m Assets Non-current assets Property, plant & equipment 70.0 (1.2) 68.8 4.2 Goodwill 68.0 5.1 73.1 4.1 Intangible assets - 1.2 1.2 4.2, 4.8 Deferred tax assets 0.1 0.1 Trade and other receivables 3.8 3.8 --------- -------- ------- 141.9 5.1 147.0 --------- -------- ------- Current assets Inventories 38.4 38.4 4.8 Construction contracts 4.5 4.5 Trade and other receivables 55.5 55.5 Cash and cash equivalents 7.4 7.4 --------- -------- ------- 105.8 - 105.8 --------- -------- ------- Total Assets 247.7 5.1 252.8 --------- -------- ------- Current liabilities Trade and other payables (63.7) 4.1 (59.6) 4.3 Tax liabilities (9.5) (9.5) Obligations under finance leases (0.3) (0.3) Bank overdrafts and loans (2.6) (2.6) --------- -------- ------- (76.1) 4.1 (72.0) --------- -------- ------- Non current liabilities Bank and other loans (52.6) (52.6) Retirement benefit obligations (41.2) (0.2) (41.4) 4.4 Deferred tax liabilities (0.4) (0.5) (0.9) 4.5 Obligations under finance leases (1.8) (1.8) Others (0.3) (0.3) --------- -------- ------- (96.3) (0.7) (97.0) --------- -------- ------- Total Liabilities (172.4) 3.4 (169.0) --------- -------- ------- Net Assets 75.3 8.5 83.8 --------- -------- ------- Capital and Reserves Share capital 30.7 - 30.7 Share premium 3.5 - 3.5 Other reserves 17.7 (0.7) 17.0 4.7 Hedging and translation reserve - 0.5 0.5 4.7 Equity reserve - 0.1 0.1 4.6 Retained earnings 24.7 8.6 33.3 Own shares (1.3) - (1.3) --------- -------- ------- Total Equity 75.3 8.5 83.8 --------- -------- ------- 4.1 Goodwill amortisation Under UK GAAP, goodwill arising on acquisitions subsequent to 1 January 1998 was capitalised and amortised over a period of up to 20 years. Under IFRS, goodwill is held at its carrying value (the UK GAAP net book value as at 31 December 2003) and subjected to annual impairment testing. Hence the goodwill amortisation charge of Â£5.1m has been reversed, leading to an equivalent increase in the goodwill value on the balance sheet at the end of 2004 under IFRS. 4.2 Intangible assets IFRS requires computer software to be recorded as an intangible asset and amortised over its useful life. Accordingly, Â£1.2m of net book value has been transferred from within plant & equipment to intangible assets. At 31 December 2003, the equivalent adjustment was a transfer of Â£1.6m. There is no net effect in the income statement, although Â£0.5m of depreciation will now be recorded as the amortisation of intangibles. 4.3 Dividends Under UK GAAP, any dividend proposed in respect of a year is recognised in the income statement and provided for in the closing balance sheet. Under IFRS, a declared dividend does not constitute an adjusting post balance sheet event. Hence, the provision for the final dividend of Â£4.1m at the end of 2004 under UK GAAP has been reversed under IFRS. The same adjustment applies to the proposed dividend as at 31 December 2003. 4.4 Retirement benefit obligations IFRS requires that invested assets be valued at bid price, rather than at mid-price as required under UK GAAP, by FRS17. This revaluation causes the assets held by the funded plans to reduce in value by Â£0.2m, and consequently the net balance sheet pension deficit to increase by the same amount. The same adjustment applies to the balance sheet as at 31 December 2003. 4.5 Deferred tax IFRS changes the focus of deferred tax from the income statement to the balance sheet and to the differences between the book value and tax base of assets and liabilities. Under IFRS, deferred tax is provided on all temporary differences, albeit that deferred tax assets are only recognised to the extent that they may be regarded as recoverable. The Group has recognised a net increase in deferred tax liabilities of Â£0.5m relating to the taxation of deferred foreign exchange gains arising in overseas territories. The equivalent adjustment as at 31 December 2003 was Â£0.6m. The movement in the year ended 31 December 2004 has been credited directly to equity via the statement of recognised income and expense. 4.6 Share based payments In 2003, under IFRS, a cost of Â£0.1m would have been recognised for share options. In 2004, a further small cost was incurred, with the cumulative provision remaining at Â£0.1m at the end of 2004. 4.7 Share capital and reserves As noted later under the IFRS 1 exemptions, the cumulative translation differences have been set to zero at the transition date. The closing balance of Â£0.5m represents the amount arising in 2004. Also, as noted under the IFRS 1 exemptions, the existing UK GAAP value of property, plant and equipment has been taken as the deemed cost for IFRS. Hence, the revaluation reserve has been reset to zero, with the previous balance of Â£0.7m having been transferred to the profit and loss reserve. 4.8 Research & development Under UK GAAP, all research and development costs were charged against revenue as incurred unless they were specifically recoverable through funded development contracts or under contractual guarantees. If recoverable, the costs were capitalised within inventory and charged to the income statement at the same time as the related revenues were recognised. Under IFRS, the above treatment of specifically recoverable funded development engineering will continue whereas, amounts deemed recoverable as a result of contractual guarantees will be capitalised within intangible assets and amortised over the guarantee period. As at 31 December 2004 there were no such amounts. Other ongoing development activities have been reviewed. Throughout the Group, the majority of development expenditure is directed to improvements in existing manufacturing processes and product technology when the costs will continue to be expensed as incurred under IFRS. Much of the investment in new products takes place prior to securing commercial production orders, and is incurred on an at risk basis. In such circumstances the costs will continue to be expensed. However, where there is greater certainty as to the ultimate benefit and the timescale over which the benefit will be achieved, the cost will be capitalised and amortised, provided that the project also meets the criteria for recognition as an asset. As at 31 December 2004, it was concluded that no projects met the criteria to capitalise any such amounts. Further, IFRS does not permit assessments to be performed retrospectively and with the benefit of hindsight. As at 31 December 2003 the appropriate review procedures were not in place to carry out such an assessment and so no amounts could be capitalised at that date. 5.Group Cash Flow Statement IFRS 2004 Â£m Net cash inflow from operating activities (UK GAAP) 20.4 less: interest paid (5.4) add: tax receipts 2.7 -------- Net cash inflow from operating activities (IFRS) 17.7 Investing activities Interest received 2.5 Disposal of subsidiaries 4.7 Proceeds on disposal of property, plant & equipment 0.7 Purchases of property, plant & equipment (9.8) Purchases of intangible assets - software (0.2) Acquisition of subsidiary (deferred consideration) (0.2) -------- Net cash used in investing activities (2.3) Financing activities Dividends paid (6.1) Repayment of borrowings (18.9) Repayments of obligations under finance leases (0.3) Cash inflow on forward contracts 4.5 -------- Net cash used in financing activities (20.8) -------- Net decrease in cash and cash equivalents (5.4) Cash and cash equivalents at beginning of year 11.5 Effects of foreign exchange rate changes (0.2) -------- Cash and cash equivalents at end of year 5.9 -------- 2004 Â£m Cash and cash equivalents comprise: Cash and cash equivalents 7.4 Overdrafts (1.5) -------- 5.9 -------- Reconciliation of net cash inflow from operating activities to free cash flow UK GAAP IFRS Â£m Â£m Net cash inflow from operating activities 20.4 17.7 less: interest paid (5.4) add: tax receipts 2.7 add: interest received 2.5 2.5 add: proceeds on disposal of property, plant & equipment 0.7 0.7 less: purchases of property, plant & equipment - cash (10.0) (9.8) less: purchases of property, plant & equipment - finance lease (0.4) (0.4) less: purchases of intangible assets - software - (0.2) -------- -------- Free cash flow 10.5 10.5 -------- -------- Free cash flow will continue to be used as a non-statutory measure intended to demonstrate the total net cash generated by the Group prior to corporate activity such as acquisitions, disposals and distributions to shareholders. 6.Statement of Recognised Income and Expense UK GAAP Adjustment IFRS Reformatted 2004 2004 2004 Â£m Â£m Â£m Currency variations (0.5) (0.5) Actuarial losses on retirement benefit obligations (0.3) (0.3) Tax on items taken directly to equity 0.9 0.1 1.0 -------- -------- -------- Net gains not recognised in income statement 0.1 0.1 0.2 (Loss) / profit for the financial year (6.9) 13.8 6.9 -------- -------- -------- Total recognised (loss) / income for the year (6.8) 13.9 7.1 -------- -------- -------- 7.Reconciliation of Equity by Component of Equity 7.1 As at 1 January 2004 Share Share Other Translation Equity Profit Investment Total Capital Premium Reserves Reserve Reserve and in own Loss shares Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m UK GAAP 30.7 3.5 17.7 - - 28.9 (1.3) 79.5 IFRS adjustments: Post retirement benefit obligatiions (0.2) (0.2) Final dividend 4.1 4.1 Deferred tax liability (0.6) (0.6) Revaluation reserve (0.7) 0.7 - Share options 0.1 (0.1) - ------ ------ ------ ------- ------ ------ ------- ------ Total opening adjustments - - (0.7) - 0.1 3.9 - 3.3 ------ ------ ------ ------- ------ ------ ------- ------ IFRS 30.7 3.5 17.0 - 0.1 32.8 (1.3) 82.8 ------ ------ ------ ------- ------ ------ ------- ------ 7.2 As at 31 December 2004 Share Share Other Translation Equity Profit Investment Total Capital Premium Reserves Reserve Reserve and in own Loss shares Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m UK GAAP 30.7 3.5 17.7 - - 24.7 (1.3) 75.3 IFRS adjustments: Total opening adjustments - - (0.7) - 0.1 3.9 - 3.3 Change in profit for the period 13.8 13.8 Goodwill on disposal (8.7) (8.7) Translation reserve 0.5 (0.4) 0.1 ------ ------ ------ ------- ------ ------ ------- ------ IFRS 30.7 3.5 17.0 0.5 0.1 33.3 (1.3) 83.8 ------ ------ ------ ------- ------ ------ ------- ------ Â£m Opening IFRS Equity per 7.1 above 82.8 Add: total recognised income per 6 above 7.1 less: dividends paid to shareholders (6.1) ------ Closing IFRS Equity as above 83.8 ------ 8.Segmental Analysis - by Industry Gross Inter- External Trading P&L on Operating Revenue Group Revenue Profit disposal Profit Revenue of fixed assets Â£m Â£m Â£m Â£m Â£m Â£m Aerospace 139.6 (0.1) 139.5 11.1 - 11.1 Automotive 122.9 (0.3) 122.6 8.0 0.5 8.5 Industrial 44.9 (0.2) 44.7 1.0 - 1.0 Unallocated costs - - - (3.8) - (3.8) ------- ------- ------- ------- -------- ------- Total continuing operations 307.4 (0.6) 306.8 16.3 0.5 16.8 ------- ------- ------- ------- -------- ------- Discontinued operations 19.1 - 19.1 0.5 - 0.5 ------- ------- ------- ------- -------- ------- 9.Earnings Per Share UK GAAP UK GAAP IFRS IFRS Earnings EPS Earnings EPS Â£m pence Â£m pence Profit for the period from continuing operations 11.3 3.69 Loss for the period from discontinued operations (4.4) (1.44) ------- ------- (Loss) / profit on ordinary activities after taxation (6.9) (2.25) 6.9 2.25 Amortisation of goodwill 5.1 1.66 - - Profit on sale of fixed assets net of tax Â£0.2m (0.3) (0.10) (0.3) (0.10) Loss on disposal of discontinued operations 13.3 4.34 4.8 1.57 FX gains on long-term intercompany loans (0.2) (0.07) ------- -------- ------- ------- Adjusted earnings after taxation 11.2 3.65 11.2 3.65 ------- -------- ------- ------- Weighted average number of shares & (loss)/earnings per share - basic continuing 306.5m 3.69p - basic discontinued 306.5m (1.44)p - basic 306.5m (2.25)p 306.5m 2.25p - diluted 306.5m (2.25)p 310.8m 2.22p - adjusted 306.5m 3.65p 306.5m 3.65p - adjusted & diluted 310.8m 3.60p The Group will continue to provide information on adjusted earnings per share, derived in accordance with the table above. This is used to identify the performance of operations, from the time of acquisition or until the time of disposal, prior to the impact of the following items, to the extent that they apply to any accounting period: (i) gains or losses arising from the disposal of fixed assets (ii) gains or losses arising from the disposal of discontinued operations (iii) gains or losses arising from the re-translation of long-term intercompany items (iv) charges for the impairment of goodwill 10.IFRS 1 Exemptions Senior has taken the following exemptions, as permitted by IFRS 1, in the transition to IFRS. 10.1 Business combinations The accounting for acquisitions that occurred prior to the transition date of 1 January 2004 has not been restated. It should be noted that the Group's most recent acquisition took place in 1999. 10.2 Employee benefits All cumulative actuarial gains and losses have been recognised in equity at the transition date. This is consistent with the accounting treatment previously adopted under FRS17, which the Group adopted in full in its 2004 financial statements, and also with the prospective accounting policy under IAS19. Under IAS19 the Group intends to early adopt an amendment permitting the full recognition of actuarial gains and losses on an annual basis via the statement of recognised income and expense. 10.3 Cumulative translation differences Cumulative translation differences have been reset to zero at the transition date. The cumulative translation differences arising in the period on overseas operations subsequently disposed of have been transferred into the income statement as part of the loss on disposal. 10.4 Share based payments Share and share option awards made prior to 7 November 2002, that remain outstanding, have not been valued. In any event, based on the performance conditions attached to these awards it is not expected that they will ultimately vest. Awards made subsequent to 7 November 2002, that remain outstanding, have been valued and an appropriate charge is included in the income statement. 10.5 Tangible fixed assets The Group has chosen not to restate property, plant and equipment to fair value at the date of transition. These are carried at historic cost, or modified historic cost (a revaluation undertaken prior to 2000), which has been taken as the effective cost for IFRS purposes. 10.6 Financial instruments The Group has taken the exemption available in IFRS 1 not to restate comparatives for IAS32 (Financial Instruments: Disclosure and Presentation) and IAS39 (Financial Instruments: Recognition and Measurement). Consequently, information provided in this restatement, and the information that will ultimately be presented as comparatives to the 2005 financial statements, will be presented in accordance with UK GAAP. IAS32 and IAS39, which primarily relate to the accounting treatment and disclosure of financial instruments, will be implemented with effect from 1 January 2005. As indicated in the Finance Director's Review in the 2004 Annual Report, the Group uses forward contracts, in addition to currency denominated loans, to hedge the net investment in overseas operations. It also uses forward contracts to hedge transaction exposures and interest rate swaps to secure an appropriate mix of fixed and variable rate borrowing. Under UK GAAP, the Group has applied hedge accounting principles supplemented by the disclosures required by FRS13 ('Financial Instruments'). Under IFRS, the Group expects to continue this approach to hedging currency and interest rate exposures. Hedging relationships have been formally documented and it is believed that hedge accounting will continue to be allowable under IAS39, subject to meeting hedge effectiveness tests. As at 31 December 2004, the fair value of interest rate instruments was a liability of Â£0.9m against a book value of Â£nil, and the fair value of forward foreign exchange contracts was an asset of Â£0.6m against a book value of nil. In both cases the fair value will be incorporated on to the balance sheet. The future impact is unpredictable, but it is considered that it is unlikely to be material to an understanding of the Group's results. 11.Significant Accounting Policies 11.1 Basis of accounting The financial statements will be prepared in accordance with International Financial Reporting Standards (IFRS) for the first time with effect from 1 January 2005. They will be prepared on the historical cost basis, except for the revaluation of certain properties and financial instruments. The principal accounting policies expected to be adopted in the preparation of the 2005 Group accounts under IFRS are set out below. 11.2 Basis of consolidation The consolidated financial statements incorporate the financial statements of Senior plc and the entities controlled by it (its subsidiaries) made up to 31 December. Control is achieved when Senior plc has the power to govern the financial and operating policies of an invested entity so as to obtain benefits from its activities. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair value of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the income statement in the period of acquisition. The interest of minority shareholders is stated at the minority's proportion of the fair values of the assets and liabilities recognised. Subsequently, any losses applicable to the minority interest in excess of the minority interest are allocated against the interests of the parent. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. 11.3 Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately through the income statement and is not subsequently reversed. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill arising on acquisitions prior to the date of transition to IFRS has been retained at the previous UK GAAP amount subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. 11.4 Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Sales of goods are recognised when goods are delivered in accordance with the terms and conditions of the sale. Revenue from construction contracts is recognised in accordance with the Group's accounting policy on construction contracts (see 11.5 below). Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Dividend income from investments is recognised when the shareholders' legal rights to receive payment have been established. 11.5 Construction contracts Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date. This is normally calculated in accordance with the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion. Variations in contract work and claims are included to the extent that it is probable that they will be recovered from the customer. Where the outcome of a construction contract cannot be estimated reliably, contract revenue is only recognised to the extent that contract costs incurred will probably be recoverable. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. 11.6 Leasing Leases are classified as finance leases whenever the terms of the lease substantially transfer all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and a reduction of the lease obligation in order to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement. Rentals payable under operating leases are expensed on a straight-line basis over the term of the relevant lease. Benefits received and receivable as incentives to enter into an operating lease are also spread on a straight-line basis over the lease term. 11.7 Foreign currencies Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing on the date of the transaction. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Gains and losses arising on retranslation are included in net profit or loss for the period, except for exchange differences arising on non-monetary assets and liabilities where the changes in fair value are recognised directly in equity, subject to meeting the requirements under IAS21. In order to hedge its exposure to certain foreign exchange risks, the Group enters into forward contracts (see 11.17 below for details of the Group's accounting policies in respect of such derivative financial instruments). On consolidation, the assets and liabilities of the Group's overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the Group's translation reserve. Such translation differences are recognised as income or expense in the period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 11.8 Government grants Government grants received for items of a revenue nature are recognised in the income statement over the period necessary to match them with the related costs, and are deducted from that cost. Government grants relating to investment in property, plant and equipment are deducted from the initial carrying value of the related capital asset. 11.9 Operating profit Operating profit is stated after charging restructuring costs, and before investment income and finance costs, as they relate to external borrowings, retirement benefit obligations (see 11.10 below) and foreign exchange on long-term intercompany loans. 11.10 Retirement benefit costs Payments to defined contribution retirement schemes are charged as an expense as they fall due. Payments made to state-managed retirement benefit schemes are dealt with as payments to defined contribution schemes where the Group's obligations under the schemes are equivalent to those arising in a defined contribution retirement scheme. For defined benefit retirement schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with full actuarial valuations being carried out on a triennial basis, and updated at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the income statement and are presented in the statement of recognised income and expense. Past service costs are recognised immediately to the extent that the benefits are already vested. Otherwise, they are amortised on a straight-line basis over the period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service costs, and as reduced by the fair value of scheme assets. Any net asset resulting from this calculation is limited to the past service cost plus the present value of available refunds and reductions in future contributions to the plan. 11.11 Taxation The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit not the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying value of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 11.12 Property, plant and equipment Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the balance sheet at their historic cost, or at modified historic cost, being a revaluation undertaken prior to the transition date to IFRS. Fixtures, plant and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged on a straight-line basis over the estimated useful life of the asset, and is charged from the time an asset becomes available for its intended use. Annual rates are as follows: Freehold buildings 2% Improvements to leasehold buildings according to remaining lease term Plant and equipment 5% - 33% Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset at disposal and is recognised in income. 11.13 Internally generated intangible assets - research and development expenditure. An internally generated intangible asset arising from the Group's development activities is recognised if all of the following conditions are met: (i) An asset is created that can be separately identified; (ii) It is probable that the asset created will generate future economic benefits; and (iii) The development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basis over their useful lives. Development work is also carried out on a funded basis. In such circumstances the costs are accumulated in inventory and are recognised when the related billings are made. Any amounts held in inventory are subject to normal inventory valuation principles. Otherwise expenditure on research and development activities is recognised as an expense in the period in which it is incurred. 11.14 Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. The recoverable amount is the higher of the fair value less the costs to sell and the value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 11.15 Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and an appropriate allocation of production overheads. Cost is calculated using the first in first out method. Net realisable value represents the estimated selling price less the estimated costs of completion and the costs to be incurred in marketing, selling and distribution. 11.16 Equity instruments Equity instruments issued by the Company are recorded at the value of proceeds received, net of direct issue costs. 11.17 Derivative financial instruments and hedging The group's activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The group uses foreign exchange contracts and interest rate swap contracts to hedge these exposures. The use of financial derivatives is governed by the Group's treasury policy as approved by the board of directors, which provides written principles on the use of derivatives. The Group does not use derivative financial instruments for speculative purposes. Changes in the fair value of derivative financial instruments that are designated and are effective as a cash flow hedge are recognised directly in equity and the ineffective portion is recognised immediately in the income statement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss. For an effective hedge of an exposure to changes in fair value, the hedged item is adjusted for changes in fair value attributable to the risk being hedged with the corresponding entry in the income statement. Gains or losses from re-measuring the derivative are also recognised in the income statement. If the hedge is effective these entries will offset. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement as they arise. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss for the period. Derivatives embedded in other financial instruments or other host contracts are treated as derivatives when their risks and characteristics are not closely related to those host contracts. 11.18 Provisions Provisions for restructuring costs are recognised when the Group has a detailed formal plan for the restructuring and the plan has been communicated to the affected parties. 11.19 Share-based payments The Group has applied the requirements of IFRS 2 Share-based payments. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005. The Group has issued equity-settled and cash-settled share-based payments to certain employees. These payments have conditions that are non-market related. The fair value, as determined at the grant date, is expensed on a straight-line basis over the vesting period, based on the Group's estimate of the number of shares that will eventually vest. Fair value is measured by use of a Black-Scholes pricing model. The liability in respect of equity-settled amounts is included in equity, whereas the liability in respect of cash-settled amounts is included in current and non-current liabilities as appropriate. 11.20 Segmental analysis Under IFRS, segmental detail is presented according to a primary segment and a secondary segment. The Group's primary segmental analysis will be based on the industries that it serves; Aerospace, Automotive and Industrial. The secondary analysis will be presented according to geographic markets comprising North America, Europe (split between the UK and Rest of Europe) and the Rest of the World. This is consistent with the way the Group manages itself and with the format of the Group's internal financial reporting. This information is provided by RNS The company news service from the London Stock Exchange

Companies

Senior (SNR)

Thursday, 23rd May 2024

COMPANIES COVERED:

HL. QQ. AJB

Another day and another round of takeover talk with Hargreaves Lansdown being eyed by private equity suitors. AJ Bell also advances on upbeat earnings news whilst QinetiQ upgrades its profit guidance, too.

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