31st May 2005 07:00
CRH PLC31 May 2005 31 May 2005 RESTATEMENT OF 2004 RESULTS UNDER IFRS CRH plc, the international building materials group, today announces the impactof the transition to International Financial Reporting Standards (IFRS) on its2004 results previously prepared in accordance with accounting practicegenerally accepted in the Republic of Ireland (Irish GAAP). The Group'sfinancial statements for the six months ended 30 June 2005 and for the yearended 31 December 2005 will be prepared under IFRS. The impact on the audited 2004 key financial data is summarised as follows: Irish IFRS % Change Comments on principal IFRS changes GAAP euro m euro mTurnover 12,820 12,755 -1% Certain joint ventures reclassified as associates under IFRS - share of sales no longer reported Operating profit (EBITA)* 1,247 1,220 -2% Share of associates' EBITA excluded under IFRS Profit before tax 1,017 1,104 +9% Non-amortisation of goodwill Profit after tax 770 872 +13% Non-amortisation of goodwill Total Equity 5,300 4,979 -6% Pension and deferred tax assets and liabilities included under IFRS Net debt ** 2,441 2,758 +13% Inclusion of share of joint ventures' net debt euro cent euro centEarnings per share Basic 143.9 163.6 +14 % Non-amortisation of goodwill Excluding Irish GAAP goodwill amortisation 163.1 163.6 -% * Operating profit (EBITA) excludes goodwill amortisation and profit on sale of fixed assets. ** Net debt comprises current and non-current interest-bearing loans and borrowings less cash and cash equivalents and liquid investments. ________________________________________________________________________________________________________________________This announcement, together with a slide presentation and accompanying audiocommentary summarising the impact of the transition to IFRS for CRH, has beenfiled today on the Group's website at www.crh.com. If you have any questions onthis announcement or on the presentation, please contact the following at Dublin404 1000 (+353 1 404 1000) Liam O'Mahony Chief Executive Myles Lee Finance Director Maeve Carton Group Controller INTRODUCTION Up to and including 31 December 2004, CRH (the Group) prepared its consolidatedfinancial statements in accordance with Irish GAAP, which are consistent with UKGAAP. As part of the European Commission's plan to develop a single European capitalmarket, the application of IFRS is mandatory for the consolidated financialstatements of all European entities whose securities are listed on a regulatedexchange in the European Union (EU) and applies in respect of accounting periodscommencing on or after 1 January 2005. The Regulation passed by the EuropeanUnion requires that IFRS-compliant financial statements be produced by CRH forthe financial periods ending 30 June 2005 and 31 December 2005 and that thosefinancial statements contain a full set of disclosures for the comparativeperiods in 2004. As stipulated under IFRS 1 First-time Adoption of InternationalFinancial Reporting Standards, the transition date to IFRS (being the beginningof the earliest period for which the Group presents full comparative informationunder IFRS in its first IFRS financial statements) is 1 January 2004. This announcement deals with the transition to IFRS under the followingsections: 1. Impact of transition to IFRS in overview 2. Basis of preparation of financial statements under IFRS 3. Principal exemptions availed of on transition to IFRS 4. Principal changes on transition to IFRS In order to explain the impact of the transition to IFRS on CRH's reportedperformance and financial position, selected financial information previouslyreported under Irish GAAP is restated under IFRS in the attached appendices asfollows: • Appendix 1 - Independent auditors' report to the Directors of CRH plc on the preliminary IFRS consolidated financial statements for the year ended 31 December 2004. • Appendix 2 - Group Income Statement and Group Statement of Recognised Income and Expense for the year ended 31 December 2004 (FY 2004) and Group Balance Sheet as at that date together with reconciliations of profit and equity from Irish GAAP to IFRS. • Appendix 3 - Unaudited Group Income Statement and Group Statement of Recognised Income and Expense for the six-month period ended 30 June 2004 (H1 2004) and Group Balance Sheet as at that date together with reconciliations of profit and equity from Irish GAAP to IFRS. • Appendix 4 - Adjustments required to the Irish GAAP Group Balance Sheet as at 1 January 2004 (the "transition date" as defined above) for compliance with IFRS. • Appendix 5 - Restatement under IFRS of selected segmental information published in the 2004 Interim and Annual Reports. • Appendix 6 - Accounting policies under IFRS. The restatements of the Group's Income Statement, Statement of Recognised Incomeand Expense, Balance Sheet and segmental information for the full year ended 31December 2004 and the Transition Balance Sheet dated 1 January 2004 have beenaudited by the Group's auditors, Ernst & Young, Chartered Accountants. The financial information in respect of the six months ended 30 June 2004 isunaudited. 1. IMPACT OF TRANSITION TO IFRS IN OVERVIEW The standards which give rise to the most significant changes to theconsolidated results of the Group on transition to IFRS are: IFRS 2 Expensing of share-based payments at fair valueIFRS 3 / IAS 38 Non-amortisation of goodwill; intangible assets on business combinationsIAS 12 Deferred tax computed on the basis of temporary differencesIAS 19 Recognition of defined benefit pension schemes' assets and liabilitiesIAS 31 Proportionate consolidation of joint venture undertakingsIAS 37 Discounting of provisions and deferred/contingent consideration on business combinationsIAS 32 / IAS 39 Recognition and measurement of financial instruments - derivatives carried at fair value; classification of hedges The impact of the transition to IFRS on the Group financial statements issummarised as follows: Interim 2004euro millions Full-year 2004* (Unaudited) Irish GAAP IFRS Irish GAAP IFRSGroup Income StatementRevenue 12,819.7 12,754.5 5,670.4 5,607.9Operating profit (EBITA) 1,247.0 1,220.2 384.6 370.2Profit before finance costs 1,156.9 1,231.0 342.3 376.2Profit before tax (PBT) 1,017.0 1,104.0 274.7 319.4Profit after tax 769.9 871.8 205.7 255.9Tax rate (as a % of PBT) 24.3% 21.0% 25.1% 19.9%Basic EPS (euro cent) 143.9c 163.6c 38.1c 47.7cGroup Balance SheetTotal assets 11,867.6 13,072.0 12,188.5 13,353.9Total liabilities 6,567.2 8,092.6 7,022.2 8,601.1Total equity 5,300.4 4,979.4 5,166.3 4,752.8Net debt 2,440.7 2,758.1 3,174.7 3,493.2 Reconciliation of net debt Year-end 30 June 2004 2004As reported under Irish GAAP 2,440.7 3,174.7Proportionate consolidation of joint ventures 257.0 258.3Reclassification from miniority interest 54.2 65.0Fair valuation of derivatives 6.2 (4.8)Restated under IFRS 2,758.1 3,493.2 * Extracted from audited consolidated financial statements for the year ended 31December 2004 2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS UNDER IFRS General As noted above, all publicly quoted European companies in the EU are required toprepare consolidated financial statements in accordance with IFRS as adopted bythe European Commission in respect of accounting periods commencing on or after1 January 2005. The financial information presented in this announcement hasbeen prepared in accordance with International Financial Reporting Standards andInterpretations issued by the International Accounting Standards Board (IASB)and with International Accounting Standards (IAS) and Standing InterpretationsCommittee Interpretations approved by the predecessor International AccountingStandards Committee that have been subsequently authorised by the IASB andremain in effect. Qualifications to be taken into account The majority of the IASs/IFRSs have been approved by the European Commission.However, a number of IASs/IFRSs remain to be approved at the date of publicationof this document, and failure to approve these outstanding standards in time for2005 financial reporting could lead to changes in the basis of accounting or inthe basis of presentation of certain financial information from that adopted forthe purposes of this announcement. Furthermore, the restated 2004 financial information provided in this documentis subject to the issuance by the International Accounting Standards Board ofadditional Interpretations prior to the end of 2005 which may have retrospectiveimpact and thus require to be applied in the 2005 financial statements and therelated 2004 comparatives. As a result, it is possible that further changes maybe required to the 2004 financial information contained in this document priorto its inclusion as comparative data in the published 2005 interim and year-endconsolidated financial statements under IFRS. The financial instruments accounting policy contained in this announcement takesfull account of the revised version of IAS 39 approved by the EuropeanCommission under which the fair valuation of financial liabilities isprohibited. In addition, the European Commission has yet to approve theAmendment to IAS 19 Actuarial Gains and Losses, Group Plans and Disclosuresenabling the recognition of actuarial gains and losses in the Statement ofRecognised Income and Expense in the same manner as FRS 17 under Irish GAAP. Asdiscussed below in greater detail, CRH has elected to adopt this Amendment inrelation to accounting for actuarial gains and losses arising on the Group'sdefined benefit pension schemes and similar arrangements after the transitiondate prior to its effective date. 3. PRINCIPAL EXEMPTIONS AVAILED OF ON TRANSITION TO IFRS Exemptions under IFRS 1 First-time Adoption of International Financial ReportingStandards In accordance with IFRS 1, which establishes the framework for transition toIFRS by a first-time adopter such as CRH, the Group has elected, in common withthe majority of listed companies, to avail of a number of specified exemptionsfrom the general principle of retrospective restatement as follows: • Business combinations undertaken prior to the transition date of 1 January 2004 have not been subject to restatement; accordingly, goodwill as at the transition date is carried forward at its net book value and, together with goodwill arising on business combinations subsequent to the transition date, is subject to annual impairment testing in accordance with IAS 36 Impairment of Assets. As required under IFRS 1, goodwill was assessed for impairment as at the transition date and no impairment resulted from this exercise. • The fixed asset revaluation performed as at 31 December 1980 and referred to in note 11 to the financial statements in the 2004 Annual Report has been regarded as deemed cost and therefore remains unadjusted on transition to IFRS. • The cumulative actuarial gains and losses applicable to the Group's defined benefit pension schemes at the transition date have been recognised in full in the Transition Balance Sheet and adjusted against retained income. • IFRS require that on disposal of a foreign operation, the cumulative amount of currency translation differences previously recognised directly in reserves for that operation be transferred to the income statement as part of the profit or loss on disposal. CRH has deemed the cumulative currency translation differences applicable to foreign operations to be zero as at the transition date. The cumulative currency translation differences arising after the transition date (i.e. during 2004) have been reclassified from retained income to a separate component of equity (termed the "foreign currency translation reserve" in the attached documentation) with no net impact on capital and reserves attributable to the Company's equity holders. As a result of the exemptions described above, financial results and summarisedhistorical financial information previously published for the Group for periodsprior to 2004 will not be restated under IFRS. Other options availed of on transition In compliance with the transitional arrangements set out in IFRS 2 Share-basedPayment, this standard will be applied in respect of share options granted after7 November 2002. The expense reported in the 2004 interim and full-year incomestatements is thus based on share options (including savings-related shareoptions) issued in April 2003 and April 2004. The Group has opted to pursue early implementation of the financial instrumentsstandards (IAS 32 and IAS 39) with effect from the transition date takingaccount of the prohibition on the fair valuation of financial liabilitiesimposed by the version of IAS 39 approved by the European Commission. Given thedelay encountered in securing European Commission approval, the effective dateof the revised versions of IAS 32 and IAS 39 is 1 January 2005. On the introduction of FRS 17 Retirement Benefits in 2001, CRH, together withthe majority of publicly-listed entities, elected to continue to account for itspension obligations under SSAP 24 Accounting for Pension Costs and to disclosethe impact of FRS 17 in the notes to the financial statements. FRS 17 requiresimmediate recognition of actuarial gains and losses on defined benefit pensionschemes in the Statement of Total Recognised Gains and Losses (STRGL). The Grouphas therefore determined that prospective application of the corridormethodology under IAS 19 would not be appropriate and has elected to avail ofearly application of the Amendment to IAS 19 which enables the recognition ofactuarial gains and losses in retained income via the Statement of RecognisedIncome and Expense. The interest cost associated with pension scheme liabilities under IFRS,together with the expected return on pension scheme assets, are included withinnet finance costs on the face of the Income Statement. Current service costs andany past service items stemming from benefit enhancements or curtailments aredealt with as components of operating costs. 4. PRINCIPAL CHANGES ON TRANSITION TO IFRS The standards which result in significant changes for CRH arising fromtransition to IFRS are summarised in the following paragraphs. The accountingpolicies which will apply under IFRS are set out in detail in Appendix 6, and adetailed analysis of the impact of each of these changes on CRH's 2004 full-yearand interim Income Statements and Balance Sheets is shown in Appendices 2 to 3. (i) IFRS 2 Share-based Payment The fair value of share-based payments (mainly share options in the case of CRH)is expensed to the Income Statement on a straight-line basis over the vestingperiod of the options. In accordance with the exemption allowed on transition toIFRS, the fair value calculations have only been applied in respect of CRH shareoptions granted after 7 November 2002. An expense of euro 9.7 million has beenrecognised in respect of the year ended 31 December 2004 (euro 4.1 million forthe six-month period ended 30 June 2004). In certain jurisdictions in which the Group operates, the cost of share optionsis deductible for tax purposes. Accordingly, under IFRS, a deferred tax assethas been recognised in the Balance Sheet on the deductible temporary differencearising in respect of share options based on the difference between the CRHshare price as at the balance sheet date and the exercise price of the relevantoutstanding options. As at the transition date, the deferred tax asset amounted to euro 9.5 millionand increased thereafter to euro 11.0 million as at 30 June 2004 and euro 18.5million as at 31 December 2004. The increase in the deferred tax asset islargely attributable to the rise in the CRH share price from euro 16.28 at thetransition date to euro 17.36 as at 30 June 2004 and euro 19.70 as at 31December 2004. The fair value of the share options has been arrived at using a trinomial model.The following are the inputs used in determining the fair value of shareoptions: • The exercise price; the market price as at the grant date except in the case of savings-related share options which are issued at a 15% discount to the prevailing market price as at the grant date. • Future share price volatility; the annualised standard deviation of the continuously compounded rates of return on CRH shares over the expected term of the option based on monthly share price observations. In determining future volatility, historical volatility is employed as a guide and is assessed over a period commensurate with the expected term of the option. • The risk-free interest rate; the rate applicable to and available on (as at the grant date) zero-coupon euro-denominated and Sterling-denominated Government bonds with a remaining term equal to the expected term of the options being valued. • Expected dividend payments. The impact of IFRS 2 on CRH is summarised as follows:Euro millions Transition H1 2004 FY 2004Income StatementShare options expense - operating costs (4.1) (9.7)Deferred tax credit 1.5 9.0Net impact - decrease in profit after tax (2.6) (0.7)Balance SheetDeferred income tax asset 9.5 11.0 18.5Total assets 9.5 11.0 18.5Other reserves 3.9 8.0 13.6Retained income 5.6 3.0 4.9Total equity and liabilities 9.5 11.0 18.5 (ii) IFRS 3 Business Combinations/IAS 38 Intangible Assets IFRS 3 has been implemented by CRH with effect from the transition date. TheGroup has availed of the exemption under IFRS 1 enabling non-restatement ofbusiness combinations undertaken prior to the transition date. The principalimplications of IFRS 3 for the financial information accompanying thisannouncement are as follows: • Cessation of goodwill amortisation in respect of subsidiary, joint venture and associated undertakings amounting to euro 101.4 million for full-year 2004 (euro 48.7 million for the six months ended 30 June 2004). The analysis of the goodwill amortisation write-back between subsidiary, joint venture and associated undertakings is highlighted in the table overleaf and in the Irish GAAP to IFRS Group Income Statement reconciliations in Appendices 2 and 3. • The acquisition balance sheets for business combinations completed by CRH during 2004 have been restated to recognise intangible assets (comprising primarily customer relationships, non-compete agreements, franchise agreements and trade marks); this results in a corresponding reduction in the goodwill figure in the acquisition balance sheets. The amortisation charge in respect of the intangible assets thus recognised was euro 4.1 million in the full year (euro 1.5 million for the interim period), and the net intangible asset at 31 December 2004 amounted to euro 17.2 million (euro 12.9 million as at 30 June 2004). • The acquisition balance sheets of 2004 business combinations have also been restated to discount provisions and deferred consideration and to take account of other differences in accounting policies on transition to IFRS, including the measurement of finished goods and work-in-progress inventory at adjusted selling prices and the recognition of deferred tax on a temporary differences basis. In contrast to SSAP 9 Stocks and Long-Term Contracts, which governed stock/inventory valuation under Irish GAAP, IFRS 3 (in common with US GAAP) stipulates that finished goods and work-in-progress inventory should be valued on the basis of selling price in acquisition balance sheets adjusted in respect of (i) costs of disposal; (ii) a reasonable profit allowance for selling effort; and (iii) costs of conversion (in relation to work-in-progress inventory only). • Where an excess arises between the fair value of the identifiable assets, liabilities and contingent liabilities in the acquisition balance sheet and the cost of the business combination (i.e. "negative goodwill" under previous GAAP), IFRS 3 requires that this excess be credited to the Income Statement. Negative goodwill of euro 10.9 million has been credited to the full-year 2004 Group Income Statement (euro 0.9 million for the interim period) in respect of business combinations completed during 2004. • In addition to the above, IFRS 3 introduces a number of other changes which impact accounting for business combinations. In particular, the standard tightens the window within which the fair values allocated on acquisition may be restated (twelve months from the date of acquisition) and requires that contingent liabilities relating to business combinations be recognised in the acquisition balance sheet subject to fair value being reliably estimable as at the acquisition date. As dictated by IFRS 3, IAS 38 Intangible Assets and IAS 36 Impairment of Assets have also been applied with effect from the transition date. In accordance with IAS 36, goodwill arising on business combinations completed during 2004 has been subjected to impairment testing and no impairment arose. The impact on the CRH financial statements of applying the business combinationsand intangible assets standards under IFRS is summarised in the following table:euro millions H1 2004 FY 2004Income StatementTotal goodwill amortisation add-back 48.7 101.4Less: applicable to joint ventures and associates (see (v) below) (3.4) (8.3)Goodwill amortisation applicable to subsidiaries 45.3 93.1Amortisation of intangible assets (1.5) (4.1)Restatement of inventory to fair value for 2004 acquisitions (1.9) (3.3)Negative goodwill on 2004 acquisitions 0.9 10.9Current tax charge - (1.9)Net impact - increase in profit after tax 42.8 94.7Balance SheetIntangible assets 47.4 95.2Investments in associates (0.2) 0.7Inventories - 1.3Total assets 47.2 97.2Foreign currency translation reserve 0.1 (3.6)Retained income 46.2 103.0Minority interest 1.7 1.7Current income tax liabilities - 1.8Provisions and trade and other payables - discounting (0.8) (5.7)Total equity and liabilities 47.2 97.2 (iii) IAS 12 Income Taxes The requirements of IAS 12 have been retrospectively applied in the attachedrestatements of CRH's 2004 results with the cumulative adjustment as at thetransition date reflected in the Transition Balance Sheet. IAS 12 requires that deferred tax be accounted for on the basis of temporarydifferences rather than timing differences which form the basis of theequivalent standard under Irish GAAP. This difference in methodology results inan overall increase in the net CRH deferred tax liability under IFRS. Theadjustments made to deferred tax assets and liabilities on transition to IFRSprincipally relate to the following issues: • Under Irish GAAP (FRS 19 Deferred Tax), 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 recognition under IAS 12 of the deferred tax liabilities on the differences arising from such revaluations is the principal reason underlying cumulative adjustments of euro 371.8 million as at the transition date, euro 392.9 million as at 30 June 2004 and euro 377.1 million as at 31 December 2004. These figures exclude the impact of asset revaluations in joint venture undertakings which are subject to proportionate consolidation under IAS 31 and are addressed below. • The recognition of these additional deferred tax liabilities in the Group Balance Sheet under IFRS gives rise to a deferred tax credit of euro 7.4 million in the 2004 Group Income Statement (euro 3.8 million for the six months ended 30 June 2004). • IAS 12 requires that a deferred tax liability be recognised in respect of all rolled-over capital gains as opposed to those merely anticipated to crystallise. The Transition Balance Sheet adjustments include an amount of euro 31.0 million in this respect with euro 32.6 million being recognised as at 30 June 2004 and euro 31.0 million as at 31 December 2004. • Due to the focus of IAS 12 on temporary differences and the fact that provisions are being discounted under IFRS, deferred tax assets arise which have previously not been recognised under Irish GAAP. In addition, deferred tax assets have been recognised in relation to tax losses where it is probable that taxable profits will be available against which the losses may be offset in the foreseeable future and in respect of share options and defined benefit pension schemes as noted in the paragraphs dealing with IFRS 2 above and IAS 19 below. • As a result of the adoption of proportionate consolidation for joint venture undertakings and the move to IAS 12 as the basis for deferred tax computation, the Transition Balance Sheet reflects deferred tax assets and liabilities of euro 4.1 million and euro 13.2 million respectively. The significant uplift in the Group's share of the deferred tax liabilities of joint venture undertakings as at the interim and year-end balance sheet dates principally reflects the recognition of a temporary difference of circa euro 154.9 million (CRH share (49%): euro 75.9 million) attributable to the fair value asset uplift in the Secil joint venture transaction completed in June 2004. 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 at the transition date and as at 30 June 2004 and 31 December 2004therefore contain reclassifications of amounts previously netted within theoverall Group deferred tax liability; these amounts were euro 194.7 million,euro 202.3 million and euro 167.8 million as at the respective balance sheetdates. The impact of these standards for CRH is summarised as follows: euro millions Transition H1 2004 FY 2004Income StatementTemporary differences methodology under IAS 12 (0.5) (0.4)Deferred tax credit arising from recognition of temporary differences 3.8 7.4Net impact - increase in profit after tax 3.3 7.0Balance SheetMineral reserves uplift arising on 2004 acquisitions - - 19.4Increase to goodwill on 2004 acquisitions - 10.8 7.4Deferred income tax assets:- Reclassification from deferred tax liabilities 194.7 202.3 167.8- Temporary differences not previously recognised 36.3 38.6 39.6Total assets 231.0 251.7 234.2Foreign currency translation reserve - (12.9) 17.9Retained income (365.9) (362.6) (358.9)Minority interest (0.6) (0.6) (0.7)Deferred income tax liabilities:- Reclassification to deferred tax assets 194.7 202.3 167.8- Temporary differences (mainly revaluation uplifts) 371.8 392.9 377.1- Rollover relief 31.0 32.6 31.0Total equity and liabilities 231.0 251.7 234.2 Note: the impact on deferred tax of share options (IFRS 2), defined benefitpension schemes (IAS 19), financial instruments (IAS 39) and proportionateconsolidation of joint venture undertakings (IAS 31) is addressed in theindividual sections dealing with these issues. Unremitted earnings in subsidiary, joint venture and associated undertakings IAS 12 requires that deferred tax is recognised in respect of unremittedearnings in subsidiary, joint venture and associated undertakings except wherespecific conditions are satisfied. No provision has been recognised by CRH inrespect of subsidiary and joint venture undertakings as there is no commitmentto remit earnings. A deferred tax liability has been recognised in relation tounremitted earnings of associated undertakings on the basis that the exercise ofsignificant influence would not necessarily prevent earnings being remitted byother shareholders in the undertaking. Investments in subsidiary, joint venture and associated undertakings No provision has been made for temporary differences applicable to investmentsin subsidiaries and joint ventures as the Group is in a position to control thetiming of reversal of the temporary difference and it is probable that thetemporary difference will not reverse in the foreseeable future. Due to theabsence of control in the context of associated undertakings (significantinfluence by definition), deferred tax liabilities are recognised whereappropriate. (iv) IAS 19 Employee Benefits In compliance with IAS 19, the assets and liabilities of the defined benefitpension schemes operated by various Group companies have been capitalised grossof deferred tax on the face of the Balance Sheet within retirement benefitobligations. The amounts reflected in the Transition and end-2004 Balance Sheetsare in accordance with the FRS 17 disclosures previously provided in the 2003and 2004 CRH Annual Reports save for the recording of assets at bid value asopposed to mid-market under IAS 19. Deferred tax has been computed in respect ofthe various defined benefit pension schemes and the related deferred tax assetsand liabilities are included in the restatements at the various balance sheetdates. In addition, amounts previously included within provisions in respect oflong-service commitments, post-retirement healthcare obligations and similaritems have been reclassified to retirement benefit obligations in the restatedIFRS balance sheets. These amounts have historically been subject to actuarialvaluation and no restatement arises on transition to IFRS. In accordance with the exemption afforded by IFRS 1, the Group has elected torecognise all cumulative actuarial gains and losses attributable to its definedbenefit pension schemes as at the transition date. The alternative ofretrospective application of the corridor methodology under IAS 19 has not beenavailed of. In addition, in line with the Amendment to IAS 19 and Irish GAAP,actuarial gains and losses arising after the transition date are dealt with inretained income via the Statement of Recognised Income and Expense. This changein accounting policy has also been applied to the Group's joint ventureundertakings which are proportionately consolidated under IFRS (see section (v)below). The impact of IAS 19 on CRH is summarised as follows:euro millions Transition H1 2004 FY 2004Income StatementOperating costs (1.2) (0.1)Finance costs 4.2 8.5Tax charge (0.4) (2.0)Net impact - increase in profit after tax 2.6 6.4Balance SheetGoodwill - arising on 2004 business combinations - - 0.6Deferred income tax assets 77.9 85.8 101.2Total assets 77.9 85.8 101.8Foreign currency translation reserve - (5.1) 2.5Retained income (131.7) (132.2) (213.2)Deferred income tax liabilities 4.8 8.0 -Retirement benefit obligations 230.4 241.1 337.0Removal of accrual for contributions payable (25.6) (26.0) (25.1)Current income tax liabilities - - 0.6Total equity and liabilities 77.9 85.8 101.8 (v) IAS 31 Interests in Joint Ventures and IAS 28 Investments in Associates Joint Venture Undertakings In line with the benchmark methodology contained in IAS 31, the Group has optedto apply proportionate consolidation in accounting for its interests in jointventure undertakings. The financial asset and share of results (on a grossequity accounting basis) previously reported under Irish GAAP have accordinglybeen reclassified across the appropriate balance sheet and income statementcaptions in the accompanying appendices. The balance sheets of joint ventureundertakings at the transition date and at 30 June and 31 December 2004 havebeen adjusted to take account of differences between Irish GAAP and IFRS; theadjustments related principally to the re-computation of deferred tax on atemporary differences basis, the separate recognition of deferred tax assets andliabilities, the write-back of goodwill amortisation charged in 2004 and theinclusion of the assets and liabilities of defined benefit pension schemes inretirement benefit obligations. Save for the aforementioned adjustments to the carrying values of assets andliabilities on transition, the application of proportionate consolidation ispurely presentational with no net impact on results or financial position. Underproportionate consolidation, the income statements, balance sheets and cash flowstatements of these entities will be included on a line-by-line basis in therespective CRH consolidated financial statements. The significant uplift in the asset and liability figures between the transitiondate and 30 June 2004 as shown in the table below relates predominantly to theinclusion of the Secil joint venture deal which closed in June 2004. The impact of proportionate consolidation of joint ventures is as follows: euro millions Transition H1 2004 FY 2004Income StatementGoodwill amortisation add-back 3.6 7.4Temporary differences methodology under IAS 12 1.1 (2.6)Net impact - increase in profit after tax 4.7 4.8Balance SheetNon-current assets* 175.7 291.6 314.7Current assets 126.6 273.8 252.2Total assets 302.3 565.4 566.9Total equity 1.1 4.9 1.1Non-current liabilities 188.8 384.1 394.7Current liabilities 112.4 176.4 171.1Total liabilities 301.2 560.5 565.8Total equity and liabilities 302.3 565.4 566.9Net debt 177.6 258.3 257.0 * The non-current assets figures include amounts in respect of entitiesclassified as joint venture undertakings under previous GAAP which have beenreclassified as associated undertakings under IFRS (as detailed in the paragraphoverleaf). Associated Undertakings Under IAS 28, investments in associated undertakings are accounted for on anequity basis, which is consistent with Irish GAAP. However, under Irish GAAP,results of associated undertakings were presented in the profit and loss accounton the basis of the reporting entity's share of operating profit, interest andtax; in contrast, under IAS 28 the Group's share of profit after tax ofassociated undertakings is shown as a single line item in the Group IncomeStatement. On adopting IFRS, certain entities accounted for as joint ventures under IrishGAAP have been reclassified as associated undertakings and consequently fall tobe accounted for under the equity method as opposed to proportionateconsolidation. The presentational impact on the Group Income Statement andBalance Sheet of these reclassifications (which have no net effect on reportedprofit or on net financial position) is separately highlighted in Appendices 2and 3. The impact on the Group Income Statements of the application of the equityaccounting rules under IAS 28 and of the reclassification of former jointventures as associates are summarised as follows:euro millions H1 2004 FY 2004(i) Application of equity accounting under IAS 28Removal of Group share of:Operating profit (3.2) (21.7)Profit on disposal of fixed assets - (0.3)Finance costs (0.3) 1.1Tax 1.3 6.0Profit after tax 2.2 14.9Goodwill amortisation (0.2) 0.9Net impact - add-back of goodwill amortisation (0.2) 0.9(ii) Reclassification of joint ventures to associatesRemoval of Group share of:Revenue (63.1) (66.6)Operating profit (8.0) (5.4)Profit on disposal of fixed assets (0.4) (0.2)Finance costs (net) 1.7 1.1Tax 1.6 -Profit after tax 5.1 4.5Net impact - - (vi) IAS 32 Financial Instruments: Disclosure and Presentation As disclosed in the Transition Balance Sheet in Appendix 4, euro 65.7 million ofnon-recourse preference capital funding pertaining to the Group's investment inits associated undertaking in Israel has been reclassified from minorityinterest into non-current interest-bearing loans and borrowings. The requiredbalance sheet reclassifications from minority interest to non-currentinterest-bearing loans and borrowings as at 30 June 2004 and 31 December 2004amounted to euro 65.0 million and euro 54.2 million respectively; in tandem withthe above, the interest costs attaching to the preference capital previouslyreported within minority interest (amounting to euro 2.1 million in the fullyear and euro 1.0 million at interim 2004) have been reclassified to net financecosts in the accompanying Income Statements. (vii) IAS 37 Provisions, Contingent Liabilities and Contingent Assets Provisions and deferred/contingent acquisition consideration have beendiscounted to net present cost on transition to IFRS; the net credit of euro49.4 million to retained income in the Transition Balance Sheet reflects theimpact of discounting provisions at the transition date and relatespredominantly to long-dated environmental and self-insurance provisions anddeferred/contingent consideration on business combinations. In accordance withIAS 37, the discount booked to the Transition Balance Sheet will be unwoundthrough the Income Statement as a component of net finance costs and the netpresent cost will be accreted over time to nominal amount. The following is the summarised impact for CRH of the discounting of provisions: euro millions Transition H1 2004 FY 2004Income StatementReduction in operating costs 2.5 9.4Unwinding of provisions - finance costs (5.2) (11.3)Net impact - decrease in profit after tax (2.7) (1.9)Balance SheetAssets: Trade and other receivables 13.1 19.9 10.4Foreign currency translation reserve - 1.1 (1.3)Retained income 49.4 46.7 47.5Trade and other payables 5.4 (3.7) 1.6Discounting and reclassifications of provisions (41.7) (24.2) (37.4)Total equity and liabilities 13.1 19.9 10.4 (viii) IAS 39 Financial Instruments: Recognition and Measurement The Group uses financial instruments throughout its businesses: borrowings,cash, cash equivalents and short-dated deposits are used to finance the Group'soperations; trade debtors and trade creditors arise directly from operations;and derivatives, principally interest rate and currency swaps and forwardforeign exchange contracts, are used to manage interest rate risks and currencyexposures and to achieve the desired profile of borrowings. The transition to IAS 39, which governs the recognition and measurement offinancial instruments under IFRS, gives rise to a significant change in themethodology of accounting for financial instruments requiring, in general, thatfinancial instruments are recorded initially at fair value with subsequentmeasurement either at fair value or amortised cost dependent on the nature ofthe financial asset or financial liability. Under IAS 39, derivatives are alwaysmeasured at fair value (i.e. are "marked-to-market") with changes in valuearising from fluctuations in interest rates, foreign exchange rates andcommodity prices inter alia. Irish GAAP focused on the disclosure, rather thanthe recognition, of financial instrument exposures. Prior to the conversion to IAS 39, the majority of derivatives were notrecognised in financial statements until settlement of the hedged item; thismethodology was consistent with Irish GAAP and was applied by CRH in itsconsolidated financial statements until the end of 2004. As highlighted in the qualifications section above (page 4), the financialinstruments framework under IFRS has not been finalised at the date of issue ofthis press release. The accompanying restatements have been undertaken based onthe version of IAS 39 approved by the European Commission which prohibits thefair valuation of financial liabilities. The Group has elected to pursue early adoption of both IAS 39 and IAS 32 witheffect from the transition date. Whilst the application of IAS 32 has no directimpact on this announcement given its focus on disclosures and presentation,early application of this standard implies that the 2005 Annual Report willcontain full disclosures for the comparative period. The impact of application of IAS 39 on the restated IFRS consolidated CRH IncomeStatement and Balance Sheet may be summarised as follows: • The net impact of the various adjustments required under IAS 39 on Group debt is an increase of euro 3.3 million as at the transition date followed by a decrease of euro 4.8 million as at 30 June 2004 and an increase of euro 6.2 million as at 31 December 2004. • As discussed in more detail in the accounting policies provided in Appendix 6, the following classifications have been adopted in respect of the financial instruments employed by CRH: • Cash and cash equivalents are defined as those items which have an original maturity of three months or less from the date of acquisition. Where the original maturity exceeds three months, the items are classified within financial assets and recorded at either amortised cost or at fair value. • Derivative financial instruments are measured at fair value in all cases with hedge accounting employed in respect of those derivatives fulfilling the stringent requirements for hedge accounting laid down in IAS 39; in general, these criteria relate to the documentation of the hedging relationship, upfront designation of such in accordance with the subsequent paragraph and the expectation that the hedge will be highly effective throughout its life from inception. Where the criteria enabling the employment of hedge accounting are not satisfied, movements in the related derivatives are reported in the Group Income Statement either in operating costs or net finance costs as appropriate. The total charge of euro 7.2 million in the full-year 2004 Income Statement (euro 3.3 million income as at the interim stage) is attributable to a combination of hedge ineffectiveness and movements on non-qualifying hedging instruments. • In applying hedge accounting, IAS 39 identifies three categories of hedges - fair value, cash flow and net investment. In the case of fair value hedges, movements in fair value between the hedged item and the hedging instrument are dealt with through the income statement with any measure of ineffectiveness being reflected either as a debit or a credit (in the case of overly effective hedges still falling within the 80%-125% corridor stipulated in IAS 39). Where hedging instruments are classified as cash flow or net investment hedges, movements in fair value are accounted for through equity and released to the income statement over time as changes in the hedged cash flow are recognised. Ineffectiveness on fair value, cash flow and net investment hedges is reflected in the income statement. The impact on CRH of the application of IAS 39 is summarised as follows: euro millions Transition H1 2004 FY 2004Income StatementOperating costs 0.8 (3.2)Finance costs 4.1 (3.8)Deferred tax (1.6) (0.2)Net impact - increase/(decrease) in profit after tax 3.3 (7.2)Balance SheetDeferred income tax assets 0.9 0.3 1.1Derivative financial instruments 223.9 184.1 174.3Total assets 224.8 184.4 175.4Foreign currency translation reserve - 2.3 5.1Retained income (3.6) 0.1 (11.1)Interest-bearing loans and borrowings 26.2 (8.7) (81.8)Derivative financial instruments 201.0 188.0 262.3Deferred income tax liabilities 1.2 2.7 0.9Total equity and liabilities 224.8 184.4 175.4Reconciliation of net debtAs reported under Irish GAAP 2,308.1 3,174.7 2,440.7Proportionate consolidation of joint ventures (v) 177.6 258.3 257.0Reclassification of preference capital (vi) 65.7 65.0 54.2Mark-to-market of derivatives 3.3 (4.8) 6.2Net debt under IFRS 2,554.7 3,493.2 2,758.1 Appendix 1 Page 1 of 2 Independent auditors' report to the Directors of CRH plc on the preliminary IFRSconsolidated financial statements for the year ended 31 December 2004 We have audited the accompanying preliminary International Financial ReportingStandards ("IFRS") consolidated financial statements of CRH plc ("the Company")for the year ended 31 December 2004 which comprise the Group Balance Sheet as at1 January 2004, the Group Income Statement and Group Statement of RecognisedIncome and Expense for the year ended 31 December 2004, the Group Balance Sheetas at 31 December 2004 together with the related accounting policies under IFRSand segmental information set out on pages 31 to 40 and 27 and 28 respectivelybut excluding half year information. This report is made solely to the Directors in accordance with our engagementletter dated 25 April 2005. Our audit work has been undertaken so that we mightstate to the Directors those matters we are required to state to them in anauditors' report and for no other purpose. To the fullest extent permitted bylaw, we do not accept or assume responsibility or liability to anyone other thanthe Company for our audit work, for this report, or for the opinions we haveformed. Respective Responsibilities of the Company's Directors and Ernst & Young,Chartered Accountants These preliminary IFRS consolidated financial statements are the responsibilityof the Company's Directors and have been prepared as part of the Company'sconversion to IFRS. They have been prepared in accordance with the basis set outin sections 2 and 3 to the Restatement of 2004 Results under IFRS and Appendix6, which describe how IFRS have been applied under IFRS 1, including theassumptions management has made about the standards and interpretations expectedto be effective, and the policies expected to be adopted, when managementprepares its first complete set of IFRS consolidated financial statements as at31 December 2005. Our responsibility is to express an independent opinion on the preliminary IFRSconsolidated financial statements based on our audit. We read the otherinformation accompanying the preliminary IFRS consolidated financial statementsand consider whether it is consistent with the preliminary IFRS consolidatedfinancial statements. We consider the implications for our report if we becomeaware of any apparent misstatements or material inconsistencies with thepreliminary IFRS consolidated financial statements. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by theAuditing Practices Board. Those Standards require that we plan and perform theaudit to obtain reasonable assurance about whether the preliminary IFRSconsolidated financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the preliminary IFRS consolidated financial statements. An auditalso includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall presentation of thepreliminary IFRS consolidated financial statements. We believe that our auditprovides a reasonable basis for our opinion. Emphasis of matter Without qualifying our opinion, we draw attention to the fact that section 2 tothe Restatement of 2004 Results under IFRS explains why there is a possibilitythat the preliminary IFRS consolidated financial statements may requireadjustment before constituting the final IFRS consolidated financial statements.Moreover, we draw attention to the fact that, under IFRS only a complete set ofconsolidated financial statements with comparative financial information andexplanatory notes can provide a fair presentation of the Company's financialposition, results of operations and cash flows in accordance with IFRS. We also draw attention to the fact that we have not audited the Group BalanceSheet of the Company, the related Group Income Statement, Group Statement ofRecognised Income and Expense and related segmental information for the halfyear ended 30 June 2004. Appendix 1 Page 2 of 2 Opinion In our opinion, the preliminary IFRS consolidated financial statements for theyear ended 31 December 2004 have been prepared, in all material respects, inaccordance with the basis set out in sections 2 and 3 to the Restatement of 2004Results under IFRS and Appendix 6, which describe how IFRS have been appliedunder IFRS 1, including the assumptions management has made about the standardsand interpretations expected to be effective, and the policies expected to beadopted, when management prepares its first complete set of IFRS consolidatedfinancial statements as at 31 December 2005. Ernst & Young, Chartered Accountants Registered Auditors 27 May 2005 Appendix 2 Page 1 of 4CRH plcGROUP INCOME STATEMENTfor the year ended 31 December 2004 Restated under IFRS Audited Continuing operations Joint Ventures Total 2004 2004 2004 •m •m •mRevenue 12,280.1 474.4 12,754.5Cost of sales 8,415.5 301.9 8,717.4Gross profit 3,864.6 172.5 4,037.1Related Shares:
CRH