4th Jul 2005 07:00
British Airways PLC04 July 2005 AIRLINE REPORTS UNDER IFRS British Airways today (July 4) releases financial information prepared underInternational Financial Reporting Standards (IFRS) for the year ended March 31,2005 and explains the impact of the adoption of IFRS on these results. Under IFRS, the airline's operating profit for the year ended March 31, 2005increased from £540 million under UK GAAP to £556 million and profit before taxincreased from £415 million to £513 million. British Airways' chief financial officer, John Rishton, said: "The impacts ofnew accounting rules on our income statement are minor. However, there will bea significant impact on our balance sheet. "Net assets under IFRS, at March 31, 2005 are reduced by £1.3 billion to £1.4billion, mainly due to moving the pension deficit on to the balance sheet. Itwas previously fully disclosed as a Note to the Report and Accounts." The adoption of IFRS represents an accounting change only, and does not affectthe underlying operation of the business or the airline's cash flows for 2004/05. ends Notes to editors: • For all periods up to and including March 2005, British Airways haspreviously prepared its Group financial statements under UK Generally AcceptedAccounting Practice (UK GAAP). • In accordance with EU regulations, the Group is required to adopt IFRSfrom 1 April 2005 and prepare its Group financial statements on an IFRS basis. • The Group's first Report and Accounts prepared under IFRS accountingpolicies will be for the period ending March 31, 2006 and the first quarterlysummary financial statements will be released for the period ending June 30,2005. • As allowed under IFRS 1 'First time adoption of International FinancialReporting Standards' standards IAS 32 and 39 on Financial Instruments will beadopted from 1 April 2005. • The full detail of all the changes is available at bashares.com. Release of financial information for 2004/05 under International Financial Reporting Standards Contents 1. Introduction 2. Summary impact 3. Presentation 4. Review of main changes 5. International Financial Reporting Standards consolidated financial information - Income statement for the year ended March 31, 2005 - Balance sheet as at April 1, 2004 (opening balance sheet) - Balance sheet as at March 31, 2005 (closing balance sheet) Appendices 1. Basis of preparation 2. Accounting policies 3. Quarterly reconciliations of income and equity 4. Ernst & Young audit report 1 Introduction British Airways plc currently prepares its consolidated financial statementsunder UK Generally Accepted Accounting Practice (UK GAAP). Following RegulationNo. 1606/2002 passed by the European Parliament in 2002, all listed EU companiesare required to prepare consolidated financial statements in accordance withInternational Financial Reporting Standards (IFRS) for accounting periodsbeginning on or after January 1, 2005. The Group's first Report and Accounts prepared under IFRS accounting policieswill be for the period ending March 31, 2006 and the first quarterly summaryfinancial statements will be released for the period ending June 30, 2005. The purpose of this document is to explain the accounting policy changes arisingfrom the adoption of IFRS and their impact on the financial statements for theperiod ended March 31, 2005. The financial information presented in this document has been prepared on thebasis of those International Financial Reporting Standards, InternationalAccounting Standards, and International Financial Reporting InterpretationsCommittee (IFRIC) and Standard Interpretations Committee (SIC) interpretationsthat are expected to be applicable to 2005/06 financial reporting. These aresubject to ongoing review and endorsement by the European Commission, whilst theapplication of the standards continues to be subject to interpretation by IFRICas well as emerging industry consensus. As a consequence, further adjustments tothe accounting policies and treatments may need to be made in the first completeset of IFRS financial statements for 2005/06. 2 Summary Impact £m 2004/05 UK GAAP IFRS Variance H/(L) %Turnover 7,813 7,772 (41) (0.5)Operating profit 540 556 16 3.0Operating margin (pts) 6.9 7.2 0.3 Profit before tax 415 513 98 23.6Earnings per share 23.4p 35.2p 11.8 Net assets * 2,684 1,397 (1,287) (48.0) Reserves ** 2,220 940 (1,280) (57.7) Gearing 52.1% 67.7% 15.6pts * at 31/03/05 ** Under IFRS, there are no distributable reserves as £1,043m of the reservesbalance relates to share premium and revaluation reserves. The adoption of IFRS represents an accounting change only, and does not affectthe ongoing operations, or cash flows of the Group for 2004/05. There are someitems that might impact the timing of tax cash flows in the future. 3 Presentation Section 5 of this report, and Appendix 3, contain reconciliations to assist inunderstanding the nature and value of the differences between UK GAAP and IFRS.Section 5 presents the balance sheets on transition at April 1, 2004 and atMarch 31, 2005 together with the income statement for the year to March 31,2005, and Appendix 3 also contains quarterly reconciliations. The financial information is in IFRS format, and reflects a number ofdifferences in presentation between UK GAAP and IFRS including; • The disclosure of realised currency differences separately in the income statement; • The disclosure of certain assets and liabilities on a gross as opposed to a net basis. As allowed under IFRS 1, IAS 32 and IAS 39 will be adopted from April 1, 2005and as a consequence certain presentational changes will be made to thefinancial statements. The Group's perpetual preferred securities currently shownas a non-equity minority interest will be treated as equity under IAS 32. From2005/06, the ineffective portion of gains and losses on fuel derivative hedgeswill be disclosed separately in the income statement and operating margin willbe calculated excluding such gains and losses. The IFRS cash flow statement will explain the change in cash and cashequivalents rather than purely cash as under UK GAAP. Cash and cash equivalentsunder IFRS comprise cash and short-term liquid investments. In addition, theformat of the cash flow statement will change, with cash flows being categorisedas operating, investing, or funding. 4 Review of main changes This section describes the most significant changes arising from transition toIFRS, with reference to the financial information in Section 5. IAS 19 - Employee Benefits (a) Post employment benefits Under UK GAAP we apply the measurement and recognition requirements of SSAP 24to accounting for pensions and post-retirement benefits in our financialstatements, whilst providing disclosures under FRS 17. IAS 19 takes a balance sheet approach to accounting for defined benefit schemes,similar to FRS 17. Therefore, on transition, the deficit, similar to thatpreviously disclosed under FRS 17, has been recognised in the balance sheet. AtApril 1, 2004, this results in a total reduction in net assets of £1.2 billion.This represents a pre-tax net deficit of £1.7 billion partially offset by theassociated deferred tax asset of £0.5 billion. Going forward we are electing to apply the 'corridor' treatment under IAS 19.The impact will be that actuarial gains and losses are only recognised to theextent that they exceed 10 per cent of the greater of the scheme assets orliabilities, and in that case are spread over the remaining average servicelives of employees. Therefore, the net actuarial losses on the pension schemesfor 2004/05 of £0.3 billion (after tax) has not been recognised. The impact on pre-tax income for 2004/05 from the adoption of IAS 19 is anincrease of £16 million, representing a reduction of £45 million in operatingcosts, partially offset by an increase of £29 million in financing charges. Other Employee Benefits Under UK GAAP, no provision is currently made for annual leave accrued. UnderIAS 19, the expected cost of compensated short-term absences should berecognised at the time the related service is provided. As a result, ontransition to IFRS a provision of £9 million has been recognised net of deferredtax. The impact on pre-tax income for 2004/05 is a reduction of £1 million. IAS 18 - Revenue Recognition (b) The Group receives revenue from the sale of mileage credits to third parties,including BA Miles that are managed through the Executive Club frequent flyerprogramme and Airmiles that are managed through the wholly owned subsidiaryAirmiles Travel Promotions Limited. Under UK GAAP, revenue from the sale ofmiles is recognised on issue of the mile, with a provision made under FRS 12 forthe incremental cost of providing the service on redemption of the mile. IAS 18 is more prescriptive about the point at which revenue is recognised.Under IAS 18, the fair value of the miles sold is deferred and recognised onredemption of the mileage credit. The cost of providing free redemption servicesis recognised when the miles are redeemed. On transition this will result in areduction in net assets of £167 million. The impact on pre-tax income for 2004/05 is a reduction of £31 million,reflecting £41 million of revenue deferred, partially offset by a £10 millionreduction in cost no longer provided. IAS 16 - Property Plant and Equipment (c) IAS 16 is focused on the balance sheet cost in prescribing the level at whichparts should be determined; in particular it requires that each part ofproperty, plant and equipment that has a cost that is significant in relation tothe overall cost of the item should be depreciated separately. Under UK GAAP,the emphasis is on the income statement depreciation charge in determining theasset components. Under UK GAAP, the cost of major engine overhaul is expensed to the incomestatement. Under IAS 16, major engine overhaul will be treated as a separateasset component with the cost capitalised and depreciated over the period to thenext major overhaul. On transition this will result in a reduction in net assets of £27 million. Thereduction results from the years preceding transition to IFRS which saw a lowerlevel of engine overhaul expense required to be capitalised than would occurduring a normal engine overhaul cycle. The pre-tax impact on the incomestatement for 2004/05 is a credit of £28 million reflecting a reduction inengineering costs of £70 million partially offset by an increase in depreciationcosts. IFRS 2 - Share-Based Payments (d) Under UK GAAP, the Group was either exempt from recognising the cost ofproviding share options to employees or the cost was measured at zero in theincome statement. IFRS 2 requires a charge to be made to the income statement.The expense is calculated as the fair value of the award on the date of grantand is recognised over the vesting period of the scheme. A binomial latticemodel has been used to calculate the fair value of options on their grant date.The Group has applied the provisions of IFRS 2 only to awards made afterNovember 7, 2002, an option allowed on transition by IFRS 1. In 2004/05 application of IFRS 2 results in a pre-tax charge to the incomestatement of £8 million. IAS 21 - Changes in Foreign Exchange Rates (e) Under UK GAAP, certain US Dollar-denominated assets and liabilities are treatedas a foreign operation ('Branch') with US Dollar as its functional currency.Exchange movements are therefore taken to reserves rather than through theincome statement. IAS 21 provides additional criteria to allow the functional currency of aforeign operation to be determined. If the functional currency is deemed to bethe same as for the parent, then exchange movements on retranslation of monetaryitems are taken through the income statement. As a result, in the 2004/05 financial statements, the exchange movements onretranslation of US Dollar liabilities previously taken in the Branch are takenthrough the income statement resulting in a charge of £7 million to operatingexpenditure (relating to working capital balances) and a credit of £23 millionto financing costs (debt retranslation). In addition, the unwinding ofcumulative exchange differences on Branch assets, previously taken to reserves,results in an increase in net assets of £152 million and an increase indepreciation costs of £13 million at transition. On the basis that the debt willbe designated as a hedge of future revenue as allowed by IAS 39, from April 1,2005, to the extent that the hedge is effective, the debt retranslation relatingto aircraft will be taken to reserves rather than to the income statement. IFRS 3 - Goodwill arising on Business Combinations (f) Under UK GAAP, goodwill arising on the acquisition of businesses is amortisedover a period not exceeding 20 years. The provisions of IFRS 3 - 'BusinessCombinations' have been applied prospectively from April 1, 1999. IFRS 3prohibits the amortisation of goodwill, requiring instead that an annual testfor impairment is carried out. As a result, amortisation charges reduce by £4million in 2004/05. IFRS 3 requires that an intangible asset acquired under a business combinationshould be recognised separately from goodwill if it is probable that futureeconomic benefits will flow from the asset and its cost can be measuredreliably. As a result £22 million of landing rights acquired with businessessince April 1, 1999 and previously classified as goodwill have been reclassifiedon transition. IAS 38 - Intangible Assets (f) IAS 38 results in £12 million of IT software that is distinct from anyassociated hardware being reclassified from tangible assets to intangible assetson transition. IFRS 5 - Assets Held for Resale (g) Under IFRS 5, an asset should be measured at market value and reclassified as anasset held for sale once a decision is made for the asset to be sold and it ismade available for sale. This results in a loss of £3 million being recognisedin the transition balance sheet rather than Quarter 1 of 2004/05. IAS 28 - Associates (h) The results of the Group's associated undertakings, consolidated using theequity method, should be included under the same accounting policies as thoseapplied by the Group. As a result the carrying value of the associatedundertakings has been reduced by £58 million in the transition balance sheet,principally in respect of deferral of frequent flyer revenue and accrual foremployee benefit obligations. The impact on the 2004/05 income statement is notmaterial. In future periods, the results of associated undertakings will be presented on apost-tax basis and as result the pre-tax results for 2004/05 will reduce by £14million offset by an equivalent reduction in the tax charge for the year. IFRS 1 - Impact on disposal of Qantas (i) Under UK GAAP, the reported loss on disposal of our share of Qantas was £11million. IFRS impacts both the valuation of the net assets of Qantas prior todisposal and the basis on which any gain or loss on disposal is calculated.Under IFRS, the disposal of Qantas results in a £97 million improvement in theincome statement for 2004/05, reflecting a £59 million decrease in the netassets of Qantas (see (h) above), and the reversal of the requirement to writeback goodwill previously written off to reserves of £59 million, partiallyoffset by the write off of exchange gains arising on the investment since April1, 2004 of £21 million. IAS 12 - Income Taxes (j) Under UK GAAP, deferred tax was provided on timing differences that hadoriginated, but had not reversed, before the balance sheet date. Under IAS 12,deferred tax is provided on temporary differences based upon the future recoveryor settlement of assets and liabilities recognised in the balance sheet. As aresult of implementing IAS 12, an additional deferred tax liability of £94million has been provided on transition. The impact on the tax charge for 2004/05 from the adoption of IAS 12 is a credit of £14 million. In addition, deferredtax has been provided on other IFRS accounting policy changes resulting in anadditional deferred tax asset of £505 million relating to pensions and £9million relating to other adjustments. IAS 39 - Financial Instruments - Recognition and Measurement Under UK GAAP, British Airways deferred gains or losses on hedges of revenues oroperating payments, recognising them in the income statement only when theycrystallised. As allowed under IFRS 1, IAS 32 and IAS 39 will be adopted from April 1, 2005.Under IFRS, the fair value of derivatives will be measured and any adjustmentsto fair value accounted for on the balance sheet. We expect to meet the IAS 39criteria for adopting hedge accounting which will result in the effectiveelement of the cumulative movement in value of most derivatives being taken toreserves and the ineffective element to income statement, resulting in somevolatility. Certain financial assets and financial liabilities, includingcertain trade investments, will also be measured at fair value with changestaken to the income statement. The adoption of IAS 39 will result in a pre-tax increase in net assets of £273million at April 1, 2005. 5 Consolidated Financial Information - Opening Balance Sheet Balance Sheet at 01/04/04 IAS 19 IAS 18 IAS 16 IFRS 2 IAS 21 IFRS 3 IFRS 5 IAS 28 IFRS 1 IAS 12 Other (a) (b) (c) (d) (e) (f) (g) (h) (i) (j)£M UK IFRSNON-CURRENT ASSETS GAAPPROPERTY, PLANT & EQUIPMENT- Fleet 7,104 - - (34) - 197 - (53) - - - - 7,214- Property 1,042 - - - - 38 - - - - - - 1,080- Equipment 491 - - - - - (12) - - - - - 479 8,637 - - (34) - 235 (12) (53) - - - - 8,773 INTANGIBLE ASSETS- Goodwill 93 - - - - - (22) - - - - - 71- Landing Rights 75 - - - - - 22 - - - - - 97- Other - - - - - - 12 - - - - - 12 168 - - - - - 12 - - - - - 180 Investment in associates 501 - - - - - - - (58) - - - 443Long term investments (trade 30 - - - - - - - - - - - 30investments)Employee benefit assets - 134 - - - - - - - - - - 134Deferred tax receivable - - - - - - - - - - - - -Other financial assets - - - - - - - - - - - 22 22 -TOTAL NON-CURRENT ASSETS 9,336 134 - (34) - 235 - (53) (58) - - 22 9,582 ASSETS HELD FOR SALE - - - - - - - 49 - - - - 49 CURRENT ASSETS AND RECEIVABLES- Expendable spares and other 76 - - - - - - - - - - - 76inventories- Trade receivables and other 2,625 - - - - - - - - - - (985) 1,640debtors- Cash and cash equivalents 64 - - - - - - - - - - 963 1,027 TOTAL CURRENT ASSETS AND 2,765 - - - - - - - - - - (22) 2,743RECEIVABLES TOTAL ASSETS 12,101 134 - (34) - 235 - (4) (58) - - - 12,374 SHAREHOLDERS' FUNDS, MINORITY INTERESTS &LIABILITIES SHAREHOLDERS' EQUITY- Issued share capital 271 - - - - - - - - - - - 271- Treasury shares (31) - - - - - - - - - - - (31)- Other reserves 1,947 (1,187) (167) (27) - 152 (6) (3) (58) - (94) - 557 TOTAL SHAREHOLDERS' EQUITY 2,187 (1,187) (167) (27) - 152 (6) (3) (58) - (94) - 797 Equity minority interest 10 - - - - - - - - - - - 10Non-equity minority interest 200 - - - - - - - - - - - 200 MINORITY INTERESTS 210 - - - - - - - - - - 210 PROVISIONS- Employee benefit - 1,901 - - - - - - - - - - 1,901obligations- Provisions for deferred tax 1,137 (508) (72) (10) - 71 6 (1) - - 94 - 717- Other provisions 85 (45) - - - - - - - - - - 40 1,222 1,348 (72) (10) - 71 6 (1) - - 94 - 2,658 LONG TERM LIABILITIES- Interest bearing long term 5,034 - - - - - - - - - - - 5,034borrowings- Convertible long term 112 - - - - - - - - - - - 112borrowings- Other long term liabilities 340 (9) - - - 12 - - - - - - 343 5,486 (9) - - - 12 - - - - - - 5,489 CURRENT LIABILITIES- Current portion of long 682 - - - - - - - - - - - 682term borrowings - Trade and other payables 2,308 (18) 239 3 - - - - - - - - 2,532 - Current tax payable 6 - - - - - - - - - - - 6- Convertible long term - - - - - - - - - - - -borrowings 2,996 (18) 239 3 - - - - - - - - 3,220 TOTAL SHAREHOLDERS' FUNDS, 12,101 134 - (34) - 235 - (4) (58) - - - 12,374MINORITY INTERESTS &LIABILITIES Memo - Net Assets 2,397 1,007 Income Statement 2004/05 Income Statement £m IAS 19 IAS 18 IAS 16 IFRS 2 IAS 21 IFRS 3 IFRS 5 IAS 28 IFRS 1 IAS 12 UK GAAP (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) IFRSTOTAL TRAFFIC REVENUE- Passenger 6,500 - - - - - - - - - - 6,500- Cargo 482 - - - - - - - - - - 482 OTHER REVENUE 831 - (41) - - - - - - - - 790 TOTAL TURNOVER 7,813 - (41) - - - - - - - - 7,772 Employee costs 2,273 (46) - - 8 - - - - - - 2,235Depreciation and amortisation 687 - - 43 - 13 (4) - - - - 739Aircraft Leasing 106 - - - - - - - - - - 106Fuel Cost 1,128 - - - - - - - - - - 1,128Fuel Derivatives Gains/Losses -Engineering and other aircraft 502 - - (70) - - - - - - - 432costsLanding Fees and en route 556 - - - - - - - - - - 556chargesHandling charges, catering and 930 - (12) - - - - - - - - 918other operating costsSelling costs 488 - 2 - - - - - - - - 490Currency differences - 2 - - - 13 - - - - - 15Accommodation and ground 603 - - - - (6) - - - - - 597equipment TOTAL OPERATING EXPENDITURE 7,273 (44) (10) (27) 8 20 (4) - - - - 7,216 Interest expense (267) - - - - - - - 8 - - (259)Interest income 77 - - - - - - - - - - 77Other financing income and 14 (29) - - - - - - - - - (15)chargesRetranslation credits and 33 - - - - 23 - - - - - 56charges on borrowingsShare of Profit of Associates 41 - - - - - 1 - (18) - - 24Profit or Loss on Disposal (26) - - 1 - - - 3 (4) 97 - 71Income and charges relating to 3 - - - - - - - - - - 3fixed asset investments PROFIT BEFORE TAX 415 15 (31) 28 (8) 3 5 3 (14) 97 - 513 Taxation (149) (5) 9 (9) 2 4 - (1) 14 - 14 (121) PROFIT FOR THE PERIOD 266 10 (22) 19 (6) 7 5 2 - 97 14 392 Attributable to shareholders 251 10 (22) 19 (6) 7 5 2 - 97 14 377Attributable to minority 15 - - - - - - - - - - 15interests MemoOPERATING PROFIT 540 44 (31) 27 (8) (20) 4 - - - - 556 Operating Margin 6.9% 7.2% EPS (basic) 23.4 35.2EPS (diluted) 23.0 34.1 Closing Balance Sheet Balance Sheet at 31/03/05 IAS 19 IAS 18 IAS 16 IFRS 2 IAS 21 IFRS 3 IFRS 5 IAS 28 IFRS 1 IAS 12 Other £M UK (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) GAAP IFRSNON-CURRENT ASSETSPROPERTY, PLANT & EQUIPMENT- Fleet 6,748 - - (6) - 207 - (5) - - - - 6,944- Property 959 - - - - 42 - (1) - - - - 1,000- Equipment 445 - - - - - (60) - - - - - 385 8,152 - - (6) - 249 (60) (6) - - - - 8,329 INTANGIBLE ASSETS- Goodwill 88 - - - - - (16) - - - - - 72- Landing Rights 102 - - - - - 20 - - - - - 122- Other - - - - - - 60 - - - - - 60 190 - - - - - 64 - - - - - 254 Investment in associates 120 - - - - - 1 - (54) 59 - - 126Long term investments (trade 30 - - - - - - - - - - - 30investments)Employee benefit assets - 137 - - - - - - - - - - 137Deferred tax receivable - - - - - - - - - - - - -Other financial assets - - - - - - - - - - - 38 38 -TOTAL NON-CURRENT ASSETS 8,492 137 - (6) - 249 5 (6) (54) 59 - 38 8,914 ASSETS HELD FOR SALE - - - - - - - 5 - - - - 5 CURRENT ASSETS AND RECEIVABLES- Expendable spares and other 84 - - - - - - - - - - - 84inventories- Trade receivables and other 2,683 (54) - - - - - - - - - (509) 2,120debtors- Cash and cash equivalents 77 - - - - - - - - - - 471 548 TOTAL CURRENT ASSETS AND 2,844 (54) - - - - - - - - - (38) 2,752RECEIVABLES TOTAL ASSETS 11,336 83 - (6) - 249 5 (1) (54) 59 - - 11,671 SHAREHOLDERS' FUNDS, MINORITY INTERESTS &LIABILITIES SHAREHOLDERS' EQUITY- Issued share capital 271 - - - - - - - - - - - 271- Treasury shares (26) - - - - - - - - - - - (26)- Other reserves 2,220 (1,177) (189) (7) 2 168 (1) (1) (54) 59 (80) - 940 TOTAL SHAREHOLDERS' EQUITY 2,465 (1,177) (189) (7) 2 168 (1) (1) (54) 59 (80) - 1,185 Equity minority interest 12 - - - - - - - - - - - 12Non-equity minority interest 207 - - - - (7) - - - - - - 200 MINORITY INTERESTS 219 - - - - (7) - - - - - - 212 PROVISIONS- Employee benefit - 1,820 - - - - - - - - - - 1,820obligations- Provisions for deferred tax 1,243 (503) (81) (2) (2) 75 6 - - - 80 - 816- Other provisions 83 (49) - - - - - - - - - - 34 1,326 1,268 (81) (2) (2) 75 6 - - - 80 - 2,670 LONG TERM LIABILITIES- Interest bearing long term 4,045 - - - - - - - - - - - 4,045borrowings- Convertible long term - - - - - - - - - - - - -borrowings- Other long term liabilities 301 (8) - - - 13 - - - - - - 306 4,346 (8) - - - 13 - - - - - - 4,351 CURRENT LIABILITIES- Current portion of long 447 - - - - - - - - - - - 447term borrowings - Trade and other payables 2,385 - 270 3 - - - - - - - - 2,658 - Current tax payable 36 - - - - - - - - - - - 36- Convertible long term 112 - - - - - - - - - - 112borrowings 2,980 - 270 3 - - - - - - - - 3,253 TOTAL SHAREHOLDERS' FUNDS, 11,336 83 - (6) - 249 5 (1) (54) 59 - - 11,671MINORITY INTERESTS &LIABILITIES Memo - Net Assets 2,684 1,397 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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