Adoption of International Financial Reporting Standards
An ‘International Accounting Standards Regulation’ was adopted by the Council of the European Union (EU) in June 2002. This regulation requires all EU companies listed on an EU stock exchange to use ‘endorsed’ International Financial Reporting Standards (IFRS), published by the International Accounting Standards Board (IASB), to report their consolidated results with effect from financial reporting periods beginning on or after 1 January 2005. The group intends to fully comply with all IFRS issued by the IASB as endorsed by the European Union.
From 1 April 2005 onwards, the group will prepare its consolidated financial statements in accordance with IFRS. As the group’s financial year represents the period from 1 April to 31 March, the first consolidated financial statements prepared in accordance with IFRS will be for the 2006 financial year. Because the 2006 financial statements will include comparatives for 2005, the group’s comparatives will be restated to IFRS. The group has made good progress in its transition project, and intends to issue a preliminary reconciliation of the 2005 results in July 2005.
IFRS1 (First-time adoption of IFRS) permits certain exemptions from the full requirements to companies adopting IFRS for the first time. The group expects to apply the following transitional provisions:
||Business combinations recognised before the date of transition (1 April 2004) will not be restated. |
||Revaluations for fixed assets held at historical cost will not be undertaken. |
||IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement) will be applied prospectively from 1 April 2005, therefore hedge documentation and effectiveness will only be measured from that date. |
||Cumulative translation differences on foreign net investments recognised separately in equity will be taken as nil at the date of transition. |
||The cost of share options granted prior to 7 November 2002 will not be recognised in the income statement. |
||The accumulated actuarial gains and losses with regards to employee defined benefit plans will be recognised in full in the opening balance sheet.|
The group currently prepares its financial statements under UK Generally Accepted Accounting Principles (UK GAAP). Current UK GAAP differs from IFRS in certain significant respects. The main effects of the adoption of IFRS that impact the group’s 2005 published UK GAAP results are discussed below.
Pensions and other post-employment benefits
Under UK GAAP, the cost of providing pensions and other post-employment benefits is spread on a systematic basis over the estimated average remaining service life but the net surplus or deficit on defined benefits funds is not recognised on the balance sheet.
On adoption of IFRS the net deficit or surplus on a defined benefit fund will be recognised on the balance sheet. Under the IFRS methodology selected by the group, the more volatile components of the movements in the deficits or surpluses (actuarial gains and losses) will be recorded in the statement of recognised income and expenditure.
Under UK GAAP, only certain share-based plans (where the grant price is less than market price or where cash is paid out in relation to phantom share option plans) result in a charge to operating profit over the vesting period.
Under IFRS, all share-based awards from November 2002 will result in a charge to operating profit over the vesting period on a straight-line basis. This charge will be based on the fair value of the award as at the date of grant as calculated by various binomial model calculations.
Under UK GAAP deferred tax is provided on timing differences.
Under IFRS deferred tax will be provided on all timing differences as well as some permanent differences. This includes recognition of deferred tax on differences between accounting and tax bases of assets including those in respect of fair values on business combinations prior to the date of transition. Deferred tax will also be recognised on unremitted earnings of associates, unless the group is able to demonstrate that the dividend policy cannot be changed without its consent and it is unlikely those dividends will be paid in the foreseeable future.
Under UK GAAP, goodwill is amortised over its estimated life (typically 20 years).
Under IFRS, the amortisation of goodwill will no longer be allowed and goodwill will be reviewed for impairment on an annual basis.
Presentation of results of associates
UK GAAP prescribes a strict format in which items are to be presented on the face of the income statement which includes presenting a share of associates’ turnover, operating profit, interest and tax within the appropriate group measure.
IFRS does not prescribe a format, rather it requires certain items to be shown as separate lines on the face of the income statement. One of these specified items is net profit from associates which is to be shown as a separate line and includes a share of associates’ results after interest, tax and minority interests.
However, the group intends to present additional measures which will include the appropriate share of associates’ results for those segments which hold material associates and for which inclusion of the appropriate associates’ results provides a better understanding of the impact on the overall portfolio of subsidiary and associate investments.
In addition, there will be certain changes in the layout of the financial statements.
This IFRS information, which we will present in relation to 2005, will be prepared on the basis of the IFRS which are expected to be in place for the year ending 31 March 2006. The IFRS in effect at that date may differ as a result of decisions taken by the EU on endorsement, or new interpretative guidance being issued prior to the end of the year.
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