6th Jul 2005 14:17
Grafton Group PLC06 July 2005 Grafton Group plc Restatement of 2004 Results under International Financial Reporting Standards 6 July 2005 A copy of this document is also available on our website www.graftonplc.com 6 July 2005 RESTATEMENT OF 2004 RESULTS UNDER IFRS Grafton Group plc today announces the impact of the transition to InternationalFinancial Reporting Standards (IFRS) on its 2004 results previously prepared inaccordance with accounting practice generally accepted in the Republic ofIreland (Irish GAAP). The Group's interim results for the six months ended 30June 2005 and the financial statements for the year ended 31 December 2005 willbe prepared under IFRS. The impact on the audited 2004 key financial data is summarised as follows: Irish GAAP IFRS Change Comments on principal IFRS changes •'000 •'000 % Turnover 1,872,346 1,872,346 - No impact Operating profit * 151,310 166,273 +10% Non-amortisation of goodwill, employee benefits and share based payments adjustment. Profit before tax 131,851 145,826 +11% As above Profit after tax 112,063 125,890 +12% As above Total equity 535,821 495,538 -8% Pension and deferred tax assets and liabilities included under IFRS Net debt ** 338,171 349,229 +3% Inclusion of lease liability under IAS 17 - Leases • cent • centEarnings per share (EPS)Basic EPS*** 52.64 59.14 +12%Adjusted EPS# 55.64 56.11 +1% * Operating profit includes goodwill amortisation (Irish GAAP) butexcludes profit on sale of property. ** Net debt comprises current and non-current interest-bearing loans andborrowings less cash and cash equivalents and liquid investments. ***Basic earnings per share has been calculated on profit after taxdivided by the weighted average number of Grafton Units in issue. # Adjusted EPS under Irish GAAP is arrived at after excluding goodwillamortisation, property development profit after taxation and profit after tax ondisposal of land and buildings. Adjusted EPS under IFRS is arrived at after excluding amortisation on otherintangible assets, property development profit after taxation and profit aftertax on disposal of land and buildings. Grafton Group plc Introduction Grafton Group plc prepared its financial statements up to and including 31December 2004 in accordance with Irish GAAP. From 2005 onwards it is mandatoryfor the financial statements of all entities whose securities are listed on aregulated exchange in the EU to prepare their Financial Statements in accordancewith International Financial Reporting Standards (IFRS) as adopted by theEuropean Union (EU). This change applies to all financial reporting foraccounting periods beginning on or after 1 January 2005 and, consequently, theGroup's first IFRS financial statements will be for the year ended 31 December2005. The interim results for 2005 will be prepared on the basis of the IFRSaccounting policies expected to apply at 31 December 2005. It is a requirementthat the first IFRS financial statements include full comparative informationfor 2004. The date of transition to IFRS for all standards is 1 January 2004,this being the start of the earliest period for which the Group presents fullcomparative information under IFRS in its first IFRS Financial Statements otherthan the impact of IAS 32 and IAS 39 where the date of transition is 1 January2005. This announcement deals with the transition to IFRS under the followingsections: 1. Summary overview of impact of transition to IFRS 2. Basis of preparation of financial statements under IFRS 3. Principal exemptions availed of on transition to IFRS 4. Review of main changes arising on transition to IFRS The impact of the transition to IFRS on reported performance, financial positionand other key financial information previously reported under Irish GAAP is setout in the attached appendices as follows: Appendix 1 - Independent Auditors' Report to the Directors of Grafton Groupplc on the Preliminary IFRS Consolidated Financial Statements for the year ended31 December 2004. Appendix 2 - Preliminary Group Income Statement and Group Statement ofRecognised Income and Expense for the year ended 31 December 2004 and GroupBalance Sheet as at that date together with reconciliations of profit and equityfrom Irish GAAP to IFRS. Appendix 3 - Unaudited preliminary Group Income Statement and Group Statementof Recognised Income and Expense for the six months ended 30 June 2004 and GroupBalance Sheet as of that date together with reconciliations of profit and equityfrom Irish GAAP to IFRS. Appendix 4 - Adjustments required to Irish GAAP Group Balance Sheet as at 1January 2004, the transition date, for compliance with IFRS. Appendix 5 - Restatement under IFRS of segmental income statement informationpublished with the 2004 interim and full year results. Appendix 6 - Principal Accounting Policies under IFRS. The restatement of the Group's Preliminary Income Statement, Statement ofRecognised Income and Expense, Balance Sheet and segmental information for thefull year ended 31 December 2004 and the Preliminary Transition Balance Sheet asat 1 January 2004 have been audited by the Group's auditors KPMG, CharteredAccountants. The financial information in respect of the preliminary InterimResults for the six months ended 30 June 2004 is unaudited. 1. Summary Overview of Impact of Transition to IFRS The impact of the transition to IFRS on the Group's financial statements issummarised as follows: Euro thousands Full Year 2004 Interim 2004 (Unaudited) Irish GAAP* IFRS*** Irish GAAP** IFRS*** •'000 •'000 •'000 •'000 Group Income Statement Revenue 1,872,346 1,872,346 911,352 911,352 Operating profit 151,310 166,273 70,417 77,460 Profit on disposal of property 792 792 792 792 Profit before net finance costs and income from financial assets 152,102 167,065 71,209 78,252 Income from financial assets 1,541 1,541 1,541 1,541 Net finance costs 21,792 22,780 10,887 11,381 Profit before tax (PBT) 131,851 145,826 61,863 68,412 Taxation 19,788 19,936 9,280 9,319 Profit after tax 112,063 125,890 52,583 59,093 Tax rate (as a % of PBT) 15% 13.7% 15% 13.6% Basic EPS (euro cent) 52.64c 59.14c 24.73c 27.79c Group Balance Sheet Total assets 1,374,600 1,406,407 1,358,300 1,381,398 Total liabilities 838,779 910,869 869,464 935,413 Total equity 535,821 495,538 488,836 445,985 Net debt 338,171 349,229 362,214 373,487 Net debt to equity 63% 70% 74% 84% Reconciliation of net debt Year-end 30 June 2004 2004 •'000 •'000 As reported under Irish GAAP 338,171 362,214 Reassessment of leases 11,058 11,273 Restated under IFRS 349,229 373,487 * Extracted from audited consolidated financial statements for the yearended 31 December 2004 ** Extracted from the unaudited consolidated interim results for thehalf-year to 30 June 2004 *** Excludes impact of IAS 32 and IAS 39 2. Basis of Preparation of Financial Statements under IFRS EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidatedfinancial statements of the Group, for the year ending 31 December 2005, beprepared in accordance with accounting standards adopted for use in the EuropeanUnion (EU) further to the IAS Regulation (EC 1606/2002) ("accounting standardsadopted by the EU"). This preliminary financial information comprising the consolidated preliminaryIFRS balance sheets of the Company and its subsidiaries at 1 January 2004, 30June 2004 and 31 December 2004, the consolidated preliminary IFRS incomestatements for the year ended 31 December 2004 and the six month period ended 30June 2004 and the related notes, has been prepared on the basis of therecognition and measurement requirements of IFRS's in issue that either areadopted by the EU and effective (or available for early adoption) at 31 December2005 or are expected to be adopted and effective (or available for earlyadoption) at 31 December 2005, the Group's first annual reporting date at whichit is required to use accounting standards adopted by the EU. Based on theserecognition and measurement requirements management has made assumptions aboutthe accounting policies expected to be applied, which are as set out below, whenthe first annual financial statements are prepared in accordance with accountingstandards adopted by the EU for the year ending 31 December 2005. In particular, management has assumed that the following IFRS's issued by theInternational Accounting Standards Board and IFRIC Interpretations issued by theInternational Financial Reporting Interpretations Committee will be adopted bythe EU such that they will be available for use in the annual IFRS financialstatements for the year ending 31 December 2005: • Amendment to IAS 19: Actuarial Gains and Losses, Group Plans and Disclosures • Amendment to IAS 39: Financial Instruments: Recognition and Measurement - Fair Value Option In addition, the accounting standards adopted by the EU that will be effective(or available for early adoption) in the annual financial statements for theyear ending 31 December 2005 are still subject to change and to additionalinterpretations and therefore cannot be determined with certainty. Accordingly,the accounting policies for 2005 will only be finally determined when the annualfinancial statements are prepared for the year ending 31 December 2005. Details of the exemptions availed of on transition to IFRS are set out inSection 3 including the exemption from restatement of the 2004 numbers relatingto IAS 32 and IAS 39. No adjustments have been made for any changes in estimatesmade at the time of approval of the 2004 consolidated financial statements underIrish GAAP on which the preliminary IFRS financial information is based. 3. Principal Exemptions Availed of on Transition to IFRS IFRS 1, "First-time adoption of International Financial Reporting Standards",sets out the procedure that the Group must follow when it adopts IFRS for thefirst time as the basis for preparing its Consolidated Financial Statements.The Group is required to establish its IFRS Accounting Policies for 2005 and, ingeneral, apply these retrospectively to determine the IFRS opening balance sheetat the transition date of 1 January 2004. The standard permits a number ofspecified exemptions from the general principal of retrospective restatement andthe Group has elected, in common with other listed companies, to avail of anumber of these exemptions as follows: (i) Business Combinations The Group has chosen not to restate business combinations that occurred prior tothe transition date of 1 January 2004. As a result, goodwill as at thetransition date is carried forward at its net book value and together withgoodwill arising on business combinations after the transition date is subjectto annual impairment testing in accordance with IAS 36 "Impairment of Assets".As required by IFRS 1 goodwill was assessed for impairment as at the transitiondate and no impairment resulted from the exercise. (ii) Share-Based Payments The Group has availed of the transitional arrangements set out in IFRS 2, "Share-based Payment", which permits the recognition and measurement principlesof the standard to be applied only to options granted after 7 November 2002. (iii) Fixed Assets The revaluation in 1998 of the Group's freehold and long leasehold propertieslocated in the Republic of Ireland has been regarded as deemed cost andtherefore remains unadjusted on transition to IFRS. (iv) Employee Benefits The Group has elected to recognise all cumulative actuarial gains and lossesapplicable to defined benefit pension schemes in the transition balance sheetand to adjust them against retained income. Going forward, the Group expects toapply the amendment to IAS 19, "Actuarial Gains and Losses, Group Plans andDisclosures", (not yet approved by the European Commission) which allowsactuarial gains and losses to be recognised immediately in the Statement ofRecognised Income and Expense. This approach is consistent with the treatmentrequired by IFRS 17 the effect of which we have previously disclosed in ourIrish GAAP Financial Statements. (v) Financial Instruments The Group has availed of the exemption under IFRS1 not to restate thecomparative information under IAS 32 "Financial Instruments: Disclosure andPresentation" and IAS 39 "Financial Instruments: Recognition and Measurement".Comparative information on financial instruments for 2004 in the 2005 financialstatements will be presented on the existing Irish GAAP basis. (vi) Currency Translation Adjustments IFRS require that on disposal of a foreign operation, the cumulative amount ofcurrency translation differences previously recognised directly in reserves forthat operation be transferred to the income statement as part of the profit orloss on disposal. The Group has deemed the cumulative currency translationdifferences applicable to foreign operations to be zero as at the transitiondate. The cumulative currency translation differences arising after thetransition date (i.e. during 2004) have been re-classified from retained incometo a separate component of equity (termed the "foreign currency translationreserve" in the attached documentation) with no net impact on capital andreserves attributable to the Group's equity holders. 4. Review of Main Changes Arising on Transition to IFRS The most significant changes arising from the transition to IFRS from Irish GAAPare described in the following paragraphs. The impact of these changes on theGroup's 2004 Full Year and Interim Income Statements and Balance Sheets is setout in Appendices 2 and 3 respectively and is based on the accounting policiesin Appendix 6. (i) IFRS 2 Share-based Payment IFRS 2, "Share-based Payment", requires that an expense for share-basedpayments, which in the case of Grafton are share options, be recognised in theincome statement based on their fair value at the date of grant. This expense,which is primarily in relation to the Grafton Group Share Scheme, is recognisedover the vesting period of the schemes. Fair value calculations have beenapplied in respect of share entitlements granted after 7 November 2002 aspermitted under the framework for transition to IFRS. The fair value of theshare entitlements to be expensed is determined by using option pricing modelsand the Group has used the binomial model in its evaluation. The chargerecognised in the Income Statement over the vesting period of five years hasbeen adjusted to reflect the expected and actual levels of vesting. Thefollowing inputs were used in determining the fair value of share entitlements: • The exercise price which is the market price at the date the share entitlements were granted. • Future price volatility was based on historical volatility as a guide and is assessed over six years being the average period from date of grant to exercise of the share entitlements. • The risk free interest rate used in the model is the rate applicable to Irish Government Bonds with a remaining term equal to the expected term of the share entitlements being valued. • Expected share purchase / dividend payments. An expense of €892,000 has been recognised in the Group Income Statement inrespect of the year ended 31 December 2004 (€340,000 for the six months ended 30June 2004) and this is based on share entitlements granted in November 2003 andMay 2004. IFRS 2 will also be applied to the Save As You Earn (SAYE) Scheme for UKemployees with effect from March 2005 following a new grant of options. (ii) IFRS 3 Business Combinations / IAS 38 Intangible Assets Under Irish GAAP, goodwill recognised on acquisitions made after 1997 wasamortised over its useful life of 20 years. Under IFRS 3 goodwill is no longeramortised on a straight line basis but instead is subject to annual impairmenttesting. At 1 January 2004, the transition date, the Group held a net goodwillasset of €210.8 million which is carried forward at its net book value and,together with goodwill arising on business combinations subsequent to thetransition date, is subject to annual impairment testing in accordance with IAS36, "Impairment of Assets". As a result the 2004 charge of €12.8 million underIrish GAAP for goodwill amortisation is not charged under IFRS and results in anincrease in pre-tax profit. Under Irish GAAP, the Group previously reversed thegoodwill amortisation charge to determine adjusted earnings per share. Thischange, therefore, more appropriately aligns the accounting treatment ofgoodwill with the Group's presentation of the underlying earnings performance ofthe business. At 31 December 2004 impairment reviews were performed on goodwill and noimpairments resulted from this review. Under IAS 38, "Intangible Assets" there is a requirement to separately identifyother intangibles acquired rather than include these as part of goodwill.Intangible assets, other than goodwill, are amortised over their useful lives.These lives will typically not be indefinite and as a result, upon acquisitionof a company, intangible assets such as brands and customer lists are nowseparately valued and then amortised over their economic lives. The acquisitionbalance sheets for businesses acquired during 2004 have not given rise to therecognition of intangible assets other than goodwill on the grounds that theintangible assets arising were not considered material. The acquisition in January 2005 of Heiton Group plc and further acquisitionsgoing forward may result in the recognition of intangible assets other thangoodwill and an associated amortisation charge. This charge will be essentiallya re-classification of costs associated with goodwill and will be added back inarriving at the Group's adjusted earnings per share, consistent with theprevious treatment of goodwill amortisation under Irish GAAP. The acquisition balance sheets for 2004 have been restated to take account ofthe different accounting policy under IFRS concerning the measurement ofinventories. IFRS 3 requires that finished goods should be valued on the basisof selling price in the acquisition balance sheets adjusted for costs ofdisposal, a reasonable profit allowance for selling effort and, in the case ofwork in progress, costs of conversion. An expense of €100,000 for the yearended 31 December 2004 (€45,000 for the six month ended 30 June 2004) has beenrecognised in respect of the restatement of inventory to fair value foracquisitions made in 2004. (iii) Deferred and Current Taxes Under Irish GAAP, deferred tax is recognised in respect of all timingdifferences that have originated but not reversed by the balance sheet date andwhich could give rise to an obligation to pay more or less taxation in thefuture. Deferred tax under IAS 12, "Income Taxes," is recognised in respect of alltemporary differences at the balance sheet date between the tax bases of assetsand liabilities and their carrying value for financial reporting purposes. IAS12 also requires that deferred tax assets and liabilities must be disclosedseparately on the balance sheet. IAS 12 results in an overall increase in thenet deferred tax liability of the Group. The adjustments made to deferred taxassets and liabilities as at the transition date of 1 January 2004, andreflected in the transition balance sheet, principally relate to the followingissues: • The Group revalued its Irish freehold and long leasehold properties in 1998. IAS 12 requires a provision to be made for deferred tax on property revaluation surpluses and this gave rise to a deferred tax liability of €5,033,000 which is reflected in the transition balance sheet. • Under Irish GAAP, deferred tax was not provided on fair value asset uplifts in business combinations if these uplifts did not give rise to timing differences between the tax base and the book value of the revalued assets. The requirement under IAS 12 to provide deferred tax on the differences arising from such revaluations gave rise to a deferred tax liability of €12,228,000 as at the transition date. This liability increased to €12,999,000 as at 30 June 2004 and €12,765,000 as at 31 December 2004. • IAS 12 requires that a deferred tax provision be made for all rolled-over capital gains rather than those expected to crystallise. The IFRS transition balance sheet includes a deferred tax liability of €1,003,000 in respect of rolled-over capital gains, which did not arise under Irish GAAP. • The deferred tax impact of defined benefit pension scheme surpluses and deficits accounted for in accordance with IAS 19, "Employee Benefits", has resulted in the creation of a deferred tax asset of €5,759,000 in the transition balance sheet. The deferred tax liability reduces by €789,000 as a result of a reversal of the SSAP 24 pension prepayment in the Irish GAAP balance sheet. A net deferred tax liability of €11,716,000 as set out above has been providedin the transition balance sheet. IAS 12 requires deferred tax to be provided in respect of undistributed profitsof overseas subsidiaries unless the parent is able to control the timing ofremittances and it is probable that such remittances will not be made in theforeseeable future. As the Group is able to control the timing of remittancesfrom overseas subsidiaries and no such remittances are anticipated in theforeseeable future, no provision has been made for any tax on undistributedprofits of overseas subsidiaries. Similarly, no deferred tax assets orliabilities have been recognised in respect of temporary differences associatedwith investments in subsidiaries. In addition to the provisions of IAS 12 described above, IAS 1, "Presentation ofFinancial Statements" requires separate disclosure of deferred tax assets andliabilities on the face of the balance sheet. The Group's restated BalanceSheets therefore contain re-classifications of deferred tax assets previouslynetted within the overall Group deferred tax liability; these amounts were€5,959,000, €5,954,000 and €7,368,000 as at the transition date, 30 June 2004and 31 December 2004 respectively. (iv) IAS 19 Employee Benefits The Group currently applies the provisions of SSAP 24 under Irish GAAP andprovides detailed disclosure under FRS 17 in accounting for pensions and otherpost employment benefits. IAS 19, "Employee Benefits", requires the assets andliabilities of defined benefit pension schemes to be capitalised on the face ofthe balance sheet. The Group's transition IFRS Balance Sheet reflects theassets and liabilities of the Group's defined benefit pension schemes. Thisinformation is consistent with the information previously disclosed under FRS 17except that scheme assets are valued at the bid value under IAS 19 whereas themid market value is used under FRS 17. In accordance with the exemption underIFRS 1, the Group has recognised all cumulative actuarial gains and lossesattributable to its defined benefit pension schemes as at the transition date.This has resulted in a pre-tax reduction in net assets of €30.7 million whichrepresents the sum of the deficit plus the reversal of a SSAP 24 debtor in theIrish GAAP balance sheet as at 31 December 2003. An associated deferred taxasset of €6.5 million has been recognised in respect of the pension deficit.Therefore the total adjustment to net assets is €24.2 million. The reduction in the 2004 pre-tax charge to the income statement as a result ofthe adoption of IAS 19, compared to SSAP 24, is €2.1 million. The related taxeffect is an increase of €0.3 million in the deferred tax charge. Going forward the Group has elected to apply the amendment to IAS 19 whichallows actuarial gains and losses to be taken directly to reserves through theStatement of Recognised Income and Expense. (v) IAS 17 Leases Under Irish GAAP, determination of property finance leases is made by referenceto the lease as a whole. Under IAS 17, "Leases", the determination must be madeby reference to the land and buildings elements of the leases separately. Asmall number of leases previously recognised as operating leases have beenreclassified as finance leases as required by IAS 17. This has resulted in anincrease of €9,750,000 in the carrying value of property within property, plantand equipment together with the related finance lease creditor of €11,488,000.This creditor, because of its inclusion within borrowings, has the effect ofincreasing net debt. Cashflows are however unaffected. The key impact on the Income Statement is that for these specific leases, therentals under operating leases charged to operating profit under Irish GAAP arereplaced with a depreciation charge on the property and a finance charge whichis included within interest. The total amounts charged to the income statementover the life of the finance leases remain the same under both Irish GAAP andIFRS. However a higher charge is incurred in the early years of a lease owingto the impact of higher interest charges which results in the retained earningsbeing reduced by €1,738,000 at the transition date. The net impact of thischange on the 2004 income statement is not material. (vi) IAS 39 Financial Instruments: Recognition and Measurement The Group has availed of the exemption not to restate comparative informationfor both IAS 32 and IAS 39 Financial Instruments. The impact of these standardson 2005 is expected to be as follows: The Group enters into derivative instruments to limit its exposure to interestrate and foreign exchange risk. Under Irish GAAP, these instruments areaccounted for as hedges, whereby gains and losses are deferred until theunderlying transaction occurs. Under IFRS, derivative instruments are recognisedon the balance sheet at fair value. In order to achieve hedge accounting underIFRS, certain criteria must be met regarding documentation, designation andeffectiveness of the hedge. When a derivative is used to hedge the change infair value of a recognised asset, liability or firm commitment, the change infair value of both the hedging instrument and the hedged risk in the hedged itemare recognised in the income statement when they occur. For a hedge of changesin the future cash flows relating to a recognised asset, liability or probableforecast transaction, the change in fair value of the hedging instrument isrecognised in equity to the extent that it is an effective hedge until thosefuture cash flows occur. On 1 January 2005 the investment in Heiton Group plc will be reflected at fairvalue. Following the acquisition of Heiton Group plc on 7 January 2005 the fairvalue of Heiton Group plc will be replaced by the fair value of the net assetsacquired. The Group will apply IAS 32 and IAS 39 for the first time for the year ending 31December 2005. Appendix 1 Page 1 of 2 Independent auditors' report to the Directors of Grafton Group plc on itsconsolidated preliminary International Financial Reporting Standards ('IFRS')financial information In accordance with the terms of our engagement letter we have audited theaccompanying consolidated preliminary IFRS balance sheets of the Company and itssubsidiaries ('the Group') as at 1 January 2004 and 31 December 2004, therelated consolidated preliminary IFRS income statement for the year ended 31December 2004 and related basis of preparation, accounting policies and othernotes as set out on pages 13 to 34 ('the preliminary IFRS financialinformation'). Included with the preliminary IFRS financial information set out on pages 13 to34 are the consolidated preliminary balance sheet as at 30 June 2004 and therelated consolidated preliminary income statement for the six-month period thenended ('the preliminary IFRS interim financial information'). We have notaudited this preliminary IFRS interim financial information and therefore it isnot covered by this opinion. Respective responsibilities of Directors and KPMG The directors of the Company have accepted responsibility for the preparation ofthe preliminary IFRS financial information which has been prepared as part ofthe Group's conversion to IFRS. As explained in the basis of preparation noteon page 5, this preliminary IFRS financial information has been prepared on thebasis of the recognition and measurement criteria of IFRS in issue that eitherare adopted by the EU and effective (or available for early adoption) at 31December 2005 or are expected to be adopted and effective (or available forearly adoption) at 31 December 2005. Our responsibilities, as independentauditors, are established in Ireland by the Auditing Practices Board, ourprofession's ethical guidance and the terms of our engagement. Under the terms of engagement we are required to report to you our opinion as towhether the preliminary IFRS financial information has been properly prepared,in all material respects, in accordance with the respective accounting policynotes to the preliminary IFRS financial information. We also report to you if,in our opinion, we have not received all the information and explanations werequire for our audit. We read the other information accompanying the preliminary IFRS financialinformation and consider whether it is consistent with the preliminary IFRSfinancial information. We consider the implications for our report if we becomeaware of any apparent misstatements or material inconsistencies with thepreliminary IFRS financial information. Our report has been prepared for the Company solely in connection with theCompany's conversion to IFRS. Our report was designed to meet the agreedrequirements of the Company determined by the Company's needs at the time. Ourreport should not therefore be regarded as suitable to be used or relied on byany party wishing to acquire rights against us other than the Company for anypurpose or in any context. Any party other than the Company who chooses to relyon our report (or any part of it) will do so at its own risk. To the fullestextent permitted by law, KPMG will accept no responsibility or liability inrespect of our report to any other party. Basis of audit opinion We conducted our audit having regard to Auditing Standards issued by theAuditing Practices Board. An audit includes examination, on a test basis, ofevidence relevant to the amounts and disclosures in the preliminary IFRSfinancial information. It also includes an assessment of the significantestimates and judgements made by the directors in the preparation of thepreliminary IFRS financial information, and of whether the accounting policiesare appropriate to the Group's circumstances, consistently applied andadequately disclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the preliminary IFRSfinancial information is free from material misstatement, whether caused byfraud or other irregularity or error. In forming our opinion we also evaluatedthe overall adequacy of the presentation of information in the preliminary IFRSfinancial information. Emphases of matter Without qualifying our opinion, we draw your attention to the following matters: n The basis of preparation set out on page 5 explains why there is apossibility that the preliminary IFRS financial information may requireadjustment before being used as the basis of preparing the final consolidatedIFRS financial statements as at 31 December 2005; n As part of its conversion to IFRSs, the Group has prepared thepreliminary IFRS financial information for the year ended 31 December 2004 toestablish the financial position and results of operations of the Groupnecessary to provide the comparative financial information expected to beincluded in the Group's first complete set of IFRS consolidated financialstatements as at 31 December 2005. The preliminary IFRS financial informationdoes not include comparative financial information for the prior period. n As explained in the basis of preparation on page 5, no adjustments havebeen made for any changes in estimates made at the time of approval of the 2004consolidated financial statements under Irish generally accepted accountingprinciples on which the preliminary IFRS financial information is based. n IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39Financial Instruments: Recognition and Measurement have not been applied to thepreliminary IFRS financial information relating to 2004 as permitted by IFRS 1First-time Adoption of International Financial Reporting Standards. Opinion In our opinion, the accompanying preliminary IFRS financial information on pages13 to 34 has been prepared, in all material respects, in accordance with thebasis of preparation and accounting policy notes which describe how IFRSs havebeen applied under IFRS 1, including the assumptions made by the directors ofthe Company about the standards and interpretations expected to be effective,and the policies expected to be adopted, when they prepare the first completeset of consolidated IFRS financial statements of the Company for the year to 31December 2005. KPMGChartered AccountantsDublin 5 July 2005. Appendix 2 Page 1 of 4 Grafton Group plc GROUP INCOME STATEMENTfor the year ended 31 December 2004 Audited Restated under IFRS Continuing Operations 2004 •'000 Revenue 1,872,346Cost of sales (1,255,207)Gross profit 617,139 Operating costs (457,595)Other operating income - property development profit 6,729Operating profit 166,273 Profit on disposal of property 792 Profit before net finance costs and income from financial assets 167,065 Income from financial assets 1,541Finance costs (net) (22,780) Profit before tax 145,826 Income tax expense (19,936) Profit after tax for the financial year 125,890 Profit attributable to:Equity holders of the Company 125,890Profit after tax for the financial year 125,890 Earning per Ordinary Share - basic 59.14c GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE for the year ended 31 December 2004 Audited 2004 •'000Items of income and expense recognised directly within equity:Currency translation effects - on foreign currency net investments (2,176)- on foreign currency borrowings 20Actuarial loss (11,760)Deferred tax asset on Group defined benefit pension schemes 1,186Deferred tax recognised through equity 123Net expense recognised directly in equity (12,607) Profit after tax for the financial year 125,890 Total recognised income and expense for the financial year 113,283 Attributable to:Equity holders of the Company 113,283 Total recognised income and expense for the financial year 113,283 Appendix 2 Page 2 of 4 Grafton Group plc GROUP INCOME STATEMENT FULL-YEAR 2004 - RECONCILIATION FROM IRISH GAAP TO IFRS Previous IFRS 2 IAS 19 IFRS 3 IAS 17 Restated Irish Share-Based Employee Business Leases under GAAP Payments Benefits Combinations IFRS •'000 •'000 •'000 •'000 •'000 •'000 Turnover 1,872,346 - - - - 1,872,346Cost of sales (1,255,107) - - (100) - (1,255,207)Gross profit 617,239 - - (100) - 617,139 Operating costs (459,838) (892) 2,433 - 702 (457,595)Other operating income -property development profit 6,729 - - - - 6,729Goodwill amortisation (12,820) - - 12,820 - - Operating profit 151,310 (892) 2,433 12,720 702 166,273 Profit on disposal of property 792 - - - - 792 Profit before net financecosts and income fromfinancial assets 152,102 (892) 2,433 12,720 702 167,065 Income from financial assets 1,541 - - - - 1,541 Net finance costs (21,792) - (287) - (701) (22,780) Profit on ordinary activitiesbefore taxation 131,851 (892) 2,146 12,720 1 145,826 Taxation (19,788) 123 (301) 30 - (19,936) Profit for the financial year 112,063 (769) 1,845 12,750 1 125,890 Attributable to: Equity holders of the Company 112,063 (769) 1,845 12,750 1 125,890 112,063 (769) 1,845 12,750 1 125,890 Basic earnings per share 52.64 (0.36) 0.87 5.99 - 59.14(cent) Adjusted earnings per share 55.64 (0.36) 0.87 (0.04) - 56.11(cent) Appendix 2 Page 3 of 4 Grafton Group plc GROUP BALANCE SHEET AS AT 31 DECEMBER 2004 Restated under IFRS Audited 2004 •'000 ASSETSNon-current assetsProperty, plant and equipment 406,207Intangible assets 247,155Financial assets 47,019Deferred income tax assets 14,313Total non-current assets 714,694 Current assetsInventories 237,680Trade and other receivables 318,165Cash and cash equivalents 135,868Total current assets 691,713 Total assets 1,406,407 EQUITYCapital and reserves attributable to the Company's equity holdersEquity share capital 10,864Share premium account 103,600Capital redemption reserve 227Revaluation reserve 34,988Other reserve - shares to be issued 971Foreign currency translation reserve (2,156)Retained earnings 347,044 Total equity 495,538 LIABILITIESNon-current liabilitiesInterest-bearing loans and borrowings 378,401Deferred income tax liabilities 59,330Retirement benefit obligations 35,597Deferred acquisition consideration 1,552Total non-current liabilities 474,880 Current liabilitiesInterest-bearing loans and borrowings 106,696Trade and other payables 310,786Current income tax liabilities 14,074Deferred acquisition consideration 4,433Total current liabilities 435,989 Total liabilities 910,869 Total equity and liabilities 1,406,407 Appendix 2 Page 4 of 4 Grafton Group plc Group Balance Sheet as at 31 December 2004 - Reconciliation from Irish GAAP toIFRS Previous IFRS 2 IAS 19 IFRS 3 IAS 12 IAS 17 Reclassifications Restated Irish Share Employee Business Income Leases •'000 Under GAAP based benefits Combinations Tax •'000 IFRS •'000 Payments •'000 •'000 •'000 •'000 •'000ASSETS Non-current assetsProperty, plant and 396,886 - - - - 9,321 - 406,207equipmentIntangible assets - 234,309 - - 12,304 542 - - 247,155goodwillIntangible assets - - - - - - - - -otherFinancial assets 47,019 - - - - - - 47,019Deferred tax assets - 212 6,733 - 7,368 - - 14,313 678,214 212 6,733 12,304 7,910 9,321 - 714,694Current assetsInventories 237,680 - - - - - - 237,680Trade and other 322,838 - (4,673) - - - - 318,165receivablesCash and cash 135,868 - - - - - - 135,868equivalents 696,386 - (4,673) - - - - 691,713 Total assets 1,374,600 212 2,060 12,304 7,910 9,321 - 1,406,407 EQUITY Capital and reserves attributableto equity holdersShare capital 10,864 - - - - - - 10,864Share premium account 103,600 - - - - - - 103,600Capital redemption 227 - - - - - - 227reserveRevaluation reserve 39,987 - - - (4,999) - - 34,988Other reserve - shares - 971 - - - - 971to be issuedForeign currency - - 80 (446) 5 - (1,795) (2,156)translation reserveRetained earnings 381,143 (759) (32,917) 12,750 (13,231) (1,737) 1,795 347,044 Total equity 535,821 212 (32,837) 12,304 (18,225) (1,737) - 495,538 LIABILITIESNon-currentliabilitiesInterest bearing loans 367,773 - - - - 10,628 - 378,401and borrowingsRetirement benefit - - 35,597 - - - - 35,597obligationsDeferred income tax 33,895 - (700) - 26,135 - - 59,330liabilitiesDeferred acquisition 1,552 - - - - - - 1,552consideration 403,220 - 34,897 - 26,135 10,628 - 474,880Current liabilitiesInterest bearing loans 106,266 - - - - 430 - 106,696and borrowingsTrade and other 310,786 - - - - - - 310,786payablesCurrent income tax 14,074 - - - - - - 14,074liabilitiesDeferred acquisition 4,433 - - - - - - 4,433consideration 435,559 - - - - 430 - 435,989Total liabilities 838,779 - 34,897 - 26,135 11,058 - 910,869 Total equity and 1,374,600 212 2,060 12,304 7,910 9,321 - 1,406,407liabilities Net debt 338,171 - - - - 11,058 - 349,229 Appendix 3 Page 1 of 4 Grafton Group plc GROUP INCOME STATEMENT for the six months ended 30 June 2004 Unaudited Restated under IFRS Continuing Operations 2004 •'000 Revenue 911,352Cost of sales (614,841)Gross profit 296,511 Operating costs (225,780)Other operating income - property development profit 6,729Operating profit 77,460 Profit on disposal of property 792 Profit before net finance costs and income from financial assets 78,252 Income from financial assets 1,541Finance costs (net) (11,381) Profit before tax 68,412 Income tax expense (9,319) Profit after tax for the financial period 59,093 Profit attributable to:Equity holders of the Company 59,093Profit after tax for the financial period 59,093 Earning per Ordinary Share - basic 27.79 GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE for the six months ended 30 June 2004 Unaudited 2004 •'000Items of income and expense recognised directly within equity:Currency translation effects - on foreign currency net investments 10,956- on foreign currency borrowings (2,377)Actuarial loss (4,695)Deferred tax asset on Group defined benefit pension schemes 378Deferred tax recognised through equity 17Net expense recognised directly in equity 4,279 Profit after tax for the financial period 59,093 Total recognised income and expense for the financial period 63,372 Attributable to:Equity holders of the Company 63,372 Total recognised income and expense for the financial period 63,372 Appendix 3 Page 2 of 4 Grafton Group plc GROUP INCOME STATEMENT FOR THE SIX MONTHS ENDED 30 JUNE 2004 - RECONCILIATIONFROM IRISH GAAP TO IFRS Previous IFRS 2 IAS 19 IFRS 3 IAS 17 Restated Irish Share-Based Employee Business Leases under GAAP Payments Benefits Combinations IFRS •'000 •'000 •'000 •'000 •'000 •'000 Turnover 911,352 - - - - 911,352Cost of sales (614,796) - - (45) - (614,841)Gross profit 296,556 - - (45) - 296,511 Operating costs (226,673) (340) 882 - 351 (225,780)Other operating income -property development profit 6,729 - - - 6,729Goodwill amortisation (6,195) - - 6,195 - - Operating profit 70,417 (340) 882 6,150 351 77,460 Profit on disposal of property 792 - - - - 792 Profit before net financecosts and income fromfinancial assets 71,209 (340) 882 6,150 351 78,252 Income from financial assets 1,541 - - - - 1,541 Net finance costs (10,887) - (144) - (350) (11,381) Profit on ordinary activitiesbefore taxation 61,863 (340) 738 6,150 1 68,412 Taxation (9,280) 40 (93) 14 - (9,319) Profit for the financial 52,583 (300) 645 6,164 1 59,093period Attributable to:Equity holders of the Company 52,583 (300) 645 6,164 1 59,093 52,583 (300) 645 6,164 1 59,093 Basic earnings per share 24.73 (0.14) 0.30 2.90 0.00 27.79(cent) Adjusted earnings per share 24.63 (0.14) 0.30 (0.01) 0.00 24.78(cent) Appendix 3Related Shares:
Grafton Group