IFRS
Victrex PLC
06 December 2005
Victrex plc
Explanation of transition to IFRS
Restatement of financial information for the year ended
30 September 2005
As released to the Stock Exchange on 6th December 2005
International Financial Reporting Standards ('IFRS') became mandatory for all
listed companies within the EU for accounting periods which began on or after 1
January 2005. Accordingly, Victrex plc adopted IFRS with effect from 1 October
2005. Victrex plc will therefore publish its results for the six months ending
31 March 2006 and the year ending 30 September 2006 in accordance with IFRS.
A restated consolidated income statement under IFRS for the year ended 30
September 2005 together with consolidated balance sheets as at 30 September 2004
and 2005 are set out on pages 2 to 3. This unaudited information is for guidance
only and will only be finalised when Victrex publishes its financial statements
for the year ending 30 September 2006.
The principal differences for Victrex between reporting on the basis of IFRS
compared to current UK Generally Accepted Accounting Practice ('UK GAAP') are as
follows:
a) Proposed dividends which have not been declared at the balance sheet
date can no longer be recognised in the financial statements;
b) The fair value of all employee share options has to be charged through
the income statement. Previously under UK GAAP only options granted
under the Directors' LTIP were charged;
c) The deferred tax provision has to be adjusted as a result of:
(i) Discounting no longer being permitted;
(ii) IFRS being more prescriptive regarding the recognition of
deferred tax assets and,
(iii) Changes in accounting for employee benefits.
d) Amortisation of goodwill is no longer permitted;
e) The deficit in the defined benefit section of Victrex's principal
pension scheme has to be recognised on the balance sheet. The movement
in the deficit as a result of current service cost, contributions and
other finance expenditure 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 and,
f) The fair value of forward foreign currency contracts has to be
recognised on the balance sheet and Victrex has continued to hedge
account.
A more detailed explanation of the principal differences between UK GAAP and
IFRS affecting the Group is set out in note 2 on pages 4 to 6 and
reconciliations of the statements from UK GAAP to IFRS are set out in note 3 on
pages 7 to 11.
Consolidated income statement - restated for IFRS (unaudited)
2005
For the year ended 30 September £m
_______________________________________________________________________________
Revenue 100.9
Cost of sales (43.6)
_______________________________________________________________________________
Gross profit 57.3
Sales, marketing and administrative expenses (22.8)
_______________________________________________________________________________
Operating profit 34.5
Finance income 0.4
Finance costs (0.1)
Share of operating profit of Japanese joint venture 0.5
_______________________________________________________________________________
Profit before tax 35.3
Tax expense (11.2)
_______________________________________________________________________________
Profit for the year attributable to equity holders of
the parent 24.1
_______________________________________________________________________________
Earnings per ordinary share Basic 29.9p
Diluted 29.5p
_______________________________________________________________________________
Consolidated statement of recognised income and expense - restated for IFRS
(unaudited)
2005
For the year ended 30 September £m
_______________________________________________________________________________
Cash flow hedges (0.3)
Exchange differences on translation of foreign operations 0.1
Actuarial gains on defined benefit pension schemes 0.8
Tax on items taken directly to or transferred from equity (0.2)
_______________________________________________________________________________
Net income recognised directly in equity 0.4
Profit for the year 24.1
_______________________________________________________________________________
Total recognised income and expense for the year
attributable to equity shareholders of the parent 24.5
_______________________________________________________________________________
Consolidated statement of changes in equity - restated for IFRS (unaudited)
Share Share Translation Hedging Reserve Retained Total
capital premium reserve reserve for own earnings equity
shares
£m £m £m £m £m £m £m
At beginning of year 0.8 13.4 - 0.5 (2.3) 60.4 72.8
Total recognised income and
expense - - 0.1 (0.3) - 24.7 24.5
Share options exercised - 1.8 - - 0.3 - 2.1
Purchase of own shares held - - - - (0.1) - (0.1)
Dividends to shareholders - - - - - (7.1) (7.1)
_______________________________________________________________________________________________________________
At end of year 0.8 15.2 0.1 0.2 (2.1) 78.0 92.2
_______________________________________________________________________________________________________________
Consolidated balance sheet - restated for IFRS (unaudited)
As at 30 September 2005 2004
ASSETS £m £m
_______________________________________________________________________________
Non-current assets
Property, plant and equipment 63.8 49.3
Intangible assets 10.1 6.7
Investment in Japanese joint venture
share of gross 2.2 1.9
assets
share of gross (2.2) (1.6)
liabilities
Deferred tax assets 3.9 3.2
_______________________________________________________________________________
77.8 59.5
_______________________________________________________________________________
Current assets
Inventories 20.0 18.8
Trade and other receivables 12.8 10.1
Deferred tax assets 0.2 0.2
Derivative financial instruments 1.4 1.5
Cash and cash equivalents 15.7 16.8
_______________________________________________________________________________
50.1 47.4
_______________________________________________________________________________
Total assets 127.9 106.9
_______________________________________________________________________________
LIABILITIES
_______________________________________________________________________________
Non-current liabilities
Deferred tax liabilities (9.6) (7.9)
Retirement benefit obligations (7.8) (8.2)
_______________________________________________________________________________
(17.4) (16.1)
_______________________________________________________________________________
Current liabilities
Derivative financial instruments (1.0) (0.4)
Trade and other payables (17.3) (17.6)
_______________________________________________________________________________
(18.3) (18.0)
_______________________________________________________________________________
Total liabilities (35.7) (34.1)
_______________________________________________________________________________
_______________________________________________________________________________
Total assets less total
liabilities 92.2 72.8
_______________________________________________________________________________
EQUITY
_______________________________________________________________________________
Capital and reserves attributable to
equity holders
Share capital 0.8 0.8
Share premium account 15.2 13.4
Translation reserve 0.1 -
Hedging reserve 0.2 0.5
Reserve for own shares (2.1) (2.3)
Retained earnings 78.0 60.4
_______________________________________________________________________________
Equity shareholders' funds 92.2 72.8
_______________________________________________________________________________
Selected notes to the IFRS statements
1. Basis of preparation
The restated financial statements for the year ended 30 September 2005 and the
opening balance sheet at 1 October 2004 have been prepared in accordance with
International Accounting Standards ('IAS') and International Financial Reporting
Standards ('IFRS') issued by the International Accounting Standards Board
('IASB') for illustrative purposes only. These are subject to ongoing review and
possible amendment by interpretative guidance from the IASB. Victrex also
continues to conduct an ongoing review of changes, interpretations and best
practice and hence further restatement may occur up until the financial
statements for the year ending 30 September 2006 are published.
The principal differences between UK GAAP and IFRS for the Group are set out in
note 2.
The main disclosures required by IFRS 1 - First-time Adoption of International
Financial Reporting Standards regarding the transition from UK GAAP to IFRS are
set out in note 3.
2. Principal differences between UK GAAP and IFRS
a) 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 final dividend will
not be recognised as a liability on the balance sheet as at 30 September
2005 (£7.5m).
b) Share based payments
Under UK GAAP there is no charge to the profit and loss account relating
to options granted under the Victrex Employee share option scheme,
Executive plan, Save as you earn scheme, Sharesave plan or Stock purchase
plan. As regards the LTIP, under UK GAAP, the profit and loss account is
charged over the performance period with an amount equal to the market
price on the date of the award, subject to meeting performance targets.
However, IFRS 2 - Share Based Payments, requires that the fair value of
all such relevant instruments granted since 7 November 2002, which have
not vested by 1 January 2005, be charged to the income statement over the
relevant option vesting periods (adjusted for actual and expected levels).
Fair values have been calculated using the recognised stochastic options
valuation model.
Victrex receives a tax credit, as appropriate, which relates to share
options and awards when exercised, based on the gains the award holders
make. A deferred tax asset representing an estimate of the future tax
relief for this gain has to recognised under IFRS and is based on the
potential gains available to the option or award holders at the balance
sheet date.
The profit impact of this adjustment in 2005 is a net charge of £0.1m,
offset by a deferred tax credit of £0.6m. A corresponding deferred tax
asset of £0.6m has been recognised at 30 September 2005.
c) 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 year's results is an increased
deferred tax charge of £0.9m and the resulting adjustment to the closing
balance sheet as at 30 September 2005 is an increase of £2.6m.
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 on the opening balance
sheet. The impact on the year's results is a decreased deferred tax charge
of £0.3m and the resulting effect on the balance sheet as at 30 September
2005 is an increase of £1.0m.
The combined impact on the income statement is an increased deferred tax
charge of £0.6m.
The specific deferred taxation impact of changes in accounting for
pensions and share based payments is set out in sections e) and b)
respectively.
d) Goodwill amortisation
Under UK GAAP, goodwill is amortised by equal installments 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 on 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 2005 is a credit of £0.7m, 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. The profit impact of this adjustment in 2005 is a credit of
£0.2m, being the reversal of amortisation previously charged under UK
GAAP.
e) 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 on 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 expenditure has 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 FRS 17 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 £7.8m and a deferred tax asset of £2.3m as at 30
September 2005. The movement during the year as a result of current
service cost, contributions and other finance income of £0.3m 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.
f) Accounting for foreign currency transactions and 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 has 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 materially affect overall profitability, there
are minor changes in categorisation within the detail with a reduction in
turnover of £0.7m offset by a reduction in cost of sales of £0.2m and
indirect overheads of £0.3m.
The opening balance sheet as at 30 September 2004 recognises a financial
asset of £1.5m and a financial liability of £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 30 September 2005 recognises a financial asset of
£1.4m and a financial liability £1.0m and a corresponding hedging reserve
of £0.2m.
3. Reconciliation of UK GAAP to IFRS
(i) Reconciliation of the consolidated income statement for the year ended
30 September 2005
Audited Dividend Share Deferred Goodwill Pensions Accounting Unaudited
UK GAAP recognition based taxation amortisation for foreign year ended
In IFRS payments currency 30 Sept 05
format transactions restated
and under IFRS
financial
instruments
£m £m £m £m £m £m £m £m
a b c d e f
__________________________________________________________________________________________________________________
Revenue 101.6 - - - - - (0.7) 100.9
Cost of sales (43.6) - - - - (0.2) 0.2 (43.6)
__________________________________________________________________________________________________________________
Gross profit 58.0 - - - - (0.2) (0.5) 57.3
Sales,
marketing and
administrative
expenses (23.7) - (0.1) - 0.9 (0.2) 0.3 (22.8)
__________________________________________________________________________________________________________________
Group operating
profit 34.3 - (0.1) - 0.9 (0.4) (0.2) 34.5
Finance income 0.4 - - - - - - 0.4
Finance costs (0.1) - - - - - - (0.1)
Share of
operating
profit of
Japanese joint
venture 0.5 - - - - - - 0.5
__________________________________________________________________________________________________________________
Profit before
tax 35.1 - (0.1) - 0.9 (0.4) (0.2) 35.3
Tax expense (11.4) - 0.6 (0.6) - 0.1 0.1 (11.2)
__________________________________________________________________________________________________________________
Profit for the
year attributable
to equity
holders of the
parent 23.7 - 0.5 (0.6) 0.9 (0.3) (0.1) 24.1
____________________________________________________________________
Equity
dividends paid
and proposed (9.7) 9.7
______________________________________________
Retained
profit for the
financial year 14.0 9.7
______________________________________________
Earnings per
ordinary share
Basic 29.3p 29.9p
Diluted 29.0p 29.5p
__________________________________________________________________________________________________________________
(ii) Reconciliation of the consolidated statement of recognised income and
expense for the year ended 30 September 2005
Audited UK GAAP Dividend Share based Deferred Goodwill Pensions Accounting Unaudited
in IFRS recognition payments taxation Amortisation for foreign year ended
Format currency 30 Sept 05
transactions restated
and financial under IFRS
Instruments
£m £m £m £m £m £m £m £m
a b c d e f
_______________________________________________________________________________________________________________________
Cash flow
hedges - - - - - - (0.3) (0.3)
Exchange
differences
on translation
of foreign
operations (0.1) - - - - - 0.2 0.1
Actuarial
gains on
defined benefit
pension schemes - - - - - 0.8 - 0.8
Tax on items
taken directly
to or
transferred - - - - - (0.2) - (0.2)
from equity
_______________________________________________________________________________________________________________________
Net income
recognised
directly in
equity (0.1) - - - - 0.6 (0.1) 0.4
Profit for
the year 23.7 - 0.5 (0.6) 0.9 (0.3) (0.1) 24.1
Dividends (9.7) 9.7 - - - - - -
_______________________________________________________________________________________________________________________
Total recognised
income and
expense for
the year
attributable
to equity
shareholders
of the parent 13.9 9.7 0.5 (0.6) 0.9 0.3 (0.2) 24.5
_______________________________________________________________________________________________________________________
(iii) Reconciliation of the consolidated balance sheet at 30 September 2005
Audited UK GAAP Dividend Share based Deferred Goodwill Pensions Accounting Unaudited
in IFRS recognition payments taxation Amortisation for foreign restated
Format currency under IFRS
transactions 30 Sept 05
and financial
Instruments
ASSETS £m £m £m £m £m £m £m £m
a b c d e f
_______________________________________________________________________________________________________________________
Non-current assets
Property, plant and
equipment 63.8 - - - - - - 63.8
Goodwill 6.2 - - - 0.9 - - 7.1
Other intangible
assets 3.0 - - - - - - 3.0
Investment in
Japanese joint
venture
- share of
gross assets 2.3 - - - - - (0.1) 2.2
- share of
gross liabilities (2.3) - - - - - 0.1 (2.2)
Deferred tax
assets - - 0.6 1.0 - 2.3 - 3.9
_______________________________________________________________________________________________________________________
73.0 - 0.6 1.0 0.9 2.3 - 77.8
_______________________________________________________________________________________________________________________
Current assets
Inventories 20.0 - - - - - - 20.0
Trade and other
receivables 13.0 - - - - - (0.2) 12.8
Deferred tax
assets 0.2 - - - - - - 0.2
Derivative
financial
instruments - - - - - - 1.4 1.4
Cash and cash
equivalents 15.8 - - - - - (0.1) 15.7
_______________________________________________________________________________________________________________________
49.0 - - - - - 1.1 50.1
_______________________________________________________________________________________________________________________
Total assets 122.0 - 0.6 1.0 0.9 2.3 1.1 127.9
_______________________________________________________________________________________________________________________
LIABILITIES
_______________________________________________________________________________________________________________________
Current liabilities
Derivative
financial
instruments - - - - - - (1.0) (1.0)
Other
creditors (24.8) 7.5 - - - - - (17.3)
_______________________________________________________________________________________________________________________
(24.8) 7.5 - - - - (1.0) (18.3)
_______________________________________________________________________________________________________________________
Non-current
liabilities
Deferred tax
liabilities (7.0) - - (2.6) - - - (9.6)
Retirement
benefit
obligations - - - - - (7.8) - (7.8)
_______________________________________________________________________________________________________________________
(7.0) - - (2.6) - (7.8) - (17.4)
_______________________________________________________________________________________________________________________
Total
liabilities (31.8) 7.5 - (2.6) - (7.8) (1.0) (35.7)
_______________________________________________________________________________________________________________________
Total assets
less total
liabilities 90.2 7.5 0.6 (1.6) 0.9 (5.5) 0.1 92.2
_______________________________________________________________________________________________________________________
EQUITY
_______________________________________________________________________________________________________________________
Capital and
reserves
attributable
to equity
holders
Share capital 0.8 - - - - - - 0.8
Share premium
account 15.2 - - - - - - 15.2
Translation
reserve - - - - - - 0.1 0.1
Hedging reserve - - - - - - 0.2 0.2
Reserve for
own shares (2.1) - - - - - - (2.1)
Retained earnings 76.3 7.5 0.6 (1.6) 0.9 (5.5) (0.2) 78.0
_______________________________________________________________________________________________________________________
Equity
shareholders'
funds 90.2 7.5 0.6 (1.6) 0.9 (5.5) 0.1 92.2
_______________________________________________________________________________________________________________________
(iv) Reconciliation of the consolidated balance sheet at 1 October 2004
Audited Dividend Deferred Goodwill Pensions Accounting for Unaudited
UK GAAP recognition taxation amortisation foreign restated
in IFRS currency under IFRS
format transactions 30 Sept 04
and financial
instruments
£m £m £m £m £m £m £m
ASSETS a c d e f
_______________________________________________________________________________________________________
Non-current
assets
Property,
plant and
equipment 49.3 - - - - - 49.3
Goodwill 3.5 - - - - - 3.5
Other
intangible
assets 3.2 - - - - - 3.2
Investment in
Japanese joint
venture
- share of
gross assets 2.1 - - - - (0.2) 1.9
- share of
gross
liabilities (1.8) - - - - 0.2 (1.6)
Deferred tax
assets 0.2 - 0.7 - 2.5 - 3.4
_______________________________________________________________________________________________________
56.5 - 0.7 - 2.5 - 59.7
_______________________________________________________________________________________________________
Current assets
Inventories 18.8 - - - - - 18.8
Trade and
other
receivables 10.6 - - - - (0.5) 10.1
Derivative
financial
instruments - - - - - 1.5 1.5
Cash and cash
equivalents 17.0 - - - - (0.2) 16.8
_______________________________________________________________________________________________________
46.4 - - - - 0.8 47.2
_______________________________________________________________________________________________________
Total assets 102.9 - 0.7 - 2.5 0.8 106.9
_______________________________________________________________________________________________________
LIABILITIES
_______________________________________________________________________________________________________
Current
liabilities
Derivative
financial
instruments - - - - - (0.4) (0.4)
Other
creditors (22.7) 5.0 - - - 0.1 (17.6)
_______________________________________________________________________________________________________
(22.7) 5.0 - - - (0.3) (18.0)
_______________________________________________________________________________________________________
Non-current
liabilities
Deferred tax
liabilities (6.2) - (1.7) - - - (7.9)
Retirement
benefit
obligations - - - - (8.2) - (8.2)
_______________________________________________________________________________________________________
(6.2) - (1.7) - (8.2) - (16.1)
_______________________________________________________________________________________________________
Total
liabilities (28.9) 5.0 (1.7) - (8.2) (0.3) (34.1)
_______________________________________________________________________________________________________
Total assets
less total
liabilities 74.0 5.0 (1.0) - (5.7) 0.5 72.8
_______________________________________________________________________________________________________
EQUITY
Capital and
reserves
attributable to
equity
holders
Share capital 0.8 - - - - - 0.8
Share premium
account 13.4 - - - - - 13.4
Hedging
reserve - - - - - 0.5 0.5
Reserve for
own shares (2.3) - - - - - (2.3)
Retained
earnings 62.1 5.0 (1.0) - (5.7) - 60.4
_______________________________________________________________________________________________________
Equity
shareholders'
funds 74.0 5.0 (1.0) - (5.7) 0.5 72.8
_______________________________________________________________________________________________________
(v) Reconciliation of the cash flow statement for the year ended 30 September
2005
It is believed that there are no material differences between the cash flow
statement presented under UK GAAP and that under IFRS.
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