RNS Number:6892N
Senior PLC
17 June 2005
SENIOR plc
NEWS RELEASE
Friday 17 June 2005
Adoption of International Financial Reporting Standards ("IFRS")
Restatement of 2004 Financial Information
Overview of Impact
* Underlying trading and cash flows unaffected.
* Reported profit before tax and basic earnings per share significantly
improved as a result of revised accounting for goodwill on disposals and
goodwill amortisation.
* Net assets improved due to revised accounting for goodwill and proposed
dividends.
* No material changes from the effects mentioned in the 2004 Annual Report.
2004 2004
IFRS (unaudited) UK GAAP (1)
Sales - continuing subsidiaries #306.8m #306.8m
Operating profit - continuing subsidiaries #16.8m #11.8m
Profit before tax - continuing subsidiaries #12.9m #7.7m
Loss from discontinued operations (#4.4m) (#12.9m)
Profit / (loss) for the year #6.9m (#6.9m)
Basic earnings / (loss) per share 2.25p (2.25p)
Adjusted earnings per share (2) 3.65p 3.65p
Net assets #83.8m #75.3m
(1) The UK GAAP numbers are as reported in the 2004 Annual Report reformatted in
line with the IFRS presentational requirements.
(2) Adjusted earnings per share is calculated on earnings before goodwill
amortisation, profit / (loss) on sale of operations and fixed assets and
foreign exchange gains / (losses) on long-term intercompany loans.
Contact
For further information please contact:
Mark Rollins, Group Finance Director 01923 714738
This announcement, together with other information on Senior plc may be found
at: www.seniorplc.com
1.Introduction
The purpose of this statement is to provide a detailed update on the impact of
the transition to International Financial Reporting Standards (IFRS) on the 2004
published consolidated financial statements of Senior plc.
A brief commentary on the expected impact was included in the Finance Director's
Review contained in the Group's 2004 Annual Accounts. Whilst this statement
provides greater detail on the transition to IFRS, the adjustments are consistent
with the previous commentary.
The information has been prepared by management using its best knowledge,
judgement and interpretation of the expected standards and accounting policies
that will be adopted when the Group prepares its first complete set of IFRS
financial statements as at 31 December 2005. It is unaudited. It should be noted
that only a complete set of financial statements comprising an income statement,
a balance sheet, a cash flow statement, a statement of changes in equity
together with comparative financial information and explanatory notes can
provide a fair presentation of the Group's financial position and operating
performance.
This statement contains no information in respect of the Group's 2005
performance under IFRS.
Senior intends to report its interim accounts, covering the six months to 30
June 2005, under IFRS, on Thursday 4 August 2005.
2.Transition to International Financial Reporting Standards
Companies listed on security exchanges within the European Union are required to
adopt IFRS for accounting periods beginning on or after 31 December 2004. The
adoption of IFRS will, therefore, first apply to the Group's financial
statements with effect from 1 January 2005. Comparative figures are required and
consequently, for Senior, the transition date is 1 January 2004, as determined
in accordance with IFRS 1 First-time Adoption of International Accounting
Standards.
During 2004/05 the Group undertook a project, overseen by the Audit Committee,
to manage the transition to IFRS. This involved an analysis of each standard to
identify the differences between the Group's accounting policies under UK GAAP
and those to be adopted under IFRS. The additional data required to restate the
Group's results and its financial position in accordance with IFRS with effect
from the transition date has been collected and the ongoing reporting and
consolidation systems are being modified to meet IFRS requirements.
The differences between UK GAAP and IFRS that have been identified as having the
most significant effect on the Group's reported results are those arising from
the implementation of IFRS 3 Business Combinations, the treatment of proposed
dividends and presentational differences of the financial statements. These,
along with some of the more minor changes, are discussed below: Section 3 covers
the Group Income Statement; Section 4, the Group Balance Sheet and Section 5,
the Group Cash Flow Statement. The exemptions adopted by Senior in the
transition to IFRS, as permitted by IFRS 1, are explained at Section 10 and the
Accounting Policies to be adopted by the Group under IFRS in Section 11.
3.Group Income Statement
UK GAAP Adjustment IFRS Note
Reformatted
2004 2004 2004
#m #m #m
Continuing Operations 3.1
Revenue 306.8 306.8
--------- -------- -------
Trading profit 16.4 (0.1) 16.3 3.2, 3.3
Profit on sale of fixed assets 0.5 0.5 3.4
Amortisation of goodwill (5.1) 5.1 - 3.6
--------- -------- -------
Operating profit 11.8 5.0 16.8 3.2
--------- -------- -------
FX gains on long-term
intercompany loans 0.2 0.2 3.5
Interest receivable 2.2 (0.1) 2.1 3.7
Interest payable and
similar charges (5.1) 0.1 (5.0) 3.7
Finance cost of net
pension liability (1.2) (1.2)
--------- -------- -------
Profit before taxation 7.7 5.2 12.9
Taxation (1.7) 0.1 (1.6)
--------- -------- -------
Profit for the period from
continuing operations 6.0 5.3 11.3
--------- -------- -------
Discontinued Operations
Profit from operations
before taxtation 0.4 0.1 0.5 3.2
Taxation (0.1) (0.1)
Loss on disposal (13.3) 8.5 (4.8) 3.8
--------- -------- -------
Loss for the period from
discontinued operations (12.9) 8.5 (4.4)
--------- -------- -------
--------- -------- -------
(Loss) / profit for the period (6.9) 13.8 6.9 3.9
--------- -------- -------
The profit for the period is wholly attributable to equity holders of the
parent.
Earnings / (loss) per share 3.10
Total Group
Basic (2.25)p 2.25p
Diluted (2.25)p 2.22p
Continuing operations
Basic 3.69p
Diluted 3.64p
3.1 Format of the Income Statement
The proforma IFRS income statement is structured differently to the layout
previously adopted. In particular the analysis between continuing and
discontinued operations is shown differently, permitting a greater focus on the
continuing operations. The format used above is based on a current
interpretation of IFRS. It is subject to modification as standard practice
amongst UK listed entities evolves.
3.2 Trading and operating profit
These headings have been created to highlight the performance of continuing
operations from trading activities (trading profit) and also the total
performance prior to charges in respect of financing and taxation (operating
profit). The reconciling items between trading profit and operating profit will
be any profit or loss arising on sale of fixed assets (see 3.4 below) and items
such as the costs of a major restructuring exercise. Trading profit is
consistent with amounts previously disclosed as operating profit before goodwill
amortisation under UK GAAP. The segmental analysis will be based on operating
profit as financing and taxation charges are considered to be of a Group nature
and not allocable to individual segments. Furthermore, operating costs of a
Group nature that are not directly attributable to segments will be disclosed
separately, rather than being allocated to the operating segments as they were
under UK GAAP. As a result, #0.1m of central cost previously allocated to
discontinued operations has been re-allocated to the continuing operations. The
impact of any profit or loss arising on the sale of fixed assets will be shown
on a segmental basis in order to permit the underlying trading performance to be
fully understood.
3.3 Share based payments
Share based payment arrangements exist in relation to share and share option
schemes offered to senior management. Share options were issued in March 2003
and it is considered that these may ultimately vest. No cost was included in UK
GAAP accounts as the intrinsic value was nil. A cost of under #0.1m has been
included in the IFRS accounts. This expense has been based on the fair value at
the date of the award, as calculated according to the Black-Scholes pricing
model.
3.4 Profit on sale of fixed assets
Whilst this ultimately forms part of operating profit, it has been highlighted
on the basis that significant disposals of fixed assets occur on an infrequent
basis and may give rise to profits or losses. As such it is considered that
readers will have a better understanding of the underlying performance of the
operations if the impact of this item is separately identified.
3.5 Foreign exchange gains or losses on long-term intercompany loans
This has been highlighted as a separate significant item in the income statement
because of its inter-group nature and its potential future volatility.
The Group has a range of funding arrangements in place at both Group and
subsidiary level. In many instances a significant source of subsidiary funding
is an inter-group loan. Under both UK GAAP and IFRS the exchange differences
that arise on the re-translation of these loans is taken to the income statement
unless the loan can be designated as part of the net investment in the
subsidiary, in which case the difference is dealt with through reserves.
However, IFRS specifically disallows this latter treatment if the loans are in a
currency different to that of either counterparty or if the loan is between two
subsidiaries where one does not have an investment, either directly or
indirectly, in the other. Consequently, a net translation gain of #0.2m has been
transferred from equity to the income statement in 2004 in respect of such
loans.
3.6 Goodwill amortisation
Under UK GAAP, goodwill arising on acquisitions subsequent to 1 January 1998 was
capitalised and amortised over a period of up to 20 years. Under IFRS, goodwill
is held at its carrying value (the UK GAAP net book value as at 31 December
2003) and subjected to annual impairment testing. Hence the goodwill
amortisation charge of #5.1m for 2004 under UK GAAP has been reversed for IFRS
purposes.
3.7 Interest receivable and interest payable
A benefit of #0.1m arising from interest rate swap agreements was previously
shown as interest receivable. This has now been offset against the related
interest payable amount.
3.8 Loss on disposal of discontinued operations
Under UK GAAP, goodwill arising on acquisitions prior to 1 January 1998 was
written off directly to equity. When such a company was subsequently disposed,
the goodwill was 'recycled' through the income statement as part of the profit
or loss on disposal. There is no such requirement under IFRS. Hence, the UK GAAP
loss is reduced by #8.7m. Additionally, IFRS requires cumulative translation
differences to be recognised in the disposal transaction. These amount to #0.2m,
making the aggregate adjustment #8.5m.
3.9 Dividends
Under UK GAAP, any dividends paid or proposed in respect of a year are
recognised in the income statement. Under IFRS, they are recognised as
distributions from equity. Hence the dividends of #6.1m, paid and proposed in
2004, have been excluded from the income statement under IFRS. This is a format
change only.
3.10 Earnings per share
Basic earnings per share will be presented on the face of the income statement.
In accordance with IAS33 ("Earnings per Share") this amount is required to be
split between continuing and discontinued businesses. Adjusted earnings per
share will now be shown in the notes to the accounts (see section 9 below). It
is intended that the definition of adjusted earnings per share will follow that
which was previously adopted under UK GAAP, except that it will also exclude the
impact of foreign exchange gains and losses arising on long-term intercompany
loans.
4.Group Balance Sheet
UK GAAP Adjustment IFRS Note
Reformatted
2004 2004 2004
#m #m #m
Assets
Non-current assets
Property, plant & equipment 70.0 (1.2) 68.8 4.2
Goodwill 68.0 5.1 73.1 4.1
Intangible assets - 1.2 1.2 4.2, 4.8
Deferred tax assets 0.1 0.1
Trade and other receivables 3.8 3.8
--------- -------- -------
141.9 5.1 147.0
--------- -------- -------
Current assets
Inventories 38.4 38.4 4.8
Construction contracts 4.5 4.5
Trade and other receivables 55.5 55.5
Cash and cash equivalents 7.4 7.4
--------- -------- -------
105.8 - 105.8
--------- -------- -------
Total Assets 247.7 5.1 252.8
--------- -------- -------
Current liabilities
Trade and other payables (63.7) 4.1 (59.6) 4.3
Tax liabilities (9.5) (9.5)
Obligations under finance leases (0.3) (0.3)
Bank overdrafts and loans (2.6) (2.6)
--------- -------- -------
(76.1) 4.1 (72.0)
--------- -------- -------
Non current liabilities
Bank and other loans (52.6) (52.6)
Retirement benefit obligations (41.2) (0.2) (41.4) 4.4
Deferred tax liabilities (0.4) (0.5) (0.9) 4.5
Obligations under finance leases (1.8) (1.8)
Others (0.3) (0.3)
--------- -------- -------
(96.3) (0.7) (97.0)
--------- -------- -------
Total Liabilities (172.4) 3.4 (169.0)
--------- -------- -------
Net Assets 75.3 8.5 83.8
--------- -------- -------
Capital and Reserves
Share capital 30.7 - 30.7
Share premium 3.5 - 3.5
Other reserves 17.7 (0.7) 17.0 4.7
Hedging and translation reserve - 0.5 0.5 4.7
Equity reserve - 0.1 0.1 4.6
Retained earnings 24.7 8.6 33.3
Own shares (1.3) - (1.3)
--------- -------- -------
Total Equity 75.3 8.5 83.8
--------- -------- -------
4.1 Goodwill amortisation
Under UK GAAP, goodwill arising on acquisitions subsequent to 1 January 1998 was
capitalised and amortised over a period of up to 20 years. Under IFRS, goodwill
is held at its carrying value (the UK GAAP net book value as at 31 December
2003) and subjected to annual impairment testing. Hence the goodwill
amortisation charge of #5.1m has been reversed, leading to an equivalent
increase in the goodwill value on the balance sheet at the end of 2004 under
IFRS.
4.2 Intangible assets
IFRS requires computer software to be recorded as an intangible asset and
amortised over its useful life. Accordingly, #1.2m of net book value has been
transferred from within plant & equipment to intangible assets. At 31 December
2003, the equivalent adjustment was a transfer of #1.6m. There is no net effect
in the income statement, although #0.5m of depreciation will now be recorded as
the amortisation of intangibles.
4.3 Dividends
Under UK GAAP, any dividend proposed in respect of a year is recognised in the
income statement and provided for in the closing balance sheet. Under IFRS, a
declared dividend does not constitute an adjusting post balance sheet event.
Hence, the provision for the final dividend of #4.1m at the end of 2004 under UK
GAAP has been reversed under IFRS. The same adjustment applies to the proposed
dividend as at 31 December 2003.
4.4 Retirement benefit obligations
IFRS requires that invested assets be valued at bid price, rather than at
mid-price as required under UK GAAP, by FRS17. This revaluation causes the
assets held by the funded plans to reduce in value by #0.2m, and consequently
the net balance sheet pension deficit to increase by the same amount. The same
adjustment applies to the balance sheet as at 31 December 2003.
4.5 Deferred tax
IFRS changes the focus of deferred tax from the income statement to the balance
sheet and to the differences between the book value and tax base of assets and
liabilities. Under IFRS, deferred tax is provided on all temporary differences,
albeit that deferred tax assets are only recognised to the extent that they may
be regarded as recoverable. The Group has recognised a net increase in deferred
tax liabilities of #0.5m relating to the taxation of deferred foreign exchange
gains arising in overseas territories. The equivalent adjustment as at 31
December 2003 was #0.6m. The movement in the year ended 31 December 2004 has
been credited directly to equity via the statement of recognised income and
expense.
4.6 Share based payments
In 2003, under IFRS, a cost of #0.1m would have been recognised for share
options. In 2004, a further small cost was incurred, with the cumulative
provision remaining at #0.1m at the end of 2004.
4.7 Share capital and reserves
As noted later under the IFRS 1 exemptions, the cumulative translation
differences have been set to zero at the transition date. The closing balance of
#0.5m represents the amount arising in 2004. Also, as noted under the IFRS 1
exemptions, the existing UK GAAP value of property, plant and equipment has been
taken as the deemed cost for IFRS. Hence, the revaluation reserve has been reset
to zero, with the previous balance of #0.7m having been transferred to the
profit and loss reserve.
4.8 Research & development
Under UK GAAP, all research and development costs were charged against revenue
as incurred unless they were specifically recoverable through funded development
contracts or under contractual guarantees. If recoverable, the costs were
capitalised within inventory and charged to the income statement at the same
time as the related revenues were recognised.
Under IFRS, the above treatment of specifically recoverable funded development
engineering will continue whereas, amounts deemed recoverable as a result of
contractual guarantees will be capitalised within intangible assets and
amortised over the guarantee period. As at 31 December 2004 there were no such
amounts.
Other ongoing development activities have been reviewed. Throughout the Group,
the majority of development expenditure is directed to improvements in existing
manufacturing processes and product technology when the costs will continue to
be expensed as incurred under IFRS.
Much of the investment in new products takes place prior to securing commercial
production orders, and is incurred on an at risk basis. In such circumstances
the costs will continue to be expensed. However, where there is greater
certainty as to the ultimate benefit and the timescale over which the benefit
will be achieved, the cost will be capitalised and amortised, provided that the
project also meets the criteria for recognition as an asset. As at 31 December
2004, it was concluded that no projects met the criteria to capitalise any such
amounts.
Further, IFRS does not permit assessments to be performed retrospectively and
with the benefit of hindsight. As at 31 December 2003 the appropriate review
procedures were not in place to carry out such an assessment and so no amounts
could be capitalised at that date.
5.Group Cash Flow Statement
IFRS
2004
#m
Net cash inflow from operating activities (UK GAAP) 20.4
less: interest paid (5.4)
add: tax receipts 2.7
--------
Net cash inflow from operating activities (IFRS) 17.7
Investing activities
Interest received 2.5
Disposal of subsidiaries 4.7
Proceeds on disposal of property, plant & equipment 0.7
Purchases of property, plant & equipment (9.8)
Purchases of intangible assets - software (0.2)
Acquisition of subsidiary (deferred consideration) (0.2)
--------
Net cash used in investing activities (2.3)
Financing activities
Dividends paid (6.1)
Repayment of borrowings (18.9)
Repayments of obligations under finance leases (0.3)
Cash inflow on forward contracts 4.5
--------
Net cash used in financing activities (20.8)
--------
Net decrease in cash and cash equivalents (5.4)
Cash and cash equivalents at beginning of year 11.5
Effects of foreign exchange rate changes (0.2)
--------
Cash and cash equivalents at end of year 5.9
--------
2004
#m
Cash and cash equivalents comprise:
Cash and cash equivalents 7.4
Overdrafts (1.5)
--------
5.9
--------
Reconciliation of net cash inflow from operating activities
to free cash flow
UK GAAP IFRS
#m #m
Net cash inflow from operating activities 20.4 17.7
less: interest paid (5.4)
add: tax receipts 2.7
add: interest received 2.5 2.5
add: proceeds on disposal of property, plant & equipment 0.7 0.7
less: purchases of property, plant & equipment - cash (10.0) (9.8)
less: purchases of property, plant & equipment - finance
lease (0.4) (0.4)
less: purchases of intangible assets - software - (0.2)
-------- --------
Free cash flow 10.5 10.5
-------- --------
Free cash flow will continue to be used as a non-statutory measure intended to
demonstrate the total net cash generated by the Group prior to corporate
activity such as acquisitions, disposals and distributions to shareholders.
6.Statement of Recognised Income and Expense
UK GAAP Adjustment IFRS
Reformatted
2004 2004 2004
#m #m #m
Currency variations (0.5) (0.5)
Actuarial losses on retirement benefit obligations (0.3) (0.3)
Tax on items taken directly to equity 0.9 0.1 1.0
-------- -------- --------
Net gains not recognised in income statement 0.1 0.1 0.2
(Loss) / profit for the financial year (6.9) 13.8 6.9
-------- -------- --------
Total recognised (loss) / income for the year (6.8) 13.9 7.1
-------- -------- --------
7.Reconciliation of Equity by Component of Equity
7.1 As at 1 January 2004
Share Share Other Translation Equity Profit Investment Total
Capital Premium Reserves Reserve Reserve and in own
Loss shares
#m #m #m #m #m #m #m #m
UK GAAP 30.7 3.5 17.7 - - 28.9 (1.3) 79.5
IFRS adjustments:
Post retirement
benefit obligatiions (0.2) (0.2)
Final dividend 4.1 4.1
Deferred tax liability (0.6) (0.6)
Revaluation reserve (0.7) 0.7 -
Share options 0.1 (0.1) -
------ ------ ------ ------- ------ ------ ------- ------
Total opening
adjustments - - (0.7) - 0.1 3.9 - 3.3
------ ------ ------ ------- ------ ------ ------- ------
IFRS 30.7 3.5 17.0 - 0.1 32.8 (1.3) 82.8
------ ------ ------ ------- ------ ------ ------- ------
7.2 As at 31 December 2004
Share Share Other Translation Equity Profit Investment Total
Capital Premium Reserves Reserve Reserve and in own
Loss shares
#m #m #m #m #m #m #m #m
UK GAAP 30.7 3.5 17.7 - - 24.7 (1.3) 75.3
IFRS
adjustments:
Total opening
adjustments - - (0.7) - 0.1 3.9 - 3.3
Change in profit
for the period 13.8 13.8
Goodwill on disposal (8.7) (8.7)
Translation reserve 0.5 (0.4) 0.1
------ ------ ------ ------- ------ ------ ------- ------
IFRS 30.7 3.5 17.0 0.5 0.1 33.3 (1.3) 83.8
------ ------ ------ ------- ------ ------ ------- ------
#m
Opening IFRS Equity per 7.1 above 82.8
Add: total recognised income per 6 above 7.1
less: dividends paid to shareholders (6.1)
------
Closing IFRS Equity as above 83.8
------
8.Segmental Analysis - by Industry
Gross Inter- External Trading P&L on Operating
Revenue Group Revenue Profit disposal Profit
Revenue of fixed
assets
#m #m #m #m #m #m
Aerospace 139.6 (0.1) 139.5 11.1 - 11.1
Automotive 122.9 (0.3) 122.6 8.0 0.5 8.5
Industrial 44.9 (0.2) 44.7 1.0 - 1.0
Unallocated costs - - - (3.8) - (3.8)
------- ------- ------- ------- -------- -------
Total continuing
operations 307.4 (0.6) 306.8 16.3 0.5 16.8
------- ------- ------- ------- -------- -------
Discontinued
operations 19.1 - 19.1 0.5 - 0.5
------- ------- ------- ------- -------- -------
9.Earnings Per Share
UK GAAP UK GAAP IFRS IFRS
Earnings EPS Earnings EPS
#m pence #m pence
Profit for the period from
continuing operations 11.3 3.69
Loss for the period from
discontinued operations (4.4) (1.44)
------- -------
(Loss) / profit on ordinary
activities after taxation (6.9) (2.25) 6.9 2.25
Amortisation of goodwill 5.1 1.66 - -
Profit on sale of fixed assets net
of tax #0.2m (0.3) (0.10) (0.3) (0.10)
Loss on disposal of discontinued
operations 13.3 4.34 4.8 1.57
FX gains on long-term intercompany
loans (0.2) (0.07)
------- -------- ------- -------
Adjusted earnings after taxation 11.2 3.65 11.2 3.65
------- -------- ------- -------
Weighted average number of shares & (loss)/earnings per share
- basic continuing 306.5m 3.69p
- basic discontinued 306.5m (1.44)p
- basic 306.5m (2.25)p 306.5m 2.25p
- diluted 306.5m (2.25)p 310.8m 2.22p
- adjusted 306.5m 3.65p 306.5m 3.65p
- adjusted & diluted 310.8m 3.60p
The Group will continue to provide information on adjusted earnings per share,
derived in accordance with the table above. This is used to identify the
performance of operations, from the time of acquisition or until the time of
disposal, prior to the impact of the following items, to the extent that they
apply to any accounting period:
(i) gains or losses arising from the disposal of fixed assets
(ii) gains or losses arising from the disposal of discontinued operations
(iii) gains or losses arising from the re-translation of long-term intercompany items
(iv) charges for the impairment of goodwill
10.IFRS 1 Exemptions
Senior has taken the following exemptions, as permitted by IFRS 1, in the
transition to IFRS.
10.1 Business combinations
The accounting for acquisitions that occurred prior to the transition date of 1
January 2004 has not been restated. It should be noted that the Group's most
recent acquisition took place in 1999.
10.2 Employee benefits
All cumulative actuarial gains and losses have been recognised in equity at the
transition date. This is consistent with the accounting treatment previously
adopted under FRS17, which the Group adopted in full in its 2004 financial
statements, and also with the prospective accounting policy under IAS19. Under
IAS19 the Group intends to early adopt an amendment permitting the full
recognition of actuarial gains and losses on an annual basis via the statement
of recognised income and expense.
10.3 Cumulative translation differences
Cumulative translation differences have been reset to zero at the transition
date. The cumulative translation differences arising in the period on overseas
operations subsequently disposed of have been transferred into the income
statement as part of the loss on disposal.
10.4 Share based payments
Share and share option awards made prior to 7 November 2002, that remain
outstanding, have not been valued. In any event, based on the performance
conditions attached to these awards it is not expected that they will ultimately
vest. Awards made subsequent to 7 November 2002, that remain outstanding, have
been valued and an appropriate charge is included in the income statement.
10.5 Tangible fixed assets
The Group has chosen not to restate property, plant and equipment to fair value
at the date of transition. These are carried at historic cost, or modified
historic cost (a revaluation undertaken prior to 2000), which has been taken as
the effective cost for IFRS purposes.
10.6 Financial instruments
The Group has taken the exemption available in IFRS 1 not to restate
comparatives for IAS32 (Financial Instruments: Disclosure and Presentation) and
IAS39 (Financial Instruments: Recognition and Measurement). Consequently,
information provided in this restatement, and the information that will
ultimately be presented as comparatives to the 2005 financial statements, will
be presented in accordance with UK GAAP.
IAS32 and IAS39, which primarily relate to the accounting treatment and
disclosure of financial instruments, will be implemented with effect from 1
January 2005. As indicated in the Finance Director's Review in the 2004 Annual
Report, the Group uses forward contracts, in addition to currency denominated
loans, to hedge the net investment in overseas operations. It also uses forward
contracts to hedge transaction exposures and interest rate swaps to secure an
appropriate mix of fixed and variable rate borrowing. Under UK GAAP, the Group
has applied hedge accounting principles supplemented by the disclosures required
by FRS13 ("Financial Instruments").
Under IFRS, the Group expects to continue this approach to hedging currency and
interest rate exposures. Hedging relationships have been formally documented and
it is believed that hedge accounting will continue to be allowable under IAS39,
subject to meeting hedge effectiveness tests.
As at 31 December 2004, the fair value of interest rate instruments was a
liability of #0.9m against a book value of #nil, and the fair value of forward
foreign exchange contracts was an asset of #0.6m against a book value of nil. In
both cases the fair value will be incorporated on to the balance sheet. The
future impact is unpredictable, but it is considered that it is unlikely to be
material to an understanding of the Group's results.
11.Significant Accounting Policies
11.1 Basis of accounting
The financial statements will be prepared in accordance with International
Financial Reporting Standards (IFRS) for the first time with effect from 1
January 2005. They will be prepared on the historical cost basis, except for the
revaluation of certain properties and financial instruments.
The principal accounting policies expected to be adopted in the preparation of
the 2005 Group accounts under IFRS are set out below.
11.2 Basis of consolidation
The consolidated financial statements incorporate the financial statements of
Senior plc and the entities controlled by it (its subsidiaries) made up to 31
December. Control is achieved when Senior plc has the power to govern the
financial and operating policies of an invested entity so as to obtain benefits
from its activities.
On acquisition, the assets and liabilities and contingent liabilities of a
subsidiary are measured at their fair values at the date of acquisition. Any
excess of the cost of acquisition over the fair values of the identifiable net
assets acquired is recognised as goodwill. Any deficiency of the cost of
acquisition below the fair value of the identifiable net assets acquired (i.e.
discount on acquisition) is credited to the income statement in the period of
acquisition. The interest of minority shareholders is stated at the minority's
proportion of the fair values of the assets and liabilities recognised.
Subsequently, any losses applicable to the minority interest in excess of the
minority interest are allocated against the interests of the parent.
The results of subsidiaries acquired or disposed of during the year are included
in the consolidated income statement from the effective date of acquisition or
up to the effective date of disposal, as appropriate.
Where necessary, adjustments are made to the financial statements of
subsidiaries to bring the accounting policies used into line with those used by
the Group.
All intra-group transactions, balances, income and expenses are eliminated on
consolidation.
11.3 Goodwill
Goodwill arising on consolidation represents the excess of the cost of
acquisition over the Group's interest in the fair value of the identifiable
assets and liabilities of a subsidiary, associate or jointly controlled entity
at the date of acquisition.
Goodwill is recognised as an asset and reviewed for impairment at least
annually. Any impairment is recognised immediately through the income statement
and is not subsequently reversed.
On disposal of a subsidiary, associate or jointly controlled entity, the
attributable amount of goodwill is included in the determination of the profit
or loss on disposal.
Goodwill arising on acquisitions prior to the date of transition to IFRS has
been retained at the previous UK GAAP amount subject to being tested for
impairment at that date. Goodwill written off to reserves under UK GAAP prior to
1998 has not been reinstated and is not included in determining any subsequent
profit or loss on disposal.
11.4 Revenue recognition
Revenue is measured at the fair value of the consideration received or
receivable and represents amounts receivable for goods and services provided in
the normal course of business, net of discounts, VAT and other sales related
taxes.
Sales of goods are recognised when goods are delivered in accordance with the
terms and conditions of the sale.
Revenue from construction contracts is recognised in accordance with the Group's
accounting policy on construction contracts (see 11.5 below).
Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective interest rate applicable.
Dividend income from investments is recognised when the shareholders' legal
rights to receive payment have been established.
11.5 Construction contracts
Where the outcome of a construction contract can be estimated reliably, revenue
and costs are recognised by reference to the stage of completion of the contract
activity at the balance sheet date. This is normally calculated in accordance
with the proportion that contract costs incurred for work performed to date bear
to the estimated total contract costs, except where this would not be
representative of the stage of completion. Variations in contract work and
claims are included to the extent that it is probable that they will be
recovered from the customer.
Where the outcome of a construction contract cannot be estimated reliably,
contract revenue is only recognised to the extent that contract costs incurred
will probably be recoverable.
When it is probable that total contract costs will exceed total contract
revenue, the expected loss is recognised as an expense immediately.
11.6 Leasing
Leases are classified as finance leases whenever the terms of the lease
substantially transfer all the risks and rewards of ownership to the lessee. All
other leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at their
fair value or, if lower, at the present value of the minimum lease payments,
each determined at the inception of the lease. The corresponding liability to
the lessor is included in the balance sheet as a finance lease obligation. Lease
payments are apportioned between finance charges and a reduction of the lease
obligation in order to achieve a constant rate of interest on the remaining
balance of the liability. Finance charges are charged directly to the income
statement.
Rentals payable under operating leases are expensed on a straight-line
basis over the term of the relevant lease.
Benefits received and receivable as incentives to enter into an operating lease
are also spread on a straight-line basis over the lease term.
11.7 Foreign currencies
Transactions in currencies other than pounds sterling are recorded at the rates
of exchange prevailing on the date of the transaction. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies
are retranslated at the rates prevailing on the balance sheet date. Gains and
losses arising on retranslation are included in net profit or loss for the
period, except for exchange differences arising on non-monetary assets and
liabilities where the changes in fair value are recognised directly in equity,
subject to meeting the requirements under IAS21.
In order to hedge its exposure to certain foreign exchange risks, the Group
enters into forward contracts (see 11.17 below for details of the Group's
accounting policies in respect of such derivative financial instruments).
On consolidation, the assets and liabilities of the Group's overseas operations
are translated at exchange rates prevailing on the balance sheet date. Income
and expense items are translated at the average exchange rates for the period
unless exchange rates fluctuate significantly. Exchange differences arising, if
any, are classified as equity and transferred to the Group's translation
reserve. Such translation differences are recognised as income or expense in the
period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
11.8 Government grants
Government grants received for items of a revenue nature are recognised in the
income statement over the period necessary to match them with the related costs,
and are deducted from that cost.
Government grants relating to investment in property, plant and equipment are
deducted from the initial carrying value of the related capital asset.
11.9 Operating profit
Operating profit is stated after charging restructuring costs, and before
investment income and finance costs, as they relate to external borrowings,
retirement benefit obligations (see 11.10 below) and foreign exchange on
long-term intercompany loans.
11.10 Retirement benefit costs
Payments to defined contribution retirement schemes are charged as an expense as
they fall due. Payments made to state-managed retirement benefit schemes are
dealt with as payments to defined contribution schemes where the Group's
obligations under the schemes are equivalent to those arising in a defined
contribution retirement scheme.
For defined benefit retirement schemes, the cost of providing benefits is
determined using the Projected Unit Credit Method, with full actuarial
valuations being carried out on a triennial basis, and updated at each balance
sheet date. Actuarial gains and losses are recognised in full in the period in
which they occur. They are recognised outside the income statement and are
presented in the statement of recognised income and expense.
Past service costs are recognised immediately to the extent that the benefits
are already vested. Otherwise, they are amortised on a straight-line basis over
the period until the benefits become vested.
The retirement benefit obligation recognised in the balance sheet represents the
present value of the defined benefit obligation as adjusted for unrecognised
past service costs, and as reduced by the fair value of scheme assets. Any net
asset resulting from this calculation is limited to the past service cost plus
the present value of available refunds and reductions in future contributions to
the plan.
11.11 Taxation
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a transaction that
affects neither the tax profit not the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interests in joint
ventures, except where the Group is able to control the reversal of the
temporary difference and it is probable that the temporary difference will not
reverse in the foreseeable future.
The carrying value of deferred tax assets is reviewed at each balance sheet date
and reduced to the extent that it is no longer probable that sufficient taxable
profits will be available to allow all or part of the deferred tax asset to be
recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
11.12 Property, plant and equipment
Land and buildings held for use in the production or supply of goods or
services, or for administrative purposes, are stated in the balance sheet at
their historic cost, or at modified historic cost, being a revaluation
undertaken prior to the transition date to IFRS.
Fixtures, plant and equipment are stated at cost less accumulated depreciation
and any recognised impairment loss.
Depreciation is charged on a straight-line basis over the estimated useful life
of the asset, and is charged from the time an asset becomes available for its
intended use. Annual rates are as follows:
Freehold buildings 2%
Improvements to leasehold buildings according to remaining lease term
Plant and equipment 5% - 33%
Assets held under finance leases are depreciated over their expected useful
lives on the same basis as owned assets or, where shorter, over the term of the
relevant lease.
The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sale proceeds and the carrying amount of the asset
at disposal and is recognised in income.
11.13 Internally generated intangible assets - research and development
expenditure.
An internally generated intangible asset arising from the Group's development
activities is recognised if all of the following conditions are met:
(i) An asset is created that can be separately identified;
(ii) It is probable that the asset created will generate future economic benefits; and
(iii) The development cost of the asset can be measured reliably.
Internally generated intangible assets are amortised on a straight-line basis
over their useful lives.
Development work is also carried out on a funded basis. In such circumstances
the costs are accumulated in inventory and are recognised when the related
billings are made. Any amounts held in inventory are subject to normal inventory
valuation principles.
Otherwise expenditure on research and development activities is recognised as an
expense in the period in which it is incurred.
11.14 Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss (if any). Where the asset does not generate cash
flows that are independent from other assets, the Group estimates the
recoverable amount of the cash-generating unit to which the asset belongs.
The recoverable amount is the higher of the fair value less the costs to sell
and the value in use. In assessing the value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks
specific to the asset for which the estimates of future cash flows have not been
adjusted.
If the recoverable amount of an asset is estimated to be less than its carrying
amount, the carrying amount of the asset is reduced to its recoverable amount.
An impairment loss is recognised as an expense immediately, unless the relevant
asset is carried at a revalued amount, in which case the impairment loss is
treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset
is increased to the revised estimate of its recoverable amount, but so that the
increased carrying amount does not exceed the carrying amount that would have
been determined had no impairment loss been recognised for the asset in prior
years. A reversal of an impairment loss is recognised as income immediately,
unless the relevant asset is carried at a revalued amount, in which case the
reversal of the impairment loss is treated as a revaluation increase.
11.15 Inventories
Inventories are stated at the lower of cost and net realisable value. Cost
comprises direct materials and, where applicable, direct labour costs and an
appropriate allocation of production overheads. Cost is calculated using the
first in first out method. Net realisable value represents the estimated selling
price less the estimated costs of completion and the costs to be incurred in
marketing, selling and distribution.
11.16 Equity instruments
Equity instruments issued by the Company are recorded at the value of proceeds
received, net of direct issue costs.
11.17 Derivative financial instruments and hedging
The group's activities expose it primarily to the financial risks of changes in
foreign currency exchange rates and interest rates. The group uses foreign
exchange contracts and interest rate swap contracts to hedge these exposures.
The use of financial derivatives is governed by the Group's treasury policy as
approved by the board of directors, which provides written principles on the use
of derivatives. The Group does not use derivative financial instruments for
speculative purposes.
Changes in the fair value of derivative financial instruments that are
designated and are effective as a cash flow hedge are recognised directly in
equity and the ineffective portion is recognised immediately in the income
statement. If the cash flow hedge of a firm commitment or forecasted transaction
results in the recognition of an asset or a liability, then, at the time the
asset or liability is recognised, the associated gains or losses on the
derivative that had previously been recognised in equity are included in the
initial measurement of the asset or liability. For hedges that do not result in
the recognition of an asset or a liability, amounts deferred in equity are
recognised in the income statement in the same period in which the hedged item
affects net profit or loss.
For an effective hedge of an exposure to changes in fair value, the hedged item
is adjusted for changes in fair value attributable to the risk being hedged with
the corresponding entry in the income statement. Gains or losses from
re-measuring the derivative are also recognised in the income statement. If the
hedge is effective these entries will offset.
Changes in the fair value of derivative financial instruments that do not
qualify for hedge accounting are recognised in the income statement as they
arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated, or exercised, or no longer qualifies for hedge accounting. At that
time, any cumulative gain or loss on the hedging instrument recognised in equity
is retained in equity until the forecasted transaction occurs. If a hedged
transaction is no longer expected to occur, the net cumulative gain or loss
recognised in equity is transferred to net profit or loss for the period.
Derivatives embedded in other financial instruments or other host contracts are
treated as derivatives when their risks and characteristics are not closely
related to those host contracts.
11.18 Provisions
Provisions for restructuring costs are recognised when the Group has a detailed
formal plan for the restructuring and the plan has been communicated to the
affected parties.
11.19 Share-based payments
The Group has applied the requirements of IFRS 2 Share-based payments. In
accordance with the transitional provisions, IFRS 2 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested as of 1
January 2005.
The Group has issued equity-settled and cash-settled share-based payments to
certain employees. These payments have conditions that are non-market related.
The fair value, as determined at the grant date, is expensed on a straight-line
basis over the vesting period, based on the Group's estimate of the number of
shares that will eventually vest.
Fair value is measured by use of a Black-Scholes pricing model.
The liability in respect of equity-settled amounts is included in equity,
whereas the liability in respect of cash-settled amounts is included in current
and non-current liabilities as appropriate.
11.20 Segmental analysis
Under IFRS, segmental detail is presented according to a primary segment and a
secondary segment. The Group's primary segmental analysis will be based on the
industries that it serves; Aerospace, Automotive and Industrial. The secondary
analysis will be presented according to geographic markets comprising North
America, Europe (split between the UK and Rest of Europe) and the Rest of the
World. This is consistent with the way the Group manages itself and with the
format of the Group's internal financial reporting.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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