14th Feb 2008 07:01
Hargreaves Services PLC14 February 2008 For immediate release 14 February 2008 Hargreaves Services plc Restatement of financial information under International Financial Reporting Standards Introduction Hargreaves Services Plc ("the Group") has historically prepared its consolidatedfinancial statements under UK Generally Accepted Accounting Practice ("UK GAAP"). The AIM rules require the adoption of Adopted IFRS as adopted by the EU ("Adopted IFRS")(1). Adopted IFRS will apply for the first time in the Group's financial statementsfor the year ending 31 May 2008. Accordingly the financial results for the 6months ended 30 November 2007 will be prepared and reported under Adopted IFRS.As the Group publishes comparative information in its Annual Report and InterimStatement the date of transition to Adopted IFRS is 1 June 2006. To explain how the Group's reported performance and financial position areaffected by this change, information previously published under UK GAAP isrestated under Adopted IFRS in the attached appendices as follows: • Appendix 1 - Adopted IFRS accounting policies; • Appendix 2 - Financial information on an Adopted IFRS basis for the 6 months ended 30 November 2006 and the year ended 31 May 2007 and the transition balance sheet at 1 June 2006; • Appendix 3 - Reconciliations of consolidated income statement, consolidated balance sheet and consolidated statement of cash flows for the year ended 31 May 2007 with explanations of the adjustments made; • Appendix 4 - Reconciliations of consolidated income statement, consolidated balance sheet and consolidated statement of cash flows for the 6 months ended 30 November 2006, with explanations of the adjustments made; • Appendix 5 - Reconciliation of transition consolidated balance sheet at 1 June 2006, with explanations of adjustments made. This unaudited financial information has been prepared on the basis of AdoptedIFRSs expected to be applicable at 31 May 2008. These are subject to ongoingreview and endorsement by the EU or possible amendment by interpretive guidancefrom the IASB and are therefore still subject to change. We will update ourrestated information for any such changes when they occur. The adoption of IFRS has an impact on the presentation of the Group's accountsbut does not change the underlying business performance. There are no changesto the business model, strategy or risk management processes. Basis of preparation The unaudited financial information has been prepared in accordance with therecognition and measurement requirements of adopted IFRS. The accountingpolicies expected to be applied in the adopted IFRSs financial statements forthe year ending 31 May 2008 are set out in Appendix 1. The auditors have issued unqualified opinions on the Group's UK GAAP financialstatements for the years ended 31 May 2006 and 31 May 2007. Both the transition balance sheet as at 1 June 2006 and the financialinformation for the year ended 31 May 2007, as prepared on the above basis, willbe audited as part of the audit of the financial statements for the year ending31 May 2008. Subject to that audit, EU endorsement of outstanding standards andno further changes from the IASB, this information is expected to form the basisfor comparatives when reporting financial results for 2008, and for subsequentreporting periods. Overview of impact For the year ended 31 May 2007 the net increase in total recognised income andexpense attributable to equity holders of the Group as a result of theconversion to Adopted IFRS was £240,000. The details of these adjustments aregiven in Appendices 2 and 3. Based on the accounting policies detailed in Appendix 1, the effect on keyreported results is as follows: 6 months ended Year ended 30 November 2006 31 May 2007 IFRS UK GAAP IFRS UK GAAP Unaudited Unaudited Unudited Audited £000 £000 £000 £000 Operating profit 3,898 3,903 9,891 9,947Profit for the period attributable to equity holders of the company 2,901 2,508 6,414 5,636Net assets 27,056 27,697 41,034 41,828Basic EPS 12.25p 10.59p 26.32p 23.12p The main areas where Adopted IFRS has impacted on the results are as follows: • Goodwill arising from acquisitions is no longer amortised, increasing reported profits and net assets. • Foreign currency forward and swap contracts and interest rate swaps are included in the financial statements at fair value with changes being recognised in the profit and loss account. • The fair value of the customer contracts at the date of acquisition of Norec Ltd is capitalised and amortised over the period in which it is delivered, reducing reported profits. Full details of the adjustments required are given in Appendix 3. IFRS 1 exemptions IFRS 1 First Time Adoption of International Financial Reporting Standards,permits those companies adopting IFRS for the first time to take certainexemptions from the full requirements of IFRS in the transition period. TheGroup has utilised the following key exemptions: (a) Share based payments: The Group has elected to apply IFRS 2 Share based payments only to share based payment transactions granted after 7 November 2002 that had not vested prior to the transition date. (b) Business combinations: The Group has chosen not to restate business combinations prior to the transition date. (c) Property, Plant and Equipment: The Group has opted to continue to measure property, plant and equipment at historical cost less accumulated depreciation, in the transition consolidated balance sheet. Appendix 1 IFRS Accounting Policies This section provides a summary of the Group's accounting policies under adoptedIFRS for the year ending 31 May 2008. Where policies have changed under adoptedIFRS as compared to UK GAAP this is indicated by *. Basis of preparation The preliminary IFRS financial information set out on pages 9 to 21 does notconstitute the company's statutory accounts for the year ended 31 May 2007.Those accounts, which were prepared under UK GAAP, have been reported on by thecompany's auditors and delivered to the Registrar of Companies. The report ofthe auditors was (i) unqualified, (ii) did not include a reference to anymatters to which the auditors drew attention by way of emphasis withoutqualifying their report and (iii) did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The financial information is presented in pounds sterling, rounded to thenearest thousand, and is prepared on the historical cost basis with someexemptions, as detailed in the accounting policies set out below. These accounting polices have been prepared on the basis of the recognition andmeasurement requirements of adopted IFRSs as at 30 November 2007 that areanticipated to be effective (or available for early adoption) at 31 May 2008,the Group's first annual reporting date at which it is required to use adoptedIFRSs. Based on these adopted IFRSs, the directors have applied the accountingpolicies as set out below, which they expect to apply when the first annual IFRSfinancial statements are prepared for the year ending 31 May 2008. However, the adopted IFRSs that will be effective (or available for earlyadoption) in the annual financial statements for the year ending 31 May 2008 arestill subject to change and to additional interpretations and therefore cannotbe determined with certainty. Accordingly, the accounting policies for thatannual period will be determined finally only when the annual financialstatements are prepared for the year ending 31 May 2008. The preparation of this financial information resulted in changes to theaccounting policies as compared with the most recent annual financial statementsprepared under previous GAAP. The accounting polices set out below have beenapplied consistently throughout the Group to all periods presented in thisfinancial information. The preparation of financial information in conformity with adopted IFRSsrequires management to make judgements, estimates and assumptions that effectthe application of policies and reported amounts of assets and liabilities,income and expenses. The estimates and associated assumptions are based onhistorical experience and various other factors that are believed to bereasonable under the circumstances, the results of which form the basis ofmaking the judgements about carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period, or in the periodof revision and future periods if the revision affects both current and futureperiods. Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. Control exists where theGroup has the power, directly or indirectly, to govern the financial andoperating policies of an entity so as to obtain benefits from its activities.The financial statements of subsidiaries are included in the consolidatedfinancial information from the date control commences until the date thatcontrol ceases. Intra-group balances and transactions, and any unrealised gains and losses orincome and expenses arising from intra-group transactions, are eliminated whenpreparing the consolidated financial information. Basis of consolidation (continued) Associates and jointly controlled entities Associates are those entities in which the Group has significant influence, butnot control, over the financial and operating policies. Significant influence ispresumed to exist when the Group holds between 20 and 50 percent of the votingpower of another entity. A jointly controlled entity is an entity over whose activities the Group hasjoint control, established by contractual agreements and requiring unanimousconsent for strategic, financial and operating decisions. The consolidatedaccounts include the Group's share of the total recognised income and expense ofjointly controlled entities and associates on an equity accounted basis. Theresults of jointly controlled entities and associates are included in theconsolidated accounts from the date that joint control or significant influencerespectively, commences until the date that it ceases. Foreign currency Transactions in foreign currencies are translated at the foreign exchange rateruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies at the balance sheet date are translated atthe foreign exchange rate ruling at that date. Non-monetary assets andliabilities that are measured in terms of historical cost in a foreign currencyare translated using the exchange rate at the date of the transaction. Foreignexchange differences arising on translation are recognised in the incomestatement. The balance sheet assets and liabilities of foreign subsidiaries are translatedinto sterling at the exchange rate at the balance sheet date, and the incomestatement is translated at the average rate. Gains and losses are then taken toa separate reserve. Classification of financial instruments issued by the Group Financial instruments issued by the Group are treated as equity (i.e. formingpart of shareholders' funds) only to the extent that they meet the following twoconditions: (a) they include no contractual obligations upon the group todeliver cash or other financial assets or to exchange financial assets orfinancial liabilities with another party under conditions that are potentiallyunfavourable to the group; and (b) where the instrument will or may be settled in the company'sown equity instruments, it is either a non-derivative that includes noobligation to deliver a variable number of the company's own equity instrumentsor is a derivative that will be settled by the company's exchanging a fixedamount of cash or other financial assets for a fixed number of its own equityinstruments. To the extent that this definition is not met, the proceeds of issue areclassified as a financial liability. Where the instrument so classified takesthe legal form of the company's own shares, the amounts presented in thesefinancial statements for called up share capital and share premium accountexclude amounts in relation to those shares. Where a financial instrument that contains both equity and financial liabilitycomponents exists these components are separated and accounted for individuallyunder the above policy. The finance cost on the financial liability componentis correspondingly higher over the life of the instrument. Finance payments associated with financial liabilities are dealt with as part offinance expenses. Finance payments associated with financial instruments thatare classified in equity are dividends and are recorded directly in equity. Financial instruments Derivative financial instruments* - Appendix 3(b) The Group uses interest rate swaps to help manage its interest rate risk, andforward foreign currency contracts to manage its exchange rate risk. The Groupalso uses derivative sale and purchase contracts to mitigate the risk offluctuating coal prices and exchange rate risk. All derivative financial instruments are recognised initially at fair value andsubsequently re-measured to fair value at each reporting date and changestherein are accounted for as described below. Changes in the fair value of the derivative hedging instrument designated as acash flow hedge are recognised directly in equity to the extent that the hedgeis effective. To the extent that the hedge is ineffective, changes in fair valueare recognised in profit and loss. Derivatives designated as hedging instruments are accounted for in line with thenature of the hedging arrangement. Derivatives are intended to be highlyeffective in mitigating the above risks, and hedge accounting is adopted wherethe required hedge documentation is in place and the relevant test criteria aremet. Changes in the fair value of any derivative instruments that do not qualify forhedge accounting are recognised immediately in the income statement as part offinancing costs. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciationand impairment losses. Where parts of an item of property, plant and equipmenthave different useful lives, they are accounted for as separate items ofproperty, plant and equipment. Mine development costs at Maltby Colliery are capitalised and depreciated overthe working life of the area of the mine to which the costs are attributable. Depreciation is charged to the income statement on a straight-line basis overthe estimated useful lives of each part of an item of property, plant andequipment. Land is not depreciated. Depreciation rates are as follows: Mineral Reserves 12.5% p.a.Freehold Buildings 2% to 4% p.a.Leasehold improvements 15% p.a.Motor vehicles and plant 10% to 20% p.a.Furniture and equipment 25% p.a.Fixtures and Fittings 15% p.a. Intangible assets and goodwill* - Appendix 3(a) Subject to the transitional relief in IFRS 1, all business combinations areaccounted for by applying the purchase method. Goodwill arises from theacquisition of businesses and represents the difference between the cost of theacquisition and the fair value of the identifiable assets, liabilities andcontingent liabilities acquired. Identifiable intangibles are those which canbe sold separately or which arise from legal rights regardless of whether thoserights are separable. Goodwill arising on acquisitions that have occurred since 1 June 2006 iscapitalised and subject to impairment review, both annually and when there areindications the carrying value may not be recoverable. Negative goodwillarising on an acquisition is recognised immediately in profit or loss. Goodwill arising on acquisitions prior to 1 June 2006 was capitalised andamortised under UK GAAP. This goodwill is carried at the UK GAAP carrying valueat the date of transition to adopted IFRS and is subject to impairment reviewsas described above. Intangible assets and goodwill* - Appendix 3(a)(continued) Other intangible assets that are acquired by the Group, which have finite usefuleconomic lives, are measured at cost less accumulated amortisation andaccumulated impairment losses. Amortisation is recognised in profit and loss ona straight-line basis over the estimated useful lives of intangible assets fromthe date that they are available for use. Inventories Inventories are stated at the lower of cost and net realisable value. Cost isbased on the weighted average method and includes expenditure incurred inacquiring the inventories and bringing them to their existing location andcondition. At Maltby Colliery, the cost of preparing proceeding coal faces is held on thebalance sheet within work in progress and is charged on a tonnage-extractedbasis over the estimated production life of the relevant face. Trade and other receivables Trade and other receivables are recognised initially at fair value. A provisionfor impairment of trade receivables is established where there is objectiveevidence that the Group will not be able to collect all amounts due according tothe agreed terms of the receivables concerned. Cash and cash equivalents* Cash and cash equivalents comprise cash balances and call deposits. Bankoverdrafts that are repayable on demand and form an integral part of the Group'scash management are included as a component of cash and cash equivalents for thepurpose only of the statement of cash flows. Trade and other payables Trade and other payables are non-interest bearing and are recognised at fairvalue. Impairment* - Appendix 3(a) The carrying amounts of the Group's assets other than inventories and deferredtax assets, are reviewed at each balance sheet date to determine whether thereis any indication of impairment. If any such indication exists, the asset'srecoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or itscash-generating unit exceeds its recoverable amount. Impairment losses arerecognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocatedfirst to reduce the carrying amount of any goodwill allocated to cash-generatingunits and then to reduce the carrying amount of the other assets in the unit ona pro rata basis. A cash generating unit is the smallest identifiable group ofassets that generates cash inflows that are largely independent of the cashinflows from other assets or groups of assets. Reversals of impairment An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed when there is anindication that the impairment loss may no longer exist and there has been achange in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carryingamount does not exceed the carrying amount that would have been determined, netof depreciation or amortisation, if no impairment loss had been recognised. Employee benefits Defined benefit pension plans Following the acquisition of The Monckton Coke & Chemical Co Ltd on 17 June 2005and Maltby Colliery on 26 February 2007, the Group operates two concessionaryfuel retirement benefit schemes. In addition following the acquisition of Maltby Colliery, the Group is a memberof two pension schemes providing benefits based on final pensionable pay. Theassets of the scheme are held separately from those of the Group. The retirement benefit scheme liabilities are measured using theprojected unit method. The concessionary fuel retirement benefit schemesare unfunded retirement benefits and as such there are no assets in the schemes. The retirement benefit deficits are recognised in full, the movement in thescheme deficits is split between operating charges, finance items and in thestatement of total recognised income and expense, actuarial gains and losses. Pension scheme assets are measured using market values. Pension schemeliabilities are measured using a projected unit method and discounted at thecurrent rate of return on a high quality corporate bond of equivalent term andcurrency to the liability. The pension scheme surplus (to the extent that it isrecoverable) or deficit is recognised in full. The movement in the schemesurplus/deficit is split between operating charges, finance items and in thestatement of total recognised income and expenses, actuarial gains and losses. Defined contribution pension plans The group operates a group personal pension scheme. The assets of the schemeare held separately from those of the group in an independently administeredfund. The amount charged against profits represents the contributions payableto the scheme in respect of the financial period. Obligations for contributions to defined contribution pension plans arerecognised as an expense in the income statement as incurred. Share-based payment transactions The Group operates a share option scheme for certain employees. The fair valueof options granted is recognised as an employee expense with a correspondingincrease in equity. The fair value is measured at grant date and spread overthe period during which the employees become unconditionally entitled to theoptions. The fair value of the options granted is measured using an optionvaluation model, taking into account the terms and conditions upon which theoptions were granted. The amount recognised as an expense is adjusted toreflect the actual number of share options that vest except where forfeiture isdue only to share prices not achieving the threshold for vesting. Revenue Revenue is measured at the fair value of consideration received or receivable,excluding value added tax, for goods and services supplied to externalcustomers. It includes the Group's share of revenue from work carried out underjointly controlled operations. Sales of goods and services are recognised whenthey are delivered and title has passed. Leases Leases of property, plant and equipment where the group has substantially allthe risks and rewards of ownership are classified as finance leases. Financeleases are capitalised at the lease's inception at the lower of the fair valueof the leased asset and the present value of the minimum lease payments. Thecorresponding rental obligations, net of finance charges, are included in otherpayables. Each lease payment is allocated between the liability and financecharges so as to achieve a constant rate of interest costs charged to the incomestatement on the outstanding balance. The property, plant and equipmentacquired under finance leases are depreciated over the shorter of the asset'suseful life and the lease term. Leases (continued) Leases where the lessor retains a significant portion of the risks and rewardsof ownership are classified as operating leases. Payments made under operatingleases (net of any incentives received from the lessor) are charged to theincome statement on a straight-line basis over the period of the lease. Net financing costs Net financing costs comprise interest payable and interest receivable on fundsinvested together with changes in the fair values of interest rate swaps andforeign currency forward contracts through the profit and loss and the expectedreturns on plan assets and interest on the pension scheme liability. Interest income and interest payable is recognised in the income statement as itaccrues, using the effective interest method. Income tax* - Appendix 3(e) Income tax on the profit or loss for the period comprises both current anddeferred tax. Income tax is recognised in the income statement except to theextent that it relates to items recognised directly in equity, in which case itis recognised in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantively enacted at the balance sheet date, andany adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amountsof assets and liabilities for financial reporting purposes and the amounts usedfor taxation purposes. The amount of deferred tax provided is based on theexpected manner of realisation or settlement of the carrying amount of assetsand liabilities, using tax rates enacted or substantively enacted at the balancesheet date. The following temporary differences are not provided for: the initialrecognition of goodwill; the initial recognition of assets or liabilities thataffect neither accounting nor taxable profit other than in a businesscombination, and differences relating to investments in subsidiaries to theextent that they will probably not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Provisions A provision is recognised in the balance sheet when the Group has a presentlegal or constructive obligation as a result of a past event, and it is probablethat an outflow of economic benefits will be required to settle the obligation.If the effect is material, provisions are determined by discounting theexpected, risk adjusted, future cash flows at a pre-tax risk-free rate. Appendix 2 Consolidated Income Statement 6 months ended Year ended 30 November 2006 31 May 2007 Unaudited Unaudited £000 £000 Revenue 102,684 240,105 Cost of sales (92,936) (213,164) Gross profit 9,748 26,941Other (expense)/income (16) 25Administrative expenses (5,834) (17,075) Operating profit 3,898 9,891Finance income 618 324Finance expenses (574) (920)Share of profit of joint ventures 205 270Share of profit of associates - 56 Profit before income tax 4,147 9,621Income tax (1,253) (3,134) Profit for the period 2,894 6,487 Attributable to:Equity holders of the company 2,901 6,414Minority Interest (7) 73 Profit for the period 2,894 6,487 Basic earnings per share 12.25p 26.32p Diluted earning per share 12.21p 26.16p Appendix 2 Consolidated Balance Sheet 1 June 30 November 31 May 2006 2006 2007 Unaudited Unaudited Unaudited £000 £000 £000ASSETSNon-current assetsProperty, plant and equipment 21,146 24,209 63,178Intangible assets 5,422 11,531 12,630Investments in joint ventures 897 1,110 881Investments in associates - - 58Other investments, including derivates 127 159 220Other receivables 500 500 500Deferred tax assets - - 502Total non-current assets 28,092 37,509 77,969 Current assetsInventories 15,055 15,208 35,027Other investments, including derivates - - -Trade and other receivables 21,167 32,291 38,406Cash and cash equivalents 15,022 3,788 11,779Total current assets 51,244 51,287 85,212 Total assets 79,336 88,796 163,181 LIABILITIESNon-current liabilitiesLoans and borrowings (19,521) (18,582) (38,477)Other non-current liabilities (2,000) - -Derivative financial instruments - - (631)Deferred tax liabilities (1,448) (1,618) -Retirement benefit obligations (469) (469) (9,411)Provisions (2,671) (2,671) (10,327)Total non-current liabilities (26,109) (23,340) (58,846) Current liabilitiesTrade and other payables (23,439) (30,822) (49,505)Current income tax liabilities (1,550) (2,099) (1,851)Borrowings (1,915) (4,956) (11,740)Derivative financial instruments (1,059) (523) (205)Total current liabilities (27,963) (38,400) (63,301) Total liabilities (54,072) (61,740) (122,147) Net assets 25,264 27,056 41,034 EQUITYCapital and reserves attributable toequity holdersIssued capital 2,368 2,368 2,627Share premium 19,082 19,082 29,177Other reserves 29 29 29Translation reserve - - (4)Merger reserve - - 1,022Hedging reserve - - (538)Capital redemption reserve 1,530 1,530 1,530Retained earnings 2,255 4,054 7,041 25,264 27,063 40,884Minority interest in equity - (7) 150 25,264 27,056 41,034 Appendix 2 Consolidated Statement of Cash Flows 6 months ended Year ended 30 November 2006 31 May 2007 Unaudited Unaudited £000 £000Cash flows from operating activitiesProfit for the period 2,894 6,487Adjustments for:Depreciation 1,758 5,030Amortisation of intangible assets 228 685Negative goodwill on acquisition - (84)Share of profit of joint ventures (205) (270)Share of profit of associates - (56)Gain on sale of property, plant and equipment 16 (25)Equity-settled share-based payment transactions 90 268Net finance (income)/expense (44) 596Income tax expense 1,253 3,134 5,990 15,765Change in inventories (153) (13,254)Change in trade and other receivables (3,553) (4,914)Change in trade and other payables 3,713 10,691Change in provisions and employee benefits - 117 Cash from operating activities 5,997 8,405Interest paid (571) (1,971)Income tax paid (982) (2,245) Net cash inflow from operating activities 4,444 4,189 Cash flows from investing activitiesInterest received 50 324Proceeds from sale of property, plant and equipment 241 794Acquisition of property, plant and equipment (3,014) (8,661)Acquisition of subsidiary, net of cash acquired (7,710) (33,693)Acquisition of other investments - 75 Net cash outflow from investing activities (10,433) (41,161) Cash flows from financing activitiesProceeds from issue of shares - 10,332Proceeds of borrowings - 15,000Repayments of borrowings (3,006) (1,164)Repayment of finance lease liabilities (848) (1,947)Proceeds from invoice discounting facility (207) 3,656Dividends paid (1,184) (1,972) Net cash (outflow)/inflow from financing activities (5,245) 23,905 Net decrease in cash and cash equivalents (11,234) (13,067)Cash and cash equivalents at the start of the period/year 15,022 15,022 Cash and cash equivalents at the end of the period/year 3,788 1,955 Appendix 2 Consolidated Statement of Recognised Income and Expense 6 months ended Year ended 30 November 2006 31 May 2007 Unaudited Unaudited £000 £000 Foreign currency translation differences for foreign - (4)operationsEffective portion of changes in fair value of cash flow - (769)hedgesDefined benefit plan actuarial gains - 108Income tax on income and expense recognised directly in - 199equityIncome and expense recognised directly in equity - (466) Profit for the period 2,894 6,487 Total recognised income and expense for the period 2,894 6,021 Attributable to:Equity holders of the company 2,901 5,948Minority interest (7) 73Total recognised income and expense for the period 2,894 6,021 Total recognised income and expense attributable to equity holders of the Groupfor the year ended 31 May 2007 is £5,948,000 compared to £5,708,000 under UKGAAP, a difference of £240,000. This difference has resulted from an increase of£778,000 on the profit for the year and an additional expense of £538,000 on theincome and expense recognised directly in equity. Appendix 3 Reconciliation of Consolidated Income Statement - Unaudited for the year ended 31 May 2007 UK GAAP IFRS adjustments IFRS Goodwill IAS 32 & 39 Intangibles Reclassification (a) (b) (c) (d) £000 £000 £000 £000 £000 £000 Revenue 240,105 - - - - 240,105 Cost of sales (213,164) - - - - (213,164) Gross profit 26,941 - - - - 26,941Other income : group 25 - - - - 25Other income : joint ventures 30 - - - (30) -Administrative expenses (17,049) 659 - (685) - (17,075) Operating profit 9,947 659 - (685) (30) 9,891Finance income 358 - - - (34) 324Finance expenses : group (2,068) - 1,148 - - (920)Finance expenses : joint (99) - - - 99 -venturesShare of profit of joint 413 - - - (143) 270venturesShare of profit of associates 76 - - - (20) 56 Profit before income tax 8,627 659 1,148 (685) (128) 9,621Income tax expense (2,918) - (344) - 128 (3,134) Profit for the period 5,709 659 804 (685) - 6,487 Profit for the periodattributable to equity holdersof the Company 5,636 659 804 (685) - 6,414Profit for the periodattributable to minorityinterest 73 - - - - 73 Appendix 3 Reconciliation of Consolidated Balance Sheet - Unauditedat 31 May 2007 UK GAAP IFRS adjustments IFRS Goodwill IAS 32 & 39 Intangibles Reclassification (a) (b) (c) (e) £000 £000 £000 £000 £000 £000ASSETSNon-current assetsProperty, plant and equipment 63,178 - - - - 63,178Intangible assets 12,979 336 - (685) - 12,630Investments in joint ventures 881 - - - - 881Investments in associates 58 - - - - 58Other investments, including 20 - 200 - - 220derivatesOther receivables 500 - - - - 500Deferred tax assets - - 191 - 311 502Total non-current assets 77,616 336 391 (685) 311 77,969 Current assetsInventories 35,027 - - - - 35,027Trade and other receivables 38,406 - - - - 38,406Cash and cash equivalents 11,779 - - - - 11,779Total current assets 85,212 - - - - 85,212 Total assets 162,828 336 391 (685) 311 163,181 LIABILITIESNon-current liabilitiesLoans and borrowings (38,477) - - - - (38,477)Other non-current liabilities - - - - - -Derivative financial instruments - - (631) - - (631)Deferred tax liabilities - - - - - -Retirement benefit obligations (6,588) - - - (2,823) (9,411)Provisions (12,839) - - - 2,512 (10,327)Total non-current liabilities (57,904) - (631) - (311) (58,846) Current liabilitiesTrade and other payables (51,356) - - - 1,851 (49,505)Current income tax liabilities - - - - (1,851) (1,851)Borrowings (11,740) - - - - (11,740)Derivative financial instruments - - (205) - - (205)Total current liabilities (63,096) - (205) - - (63,301) Total liabilities (121,000) - (836) - (311) (122,147) Net assets/(liabilities) 41,828 336 (445) (685) - 41,034 EQUITYCapital and reserves attributableto equity holders of the companyIssued capital 2,627 - - - - 2,627Share premium 29,177 - - - - 29,177Other reserves 29 - - - - 29Translation reserve - - - - (4) (4)Merger reserve 1,022 - - - - 1,022Hedging reserve - - (538) - - (538)Capital redemption reserve 1,530 - - - - 1,530Retained earnings 7,293 336 93 (685) 4 7,041 41,678 336 (445) (685) - 40,884Minority interest in equity 150 - - - - 150 41,828 336 (445) (685) - 41,034 Appendix 3 Reconciliation of Consolidated Statement of Cash Flows - Unauditedfor the year ended 31 May 2007 UK GAAP IFRS adjustments IFRS Goodwill IAS 32 & 39 Intangibles Reclass (a) (b) (c) (d) £000 £000 £000 £000 £000 £000Cash flows from operating activitiesProfit for the period 5,709 659 804 (685) 6,487Adjustments for:Depreciation 5,030 - - - - 5,030Amortisation of intangible assets - - - 685 685Impairment losses on goodwill - - - - - -Amortisation of goodwill/Negative goodwill onacquisition 575 (659) - - - (84)Share of profit of joint ventures (413) - - - 143 (270)Share of profit of associates (76) - - - 20 (56)Gain on sale of property, plant and equipment (55) - - - 30 (25)Equity-settled share-based payment transactions 268 - - - - 268Net finance expense 1,809 - (1,148) - (65) 596Income tax expense 2,918 - 344 - (128) 3,134 15,765 - - - - 15,765Change in inventories (13,254) - - - - (13,254)Change in trade and other receivables (4,914) - - - - (4,914)Change in trade and other payables 10,691 - - - - 10,691Change in provisions and employee benefits 117 - - - - 117 Cash from operating activities 8,405 - - - - 8,405Interest paid (1,971) - - - - (1,971)Income tax paid (2,245) - - - - (2,245) Net cash inflow from operating activities 4,189 - - - - 4,189 Cash flows from investing activitiesInterest received 324 - - - - 324Proceeds from sale of property, plant and 794 - - - - 794equipmentAcquisition of property, plant and equipment (8,661) - - - - (8,661)Acquisition of subsidiary net of cash acquired (33,693) - - - - (33,693)Acquisition of other investments 75 - - - - 75 Net cash outflow from investing activities (41,161) - - - - (41,161) Cash flows from financing activitiesProceeds from the issue of share capital 10,332 - - - - 10,332Proceeds from borrowings 15,000 - - - - 15,000Repayment of borrowings (1,164) - - - - (1,164)Repayment of finance lease liabilities (1,947) - - - - (1,947)Proceeds from invoice discounting facility 3,656 - - - - 3,656Dividends paid (1,972) - - - - (1,972) Net cash inflow from financing activities 23,905 - - - - 23,905 Net decrease in cash and cash equivalents (13,067) - - - - (13,067)Cash and cash equivalents at the start of the 15,022 - - - - 15,022period Cash and cash equivalents at the end of the 1,955 - - - - 1,955period (a) & (c) IFRS 3 - Business Combinations Under UK GAAP, the Group amortised the cost of goodwill arising on acquisitionof subsidiaries over its useful life. Under IFRS 3, goodwill on acquisition isno longer amortised, but is held at it's acquired prior to the transition dateto IFRS carrying value at the transition date, or acquisition date, asappropriate, and is then subject to impairment review at each reporting date. The Group has restated the value of goodwill in its balance sheet to that at thetransition date (1 June 2006) and has carried out an impairment review as at 1June 2006 and 31 May 2007. The impact has been to decrease profit by £5,000 inthe six months ended 30 November 2006 and decrease profit by £26,000 in the yearended 31 May 2007, which includes a reversal of goodwill amortisation of£659,000 and an intangible asset amortisation charge of £685,000 (with acorresponding decrease in the carrying value of goodwill). The group has accounted for acquisitions that have occurred since 1 June 2006 inaccordance with IFRS 3 'Business Combinations'. Under IFRS 3, intangible assetspurchased as part of a business combination may meet the criteria set out inIFRS 3 for categorisation as an intangible asset other than goodwill and arethen amortised over their useful economic life. Norec Ltd On 1 September 2006 the Group acquired the entire issued share capital of Norec. Under UK GAAP the fair value of the consideration was £7,397,000 and the fairvalue of the net assets acquired was £1,061,000, which gave rise to £6,336,000goodwill on acquisition. The group has recognised an intangible asset under IFRS 3 for the customercontracts acquired. This has been fair valued at £5,707,000 at the date ofacquisition by the group. This is being amortised over the period in which thecontracts are expected to expire, which is 75 months leaving a carrying amountof £5,022,000 at 31 May 2007. Hargreaves Bulk Liquid Transport Ltd On 22 January 2007 the Group acquired the remaining 50% issued share capital ofHargreaves Bulk Liquid Transport Ltd (previously a 50% joint venture). Under UKGAAP the fair value of the consideration was £1,809,000 and the fair value ofthe net assets acquired was £280,000, which gave rise to £1,529,000 goodwill onacquisition. The group has recognised no intangible assets under IFRS 3, as there are nomaterial separately identifiable intangible assets such as key customercontracts, brand names, non-compete agreements etc. (b) IAS 32 and 39 Financial Instruments Under UK GAAP, the fair values of foreign exchange contracts, interest rateswaps and other derivative financial instruments, were not required to berecorded in the financial statements. Under IFRS, IAS 39 requires foreignexchange contracts and interest rate swaps to be recorded in the balance sheetat their fair value and movements in the fair value between balance sheet datesare included in the income statement. The value of the Group's foreign exchange contracts and interest rate swap atbalance sheet dates and the impact on the consolidated income statement are setout below: Fair value Deferred tax Net impact £000 £000 £000 Value at 1 June 2006 (1,015) 304 (711)Movement in value in 6 months to 30 November 2006 568 (170) 398Value at 30 November 2006 (447) 134 (313)Movement in value in 6 months to 31 May 2007 580 (174) 406Value at 31 May 2007 133 (40) 93 The Group has entered into a derivative contract for the sale and purchase ofcoking coal. This contract bases the sale price to a specific major Groupcustomer on the API international coal index, and also contracts to purchase thecoke from a third party, thus effectively hedging the group's risk to bothexchange rate fluctuations and coal price fluctuations in the market. The fair value is the estimated amount that the Group would have to pay toterminate the purchase contract at the balance sheet date, taking account ofcurrent API index prices, foreign currency exchange rates and the current creditworthiness of swap counterparties. Under IAS39 the group are able to hedge account for this arrangement, as it isable to prove the effective relationship between the hedging instrument and thehedged item. Hedge accounting permits any movement in the fair value of thehedge to be recognised in reserves rather than in the income statement. Themovement is disclosed in the statement of recognised income and expense. Fair value Deferred tax Net impact £000 £000 £000Value at 31 May 2007 (769) 231 (538) (d) Reclassifications Under UK GAAP, the Group's share of operating profits and taxation from jointventures was shown separately in the income statement. IAS 31 requires theGroup's share of its joint ventures profit to be shown net of tax on a singleline in the income statement. This is a reclassification adjustment in theconsolidated income statement only and no adjustment is required to theconsolidated balance sheet. Deferred tax liabilities previously included in provisions in the consolidatedbalance sheet have been reclassified and disclosed separately on the face of theconsolidated balance sheet as a deferred tax liability. Income tax liabilities previously included in trade and other payables has beenreclassified and shown separately on the face of the consolidated balance sheetas a current tax payable. Under UK GAAP, the Group's pension scheme liability was shown in the balancesheet net of the related deferred tax asset. IAS19 requires the Group's pensionscheme liability to be shown gross in the balance sheet and the associateddeferred tax asset has been reclassified to deferred tax liabilities. Appendix 4 Reconciliation of Consolidated Income Statement - Unauditedfor the six months ended 30 November 2006 UK GAAP IFRS adjustments IFRS Goodwill IAS 32 Intangibles Reclassification & 39 (a) (c) (d) (b) £000 £000 £000 £000 £000 £000 Revenue 102,684 - - - - 102,684 Cost of sales (92,936) - - - - (92,936) Gross profit 9,748 - - - - 9,748Other income (16) - - - - (16)Administrativeexpenses (5,829) 223 - (228) - (5,834) Operating profit 3,903 223 - (228) - 3,898Finance income 50 - 568 - - 618Finance expenses :group (574) - - - - (574)Finance expenses :joint ventures (33) - - - 33 -Share of profit ofjoint ventures 326 - - - (121) 205 Profit beforeincome tax 3,672 223 568 (228) (88) 4,147Income taxexpense (1,171) - (170) - 88 (1,253) Profit for theperiod 2,501 223 398 (228) - 2,894 Profit for theperiodattributable to equity holders of the Company 2,508 223 398 (228) - 2,901Loss for the periodattributable to minority interest (7) - - - - (7) (a), (b), (c), (d) - see Appendix 3 for comments Appendix 4 Reconciliation of Consolidated Balance Sheet - Unauditedat 30 November 2006 UK GAAP IFRS adjustments IFRS Goodwill IAS 32 & 39 Intangibles Reclass (a) (b) (c) (d) £000 £000 £000 £000 £000 £000ASSETSNon-current assetsProperty, plant and equipment 24,209 - - - - 24,209Intangible assets 11,859 (100) - (228) - 11,531Investments in joint ventures 1,110 - - - - 1,110Investments in associates - - - - - -Other investments, including 83 - 76 - - 159derivatesOther receivables 500 - - - - 500Total non-current assets 37,761 (100) 76 (228) - 37,509 Current assetsInventories 15,208 - - - - 15,208Other investments, including - - - - - -derivatesTrade and other receivables 32,291 - - - - 32,291Cash and cash equivalents 3,788 - - - - 3,788Total current assets 51,287 - - - - 51,287 Total assets 89,048 (100) 76 (228) - 88,796 LIABILITIESNon-current liabilitiesLoans and borrowings (18,582) - - - - (18,582)Deferred tax liabilities - - 134 - (1,752) (1,618)Retirement benefit obligations (328) - - - (141) (469)Provisions (4,564) - - - 1,893 (2,671)Total non-current liabilities (23,474) - - - - (23,340) Current liabilitiesTrade and other payables (32,921) - - - 2,099 (30,822)Current income tax liabilities - - - - (2,099) (2,099)Borrowings (4,956) - - - - (4,956)Derivative financial instruments - - (523) - - (523)Total current liabilities (37,877) - (523) - - (38,400) Total liabilities (61,351) - (389) - - (61,740) Net assets/(liabilities) 27,697 (100) (313) (228) - 27,056 EQUITYCapital and reserves attributable toequity holders of the companyIssued capital 2,368 - - - - 2,368Share premium 19,082 - - - - 19,082Other reserves 29 - - - - 29Translation reserve - - - - - -Merger reserve - - - - - -Capital redemption reserve 1,530 - - - - 1,530Retained earnings 4,695 (100) (313) (228) - 4,054 27,704 (100) (313) (228) - 27,063Minority interest in equity (7) - - - - (7) 27,697 (100) (313) (228) - 27,056 (a), (b), (c), (d) - see Appendix 3 forcomments Appendix 4 Reconciliation of Consolidated Statement of Cash Flows - Unaudited for the six months ended 30 November 2006 UK GAAP IFRS adjustments IFRS Goodwill IAS 32 & 39 Intangibles Reclass (a) (b) (c) (d) £000 £000 £000 £000 £000 £000Cash flows from operating activitiesProfit for the period 2,501 223 398 (228) - 2,894Adjustments for:Depreciation 1,758 - - - - 1,758Amortisation of goodwill 223 (223) - - - -Amortisation of intangibles - 228 - 228Share of profit of joint ventures (326) - - - 121 (205)Share of profit of associates - - - - - -Gain on sale of property, plant and equipment 16 - - - - 16Equity-settled share-based payment 90 - - - - 90transactionsNet finance expense 557 - (568) - (33) (44)Income tax expense 1,171 - 170 - (88) 1,253 5,990 - - - - 5,990Change in inventories (153) - - - - (153)Change in trade and other receivables (3,553) - - - - (3,553)Change in trade and other payables 3,713 - - - - 3,713 Cash from operating activities 5,997 - - - - 5,997Interest paid (571) - - - - (571)Income tax paid (982) - - - - (982) Net cash inflow from operating activities 4,444 - - - - 4,444 Cash flows from investing activitiesInterest received 50 - - - - 50Proceeds from sale of property, plant and 241 - - - - 241equipmentAcquisition of property, plant and equipment (3,014) - - - - (3,014)Acquisition of subsidiary, net of cash (7,710) - - - - (7,710)acquired Net cash outflow from investing activities (10,433) - - - - (10,433) Cash flows from financing activitiesRepayments of borrowings (3,006) - - - - (3,006)Payment of finance lease liabilities (848) - - - - (848)Invoice discounting activities (207) - - - - (207)Dividends paid (1,184) - - - - (1,184) Net cash outflow from financing activities (5,245) - - - - (5,245) Net decrease in cash and cash equivalents (11,234) - - - - (11,234)Cash and cash equivalents at the start of the 15,022 - - - - 15,022period Cash and cash equivalents at the end of the 3,788 - - - - 3,788period Appendix 5 Reconciliation of Consolidated Balance Sheet - Unauditedat 1 June 2006 UK GAAP IFRS adjustments IFRS Goodwill IAS 32 & Intangibles Reclassification 39 (a) (b) (c) (d) £000 £000 £000 £000 £000 £000ASSETSNon-current assetsProperty, plant and equipment 21,146 - - - - 21,146Intangible assets 5,745 (323) - - - 5,422Investments in joint ventures 897 - - - - 897Investments in associates - - - - - -Other investments, including derivates 83 - 44 - - 127Other receivables 500 - - - - 500Total non-current assets 28,371 (323) 44 - - 28,092 Current assetsInventories 15,055 - - - - 15,055Trade and other receivables 21,167 - - - - 21,167Cash and cash equivalents 15,022 - - - - 15,022Total current assets/(liabilities) 51,244 - - - - 51,244 Total assets 79,615 (323) 44 - - 79,336 LIABILITIESNon-current liabilitiesLoans and borrowings (19,521) - - - - (19,521)Other non-current liabilities (2,000) - - - - (2,000)Deferred tax liabilities - - 304 - (1,752) (1,448)Retirement benefit obligations (328) - - - (141) (469)Provisions (4,564) - - - 1,893 (2,671)Total non-current liabilities (26,413) - 304 - - (26,109) Current liabilitiesTrade and other payables (24,989) - - - 1,550 (23,439)Current income tax liabilities - - - - (1,550) (1,550)Borrowings (1,915) - - - - (1,915)Derivative financial instruments - - (1,059) - - (1,059)Total current liabilities (26,904) - (1,059) - - (27,963) Total liabilities (53,317) - (755) - - (54,072) Net assets 26,298 (323) (711) - - 25,264 EQUITYCapital and reserves attributable toequity holders of the companyIssued capital 2,368 - - - - 2,368Share premium 19,082 - - - - 19,082Other reserves 29 - - - - 29Translation reserve - - - - - -Merger reserve - - - - - -Capital redemption reserve 1,530 - - - - 1,530Retained earnings 3,289 (323) (711) - - 2,255 26,298 (323) (711) - - 25,264Minority interest in equity - - - - - - 26,298 (323) (711) - - 25,264 (a), (b), (c), (d) - see Appendix 3 for comments -------------------------- (1) References to IFRS throughout this document refer to the application ofInternational Financial Reporting Standards as adopted by the EU ("Adopted IFRS"), including International Accounting Standards ("IAS") and interpretationsissued by the International Accounting Standards Board ("IASB") and itscommittees, and as interpreted by any regulatory bodies applicable to the Group. 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Hargreaves Serv