Doc re. IFRS
Victrex PLC
07 June 2005
7 June 2005
Victrex plc
The effects of International Financial Reporting Standards
Introduction
The purpose of this document is to give guidance on how International Financial
Reporting Standards ('IFRS') will impact Victrex's financial results when
adopted for the year ending 30 September 2006.
This document is for guidance only and the effects detailed may be amended as a
result of further interpretive guidance from the International Accounting
Standards Board ('IASB') or ongoing review.
The financial information presented in this document is unaudited.
Background
Victrex plc currently prepares its financial statements under UK Generally
Accepted Accounting Practice ('UK GAAP'). For the year ending 30 September 2006
the Group will be required to prepare its interim and annual reports, including
the comparative year ending 30 September 2005, under IFRS.
This document details the principal differences arising from this transition on
the opening balance sheet as at 1 October 2004 ('date of transition') and on the
income statement (previously the profit and loss account under UK GAAP) and
balance sheet for the six months ended 31 March 2005 as announced to the Stock
Exchange today.
Impact
Half year ended 31 March 2005
UK GAAP IFRS Variance
£m £m £m
Profit before tax 17.4 17.5 0.1
Closing equity shareholders' funds 84.2 81.2 (3.0)
Earnings per share 14.6p 14.6p -
Summary of principal differences
The principal differences for Victrex between reporting on the basis of IFRS
compared to current UK GAAP are as follows:
1. Proposed dividends which have not been declared at the balance sheet
date can no longer be recognised in the financial statements;
2. The deferred tax provision will have to be adjusted as a result of:
a. Discounting no longer being permitted;
b. IFRS being more prescriptive regarding the recognition of deferred
tax assets; and
c. Changes in accounting for employee benefits (see note 4 below);
3. Amortisation of goodwill is no longer permitted;
4. The deficit in the defined benefit section of Victrex's principal
pension scheme has to be recognised on the balance sheet both at the
date of transition and as at 31 March 2005. The movement in the deficit
as a result of current service cost, contributions and other finance
income has to be recognised in the income statement with all other
movements (predominantly actuarial gains and losses) reflected through
the statement of recognised income and expense. It should be noted that
these changes would largely have been required under UK GAAP once FRS17
became fully applicable (currently the information is given in the notes
to the accounts); and
5. The fair value of forward foreign currency contracts will have to be
recognised on the balance sheet. Victrex will continue to hedge account,
and hence this adjustment is not expected to have any material impact on
the income statement.
Further details of each of these differences follow and are summarised in
tabular form in the following appendices:
Appendix 1 Reconciliation of Group equity at 1 October 2004 (date of transition
to IFRS)
Appendix 2 Reconciliation of Group profit for the six months ended 31 March 2005
Appendix 3 Reconciliation of Group equity at 31 March 2005
Principal differences explained
1. Dividend recognition
Under current UK GAAP, proposed dividends are recognised in the financial
results for the period to which they relate. However, under IFRS, a dividend can
only be recognised if it has been formally declared during the accounting period
being reported.
The Victrex Board declare interim and final dividends after the end of each
accounting period at the same time as approving the interim and annual reports.
Hence, we will no longer accrue proposed dividends in the financial period to
which they relate.
Consequently the final dividend for 2004 is not recognised as a liability in the
opening balance sheet (£5.0m) and the proposed interim dividend will not be
recognised as a liability in the balance sheet as at 31 March 2005 (£2.2m).
2. Deferred taxation
Under UK GAAP the option to calculate deferred tax on a discounted basis was
adopted by Victrex. However, under IAS 12 - Income taxes, this discounted basis
is not permitted and hence the deferred tax provision has to be stated at the
gross amount.
The effect on the opening balance sheet is an increase in the deferred tax
provision of £1.7m, the impact on the first half results is an increased
deferred tax charge £0.5m and the resulting adjustment to the closing balance as
at 31 March 2005 is an increase of £2.2m.
In addition, IAS 12 requires separate recognition of deferred tax assets and
liabilities on the Group balance sheet.
IAS 12 is also more prescriptive than UK GAAP and hence an additional deferred
tax asset of £0.7m has been recognised in the opening balance sheet. The impact
on the first half results is a decreased deferred tax charge of £0.3m and the
resulting effect as at 31 March 2005 is £1.0m.
The combined impact on the income statement is an increased deferred tax charge
of £0.2m.
The specific deferred taxation impact of changes in accounting for employee
benefits is set out in section 4 below.
3. Goodwill amortisation
Under UK GAAP, goodwill is amortised by equal instalments over its estimated
useful economic life. However, under IFRS 3 - Business combinations,
amortisation of goodwill is prohibited but is replaced by a requirement for
annual impairment testing.
Victrex has decided to take advantage of the IFRS 1 exemption whereby IFRS 3 can
be applied prospectively from the date of transition, hence removing the need to
restate previous business combinations. The carrying value of goodwill in the
opening IFRS balance sheet has therefore been restricted to that £3.5m net
carrying amount previously reported under UK GAAP.
The profit impact of this adjustment in the first half of 2005 is a credit of
£0.3m, being the reversal of amortisation previously charged under UK GAAP on
the goodwill which arose on the acquisition of the DFDPM business from Laporte
in 1999 (note that there is no change in the treatment of the knowhow arising
from that transaction).
On 1 April 2005 Victrex announced the purchase of certain operations from
Degussa AG. This included the purchase of goodwill which, in accordance with
IFRS, will not be amortised, but will be subject to annual impairment testing.
4. Pensions
Under UK GAAP, Victrex has accounted for pensions in accordance with SSAP 24,
which spreads the costs of the defined benefit section of Victrex's principal
scheme over the employees' working lives within the Group. Victrex has also made
additional disclosures giving details of the pension fund deficit, liabilities
and operating charges on the valuation methodologies in accordance with FRS 17.
IAS 19 - Employee benefits requires the actuarial deficit arising under the
defined benefit pension scheme to be recognised in the balance sheet based on
fair valuations of the assets and liabilities at the balance sheet date. The
movement in deficit as a result of current service cost, contributions and other
finance income have to be recognised in the income statement and it is Victrex's
intention to take advantage of the option under IAS 19 to recognise actuarial
gains and losses through the statement of recognised income and expense as
opposed to the income statement. Note that similar adjustments would have been
required under UK GAAP once FRS17 becomes fully applicable.
Consequently, a deficit of £8.2m and a corresponding deferred tax asset of £2.5m
have been recognised on the balance sheet at the date of transition and a
deficit of £7.6m and a deferred tax asset of £2.3m as at 31 March 2005. The
movement during the period as a result of current service cost, contributions
and other finance income of £0.2m has been recognised in the income statement
with all other movements in the deficit (predominantly actuarial gains/losses)
reflected through the statement of recognised income and expense.
5. Accounting for foreign currency transactions & financial instruments
Victrex has a policy of taking out forward foreign currency contracts to cover
forecast foreign currency income streams providing medium term predictability in
its results.
Under UK GAAP Victrex uses the effective exchange rates from the forward
contracts for translation of its foreign currency transactions and where
appropriate the consolidation of its overseas entities.
Under IFRS, Victrex will continue to hedge account (as defined by IAS 39 -
Financial Instruments: Recognition and Measurement) resulting in largely
unchanged profit and loss recognition. However, IAS does require changes to the
mechanics of how this is achieved:
•Under IAS 21 - Effects of Changes in Foreign Exchange Rates, all
transactions and consolidations are recognised using spot rates;
•Under IAS 39 the fair value of forward foreign currency contracts have to
be recognised on the balance sheet. Victrex has adopted hedge accounting and
therefore the movement in fair value can be deferred in a hedging reserve
until the associated transaction occurs at which point the cumulative
movement is released to the income statement.
Whilst the above does not affect overall profitability, there are minor changes
in categorisation within the detail with a reduction of turnover of £0.3m offset
by a reduction in cost of sales of £0.1m and indirect overheads of £0.2m.
The opening balance sheet as at 30 September 2004 recognises a financial asset
of £1.5m and a financial liability £0.4m, which account for the fair value of
derivative financial instruments (forward contracts). The corresponding hedging
reserve is £0.5m which reflects the fair value of forward contracts relating to
future transactions as at the balance sheet date. These effects are offset by
the effect of revaluing all balance sheet categories to closing spot rate.
The balance sheet as at 31 March 2005 recognises a financial asset of £1.7m and
a financial liability £0.3m and a corresponding hedging reserve of £1.0m.
Reconciliation of Group Equity at 1 October 2004 (date of transition to IFRSs) - Appendix 1
Previously Dividend Deferred Goodwill Pensions Accounting for Restated under
reported under recognition taxation amortisation foreign currency IFRS
UK GAAP transactions and
financial instruments
30 Sept 04 30 Sept 04
ASSETS £m £m £m £m £m £m £m ASSETS
-------- -------- -------- -------- ---------
Non-current Non-current
assets 1 2 3 4 5 assets
-------- -------- -------- -------- ---------
Property, Property,
plant and plant and
equipment 49.3 49.3 equipment
Goodwill 3.5 3.5 Goodwill
Other Other
intangible intangible
assets 3.2 3.2 assets
Investment in Investment in
Japanese Japanese
joint joint
venture venture
- share of - share of
gross assets 2.1 (0.2) 1.9 gross assets
- share of - share of
gross liabilities (1.8) 0.2 (1.6) gross
liabilities
Deferred tax assets 0.2 0.7 2.5 3.4 Deferred tax
assets
------- --------
56.5 59.7
------- --------
Current assets Current assets
Inventories 18.8 18.8
Inventories
Trade and other Trade and
receivables 10.6 (0.5) 10.1 other
receivables
Derivative financial Derivative
instruments 0.0 1.5 1.5 financial
instruments
Cash and cash Cash and
equivalents 17.0 (0.2) 16.8 cash equiv.
------- --------
46.4 47.2
======= ========
Total assets 102.9 106.9 Total assets
------- --------
LIABILITIES LIABILITIES
Current liabilities Current
liabilities
Derivative financial Derivative
instruments 0.0 (0.4) (0.4) financial
instruments
Other creditors (22.7) 5.0 0.1 (17.6) OtherCreditors
------- --------
(22.7) (18.0)
------- --------
Non-current Non-current
liabilities liabilities
Deferred tax Deferred tax
liabilities (6.2) (1.7) (7.9) liabilities
Retirement Retirement
benefit benefit
obligations 0.0 (8.2) (8.2) obligations
Provisions 0.0 0.0 Provisions
Other liabilities 0.0 0.0 Other
liabilities
------- --------
(6.2) (16.1)
======= ========
Total liabilities (28.9) (34.1) Total
liabilities
------- --------
------- -------- -------- -------- -------- --------- --------
Total assets Total assets
less total less total
liabilities 74.0 5.0 (1.0) 0.0 (5.7) 0.5 72.8 liabilities
======= ======== ======== ======== ======== ========= ========
EQUITY EQUITY
Capital and Capital and
reserves reserves
attributable attributable
to equity to equity
holders holders
Share 0.8 0.8 Share
capital capital
Share premium Share premium
account 13.4 13.4 account
Hedging reserve 0.0 0.5 0.5 Hedging
reserve
Retained earnings 59.8 5.0 (1.0) (5.7) 58.1 Retained
------- -------- -------- -------- -------- --------- -------- earnings
Equity Equity
shareholders' shareholders'
funds 74.0 5.0 (1.0) 0.0 (5.7) 0.5 72.8 funds
======= ======== ======== ======== ======== ========= ========
Reconciliation of Group profit for six months ended 31 March 2005 - Appendix 2
UK GAAP Unaudited half Dividend Deferred Goodwill Pensions Accounting for Unaudited half IFRS
year ended 31 recognition taxation amortisation foreign year ended 31 format
Mar 05 currency Mar05 restated
reported under transactions under IFRS
UK GAAP and financial
instruments
£m £m £m £m £m £m £m
-------- -------- -------- -------- ---------
1 2 3 4 5
-------- -------- -------- -------- ---------
Revenue 49.3 (0.3) 49.0 Revenue
Cost of sales (21.7) 0.1 (21.6) Cost of
sales
------- -------- -------- -------- -------- --------- --------
Gross profit 27.6 0.0 0.0 0.0 0.0 (0.2) 27.4 Gross
profit
Sales, Sales,
marketing and marketing
administrative and
expenses (10.8) 0.3 (0.2) 0.2 (10.5) admin.
expenses
------- -------- -------- -------- -------- --------- --------
Group operating operating
profit 16.8 0.0 0.0 0.3 (0.2) 0.0 16.9 profit
Interest receivable 0.3 0.3 Finance
income
Interest payable and Finance
other similar charges (0.1) (0.1) costs
Share of operating Share of
profit of Japanese operating
joint venture 0.4 0.4 profit of
Japanese
joint
venture
------- -------- -------- -------- -------- --------- --------
Profit on ordinary Profit
activities before before
tax 17.4 0.0 0.0 0.3 (0.2) 0.0 17.5 tax
Taxation on profit
of ordinary Tax
activities expense (5.7) (0.2) (5.9) expenses
------- -------- -------- -------- -------- --------- --------
Profit on ordinary Profit
activities after tax 11.7 0.0 (0.2) 0.3 (0.2) 0.0 11.6 for the
attributable
to equity
Equity dividends ======== ======== ======== ========= ========
paid and proposed (2.1) 2.1
------- --------
Retained profit for
the financial year 9.6 2.1
======= ========
Basic earnings Basic
per share (pence) 14.6 0.0 (0.0) 0.0 (0.0) 0.0 14.6 earnings
earnings per share
(pence)
======= ======== ======== ======== ======== ========= ========
Diluted earnings Diluted
per share (pence) 14.5 0.0 (0.0) 0.0 (0.0) 0.0 14.5 earnings
======= ======== ======== ======== ======== ========= ======== per share
(pence)
Reconciliation of Group Equity at 31 March 2005 - Appendix 3
Reported under Dividend Deferred Goodwill Pensions Accounting for Restated under
UK GAAP recognition taxation amortisation foreign IFRS
31 Mar 05 currency 31 Mar 05
Unaudited transactions Unaudited
and financial
instruments
ASSETS £m £m £m £m £m £m £m ASSETS
-------- -------- -------- -------- ---------
Non-current assets 1 2 3 4 5 Non-current
-------- -------- -------- -------- --------- assets
Property, plant and Property,
equipment 49.5 49.5 plant and
equipment
Goodwill 3.2 0.3 3.5 Goodwill
Other intangible Other
assets 2.8 2.8 intangible
assets
Investment in Investment in
Japanese joint Japanese joint
venture venture
- share of
gross assets 2.7 (0.1) 2.6 - share of
gross assets
- share of
gross liabilities(2.6) 0.2 (2.4) - share of
gross
liabilities
Derivative Derivative
financial financial
instruments 0.0 0.1 0.1 instruments
Deferred tax Deferred tax
assets 0.2 1.0 2.3 3.5 assets
------- --------
55.8 59.6
------- --------
Current assets Current assets
Inventories 18.5 18.5 Inventories
Trade and Trade and
other other
receivables 14.7 (0.5) 14.2 receivables
Derivative Derivative
financial financial
instruments 0.0 1.7 1.7 instruments
Cash and cash Cash and cash
equivalents 20.3 (0.2) 20.1 equivalents
------- --------
53.5 54.5
======= ========
Total assets 109.3 114.1 Total assets
------- --------
LIABILITIES LIABILITIES
Current Current
liabilities liabilities
Derivative Derivative
financial financial
instruments 0.0 (0.3) (0.3) instruments
Other Other
creditors (18.5) 2.2 0.1 (16.2) creditors
------- --------
(18.5) (16.5)
------- --------
Non-current Non-current
liabilities liabilities
Deferred tax Deferred tax
liabilities (6.6) (2.2) (8.8) liabilities
Retirement Retirement
benefit benefit
obligations 0.0 (7.6) (7.6) obligations
Provisions 0.0 0.0 Provisions
Other Other
liabilities 0.0 0.0 liabilities
------- --------
(6.6) (16.4)
======= ========
Total Total
liabilities (25.1) (32.9) liabilities
======= ========
Total assets Total assets
less total less total
liabilities 84.2 2.2 (1.2) 0.3 (5.3) 1.0 81.2 liabilities
======= ======== ======== ======== ======== ========= ========
EQUITY EQUITY
Capital and Capital and
reserves reserves
attributable attributable
to equity to equity
holders holders
Share capital 0.8 0.8 Share capital
Share premium Share premium
account 13.9 13.9 account
Hedging reserve 0.0 1.0 1.0 HedgingReserve
Retained earnings 69.5 2.2 (1.2) 0.3 (5.3) 65.5 Retained
------- -------- -------- -------- -------- --------- -------- earnings
Equity Equity
shareholders' shareholders'
funds 84.2 2.2 (1.2) 0.3 (5.3) 1.0 81.2 funds
======= ======== ======== ======== ======== ========= ========
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