27th Jun 2005 07:01
National Express Group PLC27 June 2005 For announcement at 0700 hours on 27 June 2005 National Express Group PLC Restatement of financial information under International Accounting Standards and International Financial Reporting Standards. National Express Group PLC today announced the restatement of its results forthe year ended 31 December 2004 in accordance with International FinancialReporting Standards ("IFRS"). These results will form the comparative data forthe Group's 2005 results announcements. There is no change to the Group's underlying operations under IFRS and, inparticular, there is no impact on the Group's strong cash flow or ability tomaintain its current dividend policy. The financial restatements result in a: • £1.6m (1.2%) decrease in 2004 full year normalised profit before tax, after the reclassification of £2.5m profit from discontinued businesses;• 2.4p (3.3%) increase in 2004 full year normalised diluted EPS to 74.2p;• £2.3m (0.9%) increase in net assets at 31 December 2004 to £266.8m; and• £12.8m (4.8%) decrease in net assets at 1 January 2005 to £254.0m on the recognition of financial instruments. Restatements and changes in disclosure arise primarily as a result of: • goodwill no longer being amortised;• recognition of all employee benefit related assets and obligations, principally defined benefit pension schemes;• recognition of an intangible asset related to the operation of UK Trains franchises, reflecting the Group's right of operation;• inclusion of a fair value charge in relation to employee share options;• dividend liability recognised when approved;• reclassification of discontinued businesses; and• recognition of certain financial instruments at fair value at 1 January 2005. Commenting on the impact of the transition to IFRS, Adam Walker, FinanceDirector, said: "Today's restatement of our 2004 result emphasises the limited financial impacton our business arising from the adoption of IFRS. Whilst the presentation ofour results may change somewhat, our fundamental financial strength isunaffected. Consequently, the Group's future prospects remain the same, as wecontinue to explore ways of utilising our strong cash generation to enhanceshareholder value." - ENDS - Notes to Editors: • A full list of all supporting appendices is available in the media centre at www.nationalexpressgroup.com For further information, please contact: Adam Walker, Finance DirectorNational Express Group PLC 020 7529 2000 National Express Group PLC Restatement of financial information under International Accounting Standards and International Financial Reporting Standards Introduction International Accounting Standards ("IAS") and International Financial ReportingStandards ("IFRS") will apply for the first time in the Group's Interim Reportfor the six months to 30 June 2005 and for the full Annual Report and Accounts2005. This press release, which is unaudited, explains how the Group'spreviously reported financial performance and position are reported under IFRS.This includes, on an IFRS basis: • the Group's consolidated balance sheet at 1 January 2004, the Group's date of transition;• the Group's consolidated balance sheet at 30 June 2004 and 31 December 2004;• the Group's consolidated income statement, consolidated statement of recognised income and expense and consolidated cash flow statement, for the year ended 31 December 2004 and six months ended 30 June 2004; and• the Group's consolidated balance sheet at 1 January 2005. The significant changes as a result of the adoption of IFRS compliant accountingpolicies are discussed below. The detailed restatements of the financial resultsare available as Appendices to this statement. This financial information has been prepared on the basis of financial reportingstandards expected to be applicable at 31 December 2005. These are subject toongoing review and endorsement by the European Union or possible amendment byinterpretive guidance from the International Accounting Standards Board ("IASB")and the International Financial Reporting Interpretations Committee ("IFRIC")and are therefore still subject to change. Overview The effect of IFRS on the Group's reported results is minimal. Normalised*operating profit for 2004 decreased by £1.6m, after the reclassification ofdiscontinued businesses and normalised* diluted EPS is 74.2p, an increase of2.4p. Profit after tax for the year ended 31 December 2004 is increased by£17.8m principally due to the requirement not to amortise goodwill. Net assetsat 31 December 2004 are increased by £2.3m. * Normalised operating profit and EPS is consistent with that disclosed in theAnnual Report and Accounts 2004. Key Changes Analysis IAS 19, 'Employee Benefits': Defined benefit pension plans The Group's opening IFRS balance sheet reflects the assets and liabilities ofthe Group's defined benefit schemes, as required by IAS 19. IAS 19 requires theGroup to recognise a liability when an employee has provided service in exchangefor employee benefits that will be paid in the future. In respect of the RailPension Scheme ("RPS") there are differences between the IAS 19 position and theFRS 17 position disclosed in note 30 to the Annual Report and Accounts 2004, asset out below. Under the Group's IFRS accounting policies, actuarial gains and losses arisingfrom experience adjustments, changes in actuarial assumptions and amendments topension plans will be charged or credited in the Statement of Recognised Incomeand Expense in the period in which they arise. Rail Pension Scheme The majority of employees of the UK Train companies are members of theappropriate shared cost section of the RPS, a funded defined benefit scheme.Applying the rules of IAS 19 to our UK Train franchises has proved to be adifficult exercise. IAS 19 is based on the theory that a pension deficitshould be considered an ongoing liability of the Group that, like any otherliability, will require settlement at a future date. In reality, we have nowexperienced three changes of UK Train franchise ownership where the pensiondeficit has transferred to the new owner, without cash consideration passing. To reflect the future transfer of the liability, a franchise adjustment is madeto the full IAS 19 calculated deficit, representing the expected deficit at theend of the franchise. This reduces the net deficit on the balance sheet and theremaining liability reflects that element of the deficit to be settled by theGroup during the franchise term. In taking on a franchise and assuming legal liability for any pension deficitthat exists at that point in time, the Group recognises an intangible assetreflecting its right to operate the train franchise. In accordance with IAS 38"Intangible Assets", the residual value of this definite life intangible assetwill be amortised on a straight line basis over the life of the franchise withthe residual value assumed to be zero. This is illustrated in the restated 2004balance sheet in the appendices by the recognition of an intangible asset of£13.0m, before amortisation, on commencement of the 'one' franchise on 1 April2004 and the franchise extensions at Wagn, Silverlink and Wessex. On transition to IFRS, there is a different approach for the first timeapplication of IAS 19 and the first time application of IAS 38. The Group'spension liabilities are recognised as at 1 January 2004 but there is arequirement to apply IAS 38 retrospectively to the intangible asset. There are anumber of franchises where the relevant sections of the RPS scheme were insurplus at the time the Group assumed legal liability for the funding of thatRPS section. Accordingly no intangible asset would have been recognised oncommencement of the franchise and therefore none is recognised at the date oftransition. The net effect of this restatement at 1 January 2004 is to reduce net assets by£4.4m, comprising the recognition of pensions deficits of £8.5m offset byintangible assets totalling £1.0m, the removal of the accruals of £0.9m andrecognising a deferred tax asset of £2.2m. For the year ended 31 December 2004,the net UK GAAP pensions charge (£26.8m) is removed and replaced with the IAS 19charge (£24.0m) and the amortisation charge in respect of the intangible assets(£1.9m). The net effect increases profit before tax by £0.9m. The pension deficit reported under IAS 19 differs from the FRS17 positiondisclosed in note 30 to the Annual Report and Accounts 2004. Under FRS 17 thedeficit at 31 December 2004 was £85.5m which, after including the franchiseadjustment of £67.6m, reduces to £17.9m under IAS 19. The 2004 IAS 19 pension charge of £24.0m is £10.8m higher than the chargereported under FRS 17. The difference arises from the removal of the net gain of£14.0m on the exit and entry of train franchises and the inclusion of adiscounting credit of £3.2m for unwinding the franchise adjustment. UK Bus and UK Coach defined benefit pension schemes The Group's obligations in respect of its UK Bus and UK Coach defined benefitpension schemes have the characteristics of traditional defined benefit schemes.Therefore the accounting follows the normal method prescribed under IAS 19,which is in line with FRS 17 as reported in note 30 to the Annual Report andAccounts 2004. Recognising the scheme net liability on transition reduces net assets by £36.5mafter deferred tax, comprising the net deficit under IAS 19 of £30.4m and thereversal of £6.1m of pension prepayments. The incremental charge arising fromthe adoption of the standard in the Group's 2004 income statement is £1.3mbefore tax. IAS 19, 'Employee Benefits': Short term compensated absences (Holiday pay) IAS 19 requires full provision for holiday pay outstanding at the period end forall staff. The recognition of this accrual decreases net assets by £2.4m at 31December 2004 before the recognition of a deferred tax asset of £0.7m. Theeffect on the operating profit result in 2004 is immaterial. IFRS 2, 'Share based payment' IFRS 2 requires the Group to reflect in the income statement the effects ofshare based payments including expenses associated with share options granted toemployees, based on the fair value at the date of the grant. In accordance with IFRS 2 and the transitional exemption permitted by IFRS 1,the fair value of awards granted after 7 November 2002 and vesting after 1January 2005 under the Group's share schemes have been calculated using astochastic valuation model, and are charged to the income statement over therelevant option vesting periods. The fair value charge reduces normalised operating profit for year ended 31December 2004 by £0.6m. In 2005, the 206,411 shares remaining unvested in theWMT Share Incentive Plan will be issued to employees, vesting immediately. Thecharge to operating profit of this appropriation will be based on the shareprice at the date of grant. IFRS 3, 'Business combinations' IFRS 3 prohibits the amortisation of goodwill. The standard requires goodwillto be carried at cost with impairment reviews undertaken annually and also whenthere are indications that the carrying value may not be recovered. The Grouphas taken advantage of the transition option to apply IFRS 3 prospectively andnot to restate business combinations prior to 1 January 2004. As a result, allprior business combination accounting including the value of goodwill is frozen(subject to any future impairment reviews) at UK GAAP amounts at 1 January 2004. The exception to this is the goodwill arising on the acquisition of Prism RailPLC ("Prism") in 2000. The train franchises acquired with Prism have finitelives and under UK GAAP the goodwill is amortised over the average life of thefranchises. An annual impairment charge, anticipated to be equivalent to thegoodwill amortisation charged under UK GAAP (2004: £33.3m), will continue to becharged on this goodwill to represent the finite nature of the cash flowsrelated to the goodwill. The full year operating profit impact in 2004 is a reduction in the amortisationcharge of £18.3m, after the IFRS 5 reclassification of the discontinuedbusinesses (see IFRS 5 below). Net assets are increased by £16.5m at 31December 2004, before the amortisation below. The Group acquired Connex Bus UK Limited, Student Express Limited and certainassets of M&O Bus Lines Limited during 2004. The accounting for theseacquisitions has been restated under IFRS 3 with no material adjustmentsrequired for the Connex Bus UK or M&O Bus Lines acquisitions. The goodwillarising on consolidation of Student Express Limited is adjusted to take accountof a £3.5m intangible asset relating to acquired contracts that is required tobe recognised under IFRS but not UK GAAP. The intangible amortisation in 2004is £0.5m. IAS 10, 'Events after the balance sheet date' Under IAS 10 the liability in respect of dividend payments is recognised whenthe dividend is approved. On this basis dividends approved after the balancesheet date should not be presented as a liability at that balance sheet date. Consequently, the final dividend declared in February 2004 in relation to thefinancial year ended 31 December 2003 has been reversed in the 1 January 2004balance sheet, increasing net assets at 1 January 2004 by £23.6m. Net assets at31 December 2004 were increased by £28.5m for the same reason. IAS 12, 'Income Taxes' The adoption of IAS 12 does not in itself result in any restatement of theGroup's tax charge. However the tax effect of the adjustments noted above willresult in a restatement of the Group's deferred tax positions as at 1 January2004 and subsequent balance sheet dates. IFRS 5, 'Non-current assets held for sale and discontinued operations' IFRS 5 requires discontinued operations to be disclosed as a single item on theface of the income statement, comprising the total of the post-tax profit of theoperations and the post-tax gain or loss recognised on the disposal. As aresult, the disclosure of the disposal of discontinued businesses in 2004 ischanged in the income statement, and there is no change to net profit or netassets. IAS 1, 'Presentation of financial statements' IAS 1 requires the split between current and non-current assets and liabilitieson the face of the balance sheet. As a result the balance sheet reconciliationsinclude a number of adjustments to reclassify assets and liabilities where thisdisclosure was not required under UK GAAP. IAS 32, 'Financial Instruments: Disclosure and Presentation' and IAS 39, 'Financial Instruments: Recognition and Measurement' IAS 32 and 39 address the accounting for, and the financial reporting of,financial instruments. The Group has opted to take advantage of the IFRS 1exemption from preparing the 2004 comparatives under IAS 32 and 39. As a resultthe date of transition to IAS 32 and 39 is 1 January 2005. The Group has adopted the full version of IAS 39 as issued by the IASB. For theGroup, compliance with the full version of IAS 39 will also achieve compliancewith the European Commission endorsed version of IAS 39. Under UK GAAP, Group derivative financial instruments used for hedging purposesare not recognised on the balance sheet. Gains and losses from derivatives aredeferred and recognised in the income statement as the underlying hedgedtransaction matures. Under IAS 39 all financial assets and liabilities are recognised initially atfair value, with the corresponding debit entry booked to the hedging reserve inequity for those instruments which meet the requirements for hedge accounting.In subsequent periods the measurement of these financial instruments depends ontheir classification into one of various measurement categories. The amountsheld in the hedging reserve will be recycled through the profit and loss overthe life of the underlying hedged transaction. The impact of this change on the financial instruments held by the Group isdiscussed below: a) Interest rate swaps The Group uses interest rate swaps to hedge interest rate exposures, by swappingfloating rate debt to fixed. These interest rate swaps are categorised as cashflow hedges to the extent that they meet the extensive IAS 39 requirements forhedge accounting. The accounting treatment for these swaps is to recognise themat 1 January 2005 at fair value with the corresponding debit entry to thehedging reserve in equity. The amounts held in the hedging reserve will berecycled through the profit and loss over the life of the debt. The net impact of bringing the interest rate swaps on balance sheet at 1 January2005 is to reduce net assets by £25.0m before deferred tax, and is consistentwith that disclosed in note 34 to the Annual Report and Accounts 2004. Of the swaps held at 1 January 2005, a $200m interest rate swap did not meet thehedge accounting criteria as it contains a written option. As disclosed in theAnnual Report and Accounts 2004, this swap was terminated in January 2005. b) Fuel price swaps The Group uses fuel swaps to hedge fuel price exposures. These swaps arecategorised as cash flow hedges at 1 January 2005. The gain or loss on theseswaps will be deferred to match the gain or loss on the underlying fuel usage.The net impact of recognising the related financial asset is to increase netassets by £6.3m before deferred tax, as at 1 January 2005, as disclosed in note34 to the Annual Report and Accounts 2004. c) Forward foreign currency contracts Forward foreign currency contracts are used to hedge the translation risk of ourinvestment in overseas operations on a post-tax basis. These contracts meet thecriteria for hedge accounting as the hedge of a net investment in a foreignoperation. The net impact of bringing these contracts on balance sheet isimmaterial. d) Reclassifications Under IAS 32 and 39 certain other assets and liabilities are classed asfinancial assets and liabilities, for example investments classified as tradeinvestments under UK GAAP are classed as financial assets under IAS 32. Thesechanges have resulted in the reclassification of items within the balance sheet. Cash Flow The adoption of the IFRS compliant accounting policies discussed above does notchange the strong cash flow generation of the Group in 2004. The operating cashflow for 2004 remains unchanged at £187.5m generated on £150.4m of normalisedoperating profit. Previously reported Effect of Restated under UK GAAP transition to IFRS under £m £m IFRS £mNormalised operating profit 152.0 (1.6) 150.4Operating profit of discontinued operations - 2.5 2.5Depreciation 64.2 - 64.2Amortisation of fixed asset grants (6.5) - (6.5)Profit on disposal (0.6) - (0.6)EBITDA 209.1 0.9 210.0Working capital and other movements 41.9 (0.9) 41.0Eurostar (3.1) - (3.1)Net cash inflow from operations 247.9 - 247.9Net capital expenditure (66.5) - (66.5)Operating cash flow before one-offs 181.4 - 181.4Other - Exceptional items (5.2) - (5.2) - Franchise revisions 11.3 - 11.3Operating cash flow 187.5 - 187.5 Operating cash flow represents "Net cash inflow from operating activities" plus"Receipts from the sale of tangible assets" less "Finance lease additions" and "Payments to acquire tangible assets" as set out in the Annual Report andAccounts 2004. The reconciliation of net debt for 2004 is unchanged from the reconciliationpresented on page 29 of our Annual Report and Accounts 2004, prepared under UKGAAP. The Group generated £164.0m of free cash flow and reduced effective netdebt by £171.2m to £136.6m. Presentation of results under IFRS The appendices are presented in accordance with the IFRS accounting policies theGroup intends to adopt for the year ending 31 December 2005. - ENDS - • A full list of all supporting appendices is available in the media centre at www.nationalexpressgroup.com This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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