IFRS Restatement
Smiths Group PLC
6 July 2005
Smiths Group: Transition to
International Financial Reporting Standards (IFRS)
Smiths Group is today publishing information about its IFRS accounting policies
and restating its interim results to 31 January 2005 and its July 2004 and
January 2005 balance sheets in order to enable an early understanding of the
effect of IFRS on the Company's financial reporting. Smiths Group will report
under IFRS for the first time in the 2005/2006 interim results.
UK GAAP remains the basis for the 2004/2005 financial statements.
The company is not issuing a trading statement at this time. A trading
statement will be issued as Smiths enters the close period in August.
Highlights:
• Headline* profit before tax for the six months ended 31 January 2005 up
10% to £170m compared to the UK GAAP equivalent (and statutory profit
before tax up 30%)
• Headline* earnings per share for the six months ended 31 January 2005
up 9% to 22.2p compared to the UK GAAP equivalent (and statutory eps up
34%)
• No further significant differences arising from previous guidance
• IAS 32 and IAS 39 to be adopted from 1 August 2005
• No effect on Smiths' trading cash flows
* Before goodwill amortisation and exceptional items (under UK GAAP) and before
significant items (under IFRS). Exceptional/significant items in the six months
ended 31 January 2005 comprised restructuring costs of £7.6m.
Alan Thomson, Financial Director, commented: 'The move to IFRS, whilst
important, does not change the economics or strategy of our business. The
increase in headline profits and earnings per share arises principally from the
capitalisation of development expenditure, although the underlying fundamentals
and cash flows of Smiths remain unchanged'.
The full text of this release may be downloaded from http://www.smiths-group.com
/ir.
Further information on the impact of IFRS will be disclosed on a conference call
for analysts, to which investors are invited to listen, at 2.30pm on Thursday 7
July.
The call will be accessed on
UK Toll Free Number: 0800-018-0764
USA Toll Free Number: 877-951-7311
PASSCODE: IFRS
LEADER: Russell Plumley
-o-
Media: Investors:
Chris Fox Russell Plumley
+44 (0) 20 8457 8403 +44 (0) 20 8457 8203
chris.fox@smiths-group.com russell.plumley@smiths-group.com
Smiths Group plc
Adoption of International Financial Reporting Standards
Introduction
As a consequence of the adoption by the European Union ('EU') of International
Financial Reporting Standards ('IFRS') Smiths Group plc ('Smiths'), in common
with all companies quoted on the London Stock Exchange or other European
exchanges, is required to prepare its consolidated financial statements under
IFRS for all periods commencing on or after 1 January 2005.
Smiths will first adopt IFRS for the year commencing 1 August 2005 and ending 31
July 2006, including the Interim Statement for the six months ending 31 January
2006. However, the requirement to restate comparative figures on the same basis
as the period then under review means that Smiths has:-
i) Applied its new IFRS accounting policies to its
consolidated 31 July 2004 balance sheet (previously prepared under UK Generally
Accepted Accounting Standards ('UK GAAP'), in order to determine an
appropriately adjusted opening position on transition to IFRS as at 1 August
2004; and
ii) Restated its results for the period of 6 months ended 31
January 2005 in line with its new IFRS accounting policies for such comparative
purposes.
The impact of IFRS on the Smiths consolidated financial statements will be
two-fold:-
a) Presentation
The format and descriptions used in the balance sheet and income statement will
change to accord with the new reporting requirements, and
b) Measurement
The recognition and measurement of certain assets, liabilities, income and
expenses will change in order to comply with the new standards.
This document sets out the changes that are required to the previously reported
2004 balance sheet and the 2005 Interim Statement in order to comply with IFRS,
and the underlying reasons for those changes. The financial information
represents the company's current best estimates, and may need to be revised
subsequently due to changes in IFRS, or to the interpretation of its provisions.
The appendices to this document contain reconciliations of the 1 August 2004
opening Balance Sheet, and the 31 January 2005 Interim Balance Sheet and Income
Statement, from a UK GAAP to an IFRS basis and revised accounting polices under
IFRS.
It should be noted that the Smiths Group plc Annual Report for the year ending
31 July 2005 will continue to be prepared under UK GAAP, and circulated to
shareholders for their approval on that basis. The 2005 full-year results and
closing balance sheet will be restated to comply with IFRS for comparison
purposes in the 2006 Annual Report. This information is expected to be made
available in late Autumn.
Summary of IFRS Impact - Balance Sheet (unaudited)
The impact of IFRS on the Smiths Group plc consolidated shareholders' funds may
be summarised as follows:-
1 August 2004 31 January 2005
£m £m
Shareholders' funds under UK GAAP 1,122.5 1,164.2
Add: Development expenditure 65.1 81.2
capitalised
Goodwill amortisation reversal - 22.1
Dividend reversal 102.5 52.0
Deferred tax (2.9) (5.7)
Other adjustments (6.2) (8.4)
Shareholders' funds under IFRS 1,281.0 1,305.4
Changes in the presentational format of the 2004 consolidated balance sheet to
accord with the new IFRS requirements are set out in Appendix A.
An analysis of UK GAAP - IFRS adjustments by category of assets and liabilities
in that new format are set out in Appendices B (1 August 2004) and E (31 January
2005).
Summary of IFRS Impact - 2005 Interim Income Statement (unaudited)
Following restatement of the Smiths Group plc consolidated balance sheet at 1
August 2004, the results for the 6 months ended 31 January 2005 have been
revised to conform with IFRS rules. The impact on the previously reported UK
GAAP pre-tax profit is summarised as follows:-
Headline* Total
£m £m
UK GAAP profit before tax 154.7 125.0
Add: Development expenditure capitalised
(net of amortisation) 16.2 16.2
Goodwill amortisation reversal - 22.1
Share based payment (3.0) (3.0)
Financing gains 2.2 2.2
Other (0.3) (0.3)
IFRS adjusted profit before tax 169.8 162.2
IFRS taxation (44.9) (42.6)
IFRS adjusted profit after taxation 124.9 119.6
EPS - Basic 22.2p 21.3p
* Before goodwill amortisation and exceptional items (under UK GAAP) and before
significant items (under IFRS). Exceptional / significant items in the six
months ended 31 January 2005 comprised restructuring costs of £7.6m.
Headline basic earnings per share (EPS) improves from 20.4p under UK GAAP to
22.2 p on an IFRS basis, and after exceptional items from 15.9p under UK GAAP to
21.3p on an IFRS basis.
A restatement of the 2005 Interim Income Statement and analysis of UK GAAP -
IFRS adjustments is set out in Appendix C.
Basis of preparation
The unaudited financial information contained in this document has been prepared
using IFRS policies based on IFRS expected to be applicable to the Company and
adopted formally by the EU as of 31 July 2006. As permitted, Smiths has adopted
early the amendment to IAS 19 Employee Benefits published in December 2004,
which is still pending endorsement by the EU.
At this stage in the development of IFRS, matters such as the interpretation and
application surrounding it are continuing to evolve. In addition IFRS currently
in issue and endorsed by the EU are subject to interpretation by IFRIC and
further standards may be issued by the IASB that will be endorsed by the EU
before 31 July 2006. These uncertainties could result in the need to change the
basis of accounting or presentation of certain financial information from that
presented in this document.
Smiths is required to establish its IFRS accounting policies for the year ended
31 July 2006, and apply these retrospectively to determine its opening IFRS
balance sheet at the transition date of 1 August 2004 and the comparative
financial information for the year ending 31 July 2005. However advantage has
been taken of certain exemptions afforded by IFRS1 First Time Adoption of
International Financial Reporting Standards as follows:-
1.Business combinations
Business combinations prior to 1 August 2004, and in particular the merger with
TI Group plc, which took place on 4 December 2000, have not been restated to
comply with IFRS 3 Business Combinations. The merger reserve of £235m will
remain as permanent item within shareholders' equity.
2. Cumulative translation differences
IAS 21 The Effects of Changes in Foreign Exchange Rates requires annual
translation differences arising on the opening net assets and net profit or loss
of each foreign subsidiary to be treated as a separate component of
shareholders' equity, and the cumulative net surplus / deficit for each
subsidiary carried forward and added to / subtracted from any gains / losses on
the future disposal of that subsidiary. Smiths has taken the option to set these
gains / losses at zero as at the date of transition to IFRS. Any gains and
losses recognised in the income statement on subsequent disposals of foreign
operations will therefore include only those translation differences arising
after 1 August 2004, the IFRS transition date.
3. Share-based payment
Smiths has applied IFRS 2 Share-based Payment retrospectively only to
equity-settled awards made after 7 November 2002 that had not vested at 1
January 2005.
4. Financial Instruments
Smiths has elected to adopt IAS 32 Financial Instruments : Disclosure and
Presentation and IAS 39 Financial Instruments : Recognition and Measurement from
1 August 2005 with no restatement of comparative information. Consequently, the
relevant comparative financial
information for the six months ended 31 January 2005 and the year ended 31 July
2005 will not reflect the impact of these standards, but will include financial
instruments accounted for on a UK GAAP basis.
Appendix F sets out the new Accounting Policies to be adopted by the company
under IFRS.
Smiths Group plc
Consolidated Balance Sheet at 1 August 2004 (unaudited)
UK GAAP Adjustments IFRS
(IFRS Format) To IFRS Basis
Total Total Total
2004 2004 2004
£m £m £m
Non-current assets
Goodwill 728.2 (0.5) 727.7
Other intangible assets 129.7 129.7
Property, plant and equipment 423.5 (12.2) 411.3
Financial Assets:
TI Automotive Limited preference shares 325.0 325.0
Other trade investments 2.3 2.3
Retirement benefit assets 103.9 103.9
Deferred tax assets 116.4 (13.7) 102.7
Trade and other receivables 9.2 (0.9) 8.3
1,708.5 102.4 1,810.9
Current assets
Inventories 423.5 (3.8) 419.7
Trade and other receivables 620.4 5.1 625.5
Cash and cash equivalents 449.2 449.2
Total assets 3,201.6 103.7 3,305.3
Non-current liabilities
Provisions for liabilities and charges (22.6) (22.6)
Retirement benefit obligations (351.2) (1.8) (353.0)
Deferred tax liabilities (49.4) 10.8 (38.6)
Financial liabilities:
Borrowings (446.5) (446.5)
Other payables (53.1) (41.6) (94.7)
Current liabilities
Provisions for liabilities and charges (79.2) (79.2)
Trade and other payables (665.9) 87.4 (578.5)
Financial liabilities:
Borrowings (275.4) (275.4)
Current tax payable (135.8) (135.8)
Total liabilities (2,079.1) 54.8 (2,024.3)
Net assets 1,122.5 158.5 1,281.0
Shareholders' equity
Share capital 140.3 140.3
Share premium account 183.0 183.0
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 562.7 158.5 721.2
Total shareholders' equity 1,122.5 158.5 1,281.0
An analysis of the above adjustments required to represent the UK GAAP balance sheet on
an IFRS basis is provided in Appendix B.
Smiths Group plc
Consolidated Income Statement (unaudited)
6 months ended 31 January 2005
Total
As IFRS Adjustments IFRS
Reported Format to IFRS Basis
(UK GAAP) (UK GAAP)
£m £m £m £m
Continuing operations
Turnover 1,344.4
Revenue 1,344.4 (6.8) 1,337.6
Cost of sales (812.0) 4.5 (807.5)
Gross profit 532.4 (2.3) 530.1
Sales and distribution costs (145.0) (0.4) (145.4)
Administrative expenses (264.0) 19.2 (244.8)
Development costs - IFRS adjustment 18.5 18.5
Operating profit 123.4 123.4 35.0 158.4
After charging: goodwill amortisation (22.1) 22.1
operational restructuring (7.6) (7.6)
Interest receivable 10.9 10.9 10.9
Interest payable (16.8) (16.8) (16.8)
Financing gains 2.2 2.2
Other finance income - retirement benefits 7.5 7.5 7.5
Profit before taxation 125.0 125.0 37.2 162.2
Taxation (35.7) (35.7) (6.9) (42.6)
Profit for the period 89.3 89.3 30.3 119.6
An analysis of the above adjustments is provided in Appendix C.
Smiths Group plc
Consolidated Balance Sheet at 31 January 2005 (unaudited)
31 January 2005
UK GAAP Adjustments IFRS
(IFRS Format) To IFRS Basis
Total Total Total
2005 2005 2005
£m £m £m
Non-current assets
Goodwill 748.6 21.3 769.9
Other intangible assets 150.7 150.7
Property, plant and equipment 434.6 (14.0) 420.6
Financial Assets:
TI Automotive Limited preference shares 325.0 325.0
Other trade investments 2.9 2.9
Retirement benefit assets 110.6 110.6
Deferred tax assets 113.5 (8.7) 104.8
Trade and other receivables 8.0 (0.9) 7.1
1,743.2 148.4 1,891.6
Current assets
Inventories 484.9 (3.3) 481.6
Trade and other receivables 620.4 620.4
Cash and cash equivalents 343.0 343.0
Total assets 3,191.5 145.1 3,336.6
Non-current liabilities
Provisions for liabilities and charges (25.5) (25.5)
Retirement benefit obligations (342.2) (1.8) (344.0)
Deferred tax liabilities (51.0) 3.0 (48.0)
Financial liabilities:
Borrowings (442.6) (442.6)
Other payables (48.2) (44.1) (92.3)
Current liabilities
Provisions for liabilities and charges (72.8) (72.8)
Trade and other payables (632.9) 39.0 (593.9)
Financial liabilities:
Borrowings (292.0) (292.0)
Current tax payable (120.1) (120.1)
Total liabilities (2,027.3) (3.9) (2,031.2)
Net assets 1,164.2 141.2 1,305.4
Shareholders' equity
Share capital 140.6 140.6
Share premium account 190.4 190.4
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 596.7 141.2 737.9
Total shareholders' equity 1,164.2 141.2 1,305.4
An analysis of the above adjustments is required to represent the UK GAAP
balance sheet on an IFRS basis is provided in Appendix E.
Principal Impact of IFRS
The key differences between UK GAAP and IFRS that will impact the Group are set
out below.
1. Research and development
Under UK GAAP research and development expenditure, other than that recoverable
from third parties, is written off in the year in which it is incurred.
Under IAS 38 Intangible Assets, the company is required to capitalise the cost
of developments which meet certain recognition criteria, including the technical
feasibility and probable future economic benefits arising from the project. This
expenditure is then amortised over the anticipated future life of the resulting
income stream.
Customer-funded and unfunded development projects are treated on a similar
basis, although the increased risk implicit in most funded development projects
means that the criteria for capitalisation are less likely to be met. Where
costs are capitalised on funded development contracts, the associated funding is
held as a deferred liability on the balance sheet, and released to the income
statement in step with the amortisation of the capitalised intangible asset.
Research costs and development costs which do not meet the relevant
capitalisation criteria are written off in the year in which they are incurred.
As a result of this policy, net assets (before deferred tax adjustment) have
increased by £65.1m and £81.2 m as at 1 August 2004 and 31 January 2005
respectively. Operating profits have increased by £16.3 million for the six
months ended 31 January 2005, represented by the capitalisation of £21.6m of
costs previously written off under UK GAAP, offset by £5.3m of amortisation of
amounts capitalised.
2. Goodwill
Under UK GAAP goodwill on businesses acquired by the Group after 1 August 1998
is capitalised and amortised on a straight-line basis over its anticipated
future life up to a maximum of 20 years. Goodwill in respect of businesses
acquired prior to 1 August 1998 was set off against reserves in the year of
acquisition. On subsequent disposal of a business acquired prior to 1 August
1998 purchased goodwill previously set off against reserves is recycled and
included in the profit or loss on disposal of the business.
Under IFRS, from 1 August 2004 onwards, goodwill will no longer be amortised,
but will instead be subject to annual impairment review. The amortisation
charge under UK GAAP for goodwill for the six months ended 31 January 2005 of
£22.1 million has been reversed from the income statement, resulting in a
corresponding increase in the net book value of goodwill. On disposal of a
business acquired before 1 August 1998 goodwill set off against reserves will no
longer be recycled as part of the profit or loss on disposal of that business.
Goodwill as at 31 January 2005 includes £46.6m in respect of Integrated
Aerospace, acquired in November 2004. Following completion of the assessment of
its intangible assets at acquisition, goodwill will be adjusted as required by
IFRS.
3. Dividends
Under UK GAAP dividends relating to an accounting period but declared after the
balance sheet date are recognised as a liability even if the approval of that
dividend took place after the balance sheet date.
Under IFRS, proposed dividends do not meet the definition of a liability until
such time as they have been declared, and in the case of the final dividend,
approved by shareholders at the Annual General Meeting. This has resulted in a
balance sheet reclassification from current liabilities to retained profit of
£102.5m and £52.0m as at 1 August 2004 and 31 January 2005 respectively.
4. Share-based payment
Smiths operates a number of share-based incentive schemes (both awards of
options and awards of shares) that are impacted by IFRS 2 Share-based Payment.
Under UK GAAP Smiths recognises an expense based on the intrinsic value of the
options (the difference between the exercise price and the market value at the
date of the award), other than for Save-As-You-Earn schemes for which UK GAAP
includes an exemption from recognising an expense.
Under IFRS the cost of all share-based payments is based on the fair value of
the options or shares at the date of grant calculated using an appropriate
pricing model; the cost is recognised over the vesting period of the award.
Accordingly an adjustment has been recognised to reflect an additional charge of
£3.0m in the six months ended 31 January 2005.
5. Retirement benefits
Under UK GAAP the company had already adopted FRS 17 Retirement Benefits. Under
FRS 17 the assets and liabilities of the Group's defined benefit pension schemes
are recognised at fair value in the balance sheet and the operating and
financing costs of defined benefit pension schemes are recognised in the profit
and loss account as operating costs and finance costs respectively. Variations
from expected costs arising from the experience of the plans or changes in
actuarial assumptions are recognised immediately in the Statement of Total
Recognised Gains and Losses.
The change to IAS 19 Employee Benefits does not give rise to any significant
change in the basis of accounting for pensions, as Smiths will adopt early the
option allowed under IAS 19 to take actuarial gains and losses immediately
directly to equity through the Statement of Recognised Income and Expense.
Changes are largely confined to presentation, in that retirement benefit scheme
surpluses and deficits must be aggregated separately on the face of the balance
sheet, and shown gross, rather than net, of deferred taxation. The deferred
tax balance under UK GAAP related to pensions amounted to assets of £116.4m and
liabilities of £31.2m as at 31 July 2004 and assets of £113.5 million and
liabilities of £33.2m as at 31 January 2005.
6. Deferred taxation
Under UK GAAP deferred tax is recognised in respect of all timing differences
that have originated but not reversed at the balance sheet date where
transactions or events have occurred at that date that will result in an
obligation to pay more, or a right to pay less or to receive more tax.
Under IFRS, deferred tax is recognised on all taxable temporary differences
between the tax base and the accounting base of balance sheet items included in
the balance sheet of the Group, except to the extent that such temporary
differences arise on initial recognition of an asset or liability. This means
that deferred tax is recognised on certain temporary differences that would not
have given rise to deferred tax under UK GAAP. The most significant differences
between UK GAAP and IFRS relate to the following:
• Deferred tax provisions relating to tax deductible goodwill set off
against reserves prior to 1 August 1998 under UK GAAP and not reinstated under
IFRS are written back. For goodwill on which deductions are still to be
claimed, deferred tax assets have been recognised on transition to IFRS and are
being amortised to offset the timing of the tax benefit. The amortisation of
the asset under IFRS corresponds to the build up of the liability under UK GAAP;
and
• Under IFRS deferred tax is provided on temporary differences arising
on investments in subsidiaries and associates (principally in respect of
unremitted earnings), except where the Group is able to control the timing of
the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
In addition to these adjustments the carrying values of deferred tax assets and
liabilities in the balance sheet have been adjusted to reflect the restatement
of assets and liabilities arising from the adoption of IFRS.
7. Computer software
Under UK GAAP all capitalised computer software was classified within tangible
fixed assets. IFRS requires capitalised software that is not an integral part of
the hardware to be treated as an intangible asset. This has resulted in balance
sheet reclassifications of approximately £12m and £14m respectively at 1 August
2004 and 31 January 2005.
Appendix A
Smiths Group plc
Consolidated Balance Sheet as at 1 August 2004 - Reclassification to IFRS Format
(unaudited)
UK GAAP UK GAAP
Format IFRS Format
Total Employee Total
2004 Benefits Other 2004
£m £m £m £m
Non-current assets
Intangible assets 728.2 728.2 Goodwill
Other intangible assets
Tangible assets 423.5 423.5 Property, plant and
equipment
Investments and advances: Financial assets
TI Automotive Limited preference shares 325.0 TI Automotive Limited
preference
325.0 shares
Other 2.3 2.3 Other trade investments
103.9 103.9 Retirement benefit assets
116.4 116.4 Deferred tax assets
9.2 9.2 Trade and other receivables
1,479.0 220.3 9.2 1,708.5
Current assets
Stocks 423.5 423.5 Inventories
Debtors - amounts falling due within one 620.4 620.4 Trade and other receivables
year
- amounts falling due after more 9.2 (9.2)
than one year
Cash at bank and on deposit 449.2 449.2 Cash and cash equivalents
Non-current liabilities
Provisions for liabilities and charges (120.0) 97.4 (22.6) Provisions for liabilities
Retirement benefit liabilities (234.8) (116.4) (351.2) Retirement benefit
obligations
Pension assets 72.7 (72.7)
(31.2) (18.2) (49.4) Deferred tax liabilities
Creditors - amounts falling due after more (499.6) 499.6
than one year
(446.5) (446.5) Borrowings
(53.1) (53.1) Other payables
Current liabilities
Creditors - amounts falling due within one (1,077.1) 1,077.1
year
Provisions for liabilities
and
(79.2) (79.2) charges
(665.9) (665.9) Trade and other payables
(275.4) (275.4) Borrowings
(135.8) (135.8) Current tax payable
1,122.5 1,122.5
Shareholders' equity
Share capital 140.3 140.3 Share capital
Share premium account 183.0 183.0 Share premium account
Revaluation reserve 1.7 1.7 Revaluation reserve
Merger reserve 234.8 234.8 Merger reserve
Retained earnings 562.7 562.7 Retained earnings
Total shareholders' equity 1,122.5 1,122.5
The reconciliation above shows the changes to the presentation of the balance
sheet that are required as a result of the adoption of IFRS. It does not deal
with the measurement changes that are required in moving from UK GAAP to IFRS.
Appendix B
Smiths Group plc
Consolidated Balance Sheet at 1 August 2004 (unaudited)
UK GAAP Adjustments To IFRS
IFRS
(IFRS Basis
Format)
Total Development Share-based Dividend Other Total
2004 Costs Payments Reversal £m 2004
£m £m £m £m £m
Non-current assets
Goodwill 728.2 (0.5) 727.7
Other intangible assets 116.6 13.1 129.7
Property, plant and equipment 423.5 (12.2) 411.3
Financial Assets:
TI Automotive Limited
preference
shares 325.0 325.0
Other trade investments 2.3 2.3
Retirement benefit assets 103.9 103.9
Deferred tax assets 116.4 4.3 (18.0) 102.7
Trade and other receivables 9.2 (0.9) 8.3
1,708.5 116.1 4.3 (18.0) 1,810.9
Current assets
Inventories 423.5 (3.8) 419.7
Trade and other receivables 620.4 5.1 625.5
Cash and cash equivalents 449.2 449.2
Total assets 3,201.6 116.1 4.3 0.0 (16.7) 3,305.3
Non-current liabilities
Provisions for liabilities and (22.6) (22.6)
charges
Retirement benefit obligations (351.2) (1.8) (353.0)
Deferred tax liabilities (49.4) (21.9) 32.7 (38.6)
Financial liabilities:
Borrowings (446.5) (446.5)
Trade and other payables (53.1) (41.4) (0.2) (94.7)
Current liabilities
Provisions for liabilities and (79.2) (79.2)
charges
Trade and other payables (665.9) (9.6) 102.5 (5.5) (578.5)
Financial liabilities:
Borrowings (275.4) (275.4)
Current tax payable (135.8) (135.8)
Total liabilities (2,079.1) (72.9) 102.5 25.2 (2,024.3)
Net assets 1,122.5 43.2 4.3 102.5 8.5 1,281.0
Shareholders' equity
Share capital 140.3 140.3
Share premium account 183.0 183.0
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 562.7 43.2 4.3 102.5 8.5 721.2
Total shareholders' equity 1,122.5 43.2 4.3 102.5 8.5 1,281.0
The reconciliation above starts with the 1 August 2004 UK GAAP balance sheet
presented in IFRS format, as set out in Appendix A.
It then plots the measurement changes required in moving from UK GAAP to IFRS.
Appendix C
Smiths Group plc
Consolidated Income Statement for the 6 months ended 31 January 2005 (unaudited)
Continuing operations As IFRS Format Development Goodwill Share-based Other IFRS
reported
(UK GAAP) (UK GAAP) Costs Amortisation Payments Adjustments Basis
£m £m £m £m £m £m
Turnover 1,344.4
Revenue 1,344.4 (6.8) 1,337.6
Cost of sales (812.0) 4.5 (807.5)
Gross profit 532.4 (2.3) 530.1
Sales and distribution costs (145.0) (0.4) (145.4)
Administrative expenses (264.0) 22.1 (3.0) 0.1 (244.8)
Development costs - IFRS 18.5 18.5
adjustment
Operating profit 123.4 123.4 16.2 22.1 (3.0) (0.3) 158.4
After Goodwill (22.1) (22.1) 22.1
charging: amortisation
Operational (7.6) (7.6) (7.6)
restructuring
Interest receivable 10.9 10.9 10.9
Interest payable (16.8) (16.8) (16.8)
Financing gains 2.2 2.2
Other finance income - 7.5 7.5 7.5
retirement benefits
Profit before taxation 125.0 125.0 16.2 22.1 (3.0) 1.9 162.2
Taxation (35.7) (35.7) (5.7) (2.2) 0.9 0.1 (42.6)
Profit for the period 89.3 89.3 10.5 19.9 (2.1) 2.0 119.6
Appendix D
Smiths Group plc
Consolidated Balance Sheet as at 31 January 2005 - Reclassification to IFRS
Format (unaudited)
UK GAAP UK GAAP
Format IFRS Format
Total Employee Total
2005 Benefits Other 2005
£m £m £m £m
Non-current assets
Intangible assets 748.6 748.6 Goodwill
Other intangible assets
Tangible assets 434.6 434.6 Property, plant and equipment
Investments and advances:
TI Automotive Limited preference shares 325.0 325.0 TI Automotive Limited
preference shares
Other 2.9 2.9 Other trade investments
110.6 110.6 Retirement benefit assets
113.5 113.5 Deferred tax assets
8.0 8.0 Trade and other receivables
1,511.1 224.1 8.0 1,743.2
Current assets
Stocks 484.9 484.9 Inventories
Debtors - amounts falling due within one 620.4 620.4 Trade and other receivables
year
- amounts falling due after more 8.0 (8.0)
than one year
Cash at bank and on deposit 343.0 343.0 Cash and cash equivalents
Total assets 2,967.4 224.1 3,191.5
Non-current liabilities
Provisions for liabilities and charges (116.1) 90.6 (25.5) Provisions for liabilities
Retirement benefit liabilities (228.7) (113.5) (342.2) Retirement benefit obligations
Pension assets 77.4 (77.4)
(33.2) (17.8) (51.0) Deferred tax liabilities
Creditors - amounts falling due after more
than one year (490.7) 490.7
(442.6) (442.6) Borrowings
(48.1) (48.1) Other payables
Current liabilities
Creditors - amounts falling due within one (1,045.1) 1,045.1
year
(72.8) (72.8) Provisions for liabilities and
charges
(633.0) (633.0) Trade and other payables
(292.0) (292.0) Borrowings
(120.1) (120.1) Current tax payable
Total liabilities (1,803.2) (224.1) (2,027.3)
Net assets 1,164.2 1,164.2
Shareholders' equity
Share capital 140.6 140.6 Share capital
Share premium account 190.4 190.4 Share premium account
Revaluation reserve 1.7 1.7 Revaluation reserve
Merger reserve 234.8 234.8 Merger reserve
Retained earnings 596.7 596.7 Retained earnings
Total shareholders' equity 1,164.2 1,164.2
The reconciliation above shows the changes to the presentation of the balance
sheet that are required as a result of the adoption of IFRS. It does not deal
with the measurement changes that are required in moving from UK GAAP to IFRS.
Appendix E
Smiths Group plc
Consolidated Balance Sheet at 31 January 2005 (unaudited)
UK GAAP Adjustments to IFRS
(IFRS Format) IFRS
Basis
Total Development Share-based Dividend Total
2005 Costs Payments Reversal Other 2005
£m £m £m £m £m £m
Non-current assets
Goodwill 748.6 (0.5) 21.8 769.9
Other intangible assets 136.3 14.4 150.7
Property, plant and equipment 434.6 (14.0) 420.6
Financial Assets:
TI Automotive Limited preference shares 325.0 325.0
Other trade investments 2.9 2.9
Retirement benefit assets 110.6 110.6
Deferred tax assets 113.5 9.6 (18.3) 104.8
Trade and other receivables 8.0 (0.9) 7.1
1,743.2 135.8 9.6 3.0 1,891.6
Current assets
Inventories 484.9 (3.3) 481.6
Trade and other receivables 620.4 620.4
Cash and cash equivalents 343.0 343.0
Total assets 3,191.5 135.8 9.6 (0.3) 3,336.6
Non-current liabilities
Provisions for liabilities and charges (25.5) (25.5)
Retirement benefit obligations (342.2) (1.8) (344.0)
Deferred tax liabilities (51.0) (27.8) 30.8 (48.0)
Financial liabilities:
Borrowings (442.6) (442.6)
Other payables (48.2) (43.3) (0.8) (92.3)
Current liabilities
Provisions for liabilities and charges (72.8) (72.8)
Trade and other payables (632.9) (11.3) (0.3) 52.0 (1.4) (593.9)
Financial liabilities:
Borrowings (292.0) (292.0)
Current tax payable (120.1) (120.1)
Total liabilities (2,027.3) (82.4) (0.3) 52.0 26.8 (2,031.2)
Net assets 1,164.2 53.4 9.3 52.0 26.5 1,305.4
Shareholders' equity
Share capital 140.6 140.6
Share premium account 190.4 190.4
Revaluation reserve 1.7 1.7
Merger reserve 234.8 234.8
Retained earnings 596.7 53.4 9.3 52.0 26.5 737.9
Total shareholders' equity 1,164.2 53.4 9.3 52.0 26.5 1,305.4
The reconciliation above starts with the 31 January 2005 UK GAAP balance sheet
presented in IFRS format. It then plots the measurement changes required in
moving from UK GAAP to IFRS.
Appendix F
Smiths Group plc
Significant IFRS Accounting Policies - to be adopted 1 August 2005
These accounting policies comply with International Financial Reporting
Standards issued up to the date of this announcement and applicable to the
company for the period under review. All relevant International Financial
Reporting Standards have been endorsed by the European Union, with the exception
of an amendment to IAS 19 Retirement Benefits allowing actuarial gains and
losses to be recognised immediately within equity. As explained on page 4 of
this document, there are uncertainties surrounding the development of IFRS which
mean that these polices may change before 31 July 2006, when the Company will
present its first full financial statements under IFRS.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and its subsidiaries.
Subsidiaries are all entities over which the Company has the power to govern the
financial and operating policies generally accompanying a shareholding of more
than one half of the voting rights. Subsidiaries are fully consolidated from
the date on which control is transferred to the Company. They are
de-consolidated from the date that control ceases.
Foreign currencies
The Company's presentational currency is sterling. The results and financial
position of all subsidiaries and associates that have a functional currency
different from sterling are translated into sterling as follows:
• Assets and liabilities are translated at the closing rate at the date
of that balance sheet;
• Income and expenses are translated at average rates; and
• All resulting exchange differences are recognised as a separate
component of equity.
On consolidation, exchange differences arising from the translation of the net
investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to shareholders equity.
When a foreign operation is sold, the cumulative amount of such exchange
differences is recognised in the income statement as part of the gain or loss on
sale.
Revenue
Revenue comprises the fair value for the sale of goods and services, net of
trade discounts and sales related taxes, and the value of work undertaken during
the year on long-term contracts. Revenue is recognised when the risks and
rewards of the underlying sale have been transferred to the customer, which is
usually where title passes or a separately identifiable phase of a contract or
development has been completed and accepted by the customer.
Where the outcome of a 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. The Group uses the 'percentage of completion method' to
determine the appropriate amount to recognise in a given period. The assessment
of the stage of completion is dependent on the nature of the contract, but will
generally be based on costs incurred or services performed up to the reporting
date, or alternatively, where appropriate, the achievement of contractual
milestones.
Employee benefits
Pension obligations and post-retirement benefits
The Company has both defined benefit and defined contribution plans.
For defined benefit plans the liability recognised in the balance sheet is the
present value of the defined benefit obligation at the balance sheet date less
the fair value of plan assets. The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit method. The
present value of the defined benefit obligation is determined by discounting the
estimated future cash outflows using interest rates of high-quality corporate
bonds that are denominated in the currency in which the benefits will be paid,
and that have terms to maturity approximating to the terms of the related
pension liability. Actuarial gains and losses arising from experience
adjustments and changes in actuarial assumptions are recognised in full in the
period in which they occur, outside of the income statement and are presented in
the statement of recognised income and expense. Past service costs are
recognised immediately in income, unless the changes to the pension plan are
conditional on the employees remaining in service for a specified period of time
(the vesting period). In this case, the past service costs are amortised on a
straight-line basis over the vesting period.
For defined contribution plans, the Group pays contributions to publicly or
privately administered pension insurance plans on a mandatory, contractual or
voluntary basis. Contributions are expensed as incurred.
Share based compensation
The Company operates a number of equity settled share based compensation plans.
The fair value of the employee services received in exchange for the grant of
shares or share options is recognised as an expense. The total amount to be
expensed over the vesting period is determined by reference to the fair value of
the shares or share options granted, excluding the impact of any non-market
vesting conditions (for example profitability and sales growth targets). Fair
value is determined by reference to option pricing models, principally Binomial
models.
The Company has applied the requirements of IFRS 2 Share-based Payment. In
accordance with the transitional provisions, IFRS 2 has been applied only to
grants of equity instruments after 7 November 2002 that had not vested as at 1
January 2005. The intrinsic value of earlier grants remain charged to the income
statement, as previously required under UK GAAP.
Significant items
Items which are sufficiently material are presented separately within their
relevant consolidated income statement category. The separate reporting of such
items helps provide a better indication of the Company's underlying business
performance. Events which may give rise to such items include the restructuring
of businesses; gains and losses on their sale; and asset impairments.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value
of the Company's share of the identifiable net assets of the acquired subsidiary
at the date of acquisition. Identifiable net assets include intangible assets
other than goodwill. Any such intangible assets are amortised over their
expected future lives unless they are regarded as having an indefinite life, in
which case they are not amortised, but subjected to annual impairment testing in
a similar manner to goodwill.
Goodwill arising from acquisitions of subsidiaries after 1 August 1998 is
included in intangible assets, is not amortised but is tested annually for
impairment and carried at cost less accumulated impairment losses. Gains and
losses on the disposal of an entity include the carrying amount of goodwill
relating to the entity sold.
Goodwill arising from acquisitions of subsidiaries before 1 August 1998, which
was set against reserves in the year of acquisition under UK GAAP, has not been
reinstated and is not included in determining any subsequent profit or loss on
disposal of the related entity.
Goodwill is tested for impairment at least annually or whenever there is an
indication that the asset may be impaired. Any impairment is recognised
immediately in the income statement. Subsequent reversals of impairment losses
for goodwill are not recognised.
Research and development
Expenditure on research and development is charged to the profit and loss
account in the year in which it is incurred with the exception of:
• amounts recoverable from third parties; and
• expenditure incurred in respect of the development of certain major
new product projects where the outcome of those projects is assessed as being
reasonably certain as regards viability and technical feasibility. Such
expenditure is capitalised and amortised over the expected useful life of the
development, usually being the estimated period of sale for each product or 15
years, whichever is the shorter, commencing in the year sales of the product are
first made.
Property plant and equipment
Property, plant and equipment is stated at historical cost less accumulated
depreciation and any recognised impairment losses.
Land is not depreciated. Depreciation is provided on other assets estimated to
write off the depreciable amount of relevant assets by equal annual instalments
over their estimated useful lives. In general, the rates used are: Freehold and
long leasehold buildings - 2%, Short leasehold property - over the period of the
lease, Plant, machinery, etc. - 10% to 20%, Motor vehicles - 25%, Tools and
other equipment - 10% to 33%.
Fixed assets held under finance leases are capitalised and depreciated in
accordance with the Company's depreciation policy, or over the lease term, if
shorter.
The assets' residual values and useful lives are reviewed, and adjusted if
appropriate, at each balance sheet date.
An asset's carrying amount is written down immediately to its recoverable amount
if the asset's carrying amount is greater than its estimated recoverable amount.
Leases
Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under
operating leases are charged to the income statement on a straight-line basis
over the period of the lease.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the first-in, first-out (FIFO) method. The cost of finished
goods and work in progress comprises raw materials, direct labour, other direct
costs and related production overheads (based on normal operating capacity). It
excludes borrowing costs. Net realisable value is the estimated selling price
in the ordinary course of business, less applicable variable selling expenses.
Trade and other receivables
Trade and other receivables are stated at cost after deducting adequate
provision for doubtful debts.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand, highly liquid
interest-bearing securities with maturities of three months or less, and bank
overdrafts.
Provisions
Provisions for service guarantees and product liability, disposal indemnities,
restructuring costs, vacant leasehold property and legal claims are recognised
when; the Company has a legal or constructive obligation as a result of a past
event; it is probable that an outflow of resources will be required to settle
the obligation; and the amount has been reliably estimated. Provisions are not
recognised for future operating losses.
Where there are a number of similar obligations, foe example where a service
guarantee has been given, the likelihood that an outflow will be required in
settlement is determined by considering the class of obligations as a whole. A
provision is recognised even if the likelihood of an outflow with respect to any
one item included in the same class of obligations may be small.
Where a leasehold property is vacant, or sub-let under terms such that the
rental income is insufficient to meet all outgoings, provision is made for the
anticipated future shortfall up to termination of the lease, or the termination
payment, if smaller.
Taxation
The charge for taxation is based on profits for the year and takes into account
taxation deferred because of temporary differences between the treatment of
certain items for taxation and accounting purposes.
Deferred tax is provided in full using the balance sheet liability method. A
deferred tax asset is recognised where it is probable that future taxable income
will be sufficient to utilise the available relief. Tax is charged or credited
to the income statement except when it relates to items charged or credited
directly to equity, in which case the tax is also dealt with in equity.
Deferred tax is provided on temporary differences arising on investments in
subsidiaries and associates, except where the timing of the reversal of the
temporary differences is controlled by the Company and it is probable that the
temporary difference will not reverse in the foreseeable future.
Financial assets
Financial assets are initially recognised at fair value (i.e. original cost plus
transaction costs). They are no longer recognised when the right to receive cash
flows from the assets have expired or have been transferred, and the Company has
transferred substantially all of the risks and rewards of ownership.
The subsequent measurement of financial assets depends on their classification.
They are classified as either loans and receivables; held to maturity
investments; available-for-sale financial assets; or financial assets where
changes in fair value are charged (or credited) to the income statement. The
classification depends on the purpose for which the financial assets were
acquired. Management determines the classification of financial assets at
initial recognition and re-evaluates their designation at each reporting date.
Loans and receivables and held-to-maturity investments are subsequently measured
at amortised cost using the effective interest method. Available-for-sale
financial assets and financial assets where changes in fair value are charged
(or credited) to the income statement are subsequently measured at fair value.
Realised and unrealised gains and losses arising from changes in the fair value
of the 'financial assets at fair value through profit and loss' category are
included in the income statement in the period in which they arise. Unrealised
gains and losses arising from changes in the fair value of non-monetary
securities classified as available-for-sale are recognised in equity. When
securities classified as available-for-sale are sold or impaired, the
accumulated fair value adjustments are included in the income statement as gains
or losses from investment securities.
Financial liabilities
Borrowings made by the Company are initially recognised at the amount received,
net of related transaction costs. These transaction costs and any discount or
premium on issue are subsequently amortised through the income statement as
interest over the life of the loan, and added to the liability disclosed in the
balance sheet.
Borrowings are classified as current liabilities unless the Company has an
unconditional right to defer settlement of the liability for at least one year
after the balance sheet date.
Derivative financial instruments and hedging activities
Derivatives are initially recognised at fair value on the date a derivative
contract is entered into and are subsequently re-measured at their fair value.
The method of recognising any resulting gain or loss depends on whether the
derivative is designated as a hedging instrument, and if so, the nature of the
item being hedged.
Fair value hedge
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.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are
designated and qualify as cash flow hedges are recognised in equity. The gain
or loss relating to any ineffective portion is recognised immediately in the
income statement.
Amounts accumulated in equity are recycled in the income statement in the
periods when the hedged item will affect profit or loss (for instance when the
forecast sale that is hedged takes place). However, when a forecast transaction
that is hedged results in the recognition of a non-financial asset (for example,
inventory) or a liability, the gains and losses previously deferred in equity
are transferred from equity reserves and included in the initial measurement of
the cost of the asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets
the criteria for hedge accounting, any cumulative gain or loss existing in
equity at that time remains in equity and is recognised when the forecast
transaction is ultimately recognised in the income statement. When a forecast
transaction is no longer expected to occur, the cumulative gain or loss that was
reported in equity is immediately transferred to the income statement.
Net investment hedge
Hedges of net investments in foreign operations are accounted for similarly to
cash flow hedges. Any gain or loss on the hedging instrument relating to the
effective portion of the hedge is recognised in equity; the gain or loss
relating to any ineffective portion is recognised immediately in the income
statement.
Gains and losses accumulated in equity are included in the income statement when
the foreign operation is disposed of.
Derivatives that do not qualify for hedge accounting
Certain derivative instruments do not qualify for hedge accounting. Changes in
the fair value of any derivative instruments that do not qualify for hedge
accounting are recognised in the profit and loss account.
Derivatives embedded in other financial instruments or other host contracts are
treated as separate derivatives when their risks and characteristics are not
closely related to those of the host contracts and the host contracts are not
carried at their fair value. Unrealised gains and losses on these embedded
derivatives are recognised in the profit and loss account.
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