6th Jul 2005 13:48
Smiths Group PLC6 July 2005 Smiths Group: Transition to International Financial Reporting Standards (IFRS) Smiths Group is today publishing information about its IFRS accounting policiesand restating its interim results to 31 January 2005 and its July 2004 andJanuary 2005 balance sheets in order to enable an early understanding of theeffect of IFRS on the Company's financial reporting. Smiths Group will reportunder IFRS for the first time in the 2005/2006 interim results. UK GAAP remains the basis for the 2004/2005 financial statements. The company is not issuing a trading statement at this time. A tradingstatement will be issued as Smiths enters the close period in August. Highlights: • Headline* profit before tax for the six months ended 31 January 2005 up 10% to £170m compared to the UK GAAP equivalent (and statutory profit before tax up 30%) • Headline* earnings per share for the six months ended 31 January 2005 up 9% to 22.2p compared to the UK GAAP equivalent (and statutory eps up 34%) • No further significant differences arising from previous guidance • IAS 32 and IAS 39 to be adopted from 1 August 2005 • No effect on Smiths' trading cash flows * Before goodwill amortisation and exceptional items (under UK GAAP) and beforesignificant items (under IFRS). Exceptional/significant items in the six monthsended 31 January 2005 comprised restructuring costs of £7.6m. Alan Thomson, Financial Director, commented: "The move to IFRS, whilstimportant, does not change the economics or strategy of our business. Theincrease in headline profits and earnings per share arises principally from thecapitalisation of development expenditure, although the underlying fundamentalsand cash flows of Smiths remain unchanged". The full text of this release may be downloaded from http://www.smiths-group.com/ir. Further information on the impact of IFRS will be disclosed on a conference callfor analysts, to which investors are invited to listen, at 2.30pm on Thursday 7July. The call will be accessed onUK Toll Free Number: 0800-018-0764USA Toll Free Number: 877-951-7311PASSCODE: IFRSLEADER: Russell Plumley -o- Media: Investors:Chris Fox Russell Plumley+44 (0) 20 8457 8403 +44 (0) 20 8457 [email protected] [email protected] Smiths Group plc Adoption of International Financial Reporting Standards Introduction As a consequence of the adoption by the European Union ("EU") of InternationalFinancial Reporting Standards ("IFRS") Smiths Group plc ("Smiths"), in commonwith all companies quoted on the London Stock Exchange or other Europeanexchanges, is required to prepare its consolidated financial statements underIFRS for all periods commencing on or after 1 January 2005. Smiths will first adopt IFRS for the year commencing 1 August 2005 and ending 31July 2006, including the Interim Statement for the six months ending 31 January2006. However, the requirement to restate comparative figures on the same basisas the period then under review means that Smiths has:- i) Applied its new IFRS accounting policies to itsconsolidated 31 July 2004 balance sheet (previously prepared under UK GenerallyAccepted Accounting Standards ("UK GAAP"), in order to determine anappropriately adjusted opening position on transition to IFRS as at 1 August2004; and ii) Restated its results for the period of 6 months ended 31January 2005 in line with its new IFRS accounting policies for such comparativepurposes. The impact of IFRS on the Smiths consolidated financial statements will betwo-fold:- a) Presentation The format and descriptions used in the balance sheet and income statement willchange to accord with the new reporting requirements, and b) Measurement The recognition and measurement of certain assets, liabilities, income andexpenses will change in order to comply with the new standards. This document sets out the changes that are required to the previously reported2004 balance sheet and the 2005 Interim Statement in order to comply with IFRS,and the underlying reasons for those changes. The financial informationrepresents the company's current best estimates, and may need to be revisedsubsequently due to changes in IFRS, or to the interpretation of its provisions.The appendices to this document contain reconciliations of the 1 August 2004opening Balance Sheet, and the 31 January 2005 Interim Balance Sheet and IncomeStatement, from a UK GAAP to an IFRS basis and revised accounting polices underIFRS. It should be noted that the Smiths Group plc Annual Report for the year ending31 July 2005 will continue to be prepared under UK GAAP, and circulated toshareholders for their approval on that basis. The 2005 full-year results andclosing balance sheet will be restated to comply with IFRS for comparisonpurposes in the 2006 Annual Report. This information is expected to be madeavailable in late Autumn. Summary of IFRS Impact - Balance Sheet (unaudited) The impact of IFRS on the Smiths Group plc consolidated shareholders' funds maybe summarised as follows:- 1 August 2004 31 January 2005 £m £m Shareholders' funds under UK GAAP 1,122.5 1,164.2 Add: Development expenditure 65.1 81.2 capitalised Goodwill amortisation reversal - 22.1 Dividend reversal 102.5 52.0 Deferred tax (2.9) (5.7) Other adjustments (6.2) (8.4) Shareholders' funds under IFRS 1,281.0 1,305.4 Changes in the presentational format of the 2004 consolidated balance sheet toaccord with the new IFRS requirements are set out in Appendix A. An analysis of UK GAAP - IFRS adjustments by category of assets and liabilitiesin that new format are set out in Appendices B (1 August 2004) and E (31 January2005). Summary of IFRS Impact - 2005 Interim Income Statement (unaudited) Following restatement of the Smiths Group plc consolidated balance sheet at 1August 2004, the results for the 6 months ended 31 January 2005 have beenrevised to conform with IFRS rules. The impact on the previously reported UKGAAP pre-tax profit is summarised as follows:- Headline* Total £m £m UK GAAP profit before tax 154.7 125.0 Add: Development expenditure capitalised (net of amortisation) 16.2 16.2 Goodwill amortisation reversal - 22.1 Share based payment (3.0) (3.0) Financing gains 2.2 2.2 Other (0.3) (0.3) IFRS adjusted profit before tax 169.8 162.2 IFRS taxation (44.9) (42.6) IFRS adjusted profit after taxation 124.9 119.6 EPS - Basic 22.2p 21.3p * Before goodwill amortisation and exceptional items (under UK GAAP) and beforesignificant items (under IFRS). Exceptional / significant items in the sixmonths ended 31 January 2005 comprised restructuring costs of £7.6m. Headline basic earnings per share (EPS) improves from 20.4p under UK GAAP to22.2 p on an IFRS basis, and after exceptional items from 15.9p under UK GAAP to21.3p on an IFRS basis. A restatement of the 2005 Interim Income Statement and analysis of UK GAAP -IFRS adjustments is set out in Appendix C. Basis of preparation The unaudited financial information contained in this document has been preparedusing IFRS policies based on IFRS expected to be applicable to the Company andadopted formally by the EU as of 31 July 2006. As permitted, Smiths has adoptedearly the amendment to IAS 19 Employee Benefits published in December 2004,which is still pending endorsement by the EU. At this stage in the development of IFRS, matters such as the interpretation andapplication surrounding it are continuing to evolve. In addition IFRS currentlyin issue and endorsed by the EU are subject to interpretation by IFRIC andfurther standards may be issued by the IASB that will be endorsed by the EUbefore 31 July 2006. These uncertainties could result in the need to change thebasis of accounting or presentation of certain financial information from thatpresented in this document. Smiths is required to establish its IFRS accounting policies for the year ended31 July 2006, and apply these retrospectively to determine its opening IFRSbalance sheet at the transition date of 1 August 2004 and the comparativefinancial information for the year ending 31 July 2005. However advantage hasbeen taken of certain exemptions afforded by IFRS1 First Time Adoption ofInternational Financial Reporting Standards as follows:- 1.Business combinations Business combinations prior to 1 August 2004, and in particular the merger withTI Group plc, which took place on 4 December 2000, have not been restated tocomply with IFRS 3 Business Combinations. The merger reserve of £235m willremain as permanent item within shareholders' equity. 2. Cumulative translation differences IAS 21 The Effects of Changes in Foreign Exchange Rates requires annualtranslation differences arising on the opening net assets and net profit or lossof each foreign subsidiary to be treated as a separate component ofshareholders' equity, and the cumulative net surplus / deficit for eachsubsidiary carried forward and added to / subtracted from any gains / losses onthe future disposal of that subsidiary. Smiths has taken the option to set thesegains / losses at zero as at the date of transition to IFRS. Any gains andlosses recognised in the income statement on subsequent disposals of foreignoperations will therefore include only those translation differences arisingafter 1 August 2004, the IFRS transition date. 3. Share-based payment Smiths has applied IFRS 2 Share-based Payment retrospectively only toequity-settled awards made after 7 November 2002 that had not vested at 1January 2005. 4. Financial Instruments Smiths has elected to adopt IAS 32 Financial Instruments : Disclosure andPresentation and IAS 39 Financial Instruments : Recognition and Measurement from1 August 2005 with no restatement of comparative information. Consequently, therelevant comparative financial information for the six months ended 31 January 2005 and the year ended 31 July2005 will not reflect the impact of these standards, but will include financialinstruments accounted for on a UK GAAP basis. Appendix F sets out the new Accounting Policies to be adopted by the companyunder IFRS. Smiths Group plc Consolidated Balance Sheet at 1 August 2004 (unaudited) UK GAAP Adjustments IFRS (IFRS Format) To IFRS Basis Total Total Total 2004 2004 2004 £m £m £m Non-current assets Goodwill 728.2 (0.5) 727.7Other intangible assets 129.7 129.7Property, plant and equipment 423.5 (12.2) 411.3 Financial Assets:TI Automotive Limited preference shares 325.0 325.0Other trade investments 2.3 2.3 Retirement benefit assets 103.9 103.9Deferred tax assets 116.4 (13.7) 102.7Trade and other receivables 9.2 (0.9) 8.3 1,708.5 102.4 1,810.9 Current assets Inventories 423.5 (3.8) 419.7Trade and other receivables 620.4 5.1 625.5Cash and cash equivalents 449.2 449.2 Total assets 3,201.6 103.7 3,305.3 Non-current liabilities Provisions for liabilities and charges (22.6) (22.6)Retirement benefit obligations (351.2) (1.8) (353.0)Deferred tax liabilities (49.4) 10.8 (38.6) Financial liabilities:Borrowings (446.5) (446.5) Other payables (53.1) (41.6) (94.7) Current liabilities Provisions for liabilities and charges (79.2) (79.2)Trade and other payables (665.9) 87.4 (578.5) Financial liabilities:Borrowings (275.4) (275.4) Current tax payable (135.8) (135.8) Total liabilities (2,079.1) 54.8 (2,024.3) Net assets 1,122.5 158.5 1,281.0 Shareholders' equity Share capital 140.3 140.3Share premium account 183.0 183.0Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 562.7 158.5 721.2 Total shareholders' equity 1,122.5 158.5 1,281.0 An analysis of the above adjustments required to represent the UK GAAP balance sheet onan IFRS basis is provided in Appendix B. Smiths Group plc Consolidated Income Statement (unaudited) 6 months ended 31 January 2005 Total As IFRS Adjustments IFRS Reported Format to IFRS Basis (UK GAAP) (UK GAAP) £m £m £m £m Continuing operations Turnover 1,344.4 Revenue 1,344.4 (6.8) 1,337.6Cost of sales (812.0) 4.5 (807.5) Gross profit 532.4 (2.3) 530.1 Sales and distribution costs (145.0) (0.4) (145.4)Administrative expenses (264.0) 19.2 (244.8)Development costs - IFRS adjustment 18.5 18.5 Operating profit 123.4 123.4 35.0 158.4 After charging: goodwill amortisation (22.1) 22.1 operational restructuring (7.6) (7.6) Interest receivable 10.9 10.9 10.9Interest payable (16.8) (16.8) (16.8)Financing gains 2.2 2.2Other finance income - retirement benefits 7.5 7.5 7.5 Profit before taxation 125.0 125.0 37.2 162.2 Taxation (35.7) (35.7) (6.9) (42.6) Profit for the period 89.3 89.3 30.3 119.6 An analysis of the above adjustments is provided in Appendix C. Smiths Group plc Consolidated Balance Sheet at 31 January 2005 (unaudited) 31 January 2005 UK GAAP Adjustments IFRS (IFRS Format) To IFRS Basis Total Total Total 2005 2005 2005 £m £m £m Non-current assets Goodwill 748.6 21.3 769.9Other intangible assets 150.7 150.7Property, plant and equipment 434.6 (14.0) 420.6 Financial Assets:TI Automotive Limited preference shares 325.0 325.0Other trade investments 2.9 2.9 Retirement benefit assets 110.6 110.6Deferred tax assets 113.5 (8.7) 104.8Trade and other receivables 8.0 (0.9) 7.1 1,743.2 148.4 1,891.6 Current assets Inventories 484.9 (3.3) 481.6Trade and other receivables 620.4 620.4Cash and cash equivalents 343.0 343.0 Total assets 3,191.5 145.1 3,336.6 Non-current liabilities Provisions for liabilities and charges (25.5) (25.5)Retirement benefit obligations (342.2) (1.8) (344.0)Deferred tax liabilities (51.0) 3.0 (48.0) Financial liabilities:Borrowings (442.6) (442.6)Other payables (48.2) (44.1) (92.3) Current liabilities Provisions for liabilities and charges (72.8) (72.8)Trade and other payables (632.9) 39.0 (593.9) Financial liabilities:Borrowings (292.0) (292.0) Current tax payable (120.1) (120.1) Total liabilities (2,027.3) (3.9) (2,031.2) Net assets 1,164.2 141.2 1,305.4 Shareholders' equity Share capital 140.6 140.6Share premium account 190.4 190.4Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 596.7 141.2 737.9 Total shareholders' equity 1,164.2 141.2 1,305.4 An analysis of the above adjustments is required to represent the UK GAAPbalance sheet on an IFRS basis is provided in Appendix E. Principal Impact of IFRS The key differences between UK GAAP and IFRS that will impact the Group are setout below. 1. Research and development Under UK GAAP research and development expenditure, other than that recoverablefrom third parties, is written off in the year in which it is incurred. Under IAS 38 Intangible Assets, the company is required to capitalise the costof developments which meet certain recognition criteria, including the technicalfeasibility and probable future economic benefits arising from the project. Thisexpenditure is then amortised over the anticipated future life of the resultingincome stream. Customer-funded and unfunded development projects are treated on a similarbasis, although the increased risk implicit in most funded development projectsmeans that the criteria for capitalisation are less likely to be met. Wherecosts are capitalised on funded development contracts, the associated funding isheld as a deferred liability on the balance sheet, and released to the incomestatement in step with the amortisation of the capitalised intangible asset. Research costs and development costs which do not meet the relevantcapitalisation criteria are written off in the year in which they are incurred. As a result of this policy, net assets (before deferred tax adjustment) haveincreased by £65.1m and £81.2 m as at 1 August 2004 and 31 January 2005respectively. Operating profits have increased by £16.3 million for the sixmonths ended 31 January 2005, represented by the capitalisation of £21.6m ofcosts previously written off under UK GAAP, offset by £5.3m of amortisation ofamounts capitalised. 2. Goodwill Under UK GAAP goodwill on businesses acquired by the Group after 1 August 1998is capitalised and amortised on a straight-line basis over its anticipatedfuture life up to a maximum of 20 years. Goodwill in respect of businessesacquired prior to 1 August 1998 was set off against reserves in the year ofacquisition. On subsequent disposal of a business acquired prior to 1 August1998 purchased goodwill previously set off against reserves is recycled andincluded in the profit or loss on disposal of the business. Under IFRS, from 1 August 2004 onwards, goodwill will no longer be amortised,but will instead be subject to annual impairment review. The amortisationcharge under UK GAAP for goodwill for the six months ended 31 January 2005 of£22.1 million has been reversed from the income statement, resulting in acorresponding increase in the net book value of goodwill. On disposal of abusiness acquired before 1 August 1998 goodwill set off against reserves will nolonger be recycled as part of the profit or loss on disposal of that business. Goodwill as at 31 January 2005 includes £46.6m in respect of IntegratedAerospace, acquired in November 2004. Following completion of the assessment ofits intangible assets at acquisition, goodwill will be adjusted as required byIFRS. 3. Dividends Under UK GAAP dividends relating to an accounting period but declared after thebalance sheet date are recognised as a liability even if the approval of thatdividend took place after the balance sheet date. Under IFRS, proposed dividends do not meet the definition of a liability untilsuch time as they have been declared, and in the case of the final dividend,approved by shareholders at the Annual General Meeting. This has resulted in abalance sheet reclassification from current liabilities to retained profit of£102.5m and £52.0m as at 1 August 2004 and 31 January 2005 respectively. 4. Share-based payment Smiths operates a number of share-based incentive schemes (both awards ofoptions and awards of shares) that are impacted by IFRS 2 Share-based Payment.Under UK GAAP Smiths recognises an expense based on the intrinsic value of theoptions (the difference between the exercise price and the market value at thedate of the award), other than for Save-As-You-Earn schemes for which UK GAAPincludes an exemption from recognising an expense. Under IFRS the cost of all share-based payments is based on the fair value ofthe options or shares at the date of grant calculated using an appropriatepricing model; the cost is recognised over the vesting period of the award.Accordingly an adjustment has been recognised to reflect an additional charge of£3.0m in the six months ended 31 January 2005. 5. Retirement benefits Under UK GAAP the company had already adopted FRS 17 Retirement Benefits. UnderFRS 17 the assets and liabilities of the Group's defined benefit pension schemesare recognised at fair value in the balance sheet and the operating andfinancing costs of defined benefit pension schemes are recognised in the profitand loss account as operating costs and finance costs respectively. Variationsfrom expected costs arising from the experience of the plans or changes inactuarial assumptions are recognised immediately in the Statement of TotalRecognised Gains and Losses. The change to IAS 19 Employee Benefits does not give rise to any significantchange in the basis of accounting for pensions, as Smiths will adopt early theoption allowed under IAS 19 to take actuarial gains and losses immediatelydirectly to equity through the Statement of Recognised Income and Expense.Changes are largely confined to presentation, in that retirement benefit schemesurpluses and deficits must be aggregated separately on the face of the balancesheet, and shown gross, rather than net, of deferred taxation. The deferredtax balance under UK GAAP related to pensions amounted to assets of £116.4m andliabilities of £31.2m as at 31 July 2004 and assets of £113.5 million andliabilities of £33.2m as at 31 January 2005. 6. Deferred taxation Under UK GAAP deferred tax is recognised in respect of all timing differencesthat have originated but not reversed at the balance sheet date wheretransactions or events have occurred at that date that will result in anobligation to pay more, or a right to pay less or to receive more tax. Under IFRS, deferred tax is recognised on all taxable temporary differencesbetween the tax base and the accounting base of balance sheet items included inthe balance sheet of the Group, except to the extent that such temporarydifferences arise on initial recognition of an asset or liability. This meansthat deferred tax is recognised on certain temporary differences that would nothave given rise to deferred tax under UK GAAP. The most significant differencesbetween UK GAAP and IFRS relate to the following: • Deferred tax provisions relating to tax deductible goodwill set offagainst reserves prior to 1 August 1998 under UK GAAP and not reinstated underIFRS are written back. For goodwill on which deductions are still to beclaimed, deferred tax assets have been recognised on transition to IFRS and arebeing amortised to offset the timing of the tax benefit. The amortisation ofthe asset under IFRS corresponds to the build up of the liability under UK GAAP;and • Under IFRS deferred tax is provided on temporary differences arisingon investments in subsidiaries and associates (principally in respect ofunremitted earnings), except where the Group is able to control the timing ofthe reversal of the temporary difference and it is probable that the temporarydifference will not reverse in the foreseeable future. In addition to these adjustments the carrying values of deferred tax assets andliabilities in the balance sheet have been adjusted to reflect the restatementof assets and liabilities arising from the adoption of IFRS. 7. Computer software Under UK GAAP all capitalised computer software was classified within tangiblefixed assets. IFRS requires capitalised software that is not an integral part ofthe hardware to be treated as an intangible asset. This has resulted in balancesheet reclassifications of approximately £12m and £14m respectively at 1 August2004 and 31 January 2005. Appendix A Smiths Group plc Consolidated Balance Sheet as at 1 August 2004 - Reclassification to IFRS Format (unaudited) UK GAAP UK GAAP Format IFRS Format Total Employee Total 2004 Benefits Other 2004 £m £m £m £m Non-current assets Intangible assets 728.2 728.2 Goodwill Other intangible assets Tangible assets 423.5 423.5 Property, plant and equipment Investments and advances: Financial assetsTI Automotive Limited preference shares 325.0 TI Automotive Limited preference 325.0 sharesOther 2.3 2.3 Other trade investments 103.9 103.9 Retirement benefit assets 116.4 116.4 Deferred tax assets 9.2 9.2 Trade and other receivables 1,479.0 220.3 9.2 1,708.5 Current assets Stocks 423.5 423.5 InventoriesDebtors - amounts falling due within one 620.4 620.4 Trade and other receivables year - amounts falling due after more 9.2 (9.2) than one yearCash at bank and on deposit 449.2 449.2 Cash and cash equivalents Non-current liabilities Provisions for liabilities and charges (120.0) 97.4 (22.6) Provisions for liabilitiesRetirement benefit liabilities (234.8) (116.4) (351.2) Retirement benefit obligations Pension assets 72.7 (72.7) (31.2) (18.2) (49.4) Deferred tax liabilitiesCreditors - amounts falling due after more (499.6) 499.6than one year (446.5) (446.5) Borrowings (53.1) (53.1) Other payablesCurrent liabilities Creditors - amounts falling due within one (1,077.1) 1,077.1year Provisions for liabilities and (79.2) (79.2) charges (665.9) (665.9) Trade and other payables (275.4) (275.4) Borrowings (135.8) (135.8) Current tax payable 1,122.5 1,122.5 Shareholders' equity Share capital 140.3 140.3 Share capitalShare premium account 183.0 183.0 Share premium accountRevaluation reserve 1.7 1.7 Revaluation reserveMerger reserve 234.8 234.8 Merger reserveRetained earnings 562.7 562.7 Retained earnings Total shareholders' equity 1,122.5 1,122.5 The reconciliation above shows the changes to the presentation of the balancesheet that are required as a result of the adoption of IFRS. It does not dealwith the measurement changes that are required in moving from UK GAAP to IFRS. Appendix B Smiths Group plc Consolidated Balance Sheet at 1 August 2004 (unaudited) UK GAAP Adjustments To IFRS IFRS (IFRS Basis Format) Total Development Share-based Dividend Other Total 2004 Costs Payments Reversal £m 2004 £m £m £m £m £m Non-current assets Goodwill 728.2 (0.5) 727.7Other intangible assets 116.6 13.1 129.7Property, plant and equipment 423.5 (12.2) 411.3 Financial Assets:TI Automotive Limitedpreferenceshares 325.0 325.0Other trade investments 2.3 2.3 Retirement benefit assets 103.9 103.9Deferred tax assets 116.4 4.3 (18.0) 102.7Trade and other receivables 9.2 (0.9) 8.3 1,708.5 116.1 4.3 (18.0) 1,810.9Current assets Inventories 423.5 (3.8) 419.7Trade and other receivables 620.4 5.1 625.5Cash and cash equivalents 449.2 449.2 Total assets 3,201.6 116.1 4.3 0.0 (16.7) 3,305.3 Non-current liabilities Provisions for liabilities and (22.6) (22.6)chargesRetirement benefit obligations (351.2) (1.8) (353.0)Deferred tax liabilities (49.4) (21.9) 32.7 (38.6) Financial liabilities:Borrowings (446.5) (446.5) Trade and other payables (53.1) (41.4) (0.2) (94.7) Current liabilities Provisions for liabilities and (79.2) (79.2)chargesTrade and other payables (665.9) (9.6) 102.5 (5.5) (578.5) Financial liabilities:Borrowings (275.4) (275.4) Current tax payable (135.8) (135.8) Total liabilities (2,079.1) (72.9) 102.5 25.2 (2,024.3) Net assets 1,122.5 43.2 4.3 102.5 8.5 1,281.0 Shareholders' equity Share capital 140.3 140.3Share premium account 183.0 183.0Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 562.7 43.2 4.3 102.5 8.5 721.2 Total shareholders' equity 1,122.5 43.2 4.3 102.5 8.5 1,281.0 The reconciliation above starts with the 1 August 2004 UK GAAP balance sheetpresented in IFRS format, as set out in Appendix A. It then plots the measurement changes required in moving from UK GAAP to IFRS. Appendix C Smiths Group plc Consolidated Income Statement for the 6 months ended 31 January 2005 (unaudited) Continuing operations As IFRS Format Development Goodwill Share-based Other IFRS reported (UK GAAP) (UK GAAP) Costs Amortisation Payments Adjustments Basis £m £m £m £m £m £m Turnover 1,344.4 Revenue 1,344.4 (6.8) 1,337.6Cost of sales (812.0) 4.5 (807.5) Gross profit 532.4 (2.3) 530.1 Sales and distribution costs (145.0) (0.4) (145.4)Administrative expenses (264.0) 22.1 (3.0) 0.1 (244.8)Development costs - IFRS 18.5 18.5adjustment Operating profit 123.4 123.4 16.2 22.1 (3.0) (0.3) 158.4 After Goodwill (22.1) (22.1) 22.1charging: amortisation Operational (7.6) (7.6) (7.6) restructuring Interest receivable 10.9 10.9 10.9Interest payable (16.8) (16.8) (16.8)Financing gains 2.2 2.2Other finance income - 7.5 7.5 7.5retirement benefits Profit before taxation 125.0 125.0 16.2 22.1 (3.0) 1.9 162.2 Taxation (35.7) (35.7) (5.7) (2.2) 0.9 0.1 (42.6) Profit for the period 89.3 89.3 10.5 19.9 (2.1) 2.0 119.6 Appendix D Smiths Group plc Consolidated Balance Sheet as at 31 January 2005 - Reclassification to IFRS Format (unaudited) UK GAAP UK GAAP Format IFRS Format Total Employee Total 2005 Benefits Other 2005 £m £m £m £m Non-current assets Intangible assets 748.6 748.6 Goodwill Other intangible assetsTangible assets 434.6 434.6 Property, plant and equipmentInvestments and advances:TI Automotive Limited preference shares 325.0 325.0 TI Automotive Limited preference shares Other 2.9 2.9 Other trade investments 110.6 110.6 Retirement benefit assets 113.5 113.5 Deferred tax assets 8.0 8.0 Trade and other receivables 1,511.1 224.1 8.0 1,743.2 Current assets Stocks 484.9 484.9 InventoriesDebtors - amounts falling due within one 620.4 620.4 Trade and other receivables year - amounts falling due after more 8.0 (8.0) than one year Cash at bank and on deposit 343.0 343.0 Cash and cash equivalents Total assets 2,967.4 224.1 3,191.5 Non-current liabilities Provisions for liabilities and charges (116.1) 90.6 (25.5) Provisions for liabilitiesRetirement benefit liabilities (228.7) (113.5) (342.2) Retirement benefit obligationsPension assets 77.4 (77.4) (33.2) (17.8) (51.0) Deferred tax liabilitiesCreditors - amounts falling due after morethan one year (490.7) 490.7 (442.6) (442.6) Borrowings (48.1) (48.1) Other payablesCurrent liabilities Creditors - amounts falling due within one (1,045.1) 1,045.1year (72.8) (72.8) Provisions for liabilities and charges (633.0) (633.0) Trade and other payables (292.0) (292.0) Borrowings (120.1) (120.1) Current tax payable Total liabilities (1,803.2) (224.1) (2,027.3) Net assets 1,164.2 1,164.2 Shareholders' equity Share capital 140.6 140.6 Share capitalShare premium account 190.4 190.4 Share premium accountRevaluation reserve 1.7 1.7 Revaluation reserveMerger reserve 234.8 234.8 Merger reserveRetained earnings 596.7 596.7 Retained earnings Total shareholders' equity 1,164.2 1,164.2 The reconciliation above shows the changes to the presentation of the balancesheet that are required as a result of the adoption of IFRS. It does not dealwith the measurement changes that are required in moving from UK GAAP to IFRS. Appendix E Smiths Group plc Consolidated Balance Sheet at 31 January 2005 (unaudited) UK GAAP Adjustments to IFRS (IFRS Format) IFRS Basis Total Development Share-based Dividend Total 2005 Costs Payments Reversal Other 2005 £m £m £m £m £m £mNon-current assets Goodwill 748.6 (0.5) 21.8 769.9Other intangible assets 136.3 14.4 150.7Property, plant and equipment 434.6 (14.0) 420.6 Financial Assets:TI Automotive Limited preference shares 325.0 325.0Other trade investments 2.9 2.9 Retirement benefit assets 110.6 110.6Deferred tax assets 113.5 9.6 (18.3) 104.8Trade and other receivables 8.0 (0.9) 7.1 1,743.2 135.8 9.6 3.0 1,891.6 Current assets Inventories 484.9 (3.3) 481.6Trade and other receivables 620.4 620.4Cash and cash equivalents 343.0 343.0 Total assets 3,191.5 135.8 9.6 (0.3) 3,336.6 Non-current liabilities Provisions for liabilities and charges (25.5) (25.5)Retirement benefit obligations (342.2) (1.8) (344.0)Deferred tax liabilities (51.0) (27.8) 30.8 (48.0) Financial liabilities:Borrowings (442.6) (442.6) Other payables (48.2) (43.3) (0.8) (92.3) Current liabilities Provisions for liabilities and charges (72.8) (72.8)Trade and other payables (632.9) (11.3) (0.3) 52.0 (1.4) (593.9) Financial liabilities:Borrowings (292.0) (292.0) Current tax payable (120.1) (120.1) Total liabilities (2,027.3) (82.4) (0.3) 52.0 26.8 (2,031.2) Net assets 1,164.2 53.4 9.3 52.0 26.5 1,305.4 Shareholders' equity Share capital 140.6 140.6Share premium account 190.4 190.4Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 596.7 53.4 9.3 52.0 26.5 737.9 Total shareholders' equity 1,164.2 53.4 9.3 52.0 26.5 1,305.4 The reconciliation above starts with the 31 January 2005 UK GAAP balance sheetpresented in IFRS format. It then plots the measurement changes required inmoving from UK GAAP to IFRS. Appendix F Smiths Group plc Significant IFRS Accounting Policies - to be adopted 1 August 2005 These accounting policies comply with International Financial ReportingStandards issued up to the date of this announcement and applicable to thecompany for the period under review. All relevant International FinancialReporting Standards have been endorsed by the European Union, with the exceptionof an amendment to IAS 19 Retirement Benefits allowing actuarial gains andlosses to be recognised immediately within equity. As explained on page 4 ofthis document, there are uncertainties surrounding the development of IFRS whichmean that these polices may change before 31 July 2006, when the Company willpresent its first full financial statements under IFRS. Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and its subsidiaries. Subsidiaries are all entities over which the Company has the power to govern thefinancial and operating policies generally accompanying a shareholding of morethan one half of the voting rights. Subsidiaries are fully consolidated fromthe date on which control is transferred to the Company. They arede-consolidated from the date that control ceases. Foreign currencies The Company's presentational currency is sterling. The results and financialposition of all subsidiaries and associates that have a functional currencydifferent from sterling are translated into sterling as follows: • Assets and liabilities are translated at the closing rate at the dateof that balance sheet; • Income and expenses are translated at average rates; and • All resulting exchange differences are recognised as a separatecomponent of equity. On consolidation, exchange differences arising from the translation of the netinvestment in foreign entities, and of borrowings and other currency instrumentsdesignated as hedges of such investments, are taken to shareholders equity.When a foreign operation is sold, the cumulative amount of such exchangedifferences is recognised in the income statement as part of the gain or loss onsale. Revenue Revenue comprises the fair value for the sale of goods and services, net oftrade discounts and sales related taxes, and the value of work undertaken duringthe year on long-term contracts. Revenue is recognised when the risks andrewards of the underlying sale have been transferred to the customer, which isusually where title passes or a separately identifiable phase of a contract ordevelopment has been completed and accepted by the customer. Where the outcome of a contract can be estimated reliably, revenue and costs arerecognised by reference to the stage of completion of the contract activity atthe balance sheet date. The Group uses the 'percentage of completion method' todetermine the appropriate amount to recognise in a given period. The assessmentof the stage of completion is dependent on the nature of the contract, but willgenerally be based on costs incurred or services performed up to the reportingdate, or alternatively, where appropriate, the achievement of contractualmilestones. Employee benefits Pension obligations and post-retirement benefits The Company has both defined benefit and defined contribution plans. For defined benefit plans the liability recognised in the balance sheet is thepresent value of the defined benefit obligation at the balance sheet date lessthe fair value of plan assets. The defined benefit obligation is calculatedannually by independent actuaries using the projected unit credit method. Thepresent value of the defined benefit obligation is determined by discounting theestimated future cash outflows using interest rates of high-quality corporatebonds that are denominated in the currency in which the benefits will be paid,and that have terms to maturity approximating to the terms of the relatedpension liability. Actuarial gains and losses arising from experienceadjustments and changes in actuarial assumptions are recognised in full in theperiod in which they occur, outside of the income statement and are presented inthe statement of recognised income and expense. Past service costs arerecognised immediately in income, unless the changes to the pension plan areconditional on the employees remaining in service for a specified period of time(the vesting period). In this case, the past service costs are amortised on astraight-line basis over the vesting period. For defined contribution plans, the Group pays contributions to publicly orprivately administered pension insurance plans on a mandatory, contractual orvoluntary basis. Contributions are expensed as incurred. Share based compensation The Company operates a number of equity settled share based compensation plans.The fair value of the employee services received in exchange for the grant ofshares or share options is recognised as an expense. The total amount to beexpensed over the vesting period is determined by reference to the fair value ofthe shares or share options granted, excluding the impact of any non-marketvesting conditions (for example profitability and sales growth targets). Fairvalue is determined by reference to option pricing models, principally Binomialmodels. The Company has applied the requirements of IFRS 2 Share-based Payment. Inaccordance with the transitional provisions, IFRS 2 has been applied only togrants of equity instruments after 7 November 2002 that had not vested as at 1January 2005. The intrinsic value of earlier grants remain charged to the incomestatement, as previously required under UK GAAP. Significant items Items which are sufficiently material are presented separately within theirrelevant consolidated income statement category. The separate reporting of suchitems helps provide a better indication of the Company's underlying businessperformance. Events which may give rise to such items include the restructuringof businesses; gains and losses on their sale; and asset impairments. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Company's share of the identifiable net assets of the acquired subsidiaryat the date of acquisition. Identifiable net assets include intangible assetsother than goodwill. Any such intangible assets are amortised over theirexpected future lives unless they are regarded as having an indefinite life, inwhich case they are not amortised, but subjected to annual impairment testing ina similar manner to goodwill. Goodwill arising from acquisitions of subsidiaries after 1 August 1998 isincluded in intangible assets, is not amortised but is tested annually forimpairment and carried at cost less accumulated impairment losses. Gains andlosses on the disposal of an entity include the carrying amount of goodwillrelating to the entity sold. Goodwill arising from acquisitions of subsidiaries before 1 August 1998, whichwas set against reserves in the year of acquisition under UK GAAP, has not beenreinstated and is not included in determining any subsequent profit or loss ondisposal of the related entity. Goodwill is tested for impairment at least annually or whenever there is anindication that the asset may be impaired. Any impairment is recognisedimmediately in the income statement. Subsequent reversals of impairment lossesfor goodwill are not recognised. Research and development Expenditure on research and development is charged to the profit and lossaccount in the year in which it is incurred with the exception of: • amounts recoverable from third parties; and • expenditure incurred in respect of the development of certain majornew product projects where the outcome of those projects is assessed as beingreasonably certain as regards viability and technical feasibility. Suchexpenditure is capitalised and amortised over the expected useful life of theRelated Shares:
Smiths Group