Statement re IFRS accounts
easyJet PLC
20 January 2006
EASYJET REPORTS 2005 RESULTS UNDER IFRS
easyJet today (20 January) releases financial information prepared under
International Financial Reporting Standards (IFRS) for the year ended 30
September, 2005 and explains the impact of the adoption of IFRS on these
results.
Under IFRS, easyJet's profit before tax for the year ended 30 September 2005
increased from £67.9 million under UK GAAP to £82.6 million under IFRS. Net
assets at 30 September 2005 increased from £839.7 million to £863.4 million.
easyJet's Group Finance Director, Jeff Carr, said: 'Except for goodwill
amortisation, which is no longer required under IFRS, changes to our reported
profit as a result of the adoption of IFRS are relatively minor in the current
fiscal year and going forward.'
The adoption of IFRS represents an accounting change only, and does not affect
the underlying operation of the business or easyJet's cash flows for the year
ended 30 September 2005.
For further details please contact:
easyJet plc
Andrew Barker, Investor Relations +44 (0) 1582 525 982
Press:
Toby Nicol, Corporate Communications +44 (0) 1582 525 339
easyJet plc
Explanation of the financial impact following adoption of International
Financial Reporting Standards ('IFRS')
20 January 2006
Table of contents
Page
1. Introduction 1
2. Summary impact 1
3. Basis of preparation 2
4. Principal changes under international financial
reporting standards 3
5. Reconciliations to international financial
reporting standards 7
6. Accounting policies expected to be adopted for the year
ended 30 September 2006 12
1. Introduction
From 1 October 2005, easyJet is required to prepare its consolidated financial
statements in accordance with International Financial Reporting Standards
('IFRS'), as adopted by the European Union ('EU') and applicable to all listed
companies in the EU for financial reporting periods beginning on or after 1
January 2005. The Group's first results to be published under IFRS will be for
the six months ending 31 March 2006. The comparative information in those
financial statements must be restated to IFRS and therefore the Group's
transition date for the adoption of IFRS is 1 October 2004. This report is to
inform shareholders of the impact on easyJet's financial position and results
for 2005 due to the change from reporting under UK General Accepted Accounting
Principles ('UK GAAP') to IFRS. The information presented in this document sets
out the adjustments between the audited UK GAAP prepared financial statements
for the year ended 30 September 2005 and unaudited restated IFRS results for the
same period.
The IFRS standards that principally affect adjustments between UK GAAP and IFRS
are:
• IFRS 3 - Business Combinations
• IAS 21 - The Effects of Changes in Foreign Exchange Rates
• IFRS 1 - First Time Adoption of International Financial Reporting
Standards
• IFRS 2 - Share-based Payment
• IAS 12 - Income Taxes
In addition, easyJet will adopt IAS 32, Financial Instruments: Disclosure and
Presentation and IAS 39, Financial Instruments: Recognition and Measurement on 1
October 2005.
2. Summary impact for year ended 30 September 2005
UK GAAP (audited) IFRS (unaudited) Variance %
Turnover, £million 1,341.4 1,341.4 - 0.0%
Operating profit, £ million 48.7 66.2 17.5 35.9%
Profit before tax, £ million 67.9 82.6 14.7 21.6%
Profit after tax, £ million 42.6 59.0 16.4 38.5%
Revenue per seat, £ 38.66 38.66 - 0.0%
Cost per seat (before goodwill 36.20 36.28 0.1 0.2%
amortisation), pence
Cost per seat (before goodwill 28.71 28.78 0.1 0.2%
amortisation and fuel), pence
Earnings per share (basic), 10.68 14.78 4.10 38.4%
pence
Earnings per share (diluted), 10.43 14.43 4.00 38.4%
pence
Earnings per share before 15.03 14.78 (0.25) (1.7)%
goodwill amortisation (basic),
pence
Earnings per share before 14.68 14.43 (0.25) (1.7)%
goodwill amortisation
(diluted), pence
Net assets, * £ million 839.7 863.4 23.7 2.8%
Return on equity, before 7.4% 7.1% (0.3)% n/a
goodwill amortisation%
* at 30 September 2005
The components of adjustments to profit for the year ended 30 September 2005 are
as follows:
£ million Ref Profit before tax Tax (4f) Profit after tax
UK GAAP (audited) 67.9 (25.3) 42.6
Foreign exchange 4b (0.5) 1.3 0.8
Share-based payment 4c (2.0) 0.3 (1.4)
Business combinations 4d 17.4 - 17.4
Employee benefits 4e (0.1) - (0.1)
Investment in associates 4f (0.1) 0.1 -
Total impact of adjustments (unaudited) 14.7 1.7 16.4
IFRS (unaudited) 82.6 (23.6) 59.0
3. Basis of preparation
The financial information presented in this document has been prepared on the
basis that all International Financial Reporting Standards ('IFRSs'), including
interpretations of both the Standing Interpretations Committee and the
International Financial Reporting Interpretations Committee ('IFRIC'), issued by
the International Accounting Standards Board as being effective for easyJet's
reporting for the year ending 30 September 2006 (with the exception of IFRS 5,
Non-Current Assets Held for Sale and Discontinued Operations, which has been
early adopted in the year ended 30 September 2005), will be endorsed by the
European Commission. As at the date of this announcement, not all the standards
have been adopted by the European Commission. These are subject to ongoing
review and endorsement by the European Commission, whilst the application of the
standards continues to be subject to interpretation by IFRIC as well as emerging
industry consensus. As a consequence, further adjustments to the accounting
policies and treatments may need to be made to the information presented in this
document before it is published as comparative information for the Group's
interim and full year results for the year ending 30 September 2006.
A summary of the significant accounting policies expected to be used in the
preparation of the 2006 financial statements under IFRS is provided below.
IFRS 1, First Time Adoption of IFRS, outlines how to apply IFRS for the first
time. easyJet's transition date is 1 October 2004, and the standard permits
certain exemptions from the full requirements of IFRS as at that date.
easyJet has taken the following exemptions or options available as at
transition:
a) Business combinations
easyJet has taken the option not to restate business combinations that occurred
prior to 1 October 2004 on an IFRS 3, Business Combinations basis.
Consequently, goodwill balances relating to easyJet's acquisitions have been
frozen at 1 October 2004.
b) Cumulative translation differences
easyJet has deemed cumulative translation differences arising on the
consolidation of companies that qualify as foreign operations under IAS 21, The
Effects of Changes in Foreign Exchange Rates, to be nil at 1 October 2004. This
has been applied to the Group's Swiss operations.
c) Financial instruments
Up to 30 September 2005, financial instruments are recorded using UK GAAP,
rather than being restated in accordance with IAS 32, Financial Instruments:
Disclosure and Presentation and IAS 39, Financial Instruments: Recognition and
Measurement. The requirements of IAS 32 and 39 will be applied prospectively
from 1 October 2005, as permitted by IFRS 1.
d) Share-based payments
easyJet has applied IFRS 2, Share-based Payment only to equity instruments that
were granted after 7 November 2002, and which had not vested before 1 January
2005. The grants and exercise prices of options which create a charge to the
income statement are:
• Non-approved discretionary scheme and approved discretionary scheme
grants in March 2003 at £2.00, January 2004 at £3.60, December 2004 at
£1.84 and June 2005 at £2.32.
• Save As You Earn scheme grant in July 2005 at £1.86.
e) Fair value or revaluation as deemed cost
easyJet has taken the fair value of certain items of property plant and
equipment as their deemed cost at 1 October 2004. See 4 b) below for further
details.
4. Principal changes under IFRS
a) Presentation adjustments
Section 5 of this report contains reconciliations to assist in understanding the
nature and value of the differences between UK GAAP and IFRS.
The financial information is in IFRS format, and reflects a number of
differences in presentation between UK GAAP and IFRS as follows;
i) The disclosure of goodwill as separate from intangible assets on the
balance sheet;
ii) The classification of software that is not an integral part of operating
hardware as an intangible asset separate from property plant and
equipment on the balance sheet, and the classification of the related
depreciation as amortisation;
iii) The classification of long term assets previously included in current
assets;
iv) The reclassification of cash on deposit with a maturity of greater than
one year or between three months and one year, previously classified as
liquid resources in the cashflow statement, as a long term or current
financial asset;
v) The separate classification of a Boeing 737-300 which was held for
resale at 30 September 2005;
vi) The reclassification of provisions as current or non current liabilities;
vii) The reclassification of foreign exchange reserves arising on the
retranslation of subsidiaries with a functional currency other than
Sterling from retained earnings to other reserves; and
viii) The format of the income statement will be substantially similar to that
of the results of operations included in the Operating and Financial
Review in the Group's previous UK GAAP financial statements. The
Companies Act Schedule 4 format of the Profit and Loss account is no
longer required to be used under IFRS and use of this alternative format
is more relevant to how the business is managed;
b) IAS 21 - The Effects of Changes in Foreign Exchange Rates, and IFRS 1 -
First Time Adoption of IFRS
Under UK GAAP, certain US Dollar denominated assets and liabilities are treated
as a foreign operation (branch) with the US Dollar as their functional currency.
As a result, exchange movements on retranslation of assets and liabilities are
taken to reserves rather than through the income statement. IAS 21 provides
additional criteria to allow the functional currency of a foreign operation to
be determined. Certain aircraft owning companies within the Group will cease to
be classified as US Dollar branches under IAS 21, and will have a Sterling
functional currency. On implementing IAS 21, non monetary assets have been
restated at historic exchange rates, with no translation differences arising
subsequent to their purchase. Exchange differences on retranslation of monetary
items are taken to the income statement. This has resulted in an additional
£2.6 million loss being recognised during the year to 30 September 2005.
The net book value of the airbus fixed assets was restated to remove the impact
of historic foreign exchange differences recognised on retranslation of the US
Dollar denominated assets into Sterling under UK GAAP. Depreciation has also
been restated to take into account the new cost base of the aircraft fixed
assets. This resulted in an increase in the net book value of fixed assets of
£11.1 million at 1 October 2004. As a result of these changes to the cost of
Airbus aircraft fixed assets, depreciation increased by £1.1 million in the year
ended 30 September 2005.
Under the exemptions allowed by IFRS 1, the fair value at 1 October 2004 of the
Boeing 737-300 aircraft has been taken as their deemed cost. This has resulted
in a one off valuation decrease in property, plant and equipment of £3.7 million
at 1 October 2004, a decrease in accelerated depreciation of £2.7 million and a
decrease in depreciation of £0.9 million for the year to 30 September 2005, and
an increase in the loss on disposal of fixed assets of £ 0.4 million for the
year to 30 September 2005. One of the aircraft was held for sale at 30
September, 2005, and as a result of its revaluation assets held for resale
decreased by £ 0.2 million at 30 September 2005.
Certain payments on account made prior to delivery of aircraft are monetary
assets, as the aircraft that will be delivered as a result of these payments are
expected to be sold to lessors and leased back under operating leases on the
basis of commercial arrangements in place. These pre delivery deposits have
been classified separately on the balance sheet, resulting in a decrease in the
book value of fixed assets of £83.0 million on transition.
Adoption of IAS 21 may cause additional volatility in the income statement due
to changes in foreign exchange rates. This risk will be managed through a
mixture of drawing down loans in Sterling, holding cash and cash equivalents in
US Dollars and entering into foreign exchange derivative instruments.
c) IFRS 2 - Share-based Payment
IFRS 2 requires a charge to be made to the income statement for the cost of
providing share options to employees. The expense is calculated as the fair
value of the award on the date of grant, and is recognised over the vesting
period of the scheme. A binomial model has been used to calculate the fair value
of options on their grant date. easyJet has applied the provisions of IFRS 2
only to awards made after 7 November 2002, an exemption allowed on transition by
IFRS 1. There was no net impact on the balance sheet at 1 October 2004 as a
result of adopting IFRS 2.
In the year to 30 September 2005, the application of IFRS 2 results in a pre tax
charge to the income statement of £2.0 million.
d) IFRS 3 - Business Combinations
Under UK GAAP, goodwill arising on business combinations is amortised over a
period not exceeding 20 years. Under IFRS 3, regular amortisation of goodwill is
prohibited. Instead, an annual impairment test is required to support the
carrying value of goodwill.
Amortisation of goodwill arising on the purchase of TEA Basel AG (now easyJet
Switzerland) and Newgo 1 Limited, the parent company of Go Fly ceased on 1
October 2004, resulting in an increase of pre tax profits of £17.4 million in
the year ended 30 September 2005.
e) IAS 19 - Employee Benefits
Under UK GAAP, no provision is made for annual leave accrued. Under IAS 19, the
expected cost of compensated short term absences should be recognised at the
time the related service is provided. As a result, on transition, a provision of
£0.4 million has been recognised. The result on pre tax income for the year
ended 30 September 2005 is an additional expense of £0.1 million.
f) IAS 12 - Income taxes
Under UK GAAP, deferred tax was provided on timing differences that had
originated, but had not reversed, before the balance sheet date. Under IAS 12,
deferred tax is provided on temporary differences based upon the future recovery
or settlement of assets and liabilities recognised in the balance sheet.
As a result of accounting policy changes resulting from the implementation of
IFRS, and the implementation of IAS 12, a total additional deferred tax
liability of £4.3 million has been provided on transition, and the tax expense
under IFRS has been reduced by £1.6 million in the year to 30 September 2005 by
comparison to UK GAAP. These changes are as a result of the following items:
• As a result of changes in asset values as described in 4b) above, a
deferred tax liability of £4.7 million was recognised on transition. The
deferred tax charge for the year ended 30 September 2005 was reduced by £1.3
million;
• No deferred tax on share options was recognised on transition as the
market value of an easyJet share on 30 September 2004 was £1.27, less than the
exercise price of all the options which were issued after 7 November 2002 and
which are accounted for under IFRS 2 (4c above). A deferred tax asset of £0.3
million has been recognised on transition in respect of share options issued
prior to 7 November 2002. At 30 September 2005, a deferred tax asset of £8.2
million was recognised on all options. This caused a £7.9 million increase in
equity, a £0.6 million reduction in the deferred tax charge and a £0.3 million
increase in the current tax charge in the income statement. The increase in the
deferred tax asset partly reflects the increase in the share price at 30
September 2005 to £2.92, above the exercise price for the majority of the
options in issue on that date; and
• Other adjustments as a result of accounting policy changes resulted in
the recognition of an additional deferred tax asset of £0.1 million on
transition, and no additional expense arose in the year ended 30 September 2005.
g) IAS 28 - Investments in Associates
Associated undertakings are equity accounted for under both IAS 28 and UK GAAP.
The only difference between the treatment of associates under IFRS compared to
UK GAAP is the disclosures in the income statement. easyJet's share of the post
tax profits of its associate are shown on a single line in the income statement
under IFRS, whereas under UK GAAP easyJet's share of the pre tax profits of its
associate were separately disclosed, with associate's the tax charge included in
the Group's tax charge. This reduces tax expense by £0.1 million in the year.
h) Adoption of IAS 32 and 39, Financial Instruments
Under UK GAAP, easyJet deferred gains or losses on hedges of operating and
capital payments, recognising them in the income statement or the related asset
only when they crystallised.
As allowed under IFRS 1, IAS 32 and IAS 39 will be adopted prospectively from 1
October 2005 and as a consequence the fair value of certain financial
instruments will be measured and any adjustments will be put on the Balance
Sheet at that date.
At 1 October 2005, easyJet has met the criteria to adopt hedge accounting for
foreign exchange and fuel derivative instruments. These instruments comprise
forwards and zero cost collars. As a result of applying hedge accounting, the
movement in the intrinsic value of financial instruments will be taken to
reserves and the time value portion will be taken to the income statement from 1
October 2005. Since easyJet's hedging instruments predominantly comprise zero
cost collars, the income statement impact of the time value of instruments will
be zero over the full life of the instrument.
5. Reconciliations of consolidated financial information
a) Consolidated balance sheet at 1 October 2004, presentation reconciliation
UK GAAP UK For details of adjustments see part 4 (a) UK IFRS presentation
GAAP GAAP
£m £m
(i) (ii) (iii) (iv) (v) (vi) (vii)
G'will S'ware Long Cash Asset Prov'n Forex
term held
asset for
resale
309.6 309.6 Goodwill
Intangible 309.6 (309.6) 1.1 1.1 Intangible assets
assets
Tangible assets 330.4 (1.1) 329.3 Property, plant and
equipment
10.2 10.2 Financial assets -
deposits
6.3 6.3 Other long term
assets
Other 0.2 0.2 Investments
investments accounted for using
the equity method
Fixed Assets 640.2 - - 6.3 10.2 - - - 656.7 Non current assets
Debtors 174.4 (6.3) 168.1 Trade and other
receivables
4.1 4.1 Financial assets -
deposits
Cash at bank and 510.3 (14.3) 496.0 Cash and cash
in hand equivalents
Current assets 684.7 - - (6.3) (10.2) - - - 668.2 Current assets
Bank loans 9.7 9.7 Borrowings
Trade and other 287.0 287.0 Trade and other
payables payables
Corporation tax 18.0 18.0 Current tax
liabilities
10.4 10.4 Provisions
Creditors: due 314.7 - - - - - 10.4 - 325.1 Current liabilities
within one
year
Net current 370.0 - - (6.3) (10.2) - (10.4) - 343.1 Net current assets
assets
Bank loans 110.1 110.1 Borrowings >1 year
Accruals and 47.6 47.6 Other non current
deferred liabilities
income
32.5 32.5 Provisions
20.2 20.2 Deferred tax
liabilities
Creditors: due 157.7 - - - - - 52.7 - 210.4 Non current
after one liabilities
year
Provisions for 63.1 - - - - - (63.1) - -
liabilities
and charges
Net assets 789.4 - - - - - - - 789.4 Net assets
Called up share 99.8 99.8 Ordinary shares
capital
Share premium 554.2 554.2 Share premium
account
Profit and loss 135.4 135.4 Retained earnings
account
- Other reserves
Shareholders' 789.4 - - - - - - - 789.4 Shareholders' funds
funds - - equity
equity
b) Consolidated balance sheet at 1 October 2004, IFRS reconciliation
For details of adjustments see part 4
UK GAAP (b) (c) (d) (e) (f) IFRS
£million £million
Foreign Share Goodwill Employee Taxation
exchange options benefits
Goodwill 309.6 309.6
Intangible assets 1.1 1.1
Property, plant and equipment 329.3 (75.6) 253.7
Financial assets - deposits 10.2 10.2
Other long term assets 6.3 14.1 20.4
Investments accounted for using 0.2 0.2
the equity method
Non current assets 656.7 (61.5) - - - - 595.2
Trade and other receivables 168.1 68.9 237.0
Financial assets - deposits 4.1 4.1
Cash and cash equivalents 496.0 496.0
Current assets 668.2 68.9 - - - - 737.1
Borrowings 9.7 9.7
Trade and other payables 287.0 0.4 287.4
Current tax liabilities 18.0 18.0
Provisions 10.4 10.4
Current liabilities 325.1 - - - 0.4 - 325.5
Net current assets 343.1 68.9 - - (0.4) - 411.6
Borrowings >1 year 110.1 110.1
Other non current liabilities 47.6 47.6
Provisions 32.5 32.5
Deferred tax liabilities 20.2 4.3 24.5
Non current liabilities 210.4 - - - - 4.3 214.7
Net assets 789.4 7.4 - - (0.4) (4.3) 792.1
Ordinary shares 99.8 99.8
Share premium 554.2 554.2
Other reserves - -
Retained earnings 135.4 7.4 (0.4) (4.3) 138.1
Shareholders' funds - equity 789.4 7.4 - - (0.4) (4.3) 792.1
c) Consolidated income statement reconciliation for the year ended 30 September
2005
UK GAAP For details of adjustments see section 4 IFRS
£million £million
(a)(ii) (b) (c) (d) (e) (g) (f)
Software Foreign Share Goodwill Employee Tax Associate
exchange options benefits
Passenger revenue 1254.2 1254.2
Ancillary revenue 87.2 87.2
Revenue 1341.4 - - - - - - - 1341.4
Ground handling charges (130.5) (130.5)
Airport charges (230.1) (230.1)
Fuel (260.2) (260.2)
Navigation charges (108.6) (108.6)
Crew costs (136.2) (136.2)
Maintenance (119.2) (119.2)
Advertising (32.8) (32.8)
Merchant fees and incentive (15.6) (15.6)
pay
Aircraft insurance (19.3) (19.3)
Other costs (80.0) (0.3) (2.0) (0.1) (82.4)
EBITDAR 1 208.9 - (0.3) (2.0) - (0.1) - - 206.5
Depreciation (16.4) 0.8 (0.2) (15.8)
Accelerated depreciation of (2.7) 2.7 -
737-300 aircraft
Goodwill amortisation (17.4) 17.4 -
Amortisation of intangible - (0.8) (0.8)
assets
Aircraft dry lease costs (123.7) (123.7)
Group operating profit 48.7 - 2.2 (2.0) 17.4 (0.1) - - 66.2
(EBIT)
Share of profit after tax of 0.2 (0.1) 0.1
associate
Interest receivable and 27.2 27.2
other income
Interest payable and other (8.2) (2.7) (10.9)
charges
Financing incomes 19.0 - (2.7) - - - - - 16.3
Profit before tax 67.9 (0.5) (2.0) 17.4 (0.1) (0.1) 82.6
Tax (25.3) 1.6 0.1 (23.6)
Retained profit for the year 42.6 - (0.5) (2.0) 17.4 (0.1) 1.6 - 59.0
1 EBITDAR is defined as Earnings Before Interest, Tax, Depreciation,
Amortisation and Lease payments (excluding the maintenance reserve component of
operating lease payments).
d) Consolidated balance sheet at 30 September 2005, presentation reconciliation
UK GAAP UK Presentation adjustments - see 4a UK GAAP IFRS presentation
GAAP £m
£m
(i) (ii) (iii) (iv) (v) (vi) (vii)
G'will S'ware Long Cash Asset Prov'ns Forex
term held
assets for
resale
292.2 292.2 Goodwill
Intangible 292.2 (292.2) 1.4 1.4 Intangible assets
assets
Tangible assets 425.8 (1.4) 424.4 Property, plant
and equipment
22.4 22.4 Financial assets
- deposits
2.3 2.3 Other long term
assets
Other 0.2 0.2 Investments
investments accounted for
Using the equity
method
Fixed Assets 718.2 - - 2.3 22.4 - - - 742.9 Non current
assets
Debtors 197.2 (2.3) (7.3) 187.6 Trade and other
receivables
7.3 7.3 Asset held for
resale
6.1 6.1 Financial assets
- deposits
Cash at bank 695.5 (28.5) 667.0 Cash and cash
and in hand equivalents
Current assets 892.7 - - (2.3) (22.4) - - - 868.0 Current assets
Bank loans 16.3 16.3 Borrowings
Trade and other 342.4 342.4 Trade and other
payables
payables
Corporation tax 38.9 38.9 Current tax
liabilities
16.4 16.4 Provisions
Creditors: due 397.6 - - - - - 16.4 - 414.0 Current
within liabilities
One year
Net current 495.1 - - (2.3) (22.4) - (16.4) - 454.0 Net current
assets assets
Bank loans 201.0 201.0 Borrowings >1
year
Accruals and 75.1 75.1 Other non current
deferred liabilities
income
53.6 53.6 Provisions
27.5 27.5 Deferred tax
liabilities
Creditors: due 276.1 - - - - - 81.1 - 357.2 Non current
after one liabilities
year
Provisions for 97.5 (97.5) -
Liabilities &
charges
Net assets 839.7 - - - - - - - 839.7 Net assets
Called up share 100.1 100.1 Ordinary shares
capital
Share premium 557.2 557.2 Share premium
Profit and loss 182.4 (0.1) 182.3 Retained earnings
account
0.1 0.1 Other reserves
Shareholders' 839.7 - - - - - - - 839.7 Shareholders'
funds - funds - equity
equity
e) Consolidated balance sheet at 30 September 2005, IFRS reconciliation
For details of adjustments see part 4
UK GAAP (b) (c) (d) (e) (f) IFRS
£million £million
Foreign Share Goodwill Employee Taxation
exchange options benefits
Goodwill 292.2 17.4 309.6
Intangible assets 1.4 1.4
Property, plant and equipment 424.4 (25.8) 398.6
Financial assets - deposits 22.4 22.4
maturing >1 year
Other long term assets 2.3 4.4 6.7
Investments accounted for using the 0.2 0.2
equity method
Non current assets 742.9 (21.4) - 17.4 - - 738.9
Trade and other receivables 187.6 23.1 210.7
Asset held for resale 7.3 (0.2) 7.1
Financial assets - deposits 6.1 6.1
Cash and cash equivalents 667.0 667.0
Current assets 868.0 22.9 - - - - 890.9
Borrowings 16.3 16.3
Trade and other payables 342.4 - 0.5 342.9
Current tax liabilities 38.9 38.9
Provisions 16.4 16.4
Current liabilities 414.0 - - - 0.5 - 414.5
Net current assets 454.0 22.9 - - (0.5) - 476.4
Borrowings >1 year 201.0 201.0
Other non current liabilities 75.1 75.1
Provisions 53.6 53.6
Deferred tax liabilities 27.5 (5.3) 22.2
Non current liabilities 357.2 - - - - (5.3) 351.9
Net assets 839.7 1.5 - 17.4 (0.5) 5.3 863.4
Ordinary shares 100.1 100.1
Share premium 557.2 557.2
Other reserves 0.1 0.1
Retained earnings 182.3 1.5 17.4 (0.5) 5.3 206.0
Shareholders' funds - equity 839.7 1.5 - 17.4 (0.5) 5.3 863.4
6. Provisional Accounting policies under International Financial Reporting
Standards to be adopted from 1 October 2005
Basis of preparation
These financial statements have been prepared in accordance with International
Financial Reporting Standards as adopted by the European Commission and IFRIC
interpretations and with those parts of the Companies Act, 1985 applicable to
companies reporting under IFRS. The financial statements have been prepared
under the historical cost convention as modified by the revaluation of certain
aircraft assets, available for sale investments, financial instruments held for
trading. A summary of the more important Group accounting policies is set out
below, together with an explanation of where changes have been made to previous
policies on the adoption of new accounting standards in the year.
easyJet's date of transition to IFRS under IFRS 1 is 1 October 2004, and the
2005 comparatives have been restated to IFRS. IFRS 1 permits companies adopting
IFRS for the first time certain exemptions from the full requirements of IFRS in
the transition period. easyJet has taken the following options and exemptions:
• Business combinations prior to the date of transition have not been
restated;
• As described below, IAS 32 and IAS 39 on financial instruments are
being applied prospectively from 1 October 2005 and consequently
restated figures for the year ended 30 September 2005 do not reflect
the impact of these standards;
• The net book value of owned Boeing 737-300 aircraft at 1 October 2004
has been restated the fair value of those aircraft at that date; and
• Cumulative exchange differences recognised separately in equity under
IFRS are taken as nil at the date of transition.
easyJet has adopted IFRS for the first time in 2005. It has applied the
financial instruments standards IAS 32 and IAS 39 prospectively from 1 October
2005, as permitted by IFRS 1. This application reflects a change from UK GAAP
as derivative instruments are restated to fair value and all derivatives entered
into to hedge future cashflows are designated as qualifying hedges where
possible.
For the year ended 30 September 2005, financial instruments have been accounted
for in accordance with UK GAAP and thus are not comparable with the amounts
reported for 2006.
easyJet has adopted the provisions of IFRS 5, Non-current Assets Held for Sale
and Discontinued Operations, earlier than the required implementation date. As
a result, one aircraft which was held for sale at 30 September 2005 has been
reclassified as held for sale at that date.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Although these estimates are based on management's best
knowledge of the amount, events or actions may mean that actual results
ultimately differ from those estimates. The policies used in determining the
carrying value of aircraft, aircraft maintenance liabilities, and corporation
tax are material to easyJet's financial statements and require a significant
amount of management judgement.
Basis of consolidation
The consolidated financial statements incorporate those of easyJet plc and its
subsidiaries for the years, made up to 30 September 2005 and 2006, together with
the attributable share of results and reserves of associated undertakings,
adjusted where appropriate to conform with easyJet's accounting policies.
A subsidiary is an entity controlled by easyJet. Control exists when the
Company has the power, directly or indirectly, to govern the financial and
operating policies of an entity so as to benefit from its activities. A
minority interest is the portion of the profit or loss and net assets of a
subsidiary attributable to equity interests that are not owned, directly or
indirectly through subsidiaries, by the Company.
Associates are those entities in which easyJet has significant influence, but
not control over the financial and operating policies. Associates are equity
accounted for.
Intergroup balances and transactions and any unrealised gains and losses arising
from intragroup transactions, are eliminated in preparing the consolidated
financial statements.
Revenue recognition
Revenues comprise the invoiced value of airline services, net of passenger
taxes, discounts, including internet booking discounts, plus ancillary and
advertising revenue. Revenue from the sale of flight seats (passenger revenue)
is recognised in the period in which the service is provided. Unearned revenue
represents flight seats sold but not yet flown and is included in trade and
other payables. Refunds made to passengers in the pre flight period are recorded
as reductions in revenue and any refunds made post flight are ordinarily
recorded as other costs in the income statement.
Ancillary revenues include: credit card fees, excess baggage charges, sporting
equipment fees, infant fees, change fees and rescue fees; profit share from in
flight sales of food, beverages and boutique items; commissions received from
products and services sold such as hotel and car hire bookings, and travel
insurance; less chargebacks. These are recognised on the date that the right to
receive consideration occurs.
Financial instruments
Financial assets and financial liabilities are recognised when easyJet becomes a
party to the contractual provisions of the relevant instrument and derecognised
when it ceases to be a party to such provisions.
Non derivative financial assets are classified as loans and receivables, cash
and cash equivalents, deposits maturing in between three months and one year, or
deposits maturing in greater than one year.
Cash and cash equivalents includes cash in hand and deposits repayable on demand
or maturing within three months of the balance sheet date, less any overdrafts
repayable on demand.
Loans are stated at their amortised cost less any provision for impairment.
Non derivative financial liabilities are stated at amortised cost using the
effective interest rate method. For borrowings, their carrying value includes
accrued interest payable and any unamortised issue costs.
Derivative financial instruments are used by easyJet to hedge its exposure to
movements in foreign exchange rates and jet fuel prices. easyJet does not hold
or issue derivative financial instruments for trading purposes.
Derivative financial assets and liabilities are stated at fair value. All
derivatives to which hedge accounting is applied are designated as cashflow
hedges. Changes to fair values are recognised directly in equity, to the extent
that they are effective, with the ineffective portion being recognised in the
income statement. With respect to zero cost collars, the movement in the
intrinsic value of derivatives is taken to reserves and the time value portion
is taken to the income statement. Where the hedged item results in a non
financial asset, the accumulated gains and losses previously recognised in
equity are included in the initial carrying value of the asset. Otherwise
accumulated gains and losses are recognised in the income statement in the same
period in which the hedged item affects the income statement.
Hedge accounting is discontinued when a hedging instrument is derecognised (e.g.
through expiry or disposal), or no longer qualifies for hedge accounting. Where
the hedged item is a forecast transaction, the related gains and losses remain
in equity until the transaction takes place, when they are removed from equity
and recognised in the income statement.
When a hedged future transaction is no longer expected to occur, any related
gains and losses previously recognised in equity are immediately recognised in
the income statement.
Where derivatives have been entered into for translation protection of balance
sheet assets, hedge accounting is not applied. Movements in fair values of
these instruments are taken to the income statement in the month that they
occur, to set off gains and losses resulting from the retranslation of foreign
currency denominated assets and liabilities.
Foreign currencies
The primary economic environment in which an easyJet subsidiary operates
determines its functional currency. The functional currency of easyJet plc is
considered to be Sterling. Certain subsidiaries have operations that are
primarily influenced by a currency other than Sterling. Exchange differences
arising on the translation of these foreign operations are taken to reserves
until all or part of the interest is sold, when the relevant portion of the
exchange is recognised in income. Under IFRS 1, exchange differences arising
prior to 1 October 2004 are deemed to be nil. Profits and losses of foreign
operations are translated into Sterling at average rates of exchange during the
year.
Transactions arising in foreign currencies are recorded using the rate of
exchange ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies, other than as referred to above, are
translated in to Sterling using the rate of exchange ruling at the balance sheet
date and the gains or losses on translation are included in the consolidated
profit and loss account. Non monetary assets and liabilities denominated in
foreign currencies are translated into Sterling at foreign exchange rates ruling
at the dates the transactions were effected.
Leases
Rental charges on operating leases are charged to the profit and loss account on
a straight line basis over the life of the lease.
easyJet enters into sale and leaseback transactions whereby it sells to a third
party rights to acquire aircraft. On delivery of the aircraft, easyJet
subsequently leases the aircraft back, by way of operating lease. Any profit on
the disposal, where the price that the aircraft is sold for is not considered to
be fair value, is deferred and amortised over the lease term of the asset.
Purchase rights (being the amount of pre delivery deposits paid) for aircraft
that are expected to be sold and leased back to lessors are considered to be
monetary assets. These are disclosed separately from fixed assets.
Finance leases, which transfer to easyJet substantially all the risks and
benefits incidental to ownership of the leased item, are recognised at the
inception of the lease at the fair value of the leased property, or, if lower,
at the present value of the minimum lease payments. Assets held under finance
leases are depreciated as described above. Lease payments are apportioned
between the finance charges and the reduction of the lease liability so as to
achieve a constant rate of interest on the remaining balance of the liability.
Finance charges are included in interest and other expense.
Aircraft maintenance provisions
The accounting for the cost of providing major airframe and certain engine
maintenance checks for owned aircraft is described in the accounting policy for
property, plant and equipment.
Where easyJet has a commitment to maintain aircraft held under operating leases,
provision is made during the lease term for the rectification obligations
contained within lease agreements. The provisions are based on estimated future
costs of major airframe, certain engine maintenance checks and one-off costs
incurred at the end of lease by making appropriate charges to the income
statement calculated by reference to the number of hours or cycles operated
during the year.
Property, plant and equipment
Tangible fixed assets are stated at cost, less accumulated depreciation, except
for the Boeing 737-300s for which the fair value at 1 October 2004 was deemed to
be their cost as allowed under IFRS1. Depreciation is calculated to write off
the cost, less estimated residual value, of assets, on a straight line basis
over their expected useful economic lives to the Group over the following
periods:
Period of depreciation
Boeing 737-300 aircraft - 7 years
Airbus A319 aircraft - 7 years
Aircraft improvements - 3-7 years
Aircraft - prepaid maintenance - 3-7 years
Aircraft - spares - 10 years from date of purchase
Leasehold improvements - 5 years
Fixtures, fittings and equipment - 3 years
Computer hardware - 3 years
The aircraft which the Group holds are expected to have an operational life of
20-30 years. However, the Group has a policy of using recently manufactured
aircraft and, therefore, expects to hold them only for a period of approximately
seven years before selling them. Residual values, where applicable, are reviewed
annually against prevailing market rates at the balance sheet date for
equivalently aged assets and depreciation rates adjusted accordingly on a
prospective basis. The carrying value is reviewed for impairment if events or
changes in circumstances indicate that the carrying value may not be
recoverable.
An element of the cost of a new aircraft is attributed on acquisition to prepaid
maintenance of its engines and airframe and is amortised over a period ranging
from three to ten years from the date of manufacture. Subsequent costs incurred
which lend enhancement to future periods such as long term scheduled maintenance
and major overhaul of aircraft and engines are capitalised and amortised over
the length of period benefiting from these enhancements. All other costs
relating to maintenance are charged to the profit and loss account as incurred.
The cost of new Airbus aircraft comprises the invoiced price of the aircraft
from the supplier less the estimated value of other assets received by easyJet
for no consideration in connection with the transaction to purchase aircraft.
Principal assets received for no consideration in connection with the
acquisition of aircraft include the following:
• Cash - The cash received is recognised as an asset in the balance
sheet. The corresponding credits are treated as a discount and are spread
equally across each of the 120 Airbus aircraft to be delivered.
• Aircraft spares - These are capitalised in the balance sheet at their
list price and are then depreciated according to easyJet's stated accounting
policies for spares. The corresponding credits are then spread equally across
the cost of each of the 120 Airbus aircraft to be delivered.
Advance payments and option payments made in respect of aircraft purchase
commitments and options to acquire aircraft where the balance is expected to be
funded by mortgage financing are recorded at cost. On acquisition of the related
aircraft, these payments are included as part of the cost of aircraft and are
depreciated from that date. Where the balance of payment is expected to be
funded by lease financing, the advance payments are classified as deposits.
Goodwill
Where the cost of a business acquisition exceeds the fair values attributable to
the separable net assets acquired, the resulting goodwill is capitalised.
Goodwill has an indefinite useful life and is tested for impairment annually or
where indicators imply that the carrying value is not recoverable.
Intangible assets
Computer software is carried at cost less accumulated amortisation. It is
amortised on a straight line basis over its useful economic life of three years.
Impairment of assets
Assets that are subject to depreciation or amortisation are reviewed for
impairment whenever events indicate that the carrying value may not be
recoverable. An impairment loss is recognised to the extent that the carrying
value exceeds the higher of the asset's fair value less cost to sell and its
value in use.
Employee benefit costs
easyJet contributes to defined contribution pension schemes for the benefit of
employees. The assets of the schemes are held separately from those of the Group
in independently administered funds. Group contributions are charged to the
consolidated profit and loss account in the year in which they are incurred.
The expected cost of compensated holidays is recognised at the time that the
related service is provided.
Taxation including deferred tax
Deferred tax is provided in full on temporary differences relating to the
carrying amount of assets and liabilities, where it is probable that the
recovery or settlement will result in an obligation to pay more, or a right to
pay less, tax in the future. Deferred tax assets in respect of losses and tax
credits are recognised to the extent that it is probable that there will be
suitable taxable profits from which they can be deducted. Deferred tax is
measured at the tax rates that are expected to apply in the periods in which
recovery of assets and settlement of liabilities are expected to take place,
based on tax rates or laws enacted or substantively enacted at the balance sheet
date.
Share-based payment
easyJet has equity settled share based payment compensation plans. The fair
value of equity settled share based payments is measured at the date of grant
using the Binomial Lattice option pricing model. The fair value of the estimate
of the number of options that are expected to vest is expensed on a straight
line basis over the period that employees services are rendered. When it becomes
reasonably certain that performance criteria attached to the share options will
not be met, the cumulative expense previously recognised for those options is
reversed.
In accordance with the transition provisions of IFRS 1, easyJet has applied this
fair value calculation to share option grants that were made before 7 November
2002, but which had not vested by 1 January 2005.
The cost of shares that are held by employee benefit trusts, and that are not
allocated to specific grants of shares to employees, is deducted from equity.
Investments in subsidiaries
Investments in subsidiaries and associates that are not classified as held for
sale are stated at cost in the unconsolidated financial statements.
Assets held for resale
Where assets are available for sale in their current condition, and their
disposal is highly probable, they are reclassified as held for resale. Assets
held for resale are measured at the lower of their carrying value and the fair
value less costs to sell. Depreciation on assets held for resale ceases at the
point of their reclassification from fixed assets.
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