21st Sep 2007 10:42
M&C Saatchi PLC21 September 2007 M&C SAATCHI PLC21 September 2007 IMPACT OF IFRS ON FINANCIAL STATEMENTS TWELVE MONTHS TO 31 DECEMBER 2006 AND SIX MONTHS TO 30 JUNE 2006 Reconciliation of 2006 annual and interim statements from UK GAAP to IFRS following the adoption of IFRS on 1 January 2007. M&C Saatchi plc today restates its consolidated results for the year ended 31December 2006 and half year ended 30 June 2006. M&C Saatchi plc formally adoptedIFRS from 1 January 2007 with its date of transition being 1 January 2006.Future consolidated reporting will be in accordance with IFRS as adopted by theEuropean Union. This announcement is unaudited. Key Adjustments •IAS 12 deferred tax on employee options, reduces 2006 annual tax charge by £0.03m (£0.02m for 2006 half year). •IAS 19 employee benefits (holiday pay) has no effect on 2006 annual results. It caused 2006 half year statutory and headline profit before tax to be reduced by £0.4m. •Under IFRS 3 business combinations, goodwill is not amortised and is tested annually for impairment. This increased 2006 annual statutory operating profit by £1.7m (£0.9m for 2006 half year). •IAS 32 and IAS 39 financial instruments requires us to value put options held by minority shareholders, and this has reduced statutory profit before and after tax by £9.0m in the 2006 annual results (£0.4m for 2006 half year). It has also created a balance sheet liability of £22.3m in the 2006 annual results (£13.6m for 2006 half year). A reconciliation from statutory profit before tax to headline profit before taxcan be seen on the following page. IFRS 1 Relevant exemptions taken •We have not restated our business combinations prior to 1 January 2006 (IFRS 3). •Cumulative translation differences on all foreign operations as at 1 January 2006 are treated as nil (IAS 21) For further information please call: M&C Saatchi plc 020 7544 3693 Andy Blackstone, Company Secretary NUMIS 020 7260 1000 Lee Aston RECONCILIATION HEADLINE TO STATUTORY PROFIT BEFORE TAX 31 December 30 June 2006 2006 annual half year £000 £000 UK GAAP statutory profit before tax 6,037 2,002Add back amortisation of goodwill 1,735 854 ----------- -----------Headline UK GAAP profit before tax 7,772 2,856 IAS 1 - adjustment to associate presentation (2) -IAS19 & IAS 34 holiday pay accrual - (436) ----------- ----------- Headline IFRS profit before tax 7,770 2,420 IAS 38 - amortisation of intangible assets (20) -IAS 32 & IAS 39 - fair value adjustments on minority shareholders put option liabilities (8,970) (384) ----------- -----------IFRS statutory (loss) / profit before tax (1,220) 2,036 =========== =========== Under UK GAAP the difference between headline and statutory profits was thatheadline profits excluded amortisation of goodwill. Under IFRS the differencebetween headline and statutory profits is that headline profits excludes theimpact of fair value adjustments on minority shareholders put option liabilitiesand amortisation of intangible assets. The financial information included in this report does not constitute statutoryaccounts as defined in section 240 of the Companies Act 1985, and is unaudited.The year ended 31 December 2006 accounts, which were prepared under UK GAAP,have been reported on by the Company's auditors and delivered to the Registrarof Companies. The auditor's report on those statutory accounts was unqualified,did not include references to any matters to which the auditors drew attentionby way of emphasis without qualifying their report, and did not contain astatement under section 237(2) or (3) of the Companies Act 1985. YEAR ENDED 31 DECEMBER 2006 - IFRS RECONCILIATIONUNAUDITED CONSOLIDATED INCOME STATEMENT UK GAAP IFRS 3 IAS 38 IAS 1 IAS 12 IAS 32 & IAS 39 IFRS Year ended 31 Business Intangible Presentation of Deferred tax Put options Year ended December 2006 Combinations assets financial on options 31 December statements - 2006 Associates Notes (1) (2) (3) (8) (9) £000 £000 £000 £000 £000 £000 £000 Turnover(billings) 369,490 369,490 ======= ======== ======= ======== ======= ======= ========= Revenue 75,877 75,877 Operatingprofit beforegoodwillamortisation 6,258 6,258 Goodwillamortisationand impairment (1,735) 1,735 (20) - - - (20) ------- -------- ------- -------- ------- ------- --------Operatingprofit 4,523 1,735 (20) - - - 6,238 Share ofresults ofassociate 15 - - (10) - - 5 Financialincome 1,540 1,540 Financial costs (41) - - 8 - (8,970) (9,003) ------- -------- ------- -------- ------- ------- ---------Profit /(loss) beforetaxation 6,037 1,735 (20) (2) - (8,970) (1,220) Taxation onprofits (2,886) - - 2 32 - (2,852) ------- -------- ------- -------- ------- ------- ---------Profit /(loss) for thefinancialperiod 3,151 1,735 (20) - 32 (8,970) (4,072) ======= ======== ======= ======== ======= ======= ========= Attributable to:Equity holdersof the Group 2,003 1,735 (20) - 32 (8,970) (5,220) Minorityinterests 1,148 1,148 ------- -------- ------- -------- ------- ------- --------- 3,151 1,735 (20) - 32 (8,970) (4,072) ======= ======== ======= ======== ======= ======= ========= Earnings /(loss) per share - Basic 3.73p 3.23p (0.04)p - 0.06p (16.71)p (9.73)p - Diluted 3.69p 3.19p (0.04)p - 0.06p (16.51)p (9.73)p Average numberof shares -Basic 53,677,484 53,677,484 53,677,484 53,677,484 53,677,484 53,677,484 53,677,484Average numberof shares -Diluted 54,347,216 54,347,216 54,347,216 54,347,216 54,347,216 54,347,216 53,677,484 Under IAS 33, earnings per share can be diluted by the LTIP and put options. In2006 this effect is nil, see notes (7a) and (7b) for details. IAS 33 does notallow the diluted EPS to be more than basic EPS due to more shares sharing aloss thus diluted EPS is (9.73)p rather than (9.61)p had our issued options beentaken account of. The numbers in the titles in brackets relate to the explanations in the notes tothese reconciliations. These explanations deal with the effects to all thestatements. YEAR ENDED 31 DECEMBER 2006 - IFRS RECONCILIATIONUNAUDITED CONSOLIDATED BALANCE SHEET UK GAAP IFRS 3 IFRS 3 IAS 1 & IAS 12 IAS 32 & IFRS IAS 39 IAS 39 Year ended 31 Business Business Presentation of Deferred Tax on Put options Year ended 31 December 2006 Combinations Combinations - financial Options December 2006 - Goodwill Intangible statements amortisation assets Notes (1) (2) (4), (5) & (6) (8) (9) £000 £000 £000 £000 £000 £000 £000Non current assetsGoodwill 13,555 1,735 (20) - - - 15,270Intangibleassets - - - 87 - - 87Plant andequipment 3,618 - - (87) - - 3,531Deferred taxassets 693 - - - 29 - 722Investments 93 - - (93) - - -Other noncurrent 448 - - 12 - - 460assets -------- --------- --------- -------- -------- -------- -------- 18,407 1,735 (20) (81) 29 20,070 -------- --------- --------- -------- -------- -------- -------- Current assetsWork inprogress 2,416 2,416Trade andotherreceivables 45,987 - - 5 - - 45,992Cash and cashequivalents 31,284 31,284 -------- --------- --------- -------- -------- -------- -------- 79,687 - - 5 - 79,692 -------- --------- --------- -------- -------- -------- -------- Current liabilitiesTrade andother (63,430) (63,430)payablesCurrent taxliabilities (1,036) (1,036)Provision forput options - - - - - (11,077) (11,077) -------- --------- --------- -------- -------- -------- -------- (64,466) - - - - (11,077) (75,543) -------- --------- --------- -------- -------- -------- -------- Net currentassets 15,221 - - 5 - (11,077) 4,149 Total assetsless currentliabilities 33,628 1,735 (20) (76) 29 (11,077) 24,219 Non CurrentliabilitiesOther noncurrentliabilities (746) - - 76 - - (670)Deferred taxliabilities (141) (141)Employmentbenefits (221) (221)Provision forput options - - - - - (11,211) (11,211) -------- --------- --------- -------- -------- -------- --------Net assets 32,520 1,735 (20) - 29 (22,288) 11,976 ======== ========= ========= ======== ======== ======== ======== Capital and reservesShare capital 542 542Share premiumaccount 9,618 9,618Merger 13,553 1,203 - - - - 14,756reserveTreasuryreserve (792) (792)Put optionreserve - - - - - (13,318) (13,318)Share optionreserve 812 - - - 33 - 845Foreigncurrencytranslationreserve - - - (371) - - (371)Retainedearnings 7,625 532 (20) 371 (4) (8,970) (466) -------- --------- --------- -------- -------- -------- --------Totalshareholders'equity 31,358 1,735 (20) - 29 (22,288) 10,814Minorityinterest inequity 1,162 1,162 -------- --------- --------- -------- -------- -------- --------Total equity 32,520 1,735 (20) - 29 (22,288) 11,976 ======== ========= ========= ======== ======== ======== ======== The numbers in the titles in brackets relate to the explanations in the notes tothese reconciliations. These explanations deal with the effects to all thestatements. HALF YEAR ENDED 30 JUNE 2006 - IFRS RECONCILIATIONUNAUDITED CONSOLIDATED INCOME STATEMENT UK GAAP IFRS 3 IAS 19 IAS 1 IAS 12 IAS 32 & IAS 39 IFRS Half year ended Business Holiday Presentation of Deferred tax on Put options Half year 30 June 2006 Combinations Pay financial options ended 30 accrual statements - June 2006 Associates Notes (1) (10) (3) (8) (9) £000 £000 £000 £000 £000 £000 £000 Turnover(billings) 150,256 150,256 ======= ======== ======= ======== ======= ======= ======= Revenue 34,655 34,655 Operatingprofit beforegoodwillamortisation 2,192 - (436) - - - 1,756 Goodwillamortisationand impairment (854) 854 - - - - - ------- -------- ------- -------- ------- ------- -------Operatingprofit 1,338 854 (436) - - - 1,756 Share ofresults ofassociate 3 - - (1) - - 2 Financialincome 675 675Financial costs (14) - - 1 - (384) (397) ------- -------- ------- -------- ------- ------- -------Profit onordinaryactivitiesbeforetaxation 2,002 854 (436) - - (384) 2,036 Taxation onprofits fromordinaryactivities (1,293) - 133 - 18 - (1,142) ------- -------- ------- -------- ------- ------- -------Profit onordinaryactivitiesafter taxationfor financialperiod 709 854 (303) - 18 (384) 894 ======= ======== ======= ======== ======= ======= ======= Attributable toEquity holdersof the Group 264 854 (291) - 18 (384) 461Minorityinterests 445 - (12) - - - 433 ------- -------- ------- -------- ------- ------- -------Profit for thefinancialperiod 709 854 (303) - 18 (384) 894 ======= ======== ======= ======== ======= ======= ======= Earnings pershare - Basic 0.49p 1.58p (0.54)p - 0.03p (0.71)p 0.85p - Diluted 0.48p 1.56p (0.53)p - 0.03p (0.70)p 0.84p Average numberof shares -Basic 54,206,799 54,206,799 54,206,799 54,206,799 54,206,799 54,206,799 54,206,799Average numberof shares -Diluted 54,644,954 54,644,954 54,644,954 54,644,954 54,644,954 54,644,954 54,644,954 Under IAS 33, earnings per share can be diluted by the LTIP and put options. In2006 this effect is nil, see notes (7a) and (7b) for details. The numbers in the titles in brackets relate to the explanations in the notes tothese reconciliations. These explanations deal with the effects to all thestatements. HALF YEAR ENDED 30 JUNE 2006 - IFRS RECONCILIATIONUNAUDITED CONSOLIDATED BALANCE SHEET UK GAAP IFRS 3 IAS 19 IAS 1 & IAS 12 IAS 32 & IFRS IAS 39 IAS 39 Half year ended Business Holiday Presentation of Deferred Tax on Put options Half year ended 30 June 2006 Combinations Pay financial Options 30 June 2006 - Goodwill accrual statements amortisation Notes (1) (10) (4), (5) & (6) (8) (9) £000 £000 £000 £000 £000 £000 £000Non current assetsGoodwill 13,773 854 - - - - 14,627Intangibleassets - - - 88 - - 88Plant andequipment 3,363 - - (88) - - 3,275Deferred taxassets 426 - - - (18) - 408Investments 93 - - (93) - - -Other noncurrent 356 - - 12 - - 368assets -------- --------- --------- -------- -------- -------- -------- 18,011 854 - (81) (18) - 18,766 -------- --------- --------- -------- -------- -------- -------- Current assetsWork inprogress 1,759 1,759Trade andotherreceivables 40,653 40,653Cash and cashequivalents 23,742 23,742 -------- --------- --------- -------- -------- -------- -------- 66,154 - - - - - 66,154 -------- --------- --------- -------- -------- -------- -------- Current liabilitiesTrade andother (50,379) - (436) - - - (50,815)payablesCurrent taxliabilities (948) - 133 - - - (815)Provision forput options - - - - - (6,821) (6,821) -------- --------- --------- -------- -------- -------- -------- (51,327) - (303) - - (6,821) (58,451) -------- --------- --------- -------- -------- -------- -------- Net currentassets 14,827 - (303) - - (6,821) 7,703 Total assetsless currentliabilities 32,838 854 (303) (81) (18) (6,821) 26,469 Non Current liabilitiesOther noncurrentliabilities (668) - - 81 - - (587)Deferred taxliabilities (182) (182)Employmentbenefits (274) (274)Provision forput options - - - - - (6,782) (6,782) -------- --------- --------- -------- -------- -------- --------Net assets 31,714 854 (303) - (18) (13,603) 18,644 ======== ========= ========= ======== ======== ======== ======== Capital and reservesShare capital 542 542Share premiumaccount 9,618 9,618Merger 14,144 612 - - - - 14,756reservePut optionreserve - - - - - (13,219) (13,219)Share optionreserve 718 718Foreigncurrencytranslationreserve - - - (264) - - (264)Retainedearnings 5,740 242 (291) 264 (18) (384) 5,553 -------- --------- --------- -------- -------- -------- --------Totalshareholders'equity 30,762 854 (291) - (18) (13,603) 17,704Minorityinterest inequity 952 (12) 940 -------- --------- --------- -------- -------- -------- --------Total equity 31,714 854 (303) - (18) (13,603) 18,644 ======== ========= ========= ======== ======== ======== ======== The numbers in the titles in brackets relate to the explanations in the notes tothese reconciliations. These explanations deal with the effects to all thestatements. 1 JANUARY 2006 - IFRS RECONCILIATIONUNAUDITED CONSOLIDATED BALANCE SHEET UK GAAP IAS 1 IAS 1 & IAS 12 IAS 32 & IFRS IAS 39 IAS 39 1 January 2006 Presentation of Presentation of Deferred Tax on Put options 1 January 2006 financial financial Options statements statements Notes (5) (4) (8) (9) £000 £000 £000 £000 £000 £000 Non current assetsGoodwill 14,592 14,592Intangibleassets - 87 - - - 87Plant andequipment 3,194 (87) - - - 3,107Deferred taxassets 354 (36) 318Investments 100 - (100) - - -Other noncurrent 224 - 19 - - 243assets -------- -------- -------- -------- -------- -------- 18,464 - (81) (36) - 18,347 -------- -------- -------- -------- -------- -------- Current assetsWork inprogress 3,277 3,277Trade andotherreceivables 50,552 50,552Cash and cashequivalents 20,486 20,486 -------- -------- -------- -------- -------- -------- 74,315 74,315 -------- -------- -------- -------- -------- -------- Current liabilitiesTrade andother (56,209) (56,209)payablesCurrent taxliabilities (2,760) (2,760)Provision forput options - - - - (5,540) (5,540) -------- -------- -------- -------- -------- -------- (58,969) - - - (5,540) (64,509) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------Net currentassets 15,346 - - - (5,540) 9,806 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------Total assetsless currentliabilities 33,810 - (81) (36) (5,540) 28,153 -------- -------- -------- -------- -------- -------- Non Current liabilitiesTrade andotherpayablesfalling dueafter more (949) - 81 - - (868)than one yearDeferred taxliabilities (21) (21)Employmentbenefits (302) (302)Provision forput options - - - - (7,679) (7,679) -------- -------- -------- -------- -------- --------Net assets 32,538 - - (36) (13,219) 19,283 ======== ======== ======== ======== ======== ======== Capital and reservesShare capital 542 542Share premiumaccount 9,618 9,618Merger 14,756 14,756reservePut optionreserve - (13,219) (13,219)Share optionreserve 599 599Foreign - -currencytranslationreserveRetainedearnings 6,101 - - (36) - 6,065 -------- -------- -------- -------- -------- --------Totalshareholders'equity 31,616 - - (36) (13,219) 18,361Minorityinterest inequity 922 922 -------- -------- -------- -------- -------- --------Total equity 32,538 - - (36) (13,219) 19,283 ======== ======== ======== ======== ======== ======== The numbers in the titles in brackets relate to the explanations in the notes tothese reconciliations. These explanations deal with the effects to all thestatements. Cash flow statements The IFRS Cash Flow Statement, prepared under IAS 7, presents cash flows in threecategories; operating activities, investing activities and financing activities.This is fewer than the previous seven categories under UK GAAP. Other than thereclassification of cash flow items into the new disclosure categories, thereare no significant differences between the Group's Cash Flow Statement under UKGAAP and IFRS. Consequently, the revised Cash Flow Statement has not beenpresented in this document. Notes to the reconciliations between UK GAAP and IFRS (1) Business Combinations - Goodwill amortisation The Group has elected not to apply IFRS 3 retrospectively to businesscombinations completed prior to 1 January 2006. In accordance with IFRS 1 the2006 UK GAAP amortisation of goodwill entries have been reversed as follows:- December 2006 June 2006 Annual Interim £000 £000Income statementOperating profit increased 1,735 854Balance sheetGoodwill increased 1,735 854 Equity itemsMerger reserve increased 1,203 612Retained earnings increased 532 242 When we reorganised in 2004 prior to our AiM listing, we increased our holdingto greater than 90% in many of our subsidiaries, through an equity swap. Theshare premium on these acquisitions was credited to merger reserve. The mergerreserve was released to retained earnings when the related asset is expensed tothe income statement. Under IFRS the 2006 amortisation of goodwill is reversedtogether with the adjustments to merger reserve. In 2006 and in future we will not amortise goodwill, however we will continue toconduct an annual impairment review. In 2006 we identified no impairments. (2) Business Combinations - IAS 38 Intangible assets On 24 July 2006 the Group acquired 80% of 03 International Projects GmbH(renamed M&C Saatchi Berlin GmbH). At acquisition we acquired customer contractswith a fair value of £20k, these contracts had been completed before the yearend and therefore were fully amortised at the year end. The adjustments thatrelate to M&C Saatchi Berlin GmBH were as follows:- December 2006 June 2006 Annual Interim £000 £000Income statementOperating profit reduced (20) - Balance sheetUK GAAP goodwill 769 -Goodwill reduced (20) - ----------- -----------IFRS goodwill 749 - ----------- -----------Intangible assets recognised 20 -Amortisation of intangible assets (20) ----------- ----------- - - ----------- ----------- (3) Presentation of financial statements - associates Under IAS 1 we show our share of the associate's profit after tax within theAssociate line in the income statement. The effect of this adjustment is as follows:- December 2006 June 2006 Annual Interim £000 £000Income statementReduction in share of resultsassociate 10 1Reduction in interest payable 8 1Reduction in taxation 2 - ----------- -----------Profit on ordinary activities after taxation - - =========== =========== (4) Loans to loss making associates In 2006 the Group had one associate Play London Limited (Play); which made a£162k start up loss in 2005, funded by a loan from a Group company. Play made asmall profit in 2006. Under IAS1 the loss is presented as a provision against the investment (inaccordance with IAS 39). Previously under UK GAAP we have presented the loan asan investment and the provision against it separately within provisions. Withinthis adjustment we also show a small reclassification from investments to otherdebtors of £12k. The effect of this adjustment is as follows:- December 2006 June 2006 1 January 2006 Annual Interim £000 £000 £000Balance sheetInvestments of 93 93 100Reclassified to:Other debtors 12 12 19Trade and otherreceivables 5 - -Provisions 76 81 81 (5) Software defined as intangibles - IAS 16 IFRS defines software as an intangible asset instead of its UK GAAP treatment asa tangible asset within plant and equipment (fixed assets). The effect of thisadjustment is as follows:- December 2006 June 2006 1 January 2006 Annual Interim £000 £000 £000Balance sheetIncrease inintangible assets 87 88 87Reduction in plantand equipment (87) (88) (87) The amortisation of software is included within headline profits. (6) Reclassification to foreign currency translation reserve - IAS 21 We have taken the exemption in IFRS1 to treat cumulative translation differenceson all foreign operations arising pre 1 January 2006 as nil. The translation differences between 1 January 2006 and period end are:- December 2006 June 2006 1 January 2006 Annual Interim £000 £000 £000Balance sheetDecrease inforeign currencytranslationreserve (371) (264) -Increase inretained earnings 371 264 - (7a) LTIP effect on diluted EPS - IAS 33 The M&C Saatchi plc long term incentive scheme (LTIP) issues a varying number ofnil priced options in accordance with performance targets. As of 30 June 2006and 31 December 2006 the performance target had not been met, so no dilution iscaused. IAS 33 looks at the position at the balance sheet date; this is different toIFRS2 share based payments which looks forward to the position at vesting. (7b) Put option effect on diluted EPS - IAS 33 The minority shareholders in group companies have the right to exchange theirminority holdings in the subsidiary into shares in M&C Saatchi plc (putoptions). The impact of the put options, had they been exercised prior to thestart of the year would have been to increase diluted EPS by 0.10p (2006 halfyear 0.28p). As this effect does not reduce diluted EPS, the effect is ignored. (8) Deferred tax on employee share options - IAS 12 UK GAAP focuses on the income statement to calculate deferred tax; IFRS focuseson the balance sheet to calculate deferred tax. The significant difference between these two standards is the accounting fordeferred tax on options. In calculating the deferred tax IFRS uses the periodend balance sheet share price rather than the option charge in the incomestatement as UK GAAP does. The IFRS accounting creates further share price basedvolatility in our numbers, an example of which can be seen in the adjustmentsbelow. On 1 January 2006 our share price was £1.00 and below accounting price ofthe options, causing the deferred tax benefit to be less than 30% of the incomestatement option charge . By 31 December 2006 our share price was £1.40 andabove the accounting value of most of our options causing the deferred taxbenefit to be greater than 30% of the income statement option charge, the excessabove 30% of the income statement option charge is taken to reserves. Theadjustment are as follows:- December 2006 June 2006 1 January 2006 Annual Interim £000 £000 £000Income statementReduction in tax 32 18 N/A Increase in profitafter taxation 32 18 N/A Balance sheetIncrease /(decrease) indeferred tax 29 (18) (36) EquityIncrease in thefuture tax benefitof options 33 - -Decrease inretained earnings (4) (18) (36) (9) Put options - IAS 32 & IAS 39 Financial instruments The Group companies have minority shareholders which have the right to exchangetheir minority shareholdings in the subsidiary companies for shares in M&CSaatchi plc (a put option). IAS 32 & IAS 39 requires a valuation of these putoptions (liability) at their creation (or at the Group's transition to IFRS) andthen at each reporting date. The movement in the valuation of the liability ischarged to the income statement (there is no revaluation of the reserve). At 31December 2006 the following put options existed and are exercisable from: Company Year % of Company shares exchangeableWalker Media Holdings Ltd 2007 12.5Walker Media Holdings Ltd 2008 12.5Talk PR Ltd 2007 21.9The Immediate Sales Company Ltd 2007 14.0M&C Saatchi LA Inc 2007 16.0M&C Saatchi Marketing Arts Ltd 2008 50.0M&C Saatchi (M) SDN BHD 2008 20.0M&C Saatchi Sports and Entertainment Ltd 2008 22.8M&C Saatchi Agency Inc 2008 4.0M&C Saatchi (Thailand) Co Ltd 2008 48.0Provenance Communication Ltd 2009 35.0Influence Communications Limited 2009 15.0M&C Saatchi Europe Holdings Ltd 2010 4.0M&C Saatchi GAD SAS 2011 28.0M&C Saatchi Communications Pty Ltd 2011 23.0M&C Saatchi Berlin GmbH 2011 20.0 The impact of accounting for put options are as follows:- December 2006 June 2006 Annual Interim £000 £000Income statementFinancial costs - Implicit interest expense 132 55 - Change in liability caused due to performance and share price 8,838 329 -------- --------Total charge to financial costand reduction in profit 8,970 384 -------- -------- December 2006 June 2006 1 January 2006 Annual Interim £000 £000 £000Balance sheetNon current assets - Goodwill / intangibles - - - Current assets - Cash - - - - Increase in provision for put options (11,077) (6,821) (5,540) Non current liabilities - Increase in provision for put options (11,211) (6,782) (7,679) -------- -------- ----------Net assets (22,288) (13,603) (13,219) ======== ======== ========== Equity - Share capital / share premium account - - - - Increase in other non distributable reserve (13,318) (13,219) (13,219) - reduction in retained earnings (8,970) (384) - -------- -------- ----------Total Equity (22,288) (13,603) (13,219) ======== ======== ========== Explanation of the transaction:- • Initial valuation of a put option - An assessment is performed on the expected value of the cash and M&C Saatchi plc shares that will be paid in return for the minority interest, at the later of the date of, the put option agreement and transition to IFRS (1 January 2006). Both the value of the cash and shares are discounted to the present value, based on the date from which the put options can be exercised. The shares to be issued are valued at the market price for the shares at the agreement or transition date before a present value discount is applied. A credit is charged to provisions and a debit is charged to equity on initial recognition. • The debit in equity will only change if new put options are issued or the put options are exercised. On exercising the option, the debit in equity becomes the investment in the subsidiary, and this amount less the fair value of tangible net assets and intangible assets acquired becomes Goodwill. If Goodwill is negative a credit is taken to the income statement. • Changes in the provision - Assuming that no new options are issued or put options exercised, any changes to the provision will be charged / credited to the income statement. The provision changes in the following way:- o It will increase due to an imputed interest charge (implicit interest) being charged to income statement. In 2006 this charge was £132k. The charge is effected by share price movements, thus the full year charge is 21% greater than two times the half year charge (the share price increased by 21% in this period). o It will increase / decrease with changes in M&C Saatchi plc share price. As our share price goes up, the value of the shares we issue to fulfil the put option increases. This will have an effect on the imputed interest charge (in the same way that changes in contingent consideration have on its imputed interest charge), as well as the future consideration. Of the £8,970k charge in 2006, £856k was cased by a share price increasing from £1.00 to £1.40. o Increases in the value of companies with minorities holdings, due to trading performance, increases the amount of the provision. In 2006 this charge was £7,982k excluding the effect of share price movements, most of this movement related to Walker Media. o The provision is defined as short term when the minority shareholders can exercise it within one year. The £1.2m increase in the 2006 half year short term creditor is mainly due to Talk PR Ltd, The Immediate Sales Company Ltd and M&C Saatchi LA Inc being able to exercise in less than one year. • When the put option is exercised the value of the provision should equal the total value of the cash and equity given at the date of the transaction. Any differences will be charged to the income statement. Comment on the different answers that IFRS gives from similar transactions. The formula we use to calculate the value that we pay minorities for their shares are the same for put and call options. Under IFRS these are similar transactions that produce the same result differently, the only key difference between the transactions is how the date of exercise is determined. As of the date of this announcement we have the following similar transactions that are accounted for differently:- • Put option have to be accounted for under IAS 32 and IAS 39 as the group has an obligation it cannot avoid (the minority has a right to decide when to exercise). • If M&C Saatchi plc has a call option then we account also under IAS 32 and 39, however the options value from an accounting perspective is nothing and thus has no effect on the financial statements (M&C Saatchi decides when to exercise). • When the shareholders or sales purchase agreement determines the date of exercise, then it is a capital commitment and should be disclosed but not accounted for (the minority and M&C Saatchi have agreed the date in advance). (10) Holiday pay accrual - IAS 19 As a result of further guidance in IAS 19, a £436k increase in the Group'sholiday pay accrual has been made at 30 June 2006. No accrual is required at 1Jan 2006 and 31 Dec 2006 as the countries that this adjustment affects, have aholiday year end of 31 December with an immaterial amount of holiday beingcarried forward into the following year. The effect of this adjustment is as follows:- December 2006 June 2006 Annual Interim £000 £000Income statementReduction in operating profit - (436)Reduction in taxation on profitsfrom ordinary activities - 133 ----------- -----------Reduction in profit after taxation - (303) =========== =========== Accounting Policies These are the IFRS accounting policies that M&C Saatchi plc has adopted tocomply with IFRS. Significant accounting policies Our financial statements will be prepared in accordance with InternationalFinancial Reporting Standards (IFRS) adopted by the European Union and thereforethe Group financial statements comply with Article 4 of the EU IAS Regulation. Headline results Headline results are used for internal performance management and thecalculation of rewards in the LTIP scheme. M&C Saatchi management focus on theseresults in explaining the performance of the business. The term headline is nota defined term in IFRS. The key items that are excluded from headline results are the fair value gainsand losses on liabilities caused by our put option agreements, amortisation ofintangible assets created in business combinations and charges as a result ofgoodwill impairment. Basis of preparation The financial information presented in this document has been prepared on thebasis of the recognition and measurement requirements of adopted IFRSs in issuethat either are endorsed by the EU and effective (or available for earlyadoption) at 31 December 2007 or are expected to be endorsed and effective (oravailable for early adoption) at 31 December 2007, the Group's first annualreporting date at which it is required to use adopted IFRSs. Based on theseadopted and unadopted IFRSs, the directors have made assumptions about theaccounting policies expected to be applied, the significant effects of which are set out below, when the first annual IFRS financial statements areprepared for the year ending 31 December 2007. In addition, the adopted IFRSs that will be effective (or available for earlyadoption) in the annual financial statements for the year ending 31 December2007 are still subject to change and to additional interpretations and thereforecannot be determined with certainty. Accordingly, the accounting policies forthat annual period will be determined finally only when the annual financialstatements for the Group are prepared for the year ending 31 December 2007. The Group's financial results for the six month period ending 30 June 2007 willbe prepared on the basis of the principles of adopted IFRS, and will bepresented together with details of the accounting policies expected to beapplied for the year ending 31 December 2007. Basis of consolidation The M&C Saatchi plc consolidated financial statements incorporate the financialstatements of M&C Saatchi plc and entities (including special purpose entities)controlled by M&C Saatchi plc (its subsidiaries). Control is achieved where M&CSaatchi plc has the power to govern the financial and operating policies of anentity so as to obtain benefits from its activities. Where subsidiaries areacquired in the year, their results and cash flows are included from the date ofacquisition up to the balance sheet date. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring their accounting policies into line with those used byother members of the Group. All intra-Group transactions, balances, income andexpenses are eliminated on consolidation. Where a consolidated company is less than 100% owned by the Group, the minorityinterest share of the results and net assets is recognised at each reportingdate. Where such a company has net liabilities, no asset is recorded withinminority interests unless the minority shareholder has an obligation to makegood its share of the net liabilities. Subsidiary acquisition The acquisition of subsidiaries is accounted for using the purchase method. Thecost of acquisition is measured at the aggregate of the fair values of theassets given, liabilities incurred or assumed and the equity instruments issuedby the Group in exchange for control, together with any costs that are directlyattributable to the business combination. The identifiable assets andliabilities (including contingent liabilities) acquired that meet the conditionsfor recognition under IFRS 3 are recognised at their fair values at the date ofacquisition. The interest of minority shareholders in the acquiree is initially measured atthe minority's proportion of the net fair value of the assets, liabilities andcontingent liabilities recognised. Goodwill Goodwill arising on the acquisition of a subsidiary or a jointly controlledentity is recognised as an asset, being the excess of the cost of the businesscombination over the Group's interest in the net fair value of the identifiablenet assets acquired. Goodwill relating to associates is included within the carrying value of theinvestment in associates. Following initial recognition, goodwill is carried at cost less any accumulatedimpairment losses. Goodwill recognised under UK GAAP prior to the date oftransition to IFRS is stated at net book value as at that date. For the purpose of impairment testing, goodwill is allocated to each of theGroup's cash-generating units expected to benefit from the combination.Cash-generating units to which goodwill has been allocated are tested forimpairment annually, or more frequently when there is an indication ofimpairment. Any impairment is recognised immediately in the income statement andis not subsequently reversed. Goodwill arising from foreign investments are translated at the year end rate. Associates Associates are all entities over which the Group has significant influence butnot control, generally accompanying a shareholding of between 20% and 50% of thevoting rights. Investments in associates are accounted for using the equitymethod of accounting and are initially recognised at cost. The Group'sinvestment in associates includes goodwill identified on acquisition, net of anyaccumulated impairment loss. The Group's share of its associates' post-acquisition profits or losses isrecognised in the income statement, and its share of post-acquisition movementsin reserves is recognised in reserves. The cumulative post-acquisition movementsare adjusted against the carrying amount of the investment. When the Group'sshare of losses in an associate equals or exceeds its interest in the associate,including any other unsecured receivables, the Group does not recognise furtherlosses, unless it has incurred obligations or made payments on behalf of theassociate. Unrealised gains on transactions between the Group and its associates areeliminated to the extent of the Group's interest in the associates. Unrealisedlosses are also eliminated unless the transaction provides evidence of animpairment of the asset transferred. Accounting policies of associates have beenchanged where necessary to ensure consistency with the policies adopted by theGroup. Intangible assets Separately acquired intangible assets are capitalised at cost. Intangible assetsacquired as part of a business combination are capitalised at fair value at thedate of acquisition. Intangible assets that relate to associates are includedwithin the carrying value of the investment in associates. Intangible assets are stated at historical cost less accumulated amortisation. Amortisation is provided to write off the cost of all intangible assets, lessestimated residual values, evenly over their expected useful lives. Amortisation is calculated at the following annual rates: Software - 33% in equal instalmentsClient contract - length of contract in equal instalmentsBrands acquired - over expected length of time that brand will be in use in equal instalments The need for any intangible asset impairment write-down is assessed bycomparison of the carrying value of the asset against the higher of netrealisable value and value in use. Property, plant and equipment Tangible fixed assets are stated at historical cost less accumulateddepreciation. Depreciation is provided to write off the cost of all fixed assets, lessestimated residual values, evenly over their expected useful lives. Depreciation is calculated at the following annual rates: Leasehold improvements - over the period of the leaseFurniture, fittings - 10% in equal instalmentsOther equipment - 25% in equal instalmentsComputer equipment - 33% in equal instalmentsMotor vehicles - 25% in equal instalments The need for any fixed asset impairment write-down is assessed by comparison ofthe carrying value of the asset against the higher of net realisable value andvalue in use. Inventory - work in progress Work in progress comprises all outlays incurred on behalf of clients which havestill to be recharged, and is stated at the lower of cost and net realisablevalue. Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand and deposits with anoriginal maturity of three months or less, net of overdrafts. Leased assets Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. Assets held under finance lease agreements are treated as if they had beenpurchased outright. The amount capitalised is the present value of the minimumlease payments payable over the term of the lease. The corresponding leasingcommitments are shown as amounts payable to the lessor. Lease payments areapportioned between finance charges and reduction of the lease obligation so asto achieve a constant rate of interest on the remaining balance of theliability. Rentals payable under operating leases are charged to profit or loss on astraight-line basis over the term of the lease. Reverse premiums and similarincentives to enter into operating lease agreements are initially recorded asdeferred income and released to profit or loss account over the lease term. Revenue recognition Turnover (billings) represents the gross amounts billed to clients in respect ofrevenue earned and other client recharges, net of discounts and sales taxes. Revenue comprises commission and fees earned in respect of turnover. Revenue for each type of revenue is recognised on the following basis: (1) Project fees are recognised over the period of the relevant assignments or agreements. (2) Retainer fees are spread over the period of the contract on a straight-line basis. (3) Commission on media spend is recognised when the advertisements appear in the media. Employee benefits Pensions Contributions to personal pension plans are charged to the income statement inthe period in which they are due. Share-based compensation Certain employees receive remuneration in the form of share based payments,including shares or rights over shares. The cost of equity settled transactionswith employees is measured by reference to the fair value at the date at whichthey are granted excluding the impact of any non-market vesting conditions (forexample profitability and sales growth targets). The non-market vestingconditions are included in assumptions about the number of options that areexpected to become exercisable. At each balance sheet date the entity revisesits estimates of the number of the options that are expected to becomeexercisable. It recognises the impact of the revision of original estimates, ifany, in the income statement, and a corresponding adjustment to equity over theremaining vesting period. Where awards depend on future events we assess thelikelihood of these conditions being met and make an appropriate charge at theend of each reporting period. The credit for equity settled transactions istaken to the share option reserve. For cash-settled share based payments, a liability is recognised for the amountpayable at the balance sheet date with a corresponding charge being made to theincome statement. Where payments depend on future events an assessment is madeof the likelihood of these conditions being met in determining the amounts to berecorded. Where cash settled share options are only part of the way throughtheir vesting period, the liability and income statement charge are adjusted toreflect the proportion of the vesting period that has been covered up to thebalance sheet date. The charge for equity settled share based payments is recognised, together witha corresponding increase in equity, over the vesting period of the related shareoptions. The cumulative expense recognised for equity-settled share basedpayments at each reporting date reflects the extent to which the directorsconsider, as at the balance sheet date that the awards will ultimately vest. The dilutive effect of un-vested outstanding options is calculated based on thenumber that would vest had the balance sheet date been the vesting date, thisdilution is reflected in the computation of diluted earnings per share. Share based payments include options issued to employees, phantom bonuses andother long term equity linked bonuses. Payments may be in the form of cash orequity. When options are exercised, the cash received for the issued shares istaken to share capital and share premium and the related balance in the shareoption reserve is taken to the profit and loss reserve. In the event that anoption is unexercised at the end of the period when it is exercisable then therelated balance in the share option reserve is taken to the profit and lossreserve. Taxation Current tax, including UK and foreign tax, is provided at amounts expected to bepaid (or recovered) using the tax rates and laws that have been enacted orsubstantively enacted at the balance sheet date. Deferred tax is provided in full, using the liability method, on temporarydifferences arising between the tax bases of assets and liabilities and theircarrying amounts in the consolidated financial statements. However, the deferredtax is not accounted for, if it arises from initial recognition of an asset orliability in a transaction other than a business combination that at the time ofthe transaction affects neither accounting nor taxable profit or loss. Deferredtax is determined using tax rates (and laws) that have been enacted orsubstantially enacted by the balance sheet date and are expected to apply whenthe related deferred tax asset is realised or the deferred tax liability issettled. Deferred tax assets are recognised to the extent that it is probable that futuretaxable profit will be available against which the temporary differences can beutilised. Deferred tax is provided on temporary differences arising on investments insubsidiaries and associates, except where the timing of the reversal of thetemporary difference is controlled by the Group and it is probable that thetemporary difference will not reverse in the foreseeable future. Dividends Interim dividends are recorded when they are paid and the final dividends arerecorded when they become legally payable. Foreign currency Foreign currency transactions arising from normal trading activities arerecorded in local currency at the current exchange rates. Monetary assets and liabilities denominated in foreign currencies at the yearend are translated at the year end exchange rate. Foreign currency gains and losses are credited or charged to the incomestatement as they arise. For overseas operations, results are translated at the average rate of exchangeand balance sheets are translated at the closing rate of exchange. Exchange differences which arise fromtranslation of foreign subsidiary results are taken to a separate component ofequity. Non monetary items that are measured in terms of historical cost in a foreigncurrency are not retranslated. Financial instruments Financial assets and financial liabilities principally include the following: Trade receivables Trade receivables do not carry any interest and are stated at amortised cost. Ifthe trade receivable becomes irrecoverable then a bad specific debt provision iscreated. Trade payables Trade payables are not interest bearing and are stated at their amortised cost. Bank borrowings Interest-bearing bank loans and overdrafts are initially recorded as theproceeds received, net of direct issue costs. Direct issue costs are amortisedover the period of the loans and overdrafts to which they relate. Financecharges, including premiums payable on settlement or redemption and direct issuecosts, are charged to the income statement as incurred using the effectiveinterest method and are added to the carrying value of the instrument to theextent that they are not settled in the period in which they arise. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received,net of direct issue costs. Derivative financial instruments - put options Liabilities in respect of put option agreements that allow the Group's equitypartners to require the Group to purchase the minority interest are treated asderivatives over equity instruments and are recorded in the balance sheet atfair value. The fair value of such put options is re-measured at each periodend. The movement in the fair value is recognised in profit or loss. The Grouprecognises its best estimate of the amount it is likely to pay, should these putoptions be exercised by the minority interests, as a liability in the balancesheet. When the initial fair value of the liability in respect of the put options iscreated the corresponding debit is included in equity. When the put option isexercised this debit becomes the investment in the subsidiary. Provisions Provisions are recognised when the Group has a present obligation as a result ofa past event, and it is probable that the Group will be required to settle thatobligation. Provisions are measured at the directors' best estimate of theexpenditure required to settle the obligation at the balance sheet date, and arediscounted to present value where the effect is material. The increase in theprovision due to passage of time is recognised as interest expense. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
M&C Saatchi