16th Mar 2005 11:12
BG GROUP plc16 March 2005 MediaInformation 16 March 2005 BG Group update on the adoption of International Financial Reporting Standards BG Group is preparing for the adoption of International Financial ReportingStandards (IFRS) as its primary accounting basis for the year ending 31 December2005. As part of this transition, BG Group will publish within its 2004 Annual Reportand Accounts released today its re-stated financial information under IFRS,including :- • The balance sheet at 1 January 2003 - the date of transition to IFRSbased financial reporting. • Primary Financial Statements for the 2003 and 2004 financial yearsunder IFRS. • The opening balance sheet at 1 January 2005 - following the adoption ofIAS 32 and IAS 39 relating to financial instruments. The re-stated information under IFRS as included in the 2004 Annual Report andAccounts has been audited by PricewaterhouseCoopers LLP. An explanation of the re-stated financial information is attached to this PressRelease and is available on the BG website. Further financial information,including accounting policies and the special purpose audit report, is containedwithin our 2004 Annual Report and Accounts which will be downloadable from theBG Group website from midday today. A webcast and call will be hosted by Chief Financial Officer, Ashley Almanza onMonday 21 March at 11.00 am UK time to provide a briefing on the transition toIFRS. The webcast will include time for questions. To register for the webcast please log-on to http://www.bg-group.com/ir/ifrs.htm To participate in the Conference Call ring +44 (0)20 7365 1843 To listen to the Conference Call ring +44 (0)20 7784 1004 UK +1 718 354 1152 USA The main changes to BG Group's reported financial information from the adoptionof IFRS are as a result of : • The requirement not to amortise goodwill • Differences in accounting for employee benefits, principally pensionsand share-based payments. • Recognition of additional deferred tax balances • Immediate recognition of certain items of deferred income • Different treatment of regulatory cost pass through at Comgas • A change in the timing of recognition of dividends In addition, with the introduction of IAS 32 and IAS 39 from 1 January 2005,certain items classified as derivative instruments, including a number of longterm UK gas contracts will be required to be marked to market. Speaking today, Ashley Almanza, Chief Financial Officer commented "The financialinformation provided today shows clearly the overall immaterial effect of IFRSon BG Group's recent results. The Group will commence reporting under IFRS withthe 2005 first quarter results and will separately identify the re-measurementof derivative instruments under IAS 32 and IAS 39. The adoption of IFRS willhave no effect on the Group's strategy, operations or cash flow." There are matters discussed in this media information that are forward looking statements. Such statements are only predictions and actual events or results may differ materially. For a discussion of important factors which could cause actual results to differ from the forward looking statements, refer to the Company's annual report and accounts for the year ended 31 December 2004. Enquiries: Communications +44 (0) 118 929 3717 Out of hours media phone +44 (0) 07917 185 707 Investor Relations +44 (0) 118 929 3025 Website: www.bg-group.com BG Group plc Update on the adoption of International Financial Reporting Standards 16 March 2005 1.1 Introduction BG Group has included in its 2004 Annual Report and Accounts its 2003 and 2004income statements and balance sheets under International Financial ReportingStandards ('IFRS'). The financial information set out on pages 4 to 14 providesa summary of the restatement and explains how BG Group's reported performanceand financial position are affected by the transition to IFRS from 1 January2005, with prior years commencing 1 January 2003 (the 'transition date')restated for comparative purposes. The following information is available inthe 2004 Annual Report and Accounts (available on the BG Group website): o The basis of preparation of the financial information, detailedaccounting policies under IFRS, and restated financial information for the yearsended 31 December 2003 and 31 December 2004. o The opening balance sheet adjustments as at 1 January 2005 on theadoption of IAS 32 and IAS 39. o A Special Purpose Audit Report from PricewaterhouseCoopers LLP ('PwC')on the financial information presented. The key messages in this IFRS update are as follows: • The restatement of financial information to 31 December 2004 shows thatthe impact of IFRS on BG Group's prior period income statements and net assetsis not significant. There is no change to cash flow or net debt. • BG Group has chosen to adopt IAS 39 from 1 January 2005 with norestatement of prior year results. The impact of IAS 39 on the Group's netassets as at that date is a reduction of around 5%. • Financial information published in future periods will separatelyidentify items considered important for an understanding of the financialresults. This will include profits or losses on disposal of assets orbusinesses previously classified as exceptional under UK GAAP, and movements inthe income statement arising from the re-measurement of derivatives. This IFRS update contains the following sections: 1.2 Impact of IFRS on financial results, including reconciliations from UKGAAP to IFRS for net assets at transition, the income statements for the yearsended 31 December 2003 and 31 December 2004 and net assets as at 31 December2003 and 31 December 2004. 1.3 IFRS from 1 January 2005, including information on the impactof IAS 32, IAS 39, and other new standards and interpretations which will beadopted after 1 January 2005. 1.4 Presentation of results under IFRS, including an explanation ofthe way BG Group will present its results under IFRS in future quarterlyreleases. Standards currently in issue and adopted by the EU are subject to interpretationissued from time to time by the International Financial ReportingInterpretations Committee (IFRIC). Further standards may be issued by the IASBthat will be adopted for financial years beginning on or after 1 January 2005.Additionally, IFRS is currently being applied in the United Kingdom and in alarge number of countries simultaneously for the first time. Furthermore, dueto a number of new and revised standards included within the body of standardsthat comprise IFRS, there is not yet a significant body of established practiceon which to draw in forming options regarding interpretation and application.Accordingly, practice is continuing to evolve. At this preliminary stage,therefore, the full financial effect of reporting under IFRS as it will beapplied and reported on in the Group's first IFRS financial statements for theyear ended 31 December 2005 may be subject to change. 1.2 Impact of IFRS on financial results Note: The financial information for the years ended 31 December 2003 and 31December 2004 does not constitute the statutory financial statements for thoseyears. The statutory financial statements have been or will be delivered to theRegistrar and include the auditors' report which was unqualified and did notcontain a statement either under section 237(2) of the Companies Act 1985(accounting records or returns inadequate or accounts not agreeing with recordsor returns), or section 237(3) (failure to obtain necessary information andexplanations). The tables on pages 7 to 11 show the impact of IFRS on the income statement forthe years ended 31 December 2003 and 31 December 2004 as well as the impact onnet assets as at 1 January 2003, 31 December 2003, and 31 December 2004. IAS 19 Employee Benefits (Pensions) Cumulative actuarial gains and losses in respect of the Group's pension andpost-retirement benefit plans have been recognised in full on transition. Thisresults in the recognition of a pension obligation of £117m at 1 January 2003,an increase of £47m compared to the SSAP 24 pension provision. There is also anincrease in the deferred tax asset associated with pension costs of £14m.Actuarial gains and losses arising from the transition date are recognised overthe average remaining service lives of employees (commonly referred to as the'corridor' approach). The charge to operating costs in respect of pensions hasincreased by £3m in the year to 31 December 2003 and £7m in the year to 31December 2004. The charge to finance costs is £1m in the year to 31 December2003 and £2m in the year to 31 December 2004. IFRS 2 Share-based Payment BG Group has recognised the fair value of share-based payments to employeesbased on grants of options and shares from 7 November 2002 (the effective dateof IFRS 2) whilst reversing charges made in respect of employee share schemesunder UK GAAP. This has resulted in a credit to operating costs for the yearended 31 December 2003 of £5m. In the year ended 31 December 2004 theadditional charge to operating costs in respect of IFRS 2 was £8m. In futureyears, there is likely to be an annual incremental charge to operating costs asa result of IFRS 2 of around £12m (based on current award levels and shareprice) as the cumulative impact of share and share option awards with athree-year vesting period affects the income statement. Premier Power CCGT Project - Ballylumford In 2000, BG Group's wholly-owned subsidiary Premier Power Limited received £168min consideration for the restructuring of power purchase agreements withNorthern Ireland Electricity following agreement to construct a new CCGT powerplant at Ballylumford. Under UK GAAP this amount was treated as deferred incomeand released over the life of the remaining power agreements, matched to theassociated asset depreciation charge. Under IFRS the amount has been recognisedas income in the year of receipt, along with the impairment of the property,plant and equipment associated with the original power plants. This hasresulted in a reduction in the carrying value of property, plant and equipmentof £75m and a reduction in accruals and deferred income of £107m as at 1 January2003, with a related deferred tax impact of £10m (increase in provision). Forthe years ended 31 December 2003 and 31 December 2004 turnover and operatingcosts have reduced by £16m and £11m and £14m and £10m respectively. IAS 12 Income Taxes (Deferred tax) On adoption of IAS 12 BG Group has recognised deferred tax liabilities inrespect of unremitted earnings of overseas associates and jointly controlledentities and in respect of fixed assets held at fair value following a businesscombination. The impact of these adjustments is an increase to the deferred taxprovision as at 1 January 2003 of £50m, an increase in the tax charge for theyear ended 31 December 2003 of £23m and an increase in the tax charge for theyear ended 31 December 2004 of £9m. The tax charge is also increased as aresult of a charge in respect of petroleum revenue tax (£7m). On 1 January 2003the carrying value of one of BG Group's associates has been adjusted by £4m as aresult of the recognition of a deferred tax provision in respect of additionaltaxable temporary differences. In addition, a deferred tax provision of £107min respect of assets held at fair value was recognised on the acquisition ofMauritania Holdings BV and Aventura Energy Inc. in the year to 31 December 2004. IAS 10 Events after the Balance Sheet Date (Dividends) Under IAS 10 dividends declared after the balance sheet date are not recognisedas a liability at the balance sheet date. Accordingly, BG Group has reversedthe liability for proposed dividends at each balance sheet date. The impact onnet assets as at 1 January 2003, 31 December 2003 and 31 December 2004 is anincrease of £55m, £66m, and £74m respectively. IFRS 3 Business Combinations (Goodwill amortisation and fair value adjustments) BG Group has used the exemption available under IFRS 1 for not restatingbusiness combinations. IFRS 3 requires that goodwill arising from businesscombinations should not be amortised. Accordingly, the carrying value ofgoodwill as at 1 January 2003 is not adjusted and operating costs in respect ofgoodwill amortisation for the year ended 31 December 2003 of £17m and for theyear ended 31 December 2004 of £16m have been reversed. The IFRS balance sheetas at 31 December 2004 has been adjusted to take account of a deferred taxadjustment to the fair value of assets and liabilities in respect of BG Group'sacquisitions in Mauritania and Trinidad during the year. A deferred taxprovision of £107m has been recognised under IFRS and the carrying value of theassets acquired has been adjusted by the same amount. The acquisition in Canadaduring 2004 has resulted in the recognition of a deferred tax asset under bothUK GAAP and IFRS. Regulatory current account balances - Comgas Comgas (BG Group's Brazilian gas distribution business) recognises an assetunder UK GAAP in respect of the pass-through of higher costs after formalapproval of a revised tariff by the Comgas Regulator. This asset does not meetthe criteria for recognition under current IFRS and accordingly this balance hasbeen de-recognised. This has resulted in a reduction in receivables of £19m asat 1 January 2003, a reduction in operating costs of £20m for the year ended 31December 2003 and an increase in operating costs of £1m for the year ended 31December 2004. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 5 requires that a non-current asset or disposal group be classified as heldfor sale if its carrying amount will be recovered principally through a saletransaction rather than through continuing use. As at 31 December 2003 assetsof £449m and liabilities of £56m associated with BG Group's interest in theNorth Caspian PSA in Kazakhstan, the Muturi PSC and Tangguh LNG project inIndonesia and Premier Transmission Limited in the UK have been reclassified asheld for sale and separately identified on the balance sheet. As at 31 December2004 the Indonesian assets had been sold resulting in an IAS 21 adjustment toprofit on sale as foreign exchange losses of £5m arising on retranslation ofthese assets from 1 January 2003 were transferred from the translation reservein equity to the income statement. As at 31 December 2004 assets of £530m andliabilities of £67m associated with the North Caspian PSA and PremierTransmission Limited are classified as held for sale. Reconciliation of net assets as at 1 January 2003 - audited Previously Pensions Premier Deferred Dividends Regulatory Other Restated reported Power Tax current under under UK CCGT account IFRS GAAP (£m) Project (£m) AssetsNon-currentassetsGoodwill 251 - - - - - - 251Intangibleassets 561 - - - - - - 561Property,plant andequipment 4,102 - (75) - - - - 4,027Investmentsaccountedforusing equitymethod 733 - - (4) - - (2) 727Otherinvestments 9 - - - - - - 9Deferredtax assets 24 14 - - - - - 38Trade andotherreceivables 69 - - - - - - 69 -------- ------- ------- ------- ------- -------- ------ ------- 5,749 14 (75) (4) - - (2) 5,682 -------- ------- ------- ------- ------- -------- ------ -------CurrentassetsInventories 105 - - - - - - 105Trade andotherreceivables 661 - - - - (19) - 642Cash andcash equivalents 268 - - - - - - 268 -------- ------- ------- ------- ------- -------- ------ ------- 1,034 - - - - (19) - 1,015 -------- ------- ------- ------- ------- -------- ------ ------- -------- ------- ------- ------- ------- -------- ------ -------Total 6,783 14 (75) (4) - (19) (2) 6,697assets -------- ------- ------- ------- ------- -------- ------ ------- LiabilitiesCurrentliabilitiesBorrowings (580) - - - - - - (580)Trade andother payables (901) - 14 - 55 - - (832)Currentincometax liabilities (98) - - - - - - (98) -------- ------- ------- ------- ------- -------- ------ ------- (1,579) - 14 - 55 - - (1,510) -------- ------- ------- ------- ------- -------- ------ -------Non-currentliabilitiesBorrowings (690) - - - - - - (690)Trade andother payables (190) - 93 - - - - (97)Deferredincome taxliabilities (645) - (10) (50) - - - (705)Retirementbenefitobligations (70) (47) - - - - - (117)Provisionsforotherliabilities and charges (261) - - - - - - (261) -------- ------- ------- ------- ------- -------- ------ ------- (1,856) (47) 83 (50) - - - (1,870) -------- ------- ------- ------- ------- -------- ------ ------- -------- ------- ------- ------- ------- -------- ------ -------Totalliabilities (3,435) (47) 97 (50) 55 - - (3,380) -------- ------- ------- ------- ------- -------- ------ -------Net assets 3,348 (33) 22 (54) 55 (19) (2) 3,317 -------- ------- ------- ------- ------- -------- ------ -------Gearing 23.0% 23.2% -------- ------- Reconciliation of income statement for the year ended 31 December 2003 - audited Previously Pensions Share-based Premier Deferred Goodwill Regulatory Other Restated reported ------- payment Power Tax amortisation current ------ under IFRS under UK ------ CCGT ------- -------- account (£m) GAAP (£m) Project -------- -------- -------- ------ Group turnover 3,587 - - (16) - - - (7) 3,564Operating costs (2,530) (3) 5 11 - 17 20 - (2,480)Profit/(loss)on disposal ofassets andbusinesses* 117 - - - - - - (1) 116 -------- ------- ------ ------ ------- -------- -------- ------ --------Operatingprofit beforeshare ofoperatingresults fromjoint venturesand associates 1,174 (3) 5 (5) - 17 20 (8) 1,200 --------------- -------- ------- ------ ------ ------- -------- -------- ------ --------Share ofoperatingresults fromjoint venturesand associates 194 - - - - - - 1 195Totaloperatingprofit ** 1,368 (3) 5 (5) - 17 20 (7) 1,395--------------- -------- ------- ------ ------ ------- -------- -------- ------ -------- Finance income 44 - - - - - - - 44Finance costs (81) (1) - - - - - 8 (74)Share of posttax resultsfrom jointventures andassociates 130 - - - 1 - - 1 132 -------- ------- ------ ------ ------- -------- -------- ------ --------Profit beforetax 1,267 (4) 5 (5) 1 17 20 1 1,302Taxation (479) 1 (1) 1 (23) - - 1 (500) -------- ------- ------ ------ ------- -------- -------- ------ --------Profit for theyear 788 (3) 4 (4) (22) 17 20 2 802 -------- ------- ------ ------ ------- -------- -------- ------ --------Profitattributableto minorityinterest 20 - - - - - 8 - 28Profitattributabletoshareholders(earnings) 768 (3) 4 (4) (22) 17 12 2 774 -------- ------- ------ ------ ------- -------- -------- ------ --------Earnings pershareexcludingprofit/(loss)on disposal ofassets andbusinesses -basic 19.4p 19.6pEarnings pershare - basic 21.8p 21.9pEarnings pershare -diluted 21.8p 21.9p -------- -------- * Includes items reported as exceptional items under UK GAAP ** Including share of operating results from joint ventures and associates Reconciliation of net assets as at 31 December 2003 - audited Assets Previously Pensions Share-based Premier Deferred Dividends Goodwill Regulatory Assets Other Restated reported payment Power Tax amortisation current held under under UK CCGT account for IFRS GAAP (£m) Project sale (£m) Non-currentassetsGoodwill 252 - - - - - 17 - - - 269Intangibleassets 588 - - - - - - - (387) - 201Property,plant andequipment 4,020 - - (66) - - - - (22) - 3,932Investmentsaccountedforusing equitymethod 1,028 - - - (3) - - - (10) (1) 1,014Otherinvestments 10 - - - - - - - - - 10Deferredtax assets 22 15 - - - - - - - - 37Trade andotherreceivables 66 - - - - - - - - - 66 ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------ 5,986 15 - (66) (3) - 17 - (419) (1) 5,529 ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------CurrentassetsInventories 119 - - - - - - - - - 119Trade andotherreceivables 749 - - - - - - 1 (30) (1) 719Cash andcash equivalents 313 - - - - - - - - - 313 ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------ 1,181 - - - - - - 1 (30) (1) 1,151 ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------Non-currentassetsclassifiedas held for sale - - - - - - - - 449 - 449Total assets 7,167 15 - (66) (3) - 17 1 - (2) 7,129 ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------LiabilitiesCurrentliabilitiesBorrowings (495) - - - - - - - - - (495)Trade andother payables (880) - 7 13 - 66 - - 56 - (738)Currentincometax liabilities (108) - - - - - - - - - (108) ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------ (1,483) - 7 13 - 66 - - 56 - (1,341) ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------Non-currentliabilitiesBorrowings (539) - - - - - - - - - (539)Trade andother payables (154) - - 80 - - - - - - (74)Deferredincome taxliabilities (715) - (1) (9) (69) - - - - - (794)Retirementbenefitobligations (73) (50) - - - - - - - - (123)Provisionsforotherliabilities and charges (287) - - - - - - - - - (287) ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------ (1,768) (50) (1) 71 (69) - - - - - (1,817) ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------Liabilitiesassociatedwithnon-currentassetsclassifiedas held for sale - - - - - - - - (56) - (56) ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------Totalliabilities (3,251) (50) 6 84 (69) 66 - - - - (3,214) ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------Net assets 3,916 (35) 6 18 (72) 66 17 1 - (2) 3,915 ------- ------ ------ ------ ------ ------ -------- ------- ------ ------ ------Gearing 15.5% 15.6% ------- ------ Reconciliation of income statement for the year ended 31 December 2004 - audited Previously Pensions Share-based Deferred Premier Goodwill Regulatory Other Restated reported ------- payment tax Power amortisation current ----- under under UK ------ ------ CCGT -------- account IFRS (£m) GAAP (£m) Project -------- ------- -------- ------ Group turnover 4,082 - - - (14) - - (5) 4,063Operating costs (2,753) (7) (8) - 10 16 (1) - (2,743)Profit/(loss)on disposal ofassets andbusinesses* 92 - - - - - - (5) 87 -------- ------- ------ ------ ------ -------- -------- ----- -------Operatingprofit beforeshare ofoperatingresults fromjoint venturesand associates 1,421 (7) (8) - (4) 16 (1) (10) 1,407------------------- -------- ------- ------ ------ ------ -------- -------- ----- ---------Share ofoperatingresults fromjoint venturesand associates 193 - - - - - - - 193 Totaloperatingprofit** 1,614 (7) (8) - (4) 16 (1) (10) 1,600------------------- -------- ------- ------ ------ ------ -------- -------- ----- --------Finance income 42 - - - - - - - 42Finance costs (78) (2) - - - - - 5 (75)Share of posttax resultsfrom jointventures andassociates 123 - - 2 - - - - 125 -------- ------- ------ ------ ------ -------- -------- ----- -------Profit beforetax 1,508 (9) (8) 2 (4) 16 (1) (5) 1,499Taxation (576) 3 2 (15) 1 - - - (585) -------- ------- ------ ------ ------ -------- -------- ----- -------Profit for theyear 932 (6) (6) (13) (3) 16 (1) (5) 914Profitattributableto minorityinterest 28 - - - - - - - 28Profitattributabletoshareholders(earnings) 904 (6) (6) (13) (3) 16 (1) (5) 886 -------- ------- ------ ------ ------ -------- -------- ----- ------- Earnings pershareexcludingprofit/(loss)on disposal ofassets andbusinesses-basic 23.8p 23.5pEarnings pershare - basic 25.6p 25.1pEarnings pershare -diluted 25.6p 25.1p -------- ------- * Includes items reported as exceptional items under UK GAAP ** Including share of operating results from joint ventures and associates Reconciliation of net assets as at 31 December 2004 - audited Previously Pensions Premier Deferred Dividends Goodwill Assets Other Restated reported ------- Power Tax ------- amortisation held ------ under under UK CCGT ------- --------- for IFRS GAAP (£m) Project sale -------- ------- ------ (£m) -------Assets Non-currentassetsGoodwill 239 - - - - 33 - - 272Intangibleassets 976 - - 107 - - (498) - 585Property,plant andequipment 4,567 - (57) - - - - (1) 4,509Investmentsaccountedforusing equitymethod 1,062 - - (1) - - (10) (2) 1,049Otherinvestments 1 - - - - - - - 1Deferredtax assets 50 18 - - - - - - 68Trade andotherreceivables 46 - - - - - - - 46 -------- ------- ------- ------- ------- --------- ------ ------ ------- 6,941 18 (57) 106 - 33 (508) (3) 6,530 -------- ------- ------- ------- ------- --------- ------ ------ -------CurrentassetsInventories 99 - - - - - - - 99Trade andotherreceivables 1,212 - - - - - (22) - 1,190Cash andcash equivalents 340 - - - - - - - 340 -------- ------- ------- ------- ------- --------- ------ ------ ------- 1,651 - - - - - (22) - 1,629 -------- ------- ------- ------- ------- --------- ------ ------ -------Non-currentassetsclassifiedas held for sale - - - - - - 530 - 530 -------- ------- ------- ------- ------- --------- ------ ------ -------Total assets 8,592 18 (57) 106 - 33 - (3) 8,689 -------- ------- ------- ------- ------- --------- ------ ------ -------Liabilities CurrentliabilitiesBorrowings (577) - - - - - - - (577)Trade andother payables (1,130) - 13 - 74 - 67 - (976)Currentincometax liabilities (264) - - - - - - - (264) -------- ------- ------- ------- ------- --------- ------ ------ ------- (1,971) - 13 - 74 - 67 - (1,817) -------- ------- ------- ------- ------- --------- ------ ------ -------Non-currentliabilitiesBorrowings (762) - - - - - - - (762)Trade andother payables (156) - 67 - - - - - (89)Deferredincome taxliabilities (712) - (8) (187) - - - - (907)Retirementbenefitobligations (76) (59) - - - - - - (135)Provisionsforotherliabilities and charges (325) - - - - - - - (325) -------- ------- ------- ------- ------- --------- ------ ------ ------- (2,031) (59) 59 (187) - - - - (2,218) -------- ------- ------- ------- ------- --------- ------ ------ -------Liabilitiesassociatedwithnon-currentassetsclassifiedas held for sale - - - - - - (67) - (67) -------- ------- ------- ------- ------- --------- ------ ------ -------Totalliabilities (4,002) (59) 72 (187) 74 - - - (4,102) -------- ------- ------- ------- ------- --------- ------ ------ -------Net assets 4,590 (41) 15 (81) 74 33 - (3) 4,587 -------- ------- ------- ------- ------- --------- ------ ------ -------Gearing 17.9% 17.9% -------- ------- 1.3 IFRS from 1 January 2005 Impact of IAS 32 and IAS 39 BG Group will adopt IAS 32 and IAS 39 from 1 January 2005. These standards setout the accounting rules surrounding the recognition, measurement, disclosureand presentation of financial instruments. BG Group's accounting policies underIAS 32 and IAS 39 will not be impacted by the elements carved out of the EUendorsement, and hence will comply in full with IAS 39. Most of BG Group's contracts for the sale and purchase of commodities areconsidered 'own use' contracts that were entered into and continue to be heldfor the purpose of receipt or delivery in accordance with BG Group's expectedsale, purchase or usage requirements. However, under IAS 39 BG Group is alsorequired to assess own use contracts to determine whether they contain embeddedderivatives. This assessment was made based upon conditions at the inception ofthe contracts. Net assets as at 1 January 2005 will reduce by £238m on implementation of IAS39. The large majority of this reduction (£225m) relates to the recognition ofcertain long-term UK gas contracts at fair value (see below). The loss on thesecontracts arises as they are required to be marked to market and current UKmarket gas prices are considerably higher than prices under contract termsagreed in prior years. The underlying contracts are profitable on anoperational basis and there is no impact on cash flow from the accountingchange. The most significant expected impacts of adopting these standards are set outbelow: • Certain long-term contracts for the sale of gas to the UK gas market fallwithin the scope of IAS 39. Whilst the activity surrounding these contractsinvolves the physical delivery of gas, the contracts fall within the scope ofIAS 39 as they are considered to contain written options relating to buyerflexibility e.g. with respect to volumes purchased. Accordingly, they will bemarked-to-market in their entirety with movements in this mark-to-marketvaluation recognised in the income statement. • Asset optimisation activities undertaken by BG Group's UK and USoperations involve short-term contracts for the sale and purchase of commoditiesand associated derivative instruments. These instruments fall within the scopeof IAS 39 and will be marked-to-market with movements in this mark-to-marketvaluation recognised in the income statement. • BG Group's gas marketing business in the US uses derivative instrumentsto manage margin exposure arising from fluctuations in gas prices. Cash flowhedge accounting will be applied where derivative instruments are designated asa hedge of probable future gas sales. Gains and losses associated with thosederivatives determined to be effective hedges will be deferred in equity untilthe underlying transaction affects the income statement. • Financial instruments utilised by BG Group's treasury operations includeinterest rate swaps, foreign currency swaps, forward rate agreements, interestrate swaptions, tax equalisation swaps and forward exchange contracts. Thesefinancial instruments are used to manage the Group's exposure to foreignexchange and interest rate movements. Certain derivative instruments aredesignated as fair value hedges of interest rate risk associated with thelong-term debt of the Group and hedge the foreign exchange movements associatedwith the Group's net investments in foreign operations. The fair value of thesederivative instruments will be recognised on the balance sheet. Movements infair value will be recognised in income to the extent they relate to hedges ofthe risks associated with Group debt, or in equity when relating to effectivehedges of net investments in foreign operations. • Long-term issued debt of the Group will be recorded at amortised costexcept where the debt is part of a fair value hedge relationship when thecarrying value of the debt will be adjusted to reflect fair value movementsassociated with the hedged risks throughout the effective period of the hedge.These fair value movements will be recognised in income and offset againstmovements in the related hedging instrument. Impact of IFRIC 3 In December 2004 the International Financial Reporting Interpretations Committee(IFRIC) issued IFRIC 3 Emission Rights. It is effective for periods commencingfrom 1 March 2005. BG Group intends to adopt IFRIC 3 during 2005, onceallowances to be allocated under the EU Emissions Trading Scheme have beenfinalised. The adoption of IFRIC 3 will result in the balance sheet recognition of anintangible asset for the allowances held and a government grant when these havebeen allocated at below fair value. In addition, a liability will be recognised(at fair value) in respect of the obligation to deliver allowances to matchagainst emissions made. The fair values for assets and liabilities recognisedwill be based upon the market prices for emissions allowances. At currentmarket values, the impact of IFRIC 3 is not forecast to be material to BGGroup's business. Impact of IFRIC 4 IFRIC 4 Determining Whether an Arrangement contains a Lease was issued by IFRICin December 2004. It is effective for periods commencing from 1 January 2006and comparative period restatement is required. BG Group is currently reviewingthe impact of this interpretation. One likely impact is the classification ofthe Lake Charles regasification capacity contracts as finance leases. Impact of IFRS 6 In December 2004 the IASB issued IFRS 6 Exploration for and Evaluation ofMineral Resources. The standard was issued to make limited improvements toaccounting practices for exploration and evaluation expenditure in advance of acomprehensive review of accounting for extractive industries planned by theIASB. Under IFRS 6 companies can continue to use accounting policies applied beforeadopting the standard. Accordingly, BG Group will continue to use thesuccessful efforts basis of accounting for exploration activity as defined bythe UK SORP. In addition, IFRS 6 requires impairment testing to be performed onexploration and evaluation assets when facts and circumstances suggest that thecarrying values may exceed their recoverable amounts. This is consistent withBG Group's current approach. The effective date for the standard is 1 January 2006. BG Group does notconsider that adoption of this standard will have a significant impact on theresults of the Group. 1.4 Presentation of results under IFRS In order to provide users of BG Group's accounts with information under IFRSthat is readily understood in the context of information previously availableunder UK GAAP reporting, BG Group will highlight the following information inits quarterly income statements: • Under IFRS the results from associates and jointly controlled entities(joint ventures), accounted for under the equity method, are required to bepresented net of finance costs and tax on the face of the income statement.Under UK GAAP the operating results of BG Group's associates and joint ventureswere included within total operating profit. Given the importance of suchbusinesses to the Group, information will be included in the income statement tocontinue to report total operating profit including the operating results ofthese entities. • Items which were classified as exceptional under UK GAAP, in particularprofits and losses on the disposal of property, plant and equipment and othernon-current assets will be separately identified from results in respect ofbusiness performance. Management believes that the separate identification ofthese items facilitates understanding of the underlying performance of thebusiness and improves comparability of results. These items will be reported ina column separated from business performance in the income statement. • Charges and credits recognised in the income statement which arise fromthe re-measurement of derivative instruments, in particular commodityinstruments, will be separately identified from business performance as theyreflect movements in external market prices rather than the underlyingperformance of the business during the period. These items will be reported ina column separated from business performance in the income statement. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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