15th Jul 2005 07:01
Rank Group PLC15 July 2005 The Rank Group Plc ("Group") International Financial Reporting Standards 1.Introduction In line with other EU listed companies, the Group adopted InternationalFinancial Reporting Standards (IFRS) as its primary accounting basis from 1January 2005. As a result, financial statements, including comparatives,published by the Group for 2005 will be prepared under IFRS. This press release explains how the Group's previously reported UK GAAPfinancial results and position as at and for the year ended 31 December 2004would have been reported under IFRS as applicable to the comparatives that willbe presented in the Group's 2005 IFRS Financial Statements to 31 December 2005. The basis of preparation for the information contained in this document ispresented in Appendix 1 of this document. The financial information has not beenaudited by the Group's auditors, PricewaterhouseCoopers LLP, although along withother advisors, they have been consulted as appropriate throughout thetransition process. Enquiries: The Rank Group Plc 020 7706 1111Paul Marshall, Director of Finance & TaxationMike Davies, Director of Investor Relations Maitland Consultancy 020 7379 5151Suzanne Bartch A copy of this release and an IFRS slide pack will be available on the Group's website (www.rank.com) 2.Key Impact Analysis Key Impacts • £5.0m increase in 2004 adjusted profit(1)• 0.8p increase in 2004 adjusted EPS (UK GAAP - 18.0p, IFRS - 18.8p)• £24.4m decrease in net assets at adoption date of 1 January 2004• £14.7m decrease in net assets at 31 December 2004• Presentation of Deluxe Media Services ("DMS") as a discontinued operation - includes reallocating the results and provision for loss on disposal as single line below profit after tax. No adjustment made to reflect any developments since the announcement of the Group's 2004 UK GAP results in February 2005 (1) Adjusted profit : profit before tax and exceptional items, excluding DMSand foreign currency movements on inter-company balances. A reconciliation toprofit before tax is provided later in this document. Principal Adjustments • Mecca impairments - change in assessment for impairment from the whole business as a single unit to a club by club basis resulting in fixed asset impairments and onerous lease charges for certain clubs. No benefit taken where club is under valued. • Lease accounting - buildings element of certain property leases reclassified as finance leases resulting in a decrease in operating lease expenses but an increase in interest charges. On the balance sheet leased assets increase, offset by lease obligations (debt). • Goodwill amortisation ceases but acquired intangibles recognised and amortised • Employee benefits - expense recognised for all unvested share schemes granted since November 2002 based on fair value at the date of grant • Foreign exchange on certain inter-company loans taken to income statement, which may increase income statement volatility. No impact on net assets. • Transfer of casino licences and software development costs from tangible to intangible fixed assets, with no impact on net assets • Separately identifiable intangibles split from goodwill on acquisitions subsequent to the transition date (1 January 2004) • Deferred tax recognised on all temporary differences • Format - DMS results and assets and liabilities presented separately in income statement and balance sheet plus changes in balance sheet classifications. Impact on 2005 • Amortisation of equity component of convertible bond (2005 onwards)• IAS 32 & 39 adoption will increase P&L volatility• Full year of intangible amortisation on 2004 acquisitions• Employee share scheme costs cover an additional year (2003-2005)• Risk of asset impairments increases volatility• Impact of IAS 32 & 39 on Gaming revenue recognition continues to be assessed by the Group and the wider Gaming sector as a whole 3.Reconciliations Income statement for the year ended 31 December 2004 UK GAAP Other IFRS DMS IFRS Adjustments (£m) (£m) (£m) (£m)Revenue 1,953.3 - (385.1) 1,568.2Operating profit beforeexceptionals (1) 197.6 7.2 (8.9) 195.9Exceptional operatinglosses (58.1) (10.5) 27.1 (41.5)Operating profit (2) 139.5 (3.3) 18.2 154.4Exceptional non-operatingitems (185.5) 4.1 181.4 -Net financing costs (3) (37.3) 9.2 (0.4) (28.5)Associates & joint ventures - - - -(Loss) profit before tax (83.3) 10.0 199.2 125.9Tax charge (35.4) 12.1 1.2 (22.1)Discontinued operations - - (118.1) (118.1) --------- ---------- --------- ---------Loss after tax (118.7) 22.1 82.3 (14.3) ========= ========== ========= =========Attributable to:Minority interest 0.7 - - 0.7Equity shareholders (119.4) 22.1 82.3 (15.0) --------- ---------- --------- --------- (1) analysis provided in Appendix 2(2) analysis provided in Appendix 3(3) analysis provided in Appendix 4 Reconciliation of 2004 Adjusted profit before tax (4) UK GAAP IFRS £m £m £m £m(Loss) profit before tax (83.3) 125.9Adjustments:DMS pre-exceptionaloperating profit (8.9) -DMS interest (0.4) -Exceptional items 243.6 41.5Foreign currency gains oninter-company movements - (11.4) 234.3 30.1Adjusted profit before tax 151.0 156.0 (4)Adjusted profit before tax: profit before tax before exceptional items,excluding DMS and foreign currency movements on inter-company balances Balance sheet as at 31 December 2004 (5) UK Open Open 2004 2004 IFRS GAAP balance balance adjs DMS adjs* DMS (excl adjs (excl adjs* DMS) DMS) £m £m £m £m £m £mNon-current assetsGoodwill 117.7 - - 4.4 - 122.1Other intangible assets - 123.0 6.3 4.6 (3.7) 130.2Property, plant andequipment 718.7 (131.9) (2.3) (3.3) (4.1) 577.1Investments in jointventures 6.7 - - 0.4 - 7.1Other investments 48.2 - - - - 48.2Other receivables 261.1 - - - - 261.1Deferred tax asset 52.3 (17.0) - (3.1) - 32.2 1,204.7 (25.9) 4.0 3.0 (7.8) 1,178.0Current assetsInventories 65.1 - - - (13.4) 51.7Trade & other receivables 370.7 - - - (138.6) 232.1Cash & cash equivalents 84.3 - - - (8.7) 75.6Non-current assets classified as held for sale - - - - 174.0 174.0 520.1 - - - 13.3 533.4 Gross assets 1,724.8 (25.9) 4.0 3.0 5.5 1,711.4LiabilitiesBorrowings (21.9) (0.8) (0.8) (1.2) 4.9 (19.8)Trade and otherpayables (433.2) 46.5 (2.7) 5.8 112.4 (271.2)Current tax liabilities (9.7) - - - 0.2 (9.5)Liabilities directly associated with non-current assetsclassified as heldfor sale - - - - (142.8) (142.8) (464.8) 45.7 (3.5) 4.6 (25.3) (443.3)Net current assets 55.3 45.7 (3.5) 4.6 (12.0) 90.1Non-currentliabilitiesBorrowings (669.1) (24.8) (3.3) (4.2) 9.3 (692.1)Other non-currentliabilities (113.3) - (2.0) 0.5 10.5 (104.3)Provisions (29.7) (11.4) - (0.8) 5.5 (36.4)Retirement benefitobligations (33.2) (3.2) - 1.1 - (35.3) (845.3) (39.4) (5.3) (3.4) 25.3 (868.1)Net assets 414.7 (19.6) (4.8) 4.2 5.5 400.0Shareholders' equityOrdinary share capital 62.4 - - - - 62.4Share premium 88.3 - - - - 88.3Capital redemptionreserve 24.8 - - - - 24.8Other reserves 230.5 (19.6) (4.8) 4.2 5.5 215.8Shareholders' equity 406.0 (19.6) (4.8) 4.2 5.5 391.3Minority interests 8.7 - - - - 8.7Total equity 414.7 (19.6) (4.8) 4.2 5.5 400.0 *adjustments impacting the opening IFRS balance sheet at 1 January 2004(5)analysis provided in Appendix 5, Net Asset Reconciliation The adjustments are explained individually in section 5, IFRS Adjustments. 4.Formats The principal presentational differences for IFRS purposes are as follows: Discontinued Operations Results Reported on a Post-tax Basis • The Deluxe Media business meets the IFRS criteria required to be classified as discontinued operations. As a result, DMS revenue is excluded from the income statement and the results of DMS, including any associated impairment, are reported in a single line on a post-tax basis. Associate and Joint Venture Results Reported on a Post-tax Basis • Income from associates and joint ventures is reported on a post-tax basis. Balance Sheet Format • Under IFRS assets classified as long-term current assets under UK GAAP are reported as non-current assets under IFRS. Cash Flow Statement • IAS 7 will require a different presentation of the cash flow statement for IFRS purposes, categorised under the headings "operating", "investing" and "financing". A cash flow statement is not included in this report. 5.IFRS Adjustments Revenue As explained above, DMS is classified as discontinued operations under IFRS. Asa result, DMS revenue is not included in the income statement, reducing revenueby £385.1m. Profit A.Mecca Impairment The assessment for impairment under IFRS is different than under UK GAAPprincipally as a result of a different interpretation of classifying assetgroups. Under IFRS, Mecca clubs have been assessed on an individual club basisand for certain clubs, where the cash flows associated with the club do notexceed the club's carrying value, an impairment charge has been recognised inthe opening balance sheet at 1 January 2004 against the carrying value of fixedassets. Previously all clubs were treated as one business unit. In addition incertain cases an onerous lease provision has also been established. The impactof this is a reduction in net assets as at 1 January 2004 of £39.6m. In the 2004 income statement, depreciation and lease costs were reduced by £2.3mas a result of this impairment. An additional impairment charge of £6.4m wasalso incurred in the year. Accordingly, net assets were reduced by a further£4.1m during 2004. The additional impairment in 2004 has been classified as anexceptional charge in operating profit due to its size. This assessment of impairment under IFRS (together with the onerous leaseprovision made) reduces the depreciation and lease costs reported by Mecca, butincreases volatility as impairment charges are more likely to occur in thefuture. No benefit has been taken if the cash flows associated with a club exceed thecarrying value of the assets on an individual club basis. For Grosvenor and Hard Rock, impairment tests are performed at individual unitlevel for both UK GAAP and IFRS therefore the transition to IFRS has notresulted in a change. B. Leases i. Finance Leases The application of IAS 17 "Leases" results in the building elements of a numberof property leases being classified as finance leases. Consequently net assetsas at 1 January 2004 were reduced by £6.3m, being the net of additional leasedfixed assets of £19.3m, off-set by lease obligations of £25.6m. In the 2004 income statement operating lease costs were replaced by leased assetdepreciation and finance lease interest, increasing operating profit by £2.2mand interest costs by £2.3m. While the total cost recognised over the length ofthe lease is the same under UK GAAP and IFRS, the phasing is different due tomore interest being recognised at the inception of the lease under IFRS. Net assets as at 31 December 2004 decreased by a further £0.1m during 2004. ii.Lease Incentives In accordance with IAS 17, lease incentives have been spread over the entirelength of the lease. Under UK GAAP, lease incentives were spread over the periodto the first break clause or market rent review. While the total benefitrecognised over the length of the lease remains the same, the phasing changes,and operating profit for 2004 was reduced by £0.7m. Net assets at 1 January 2004 were reduced by £6.6m and by a further £0.7m during2004. iii.Sale and Leaseback Transactions Sale and leaseback adjustments relate solely to DMS and decrease DMS resultsbefore tax by £1.2m. C.Goodwill Amortisation and Acquired Intangible Asset Amortisation The Group has taken advantage of the available election not to restate anybusiness acquisitions transacted before 1 January 2004, the date of transitionto IFRS. In accordance with IFRS, goodwill is not amortised but is subject to an annualimpairment review. As a result, operating profit and net assets as at and forthe year ended 31 December 2004 increased by £5.8m being the reversal of the2004 amortisation charge (net of DMS amortisation, separately presented as notedabove). In addition, intangible assets acquired in business combinations occurring after1 January 2004 are separately recognised and amortised over their useful lives.Under UK GAAP, all excess consideration over the fair value of assets acquiredwas classified as goodwill and amortised over a period no longer than 20 years.As a result, 2004 operating profit and net assets at 31 December 2004 decreasedby £0.1m. Intangible assets acquired, provisionally measured at £1.7m, are classified asbrands, licences and software development and are being amortised over a periodof between 5 to 20 years. D.Employee Benefits i.Share Based Payments In accordance with IFRS, an expense is recognised for all equity instrumentsgranted under all unvested share schemes (Save As You Earn, Executive ShareOption Scheme, Long Term Incentive Plan) granted after 7 November 2002 based onthe fair value at the date of grant. The expense is recognised over the lengthof the vesting period of the scheme and if the actual vesting of the schemediffers from the expected vesting the charge is not always adjusted. Under UKGAAP, an expense, based on the market value of the share at the date of grant,was only recognised for the Group's Long Term Incentive Plan scheme. Operatingprofit in 2004 was reduced by £1.7m. In addition DMS incurred a charge of £0.5m. Net assets at 1 January 2004 were reduced by £0.1m and by a further £0.1m during2004 representing the Group's National Insurance liability. In 2005, employee share scheme costs will increase as the transition rulesunwind and the charge will cover all unvested schemes from November 2002 - 2005. ii.Holiday Pay Accrual In accordance with IFRS, appropriate provision must be made for the cost ofholiday entitlements not taken at the balance sheet date. Under UK GAAP, in linewith common practice, the Group did not account for holiday pay accruals unlesslegally obliged to make cash settlement. As a result, operating profit wasreduced by £0.4m in 2004 under IFRS. In addition, DMS incurred a charge of £0.3mrecognised within the results of discontinued operations. Net assets at 1 January 2004 were reduced by £4.0m and by a further £0.7m during2004. iii.Defined Benefit Retirement Plans In 2004, the Group accounted for pensions in accordance with FRS 17 for UK GAAPpurposes. In adopting IAS 19, the Group has elected to apply IAS 19 (Amended)and to recognise actuarial gains/losses in reserves. This statement has not yetbeen approved by the EU. The income statement expense for the defined benefit pension scheme is the sameunder both IFRS and UK GAAP. In accordance with IFRS, the assets of the pension plan are valued at bid-priceand a liability is recognised for death in service benefit. Under UK GAAP,assets are valued using mid-price and no liability is recognised relating todeath in service benefits. As a result, an additional £1.1m actuarial gain wasrecognised in reserves during 2004. Net assets at 1 January 2004 were reduced by£3.2m, of which the £1.1m reversed in 2004 as a result of the actuarial gain. In addition, the pension liability is shown before deferred tax, with theassociated deferred tax asset reported separately. Under UK GAAP, the pensionliability is reported net of the associated deferred tax asset of £8.9m. E.Provision for Loss on Disposal of Deluxe Media Services ("DMS") As discussed, DMS is classified as a discontinued operation under IFRS and itspost-tax results, including the provision for loss on disposal, is reported in asingle line. Under UK GAAP, £76.7m of DMS pre-1997 goodwill previously written off toreserves was charged to the income statement as part of the loss on disposal.Under IFRS, goodwill previously written off to reserves under a prior GAAP isnot charged to the income statement. In addition, the impact of the IFRS adjustments detailed above resulted in thecarrying value of the DMS business to be sold under IFRS was smaller than underUK GAAP. Consequently the provision for loss on disposal is smaller by £5.6munder IFRS. F.Foreign Exchange on Inter-company Loans Under IFRS, foreign exchange movements on inter-company loans not meeting IAS 21recognition criteria on quasi-equity are recognised in the income statement asfinance gains or losses. Under UK GAAP hedging rules, these foreign exchangemovements were taken to reserves. This change may result in volatility in futureresults. Although the foreign exchange movements recognised in the income statement areoffset by foreign exchange movements still recognised in reserves, the Group isconsidering whether or not to hedge the potential income statement volatility.In 2004, the impact was to increase profit before tax by £11.4m. This has beenexcluded from adjusted profit. There is no impact on net assets. Compared with 2004 foreign currency movements, the GBP/USD exchange rates havemoved in the opposite direction during the first half of 2005. As a result, weanticipate a foreign currency finance charge to be recognised at the 2005 halfyear with a corresponding gain being recognised in reserves. The Group understands that the IASB is currently reviewing IAS 21. Any revisionsto IAS 21 may impact the accounting implications discussed above. G.Taxation In accordance with IFRS, deferred tax has been provided on all temporarydifferences. Under UK GAAP deferred tax was provided on timing differences. Inaddition, deferred tax has been recognised on the other IFRS adjustmentsdiscussed above. The impact of this is a reduction in net assets as at 1 January2004 of £17.0m being the recognition of a £33.9m deferred tax liability ontemporary differences not recorded under UK GAAP offset by a £16.9m deferred taxasset on other IFRS adjustments. In the 2004 income statement, tax costs, including DMS, were reduced by £12.2mof which £3.4m related to 2004 IFRS adjustments impacting the income statementand net assets. Due to the tax treatment of foreign exchange in the accounts ofcertain of the Group's subsidiaries, a £8.8m tax credit was also transferred tothe income statement from reserves in relation to the £11.4m foreign exchangegain transferred from reserves. In addition, a deferred tax expense of £6.5m wasrecognised in reserves in respect of temporary differences. Accordingly, netassets were reduced by £3.1m during 2004. The Group's effective tax rate could be more volatile under IFRS. Net Assets A.Dividend Accrual In accordance with IFRS, proposed dividends are provided for in the period inwhich they are formally declared and approved. Under UK GAAP, proposed dividendsare provided for in the period to which they relate. As a result the final dividend for 2004 has been reversed for IFRS purposes andis recognised in the following year, increasing net assets by £55.5m at 1January 2004 and £5.6m at 31 December 2004. B.Casino Licences and Software Development Costs In accordance with IFRS, casino licences, software licences and otherdevelopment costs are classified as intangible assets. Under UK GAAP, theseassets were reported within tangible fixed assets. £129.4m was transferred tointangibles at 1 January 2004, of which £111m related to Gaming licences. Anadditional £2.8m, was transferred in 2004. There is no impact on net assets. 2005 Onwards A. Financial Instruments - IAS 32 & 39 In addition to the amendments discussed above, the Group has adopted IAS 32 &39, Financial Instruments with effect from 1 January 2005. The Group has notelected to restate its comparatives to reflect IAS 32 & 39. As a result, the2004 restatements continue to reflect financial instruments as accounted forunder UK GAAP. The main effects of IAS 32 & 39, which will be reflected from 2005 onwards, are: (i) Amortisation of Equity Component of Convertible Bond In accordance with IAS 32 & 39, the equity component of the Group's £167mconvertible bond was valued at bond launch and taken to equity. The equitycomponent will be amortised as a finance cost to the profit and loss accountover the life of the bond. The annual amortisation cost is £3.0m. (ii) Fair Value of Financial Instruments The Group's investments, which are not equity accounted, will be classified asavailable for sale investments. These investments will be marked to market withchanges in value taken to reserves and recycled to income when the investment issold. This is not expected to have a material impact on the Group. (iii) Hedging Rank uses derivatives to manage the level of fixed and floating rate debt withinthe Group. These derivatives are deemed to be highly effective and will resultin minimal income statement volatility. Rank also hedges the translation risk from its net investment in overseassubsidiaries using foreign exchange forwards and swaps. These derivatives willbe accounted for using the cash-flow hedge accounting methodology, with anytranslation gains and losses being recorded in reserves. The Group hedges material currency sales and purchases of subsidiary entitiesusing foreign exchange derivatives. Procedures have been put in place to ensurethat Rank can elect to account for these derivatives using the hedge accountingrules. (iv) Revenue Recognition The Group is currently evaluating the impact of IAS 32 & 39 on its policy forrevenue recognition in the Gaming business. The review will not materiallyimpact operating profit. In accordance with guidance issued by the UK Accounting Standards Board, theGroup has adopted the full version of IAS 32 & 39, as issued by the IASB. Grouppolicy also complies with the amended version endorsed by the EuropeanCommission. Appendix 1 Basis of preparation The financial information presented in this document has been prepared on thebasis of all International Financial Reporting Standards (IFRS), except IAS 32and 39, including International Accounting Standards (IAS) and interpretationsissued by the International Accounting Standards Board and its committees and asinterpreted by any regulatory bodies applicable to the Group as expected toapply to the Group on 31 December 2005. These are subject to ongoing amendmentby the IASB (e.g. IAS 19 "Employee Benefits" has not yet been approved) andsubsequent endorsement by the European Commission and are therefore subject topossible change. As a result, information contained within this release willrequire updating for any subsequent amendment to IFRS required for first timeadoption of those new standards that the Group may elect to adopt early. The financial information has not been audited by the Group's auditors,PricewaterhouseCoopers LLP, although along with other advisors, they have beenconsulted as appropriate throughout the transition process. The Group's transition date to IFRS is 1 January 2004. IFRS 1 exemptions IFRS 1, "First-time adoption of International Financial Reporting Standards"sets out the procedures that the Group must follow when it adopts IFRS for thefirst time as the basis for preparing its consolidated financial statements. TheGroup is required to establish its IFRS accounting policies as at 31 December2005 and, in general, apply these retrospectively to determine the IFRS openingbalance sheet at its date of transition, 1 January 2004. IFRS 1 provides a number of optional exceptions to this general principle. Themost significant of these are set out below, together with a description in eachcase of the exception adopted by the Group. Business combinations The Group has elected not to apply IFRS 3 retrospectively to businesscombinations that took place before the date of transition, As a result, in theopening balance sheet, goodwill arising from past business combinations(£117.7m) remains as stated under UK GAAP at 31 December 2003. Defined benefit retirement plans The Group has elected to recognise all cumulative actuarial gains and losses inrelation to employee schemes at the date of transition. In accordance with theamendment to IAS 19, issued in December 2004, the Group has recognised actuarialgains and losses in full in the period in which they occur in the statement ofincome and expenses. Financial instruments As discussed above, the Group has adopted IAS 32 and IAS 39 prospectively from 1January 2005. Foreign exchange gains and losses The Group has elected to set cumulative translation differences on retranslationof subsidiaries' net assets to zero at the date of transition. Share based payments IFRS 2 has been applied prospectively to all unvested share based paymentsgranted after 7 November 2002. Appendix 2 Pre-exceptional operating profit reconciliation £m £m Notes 2004 Operating profit* - UKGAAP 197.6DMS UK GAAP (8.9) Included within held for Sale ------- 188.7IFRS adjustments(excluding-DMS):- Goodwill amortisation 5.8 Goodwill no longer amortised (C)- Acquired intangibleamortisation (0.1) 2004 acquisitions (C)- Operating lease costs 2.2 Reclassified as finance leases (Bi)- Employee benefit costs (2.1) Share based payments, holiday pay (D)- Mecca impairment 2.0 Depreciation saving (A)- Mecca impairment 0.3 Onerous lease rent savings (A)- Associates & joint venture (0.5) Presentation- Operating lease incentives (0.7) Spread over life of lease(Bii)- Other 0.3 Other minor changes -------IFRS adjustments (exluding 7.2DMS) -------2004 Operating profit* - IFRS 195.9 =======* Before exceptional items Appendix 3 Post exceptional operating profit reconciliation £m £m Notes 2004 Operating profit - UKGAAP- Pre-exceptional 197.6- Exceptional items (58.1) DMS (£27.1m), Hard Rock (£31m) ------UK GAAP operating profit 139.5 DMS reclassification: Reclassified as held for sale- Pre-exceptional operatingprofit (8.9)- Exceptional items 27.1 ------ 18.2IFRS adjustments:- Pre-exceptional adjustments 7.2- Loss on disposal of Transferred from UK GAAP non-continuing ops (4.1) operating- Additional Mecca Impairment (6.4) 2004 impairments (A) ------IFRS adjustments (3.3) ------2004 Operating profit - IFRS 154.4 ====== Appendix 4 Financing costs reconciliation £m £m Notes2004 Net financing costs - UKGAAP 37.3- DMS interest 0.4 Presentation ------- 37.7IFRS adjustments:- Leases 2.7 Finance cost of reclassified leases- Associates (0.5) Presentation- Foreign exchange onI/co loans (11.4) No impact on net assets ------- (9.2) -------2004 Net financing costs - IFRS 28.5 ======= Rank has not elected to restate its 2004 comparatives IAS 39. As a result the amortisation of the equity component of the £167m convetible bond is not reflected above (£3.0m p.a.) Appendix 5 Net asset reconciliation £m £m Notes 2004 net assets - UK GAAP 414.7IFRS adjustments:- Opening net asset adjustment (24.4)2004 adjustments:- Income statement adjustments 104.4 As per restated income statement- Foreign exchange on Taken to income statement underIntercompany loans (11.4) IFRS- Tax (15.3)- Dividends 5.6 03 final dividend recognised, 04 final derecognised- Employee benefit costs 2.0 Share based payments taken to reserves- Pensions 1.1 Actuarial gains taken to reserves- DMS goodwill (76.7) Goodwill written off not ------- recycledIFRS adjustments (14.7) ------2004 Closing net assets - IFRS 400.0 ===== This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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