7th Jun 2005 07:05
Victrex PLC07 June 2005 7 June 2005 Victrex plc The effects of International Financial Reporting Standards Introduction The purpose of this document is to give guidance on how International FinancialReporting Standards ('IFRS') will impact Victrex's financial results whenadopted for the year ending 30 September 2006. This document is for guidance only and the effects detailed may be amended as aresult of further interpretive guidance from the International AccountingStandards Board ('IASB') or ongoing review. The financial information presented in this document is unaudited. Background Victrex plc currently prepares its financial statements under UK GenerallyAccepted Accounting Practice ('UK GAAP'). For the year ending 30 September 2006the Group will be required to prepare its interim and annual reports, includingthe comparative year ending 30 September 2005, under IFRS. This document details the principal differences arising from this transition onthe opening balance sheet as at 1 October 2004 ('date of transition') and on theincome statement (previously the profit and loss account under UK GAAP) andbalance sheet for the six months ended 31 March 2005 as announced to the StockExchange today. Impact Half year ended 31 March 2005 UK GAAP IFRS Variance £m £m £m Profit before tax 17.4 17.5 0.1Closing equity shareholders' funds 84.2 81.2 (3.0) Earnings per share 14.6p 14.6p - Summary of principal differences The principal differences for Victrex between reporting on the basis of IFRScompared to current UK GAAP are as follows: 1. Proposed dividends which have not been declared at the balance sheet date can no longer be recognised in the financial statements; 2. The deferred tax provision will have to be adjusted as a result of: a. Discounting no longer being permitted; b. IFRS being more prescriptive regarding the recognition of deferred tax assets; and c. Changes in accounting for employee benefits (see note 4 below); 3. Amortisation of goodwill is no longer permitted; 4. The deficit in the defined benefit section of Victrex's principal pension scheme has to be recognised on the balance sheet both at the date of transition and as at 31 March 2005. The movement in the deficit as a result of current service cost, contributions and other finance income has to be recognised in the income statement with all other movements (predominantly actuarial gains and losses) reflected through the statement of recognised income and expense. It should be noted that these changes would largely have been required under UK GAAP once FRS17 became fully applicable (currently the information is given in the notes to the accounts); and 5. The fair value of forward foreign currency contracts will have to be recognised on the balance sheet. Victrex will continue to hedge account, and hence this adjustment is not expected to have any material impact on the income statement. Further details of each of these differences follow and are summarised intabular form in the following appendices: Appendix 1 Reconciliation of Group equity at 1 October 2004 (date of transitionto IFRS) Appendix 2 Reconciliation of Group profit for the six months ended 31 March 2005 Appendix 3 Reconciliation of Group equity at 31 March 2005 Principal differences explained 1. Dividend recognitionUnder current UK GAAP, proposed dividends are recognised in the financialresults for the period to which they relate. However, under IFRS, a dividend canonly be recognised if it has been formally declared during the accounting periodbeing reported. The Victrex Board declare interim and final dividends after the end of eachaccounting period at the same time as approving the interim and annual reports.Hence, we will no longer accrue proposed dividends in the financial period towhich they relate. Consequently the final dividend for 2004 is not recognised as a liability in theopening balance sheet (£5.0m) and the proposed interim dividend will not berecognised as a liability in the balance sheet as at 31 March 2005 (£2.2m). 2. Deferred taxationUnder UK GAAP the option to calculate deferred tax on a discounted basis wasadopted by Victrex. However, under IAS 12 - Income taxes, this discounted basisis not permitted and hence the deferred tax provision has to be stated at thegross amount. The effect on the opening balance sheet is an increase in the deferred taxprovision of £1.7m, the impact on the first half results is an increaseddeferred tax charge £0.5m and the resulting adjustment to the closing balance asat 31 March 2005 is an increase of £2.2m. In addition, IAS 12 requires separate recognition of deferred tax assets andliabilities on the Group balance sheet. IAS 12 is also more prescriptive than UK GAAP and hence an additional deferredtax asset of £0.7m has been recognised in the opening balance sheet. The impacton the first half results is a decreased deferred tax charge of £0.3m and theresulting effect as at 31 March 2005 is £1.0m. The combined impact on the income statement is an increased deferred tax chargeof £0.2m. The specific deferred taxation impact of changes in accounting for employeebenefits is set out in section 4 below. 3. Goodwill amortisationUnder UK GAAP, goodwill is amortised by equal instalments over its estimateduseful economic life. However, under IFRS 3 - Business combinations,amortisation of goodwill is prohibited but is replaced by a requirement forannual impairment testing. Victrex has decided to take advantage of the IFRS 1 exemption whereby IFRS 3 canbe applied prospectively from the date of transition, hence removing the need torestate previous business combinations. The carrying value of goodwill in theopening IFRS balance sheet has therefore been restricted to that £3.5m netcarrying amount previously reported under UK GAAP. The profit impact of this adjustment in the first half of 2005 is a credit of£0.3m, being the reversal of amortisation previously charged under UK GAAP onthe goodwill which arose on the acquisition of the DFDPM business from Laportein 1999 (note that there is no change in the treatment of the knowhow arisingfrom that transaction). On 1 April 2005 Victrex announced the purchase of certain operations fromDegussa AG. This included the purchase of goodwill which, in accordance withIFRS, will not be amortised, but will be subject to annual impairment testing. 4. PensionsUnder UK GAAP, Victrex has accounted for pensions in accordance with SSAP 24,which spreads the costs of the defined benefit section of Victrex's principalscheme over the employees' working lives within the Group. Victrex has also madeadditional disclosures giving details of the pension fund deficit, liabilitiesand operating charges on the valuation methodologies in accordance with FRS 17. IAS 19 - Employee benefits requires the actuarial deficit arising under thedefined benefit pension scheme to be recognised in the balance sheet based onfair valuations of the assets and liabilities at the balance sheet date. Themovement in deficit as a result of current service cost, contributions and otherfinance income have to be recognised in the income statement and it is Victrex'sintention to take advantage of the option under IAS 19 to recognise actuarialgains and losses through the statement of recognised income and expense asopposed to the income statement. Note that similar adjustments would have beenrequired under UK GAAP once FRS17 becomes fully applicable. Consequently, a deficit of £8.2m and a corresponding deferred tax asset of £2.5mhave been recognised on the balance sheet at the date of transition and adeficit of £7.6m and a deferred tax asset of £2.3m as at 31 March 2005. Themovement during the period as a result of current service cost, contributionsand other finance income of £0.2m has been recognised in the income statementwith all other movements in the deficit (predominantly actuarial gains/losses)reflected through the statement of recognised income and expense. 5. Accounting for foreign currency transactions & financial instrumentsVictrex has a policy of taking out forward foreign currency contracts to coverforecast foreign currency income streams providing medium term predictability inits results. Under UK GAAP Victrex uses the effective exchange rates from the forwardcontracts for translation of its foreign currency transactions and whereappropriate 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 largelyunchanged profit and loss recognition. However, IAS does require changes to themechanics of how this is achieved: •Under IAS 21 - Effects of Changes in Foreign Exchange Rates, all transactions and consolidations are recognised using spot rates; •Under IAS 39 the fair value of forward foreign currency contracts have to be recognised on the balance sheet. Victrex has adopted hedge accounting and therefore the movement in fair value can be deferred in a hedging reserve until the associated transaction occurs at which point the cumulative movement is released to the income statement. Whilst the above does not affect overall profitability, there are minor changesin categorisation within the detail with a reduction of turnover of £0.3m offsetby a reduction in cost of sales of £0.1m and indirect overheads of £0.2m. The opening balance sheet as at 30 September 2004 recognises a financial assetof £1.5m and a financial liability £0.4m, which account for the fair value ofderivative financial instruments (forward contracts). The corresponding hedgingreserve is £0.5m which reflects the fair value of forward contracts relating tofuture transactions as at the balance sheet date. These effects are offset bythe effect of revaluing all balance sheet categories to closing spot rate. The balance sheet as at 31 March 2005 recognises a financial asset of £1.7m anda financial liability £0.3m and a corresponding hedging reserve of £1.0m. Reconciliation of Group Equity at 1 October 2004 (date of transition to IFRSs) - Appendix 1 Previously Dividend Deferred Goodwill Pensions Accounting for Restated under reported under recognition taxation amortisation foreign currency IFRS UK GAAP transactions and financial instruments 30 Sept 04 30 Sept 04ASSETS £m £m £m £m £m £m £m ASSETS -------- -------- -------- -------- ---------Non-current Non-currentassets 1 2 3 4 5 assets -------- -------- -------- -------- --------- Property, Property,plant and plant andequipment 49.3 49.3 equipmentGoodwill 3.5 3.5 GoodwillOther Otherintangible intangibleassets 3.2 3.2 assets Investment in Investment inJapanese Japanesejoint jointventure venture- share of - share ofgross assets 2.1 (0.2) 1.9 gross assets- share of - share ofgross liabilities (1.8) 0.2 (1.6) gross liabilities Deferred tax assets 0.2 0.7 2.5 3.4 Deferred tax assets ------- -------- 56.5 59.7 ------- --------Current assets Current assetsInventories 18.8 18.8 InventoriesTrade and other Trade and receivables 10.6 (0.5) 10.1 other receivablesDerivative financial Derivativeinstruments 0.0 1.5 1.5 financial instrumentsCash and cash Cash andequivalents 17.0 (0.2) 16.8 cash equiv. ------- -------- 46.4 47.2 ======= ======== Total assets 102.9 106.9 Total assets ------- -------- LIABILITIES LIABILITIESCurrent liabilities Current liabilitiesDerivative financial Derivativeinstruments 0.0 (0.4) (0.4) financial instrumentsOther creditors (22.7) 5.0 0.1 (17.6) OtherCreditors ------- -------- (22.7) (18.0) ------- --------Non-current Non-currentliabilities liabilitiesDeferred tax Deferred taxliabilities (6.2) (1.7) (7.9) liabilities Retirement Retirementbenefit benefitobligations 0.0 (8.2) (8.2) obligationsProvisions 0.0 0.0 ProvisionsOther liabilities 0.0 0.0 Other liabilities ------- -------- (6.2) (16.1) ======= ========Total liabilities (28.9) (34.1) Total liabilities ------- -------- ------- -------- -------- -------- -------- --------- --------Total assets Total assetsless total less totalliabilities 74.0 5.0 (1.0) 0.0 (5.7) 0.5 72.8 liabilities ======= ======== ======== ======== ======== ========= ======== EQUITY EQUITYCapital and Capital and reserves reservesattributable attributableto equity to equityholders holdersShare 0.8 0.8 Sharecapital capitalShare premium Share premiumaccount 13.4 13.4 account Hedging reserve 0.0 0.5 0.5 Hedging reserveRetained earnings 59.8 5.0 (1.0) (5.7) 58.1 Retained ------- -------- -------- -------- -------- --------- -------- earningsEquity Equityshareholders' shareholders'funds 74.0 5.0 (1.0) 0.0 (5.7) 0.5 72.8 funds ======= ======== ======== ======== ======== ========= ======== Reconciliation of Group profit for six months ended 31 March 2005 - Appendix 2 UK GAAP Unaudited half Dividend Deferred Goodwill Pensions Accounting for Unaudited half IFRS year ended 31 recognition taxation amortisation foreign year ended 31 format Mar 05 currency Mar05 restated reported under transactions under IFRS UK GAAP and financial instruments £m £m £m £m £m £m £m -------- -------- -------- -------- --------- 1 2 3 4 5 -------- -------- -------- -------- ---------Revenue 49.3 (0.3) 49.0 Revenue Cost of sales (21.7) 0.1 (21.6) Cost of sales ------- -------- -------- -------- -------- --------- --------Gross profit 27.6 0.0 0.0 0.0 0.0 (0.2) 27.4 Gross profitSales, Sales,marketing and marketingadministrative andexpenses (10.8) 0.3 (0.2) 0.2 (10.5) admin. expenses ------- -------- -------- -------- -------- --------- --------Group operating operating profit 16.8 0.0 0.0 0.3 (0.2) 0.0 16.9 profitInterest receivable 0.3 0.3 Finance incomeInterest payable and Financeother similar charges (0.1) (0.1) costs Share of operating Share ofprofit of Japanese operatingjoint venture 0.4 0.4 profit of Japanese joint venture ------- -------- -------- -------- -------- --------- --------Profit on ordinary Profit activities before beforetax 17.4 0.0 0.0 0.3 (0.2) 0.0 17.5 tax Taxation on profit of ordinary Tax activities expense (5.7) (0.2) (5.9) expenses ------- -------- -------- -------- -------- --------- --------Profit on ordinary Profitactivities after tax 11.7 0.0 (0.2) 0.3 (0.2) 0.0 11.6 for the attributable to equityEquity dividends ======== ======== ======== ========= ========paid and proposed (2.1) 2.1 ------- --------Retained profit for the financial year 9.6 2.1 ======= ========Basic earnings Basic per share (pence) 14.6 0.0 (0.0) 0.0 (0.0) 0.0 14.6 earningsearnings per share (pence) ======= ======== ======== ======== ======== ========= ======== Diluted earnings Dilutedper share (pence) 14.5 0.0 (0.0) 0.0 (0.0) 0.0 14.5 earnings ======= ======== ======== ======== ======== ========= ======== per share (pence) Reconciliation of Group Equity at 31 March 2005 - Appendix 3 Reported under Dividend Deferred Goodwill Pensions Accounting for Restated under UK GAAP recognition taxation amortisation foreign IFRS 31 Mar 05 currency 31 Mar 05 Unaudited transactions Unaudited and financial instrumentsASSETS £m £m £m £m £m £m £m ASSETS -------- -------- -------- -------- ---------Non-current assets 1 2 3 4 5 Non-current -------- -------- -------- -------- --------- assetsProperty, plant and Property,equipment 49.5 49.5 plant and equipmentGoodwill 3.2 0.3 3.5 GoodwillOther intangible Otherassets 2.8 2.8 intangible assetsInvestment in Investment inJapanese joint Japanese jointventure venture- share of gross assets 2.7 (0.1) 2.6 - share of gross assets- share of gross liabilities(2.6) 0.2 (2.4) - share of gross liabilitiesDerivative Derivativefinancial financialinstruments 0.0 0.1 0.1 instruments Deferred tax Deferred taxassets 0.2 1.0 2.3 3.5 assets ------- -------- 55.8 59.6 ------- --------Current assets Current assetsInventories 18.5 18.5 InventoriesTrade and Trade andother otherreceivables 14.7 (0.5) 14.2 receivablesDerivative Derivativefinancial financialinstruments 0.0 1.7 1.7 instrumentsCash and cash Cash and cashequivalents 20.3 (0.2) 20.1 equivalents ------- -------- 53.5 54.5 ======= ======== Total assets 109.3 114.1 Total assets ------- -------- LIABILITIES LIABILITIESCurrent Currentliabilities liabilitiesDerivative Derivativefinancial financialinstruments 0.0 (0.3) (0.3) instrumentsOther Othercreditors (18.5) 2.2 0.1 (16.2) creditors ------- -------- (18.5) (16.5) ------- --------Non-current Non-currentliabilities liabilitiesDeferred tax Deferred taxliabilities (6.6) (2.2) (8.8) liabilitiesRetirement Retirementbenefit benefitobligations 0.0 (7.6) (7.6) obligations Provisions 0.0 0.0 ProvisionsOther Otherliabilities 0.0 0.0 liabilities ------- -------- (6.6) (16.4) ======= ======== Total Totalliabilities (25.1) (32.9) liabilities ======= ======== Total assets Total assetsless total less totalliabilities 84.2 2.2 (1.2) 0.3 (5.3) 1.0 81.2 liabilities ======= ======== ======== ======== ======== ========= ======== EQUITY EQUITYCapital and Capital andreserves reservesattributable attributableto equity to equityholders holdersShare capital 0.8 0.8 Share capitalShare premium Share premiumaccount 13.9 13.9 accountHedging reserve 0.0 1.0 1.0 HedgingReserveRetained earnings 69.5 2.2 (1.2) 0.3 (5.3) 65.5 Retained ------- -------- -------- -------- -------- --------- -------- earningsEquity Equityshareholders' shareholders'funds 84.2 2.2 (1.2) 0.3 (5.3) 1.0 81.2 funds ======= ======== ======== ======== ======== ========= ======== This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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