28th Jul 2005 07:02
Capita Group PLC28 July 2005 The Capita Group Plc - Adoption of International Financial Reporting Standards The Capita Group Plc is required under EU Regulations to adopt InternationalFinancial Reporting Standards ("IFRS") as its primary basis of accounting forthe year ending 31 December 2005. IFRS replaces UK Generally Accepted AccountingPrinciples ("UK GAAP"), under which the Group previously prepared its financialstatements. The principal impacts on the Group's previously reported financial informationare as follows: •cessation of goodwill amortisation •recognition of all employee benefits, principally pension obligations •inclusion of a charge for employee share options based on fair value •recognition of certain deferred taxation liabilities •de-recognition of dividends not declared at period end A full description of the impacts of the change and adjustments required tobring the financial information in line with IFRS for the 12 months ended 31December 2004 and six months ended 30 June 2004, and on the balance sheet as atthe date of transition of 1 January 2004, is presented in the followingsections. Contact details: The Capita Group Plc Tel: 020 7799 1525Rod Aldridge, Executive ChairmanPaul Pindar, Chief ExecutiveShona Nichols, Corporate Communications DirectorCapita Press Office Tel: 0870 2400 488 Restatement of Financial Information under International Financial ReportingStandards ("IFRS") Contents 1. Introduction 2. First time adoption of International Financial Reporting Standards 3. Summary of major impacts of adoption of International Financial Reporting Standards 4. Summary of significant accounting policies under IFRS 5. Reconciliation of equity at 1 January 2004 (date of transition to IFRS) 6. Reconciliation of equity at 31 December 2004 (end of last period presented under previous GAAP) 7. Reconciliation of profit for the year ended 31 December 2004 8. Notes to the reconciliations 9. Group statement of recognised income and expense 10.Group statement of changes in equity 11.Independent Auditors' Special Purpose Report to The Capita Group Plc on the preliminary IFRS Financial Information for the year ended 31 December 2004 12.Appendix 1 - Reconciliation of profit for the six months ended 30 June 2004 1. Introduction The Capita Group Plc (the Company) is a public limited company, incorporated inEngland and Wales under the Companies Act 1985, whose shares are publiclytraded. In these financial statements, "Group" means the Company and all itssubsidiaries. Hitherto, The Capita Group Plc has prepared its primary financialstatements in accordance with UK Generally Accepted Accounting Principles (UKGAAP). From 2005 the Group is required to prepare its consolidated financialstatements in accordance with International Accounting Standards (IAS) andInternational Financial Reporting Standards (IFRS) as adopted by the EuropeanUnion (EU). References to IFRS throughout this document refer to the applicationof International Accounting Standards and International Financial ReportingStandards. The first Annual Report under IFRS will be for 2005 and the first interimresults reported under IFRS will be for the six months ended 30 June 2005. Thisdocument explains the differences that will arise when the Group's financialstatements are prepared under IFRS rather than UK GAAP. Specifically, thisdocument sets out reconciliations of the Group's balance sheets, as preparedunder UK GAAP, to those prepared in accordance with IFRS as at 1 January 2004(the opening balance sheet as at the date of transition to IFRS), 30 June 2004and 31 December 2004. In addition, this document includes reconciliations of theGroup's profit and loss accounts prepared under UK GAAP to those prepared inaccordance with IFRS for the six months to 30 June 2004 and for the year to 31December 2004. This restatement document has been prepared on the basis that all IFRSs,International Financial Reporting Interpretation Committee ("IFRIC")interpretations and current IASB exposure drafts will be issued as finalstandards and endorsed by the EU. It should be noted that, should the EU fail toendorse all of these standards in time for financial reporting in 2005 or ifIFRIC issues further interpretations prior to the reporting date, this mayresult in the need to change the basis of accounting and or the presentation ofcertain items from those presented in this document. The UK GAAP information contained in this document does not constitute statutoryaccounts as defined in section 240 of the Companies Act 1985. The auditors,Ernst & Young LLP, have issued unqualified opinions on the Group's UK GAAPfinancial statements for the years ended 31 December 2003 and 31 December 2004. 2. First time adoption of International Financial Reporting Standards The Group has applied IFRS 1 'First Time Adoption of International FinancialReporting Standards' as a starting point for reporting under IFRS. The Group'sdate of transition to IFRS is 1 January 2004 and comparative information in thefinancial statements is restated to reflect the Group's adoption of IFRS exceptwhere otherwise required or permitted by IFRS 1. IFRS 1 requires an entity to comply with each IFRS effective at the reportingdate for its first financial statements prepared under IFRS. As a general rule,IFRS 1 requires such standards to be applied retrospectively. However, thestandard allows several optional exemptions from full retrospective application.The Group has elected to take advantage of the following exemptions: • The Group will adopt IFRS 3 'Business Combinations' to the extent that it applies to acquisitions post 1 January 2004. Acquisitions before that date will be recorded as under previous accounting rules as the Group intends to take advantage of the exemption allowed in IFRS 1 regarding business combinations recognised before the date of transition to IFRS. All goodwill and intangibles will be tested for impairment, as required by IAS 36 'Impairment of Assets'; goodwill on an annual basis and intangibles when there is an indicator of impairment. In addition, the Group will take advantage of the exemption allowed in IFRS 1 not to apply IAS 21 'The Effects of Changes in Foreign Exchange Rates' retrospectively to fair value adjustments and goodwill arising in business combinations that occurred before the date of transition to IFRSs. • The Group will also elect to take advantage of the exemption which allows cumulative actuarial gains or losses on defined benefit pension schemes at the date of transition to IFRS to be recognised immediately. • The Group will elect to take advantage of the exemption allowed in IFRS 1 regarding cumulative translation differences. Accordingly, the cumulative translation differences for all foreign operations are deemed to be nil at the date of transition to IFRS. • The Group will elect to apply the exemptions in IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition and Measurement' to apply these standards from 1 January 2005 only. • The Group will elect to take advantage of the exemptions allowed in IFRS 1 regarding IFRS 2 'Share based payments'. The Group will apply the exemptions for share based payments granted on or before 7 November 2002. This means that only equity instruments granted after 7 November 2002 that vest after the effective date of IFRS 2 on 1 January 2005 need to be valued. The Group will meet all the disclosure requirements of IFRS 2. 3. Summary of major impacts of adoption of International Financial Reporting Standards IFRS 3 - Business Combinations. The standard deals with accounting for businesscombinations including goodwill and intangible assets. The Group's currentpolicy under UK GAAP, to amortise goodwill and to test for impairment when thereis an indication that the carrying value of an asset might not be recoverable,will be replaced by an annual impairment test and cessation of goodwillamortisation. IAS19 - Employee Benefits. The standard covers all forms of employee benefitsbut the major impact for the Group will be in the accounting policies for postretirement benefits in particular for defined benefit pension schemes. The Groupcurrently accounts for these schemes using SSAP24 and also complies with thetransitional rules of FRS17. The impact on the financial statements will be tointroduce a liability on the balance sheet in respect of defined benefit pensionschemes and to reduce shareholders' equity by a corresponding amount. IFRS 2 - Share Based Payments The standard deals with the valuation of shareawards and their treatment in the financial statements. At present no expense isrecognised under UK GAAP. Under IFRS 2 share awards must be measured at fairvalue at grant date and should be recognised as an expense over the vestingperiod. Since 31 December 2003 the Group has undertaken a review of methods for valuingshare option awards as all options granted since 7 November 2002, a datespecified in IFRS 2, that vest after the effective date of IFRS 2 on 1 January2005 require valuation. Options issued under the Capita Sharesave Scheme and TheCapita Group Plc Executive Share Option Scheme (The 1997 Scheme) have beenvalued using an enhanced Black-Scholes model. The more complex Long Term IndexedShare Appreciation Scheme (LTISAS) has been valued using an appropriatevaluation model. In cases where valuation expertise was required the Group hassought advice from external valuation specialists. The impact of this standard on the financial statements of the Group will be acharge to the profit and loss account for the year ended 31 December 2004 and anequivalent increase in shareholders' funds. Additionally there is a cumulativecharge for adoption to the date of transition to IFRS to retained earnings. IAS 12 - Income Taxes. This standard requires entities to provide for deferredtaxation based on temporary differences between the carrying amount of assets/liabilities and their tax base. Consequently, the Group has made additionalprovision for deferred tax on tax deductible purchased goodwill, separatelyidentified intangibles arising on business combinations together with deferredtax adjustments in respect of share based payments and pension costs. IAS 10 - Events after the balance sheet date. The standard does not permitdividends declared after the balance sheet date to be recognised as a liability.Consequently, under IFRS, the Group will no longer make provision for unapproveddividends at the period end. 4. Summary of significant accounting policies under IFRS The significant accounting policies adopted in the preparation of the Group'sIFRS financial information are set out below: Basis of preparationThe consolidated financial statements have been prepared on the historical costbasis, except for certain financial instruments, separately identifiableintangibles acquired on business combinations and the pension assets andliabilities which have been measured at fair value. The carrying value ofrecognised assets and liabilities that are hedged are adjusted to record changesin the fair values attributable to the risks that are being hedged. Theconsolidated financial statements are presented in pounds sterling and allvalues are rounded to the nearest tenth of a million (£Million) except whenotherwise indicated. Basis of consolidationThe consolidated financial statements comprise the financial statements of TheCapita Group Plc and its subsidiaries as at 31 December each year. The financialstatements of the subsidiaries are prepared for the same reporting year as theparent company, using consistent accounting policies, but in accordance with UKGenerally Accepted Accounting Principles (UK GAAP). Adjustments are made tobring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits arisingfrom intra-group transactions, have been eliminated in full. Subsidiaries are consolidated from the date on which control is transferred tothe Group and cease to be consolidated from the date on which control istransferred out of the Group. Where there is a loss of control of a subsidiary,the consolidated financial statements include the results for the part of thereporting year during which The Capita Group Plc has control. InventoriesInventories are stated at the lower of cost and net realisable value. Costs are those incurred in bringing inventories to their present location andcondition. Costs include any direct materials, where applicable, and labourtogether with a proportion of operating overheads based on normal operatingcapacity but excluding borrowing costs. Net realisable value is the estimatedselling price in the ordinary course of business, less estimated costs ofcompletion and the estimated costs necessary to make the sale. For long-term contracts see accounting policy below. RevenueRevenue is recognised to the extent that it is probable that the economicbenefits will flow to the Group and the revenue can be reliably measured. Otherthan in respect of long-term contracts, described below, revenue represents feeincome recognised in respect of services provided during the period (stated netof value added tax). Revenue is earned within the United Kingdom, Europe, India and South-east Asia. Long-term contracts(i) Brownfield outsourcing contracts - Brownfield contracts are where there is atransfer of an existing operation to the Group. For brownfield contracts allcosts incurred prior to service commencement are expensed as incurred andrevenue represents fees invoiced in respect of services provided. (ii) Greenfield outsourcing contracts - A greenfield contract is one in which anentirely new service is being established for our customer. For these contractsno profit is recognised until service delivery commences and is being invoiced.Upon commencement, revenue represents fees invoiced in respect of servicesprovided. Direct incremental costs incurred on the contract prior to servicecommencement and reimbursable during the contract, excluding any overheads, areincluded in debtors and amortised over the life of the contract. On somecontracts, non-refundable payments are received, prior to full servicecommencement, on the achievement of agreed contract delivery milestones. Theseare recognised as revenue when earned. (iii) Property consultancy contracts - Revenue represents the sales value ofwork done in the year, including fees invoiced and estimates in respect ofamounts to be invoiced after the year end. Profits are recognised on long-termcontracts where the final outcome can be assessed with reasonable certainty. Incalculating this the percentage of completion method is used based on theproportion of costs incurred to the total estimated cost. Cost includes directstaff costs and outlays. Full provision is made for all known or anticipatedlosses on each contract immediately such losses are forecast. Gross amounts due from customers are stated at the proportion of the anticipatednet sales value earned to date less amounts billed on account. To the extentthat fees paid on account exceed the value of work performed, they are includedin creditors as gross amounts due to customers. Foreign currency translationThe functional and presentation currency of The Capita Group Plc and its UnitedKingdom subsidiaries is the pound sterling (£). Transactions in foreigncurrencies are initially recorded in the functional currency rate ruling at thedate of the transaction. Monetary assets and liabilities denominated in foreigncurrencies are retranslated at the functional currency rate of exchange rulingat the balance sheet date. All differences are taken to the consolidated incomestatement with the exception of differences on foreign currency borrowings thatprovide a hedge against a net investment in a foreign entity. These are takendirectly to equity until the disposal of the net investment, at which time theyare recognised in the consolidated income statement. Tax charges and creditsattributable to exchange differences on those borrowings are also dealt with inequity. Non-monetary items that are measured in terms of historical cost in aforeign currency are translated using the exchange rate as at the date ofinitial transaction. Non-monetary items measured at fair value in a foreigncurrency shall be translated usingthe exchange rates at the date when the fair value was determined. The functional currencies of overseas subsidiaries include the euro, Indianrupee, Malaysian ringgit, South Korean won and the Philippine peso. As at thereporting date, the assets and liabilities of the overseas subsidiary areretranslated into the presentation currency of The Capita Group Plc at the rateof exchange ruling at the balance sheet date and its income statement istranslated at the weighted average exchange rate for the year. The exchangedifferences arising on the retranslation are taken directly to a separatecomponent of equity. On disposal of a foreign entity, the deferred cumulativeamount recognised in equity relating to that particular foreign operation shallbe recognised in the income statement. The Group has elected not to record cumulative translation differences arisingprior to the transition date as permitted by IFRS 1. In utilising thisexemption, all cumulative translation differences are deemed to be zero as at 1January 2004 and all subsequent disposals shall exclude any translationdifferences arising prior to the date of transition. Property, plant and equipmentProperty, plant and equipment is stated at cost less accumulated depreciationand any impairment in value. Depreciation is calculated on a straight-line basisover the estimated useful life of the asset as follows: Freehold buildings and long leasehold property - over 50 yearsLeasehold improvements - period of the leasePlant and equipment - 3-10 years The carrying values of property, plant and equipment are reviewed for impairmentwhen events or changes in circumstances indicate the carrying value may not berecoverable. If any such indication exists and where the carrying values exceedthe estimated recoverable amount, the assets or cash-generating units arewritten down to their recoverable amount. The recoverable amount of property,plant and equipment is the greater of net selling price and value in use. Inassessing value in use, the estimated future cash flows are discounted to theirpresent value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset. Foran asset that does not generate largely independent cash inflows, therecoverable amount is determined for the cash-generating unit to which the assetbelongs. Impairment losses are recognised in the income statement in theadministrative expenses line item. An item of property, plant and equipment is derecognised upon disposal or whenno future economic benefits are expected to arise from the continued use of theasset. Any gain or loss arising on de-recognition of the asset (calculated asthe difference between the net disposal proceeds and the carrying amount of theitem) is included in the income statement in the year in which the item isderecognised. Borrowing costsBorrowing costs are currently recognised as an expense when incurred inaccordance with the benchmark accounting treatment under IAS 23. GoodwillGoodwill recognised under UK GAAP prior to the date of transition to IFRS isstated at net book value as at this date. Goodwill recognised subsequent to 1January 2004 is, on acquisition, initially measured at cost being the excess ofthe cost of the business combination over the acquirer's interest in the netfair value of the identifiable assets, liabilities and contingent liabilities.Following initial recognition, goodwill is measured at cost less any accumulatedimpairment losses. Goodwill is reviewed for impairment, annually or morefrequently if events or changes in circumstances indicate that the carryingvalue may be impaired. As at the acquisition date, any goodwill acquired is allocated to each of thecash-generating units expected to benefit from the combination's synergies.Impairment is determined by assessing the recoverable amount of thecash-generating unit, to which the goodwill relates. Where the recoverableamount of the cash-generating unit is less than the carrying amount, animpairment loss is recognised. Where goodwill forms part of a cash-generatingunit and part of the operation within that unit is disposed of, the goodwillassociated with the operation disposed of is included in the carrying amount ofthe operation when determining the gain or loss on disposal of the operation.Goodwill disposed of in these circumstances is measured on the basis of therelative values of the operation disposed of and the portion of thecash-generating unit retained. Intangible assetsIntangible assets acquired separately are capitalised at cost and thoseidentified in a business acquisition are capitalised at fair value as at thedate of acquisition. Following initial recognition, the carrying amount of anintangible asset is its cost less any accumulated amortisation and anyaccumulated impairment losses. The useful lives of intangible assets areassessed to be either finite or indefinite. Amortisation is charged on assetswith finite lives, this expense is taken to the income statement through theadministrative expenses line item.Intangible assets created within the business are not capitalised andexpenditure is charged against profits in the year in which the expenditure isincurred. Intangible assets are only tested for impairment, either individually or at thecash-generating unit level, where there is an indicator of impairment. Gains or losses arising from de-recognition of an intangible asset are measuredas the difference between the net disposal proceeds and the carrying amount ofthe asset and are recognised in the income statement when the asset isderecognised. Recoverable amount of non-current assetsAt each reporting date, the Group assesses whether there is any indication thatan asset may be impaired. Where an indicator of impairment exists, the Groupmakes a formal estimate of the asset's recoverable amount. Where the carryingamount of an asset exceeds its recoverable amount, the asset is consideredimpaired and is written down to its recoverable amount. Recoverable amount isthe higher of an asset's or cash-generating unit's fair value less costs to selland its value in use and is determined for an individual asset, unless the assetdoes not generate cash inflows that are largely independent of those from otherassets or groups of assets. InvestmentsAll investments are initially recorded at cost, being the fair value of theconsideration given and including acquisition charges associated with theinvestment. Subsequently they are reviewed for impairment if events or changesin circumstances indicate the carrying value may not be recoverable. Trade and other receivablesTrade receivables are recognised and carried at original invoice amount less anallowance for any uncollectible amounts. An estimate for doubtful debts is madewhen collection of the full amount is no longer probable. Bad debts are writtenoff when identified. Cash and cash equivalentsCash and short-term deposits in the balance sheet comprise cash at bank and inhand and short-term deposits with an original maturity of three months or less. For the purpose of the consolidated cash flow statement, cash and cashequivalents consist of cash and cash equivalents as defined above, net ofoutstanding bank overdrafts. Interest-bearing loans and borrowingsAll loans and borrowings are initially recognised at cost, being the fair valueof the consideration received net of issue costs associated with the borrowing. After initial recognition loans and borrowings are subsequently measured atamortised cost using the effective interest method. Amortised cost is calculatedby taking into account any issue costs, and any discount or premium onsettlement. Gains and losses are recognised in the net profit or loss when the liabilitiesare derecognised or impaired, as well as through the amortisation process. ProvisionsProvisions are recognised when the Group has a present obligation (legal orconstructive) as a result of a past event and it is probable that an outflow ofresources embodying economic benefits will be required to settle the obligationand a reliable estimate can be made of the amount of the obligation. Where theGroup expects some or all of a provision to be reimbursed, for example under aninsurance contract, the reimbursement is recognised as a separate asset but onlywhen the reimbursement is virtually certain. The expense relating to anyprovision is presented in the incomestatement net of any reimbursement. If the effect of the time value of money ismaterial, provisions are determined by discounting the expected future cashflows at a pre-tax rate that reflects current market assessments of the timevalue of money and, where appropriate, the risks specific to the liability.Where discounting is used, the increase in the provision due to the passage oftime is recognised as a borrowing cost. Surplus propertiesThe Group provides on a discounted basis for the future rent expense and relatedcost of leasehold property (net of estimated sub-lease income) where the spaceis vacant or currently not planned to be used for ongoing operations. Pre-contract costsPre-contract award bidding costs are expensed as incurred. Pension schemesThe Group maintains a number of contracted-out money purchase schemes andcontributions are charged to the income statement in the year in which they aredue. In addition, the Group operates two defined benefit pension schemes andparticipates in five other defined benefit schemes, all of which requirecontributions to be made to separately administered funds. The cost of providingbenefits under these schemes are determined separately for each scheme using theprojected unit credit actuarial valuation method. In respect of three of theschemes in which the Group participates, the period of participation is for anagreed fixed period only. Due to the short term nature of these contracts, thecosts of providing these benefits have been taken as the present value ofexpected contributions requested by the relevant scheme actuary over the term ofthe contract which have been determined using the projected unit creditactuarial valuation method Actuarial gains and losses are fully recognised inequity through the statement of recognised income and expense such that thebalance sheet reflects the scheme's surplus or liability at the balance sheetdate. The employer's portion of current and past service cost is charged tooperating profit with the interest cost, net of expected return on assets in theplans, reported as a financing item. Derivative financial instrumentsThe Group uses forward foreign currency contracts to reduce exposure to foreignexchange rates. The Group also makes use of interest rate swaps to adjustinterest rate exposures. The Group will only apply IAS 32 and IAS 39 from 1 January 2005 as permitted bythe transition arrangements in IFRS 1. LeasingFinance leases, which transfer to the Group substantially all the risks andbenefits incidental to ownership of the leased item, are capitalised at theinception of the lease at the fair value of the leased property or, if lower, atthe present value of the minimum lease payments. Lease payments are apportionedbetween the finance charges and reduction of the lease liability so as toachieve a constant rate of interest on the remaining balance of the liability.Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated lifeof the asset or the lease term. Leases where the lessor retains substantiallyall the risks and benefits of ownership of the asset are classified as operatingleases. Operating lease payments are recognised as an expense in the incomestatement on a straight-line basis over the lease-term. Income taxDeferred income tax is provided, using the liability method, on all temporarydifferences at the balance sheet date between the tax bases of assets andliabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporarydifferences: • except where the deferred tax liability arises from the initial recognition of goodwill • except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss and • in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporarydifferences, carry-forward of unused tax assets and unused tax losses, to theextent that it is probable that taxable profit will be available against whichthe deductible temporary differences, and the carry-forward of unused tax assetsand unused tax losses can be utilised: • except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. The carrying amount of deferred income tax assets is reviewed at each balancesheet date and reduced to the extent that it is no longer probable thatsufficient taxable profit will be available to allow all or part of the deferredincome tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates thatare expected to apply to the year when the asset is realised or the liability issettled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted at the balance sheet date. Income tax relating to items recognised directly in equity are recognised inequity and not in the income statement. Share based paymentsThe Group operates a number of executive and employee share schemes. For allgrants of share options and awards, the fair value as at the date of grant iscalculated using an option pricing model and the corresponding expense isrecognised over the vesting period. The Group has taken advantage of the transitional provisions of IFRS 2 inrespect of equity-settled awards and has applied IFRS 2 only to equity-settledawards granted after 7 November 2002 that had not vested before 1 January 2005. Reconciliation of equity at 1 January 2004 (date of transition to IFRS) Recognise Previous Proposed pension Deferred GAAP dividend liability taxation IFRS Notes £Million £Million £Million £Million £Million-------------------------------------------------------------------------------------------Property,plant andequipment 111.7 - - - 111.7Intangibleassets 451.2 - - - 451.2Available-for-sale financialassets 5.2 - - - 5.2Deferredtaxation 1 1.6 - - 25.4 27.0-------------------------------------------------------------------------------------------Totalnon-currentassets 569.7 - - 25.4 595.1-------------------------------------------------------------------------------------------Trade andotherreceivables 136.1 - - - 136.1Prepayments 83.3 - - - 83.3Cash andshort-termdeposits 19.8 - - - 19.8-------------------------------------------------------------------------------------------Total currentassets 239.2 - - - 239.2-------------------------------------------------------------------------------------------TOTAL ASSETS 808.9 - - 25.4 834.3===========================================================================================Trade andother payables 95.0 - - - 95.0Interest-bearing loans andborrowings 158.1 - - - 158.1Employeebenefits 2 10.1 - 67.7 - 77.8Income taxpayable 26.1 - - - 26.1Proposeddividends 3 18.0 (18.0) - - -Accruals anddeferredincome 154.8 - - - 154.8Provisions 4.6 - - - 4.6-------------------------------------------------------------------------------------------TOTALLIABILITIES 466.7 (18.0) 67.7 - 516.4===========================================================================================TOTAL ASSETSLESS TOTALLIABILITIES 342.2 18.0 (67.7) 25.4 317.9===========================================================================================Issued capital 13.3 - - - 13.3Share premium 242.7 - - - 242.7Capitalredemptionreserve 0.1 - - - 0.1Retainedearnings 86.0 18.0 (67.7) 25.4 61.7-------------------------------------------------------------------------------------------EQUITYSHAREHOLDERS'FUNDS 342.1 18.0 (67.7) 25.4 317.8-------------------------------------------------------------------------------------------Minorityinterest 0.1 - - - 0.1===========================================================================================TOTAL EQUITY 342.2 18.0 (67.7) 25.4 317.9=========================================================================================== Reconciliation of equity at 31 December 2004 (end of last period presented underprevious GAAP) Amorti- Goodwill sation amorti- of Recognition sation Intangible Goodwill in- Proposed Previous of pension added assets de- tangible final Deferred GAAP liability back recognised recognised assets dividend taxation IFRS Notes £Million £Million £Million £Million £Million £Million £Million £Million £Million---------------------------------------------------------------------------------------------------------------------Property,plant andequipment 129.1 - - - - - - - 129.1Intangibleassets 1 470.2 - 29.3 10.1 (10.1) (1.8) - 2.5 500.2Available-for-sale financial assets 0.2 - - - - - - - 0.2Deferredtaxation 2 (0.9) - - - - - - 33.5 32.6---------------------------------------------------------------------------------------------------------------------Totalnon-currentassets 598.6 - 29.3 10.1 (10.1) (1.8) - 36.0 662.1---------------------------------------------------------------------------------------------------------------------Trade andotherreceivables 150.4 - - - - - - - 150.4Prepayments 98.7 - - - - - - - 98.7---------------------------------------------------------------------------------------------------------------------Total current assets 249.1 - - - - - - - 249.1---------------------------------------------------------------------------------------------------------------------TOTAL ASSETS 847.7 - 29.3 10.1 (10.1) (1.8) - 36.0 911.2=====================================================================================================================Trade andother payables 87.8 - - - - - - - 87.8Interest-bearing loans andborrowings 152.0 - - - - - - - 152.0Employeebenefits 3 (43.5) 87.6 - - - - - - 44.1Income tax payable 28.4 - - - - - - - 28.4Proposeddividends 4 23.8 - - - - - (23.8) - -Accruals anddeferredincome 196.1 - - - - - - - 196.1Overdrafts 37.0 - - - - - - - 37.0Provisions 5.5 - - - - - - - 5.5---------------------------------------------------------------------------------------------------------------------TOTALLIABILITIES 487.1 87.6 - - - - (23.8) - 550.9=====================================================================================================================TOTAL ASSETSLESS TOTALLIABILITIES 360.6 (87.6) 29.3 10.1 (10.1) (1.8) 23.8 36.0 360.3=====================================================================================================================Issued capital 13.4 - - - - - - 13.4Share premium 248.1 - - - - - - 248.1Treasuryshares (0.2) - - - - - - (0.2)Capitalredemptionreserve 0.1 - - - - - - 0.1Foreigncurrencytranslation 0.1 - - - - - - 0.1Retainedearnings 98.7 (87.6) 29.3 - - (1.8) 23.8 36.0 98.4---------------------------------------------------------------------------------------------------------------------EQUITYSHAREHOLDERS'FUNDS 360.2 (87.6) 29.3 - - (1.8) 23.8 36.0 359.9---------------------------------------------------------------------------------------------------------------------Minorityinterest 0.4 - - - - - - - 0.4=====================================================================================================================TOTAL EQUITY 360.6 (87.6) 29.3 - - (1.8) 23.8 36.0 360.3===================================================================================================================== Reconciliation of profit for the year ended 31 December 2004 De- recognition/ Recognition Share Amortisation of based Goodwill of Previous pension payment amortisation intangible Deferred GAAP charge charge added back assets taxation IFRS Notes £Million £Million £Million £Million £Million £Million £MillionContinuing operations:Revenue 1,282.2 - - - - - 1,282.2Cost of sales 955.6 - - - - - 955.6--------------------------------------------------------------------------------------------------------------------Gross profit 326.6 - - - - - 326.6Administrativeexpenses 1, 2,3 195.5 (0.1) 4.7 (29.3) 1.8 - 172.6--------------------------------------------------------------------------------------------------------------------Operating profit 131.1 0.1 (4.7) 29.3 (1.8) - 154.0 Finance costs (11.9) - - - - - (11.9)--------------------------------------------------------------------------------------------------------------------Profit before tax 119.2 0.1 (4.7) 29.3 (1.8) - 142.1 Income tax expense 4 (41.6) - - - - (2.8) (44.4)--------------------------------------------------------------------------------------------------------------------Profit for the year from continuingoperations 77.6 0.1 (4.7) 29.3 (1.8) (2.8) 97.7 Discontinued operations:Loss on discontinuedoperations (2.2) - - - - - (2.2)--------------------------------------------------------------------------------------------------------------------Profit for the year 75.4 0.1 (4.7) 29.3 (1.8) (2.8) 95.5====================================================================================================================Attributable to :Equity holdersof the parent 75.6 0.1 (4.7) 29.3 (1.8) (2.8) 95.7Minority interest (0.2) - - - - - (0.2)-------------------------------------------------------------------------------------------------------------------- 75.4 0.1 (4.7) 29.3 (1.8) (2.8) 95.5==================================================================================================================== UKGAAP IFRS Adjustments IFRSEarnings pershare - basic 11.36p 3.02p 14.38p - diluted 11.21p 3.04p 14.25p==================================================================================================================== - basic (excluding discontinued operations) 11.69p 3.02p 14.71p - diluted (excluding discontinued operations) 11.54p 3.04p 14.58p==================================================================================================================== Notes to the reconciliations Notes to the reconciliation of equity at 1 January 2004: 1. Deferred taxation recognised. 2. As a first-time adopter of IFRSs, the Group has taken advantageof the exception allowed under IFRS 1 not to apply full retrospectiveapplication of IAS 19 Employee Benefits. Accordingly, the Group has elected torecognise all cumulative actuarial gains and losses at the date of transition toIFRSs. Consequently, the full pension liability of £77.8m at 1 January 2004 isrecognised under IFRSs but was not fully recognised under previous GAAP.3. Proposed dividends are not recognised under IFRS thus the provision of £18.0m has been written back. Notes to the reconciliation of equity at 31 December 2004: 1. Goodwill amortisation under UK GAAP of £29.3m added back. £10.1mof separately identified intangible assets have been recognised in accordancewith IFRS 3/IAS 38 (de-recognised in goodwill) as has the deferred taxationliability of £2.5m in relation to this. The deferred taxation liabilityrecognised results in an equal and opposite entry in goodwill. Amortisation ofthese separately identifiable intangible assets of £1.8m has been charged to theprofit and loss account. 2. Deferred taxation recognised. 3. As noted above in the reconciliation of equity at 1 January 2004,the full pension liability of £44.1m at 31 December 2004 is recognised underIFRSs but was not fully recognised under previous GAAP. 4. Proposed dividends are not recognised under IFRS thus theprovision of £23.8m has been written back. Notes to the reconciliation of profit for the year ended 31 December 2004: 1. The change from accounting for the defined benefit pensionschemes under UK GAAP to IFRS has resulted in a reduced charge of £0.1m. 2. Provision for share-based payment of £4.7m is recognised underIFRS 2 but was not recognised under UK GAAP. 3. Goodwill amortisation under UK GAAP of £29.3m added back.Provision made for amortisation of £1.8m on separately identified intangibles. 4. Deferred taxation has been recognised. Notes to the reconciliation of the profit for the six months ended 30 June 2004: 1. Provision for share-based payment of £2.3m is recognised underIFRS 2 but was not recognised under UK GAAP.Goodwill amortisation under UK GAAP of £14.5m added back. Provision made foramortisation of £0.7m on separately identified intangibles. 2. The change from accounting for the defined benefit pensionschemes under UK GAAP to IFRS has resulted in a reduced charge of £0.3m. 3. Provision has been made for holiday pay accrued of £0.9m. Thisprovision is required under IFRS and will unwind by the year end as the employeeholiday calendar year matches the Group's financial year. This provision was notrequired under UK GAAP 4. Deferred taxation has been recognised. Reconciliation of cash and cash equivalents for relevant periods: 1. No restated IFRS cash flow has been presented as there is nodifference between the net cash flow presented under IFRSs and the net cash flowpresented under the previous GAAP. Group Statement of Recognised Income and Expense Year ended 2004 £Million--------------------------------------------------------------------------------Attributable profit for the year reported under IFRS 95.7Actuarial losses on defined benefit plans (19.7)Exchange differences resulting from translation of foreignoperations 0.1Tax taken directly to equity 13.3--------------------------------------------------------------------------------Total recognised income and expense for the year under IFRS 89.4================================================================================ Group Statement of Changes in Equity Foreign Capital currency Share Share Treasury redemption Retainted translation Minority capital premium shares reserve earnings reserve Total interests Total £Million £Million £Million £Million £Million £Million £Million £Million £Million--------------------------------------------------------------------------------------------------------------------1 January 2004under UK GAAP 13.3 242.7 - 0.1 86.0 - 342.1 0.1 342.2--------------------------------------------------------------------------------------------------------------------Equitydividendsunapproved - - - - 18.0 - 18.0 - 18.0IAS19 Pensionliabilityrecognised - - - - (67.7) - (67.7) - (67.7)Tax on changesrelating tofirst timeadoption - - - - 25.4 - 25.4 - 25.4--------------------------------------------------------------------------------------------------------------------Net changesrelating tofirst timeadoption - - - - (24.3) - (24.3) - (24.3)--------------------------------------------------------------------------------------------------------------------1 January 2004- as restated 13.3 242.7 - 0.1 61.7 - 317.8 0.1 317.9Exchangedifferencesresulting fromtranslation offoreignoperations - - - - - 0.1 0.1 - 0.1Actuariallosses ondefinedbenefit plans - - - - (19.7) - (19.7) - (19.7)Tax takendirectly toequity - - - - 13.3 - 13.3 - 13.3Share basedpaymentrecognised inthe profit andloss statement - - - - 4.7 - 4.7 - 4.7Cost of ownsharespurchased - - (0.2) - (27.7) - (27.9) - (27.9)Shares issued 0.1 5.4 - - - - 5.5 - 5.5Preferenceshare issue - - - - - - - 0.5 0.5-------------------------------------------------------------------------------------------------------------------- 13.4 248.1 (0.2) 0.1 32.3 0.1 293.8 0.6 294.4Attributableprofit for theyear - - - - 95.7 - 95.7 (0.2) 95.5Equitydividends paid - - - - (29.6) - (29.6) - (29.6)--------------------------------------------------------------------------------------------------------------------31 December2004 13.4 248.1 (0.2) 0.1 98.4 0.1 359.9 0.4 360.3==================================================================================================================== Note: The group statement of changes in equity is not a primary statement but isincluded here for clarity. It will be presented, in the abridged format, as anote in the Group's full 2005 financial statements. Independent Auditors' Special Purpose Report to The Capita Group Plc on thepreliminary IFRS Financial Statements for the year ended 31 December 2004 We have audited the accompanying preliminary International Financial ReportingStandards ("IFRS") financial information of The Capita Group Plc ("the Company")for the year ended 31 December 2004 which comprises a Reconciliation of Equityas at 1 January 2004, the Reconciliation of Profit and the Statement of Changesin Equity for the year ended 31 December 2004 and a Reconciliation of Equity asat 31 December 2004, together with the related accounting policies note set outon pages 2 to 6. We have not audited nor reviewed and we will not provide anyopinion in respect of the Reconciliation of profit for the six months ended 30June 2004 which has been included on page 13. This report is made solely to the Company in accordance with our engagementletters dated 29 November 2004 and 25 July 2005. Our audit work has beenundertaken so that we might state to the Company those matters we are requiredto state to them in an auditors' report and for no other purpose. To the fullestextent permitted by law, we do not accept or assume responsibility or liabilityto anyone other than the Company for our audit work, for this report, or for theopinions we have formed. Respective responsibilities of directors and auditorsThis preliminary IFRS financial information is the responsibility of theCompany's directors and has been prepared as part of the Company's conversion toIFRS. It has been prepared in accordance with the basis set out in Note 4 andNote 2 which describes 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 financial statements as at 31 December2005. Our responsibility is to express an independent opinion on the preliminary IFRSfinancial information based on our audit. We read the other informationaccompanying the preliminary IFRS financial information and consider whether itis consistent with the preliminary IFRS financial information. This otherinformation comprises the description of significant changes in accountingpolices on page 1. We consider the implications for our report if we becomeaware of any apparent misstatements or material inconsistencies with thepreliminary opening balance sheet. Our responsibilities do not extend to anyother information. Basis of audit opinionWe conducted our audit in accordance with United Kingdom Auditing Standardsissued by the Auditing Practices Board. Those Standards require that we plan andperform the audit to obtain reasonable assurance about whether the preliminaryIFRS financial information is free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe preliminary IFRS financial information. An audit also includes assessing theaccounting principles used and significant estimates made by management, as wellas evaluating the overall presentation of the preliminary IFRS financialinformation. We believe that our audit provides a reasonable basis for ouropinion. Emphasis of matterWithout qualifying our opinion, we draw attention to the fact that Note 1explains why there is a possibility that the preliminary IFRS financialinformation may require adjustment before constituting the final IFRS financialstatements. Moreover, we draw attention to the fact that, under IFRSs only acomplete set of 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 IFRSs. OpinionIn our opinion, the preliminary IFRS financial information for the year ended 31December 2004 has been prepared, in all material respects, in accordance withthe basis set out in Note 4 and Note 2, which describes how IFRS have beenapplied under IFRS 1, including the assumptions management has made about thestandards and interpretations expected to be effective, and the policiesexpected to be adopted, when management prepares its first complete set of IFRSfinancial statements as at 31 December 2005. Ernst & Young LLPLondon27 July 2005 Appendix 1Reconciliation of profit for the six months ended 30 June 2004 De-recognition Share Goodwill /Recognition based amortisation Amortisation Previous of pension payment added of intangible Holiday Deferred GAAP charge charge back assets pay taxation IFRS Notes £Million £Million £Million £Million £Million £Million £Million £MillionContinuingoperations:Revenue 617.3 - - - - - - 617.3Cost of sales 411.9 - - - - - - 411.9-----------------------------------------------------------------------------------------------------------------------Gross profit 205.4 - - - - - - 205.4Administrativeexpenses 1, 2, 3 150.5 (0.3) 2.3 (14.5) 0.7 0.9 - 139.6-----------------------------------------------------------------------------------------------------------------------Operatingprofit 54.9 0.3 (2.3) 14.5 (0.7) (0.9) - 65.8 Finance costs (5.5) - - - - - - (5.5)Related Shares:
Capita