22nd Sep 2005 07:01
AVEVA Group PLC22 September 2005 AVEVA Group plc Restatement of financial information under International Financial ReportingStandards September 2005 Index 1. Introduction 2. Summary of the impact of IFRS 3. Basis of preparation 4. Consolidated income statement and statement of recognised income and expense i. Six months ended 30 September 2004 ii. Year ended 31 March 2005 5. Consolidated balance sheets i. As at 31 March 2004 (opening balance sheet) ii. As at 30 September 2004 iii. As at 31 March 2005 6. Explanatory notes on the impact of IFRS 7. Appendices A. Reconciliations Reconciliation of consolidated income statements i. Six months ended 30 September 2004 ii. Year ended 31 March 2005 Reconciliation of consolidated balance sheets i. As at 31 March 2004 ii. As at 30 September 2004 iii. As at 31 March 2005 B. Summary of significant accounting policies 8. Auditors' opinion Introduction AVEVA Group plc (the "Company") is a public limited company incorporated in theUnited Kingdom under the Companies Act 1985. In this document, "Group" means theCompany and all its subsidiaries. AVEVA Group plc has prepared its primaryfinancial statements under UK generally accepted accounting principles ("UK GAAP") up to 31 March 2005. For the 31 March 2006 annual report the Group is required to prepare itsconsolidated financial statements in accordance with International AccountingStandards ("IAS") and International Financial Reporting Standards ("IFRS") andinterpretations issued by the International Accounting Standards Board ("IASB")as adopted by the European Union ("EU"). References to IFRS throughout thisdocument refer to the application of International Accounting Standards andInternational Financial Reporting Standards. The first Annual report under IFRS will be for the year ending 31 March 2006 andthe first interim results reported under IFRS will be for the 6 months ending 30September 2005. This document explains the impact of the adoption of IFRS on theGroup's financial performance and position and quantifies the expected impact onthe 2004/5 financial information previously prepared under UK GAAP. Summary of impact of IFRS Whilst the introduction of IFRS has no impact on the underlying cash flows ofthe business, the areas of accounting that will have the most significant impacton the Group's financial statements are as follows: • The treatment of goodwill;• Accounting for business combinations;• Accounting for defined benefit pension scheme;• Other employee benefits including share-based payments and holiday pay liabilities; and• Deferred taxation. The following table summarises the impact of the adoption of IFRS on the Group'sprofit before tax for the year ended 31 March 2005 and the six months ended 30September 2004: 6 months ended 30 Year ended September 2004 31 March 2005 £'000 £'000Profit before tax as reported under UK Gaap (163) 5,764 Adjustments for:Reversal of goodwill amortisation 1,022 2,331Amortisation of recognised intangibles on Tribon acquisition (538) (1,306)Reversal of fair value adjustment for deferred revenue (290) (380)Holiday pay accrual 110 10Share-based payment charge (8) (23)Accounting for defined benefit pension scheme under IAS 19 2,160 1,601Reversal of SSAP 24 accounting for defined benefit pension scheme 539 1,127 Profit before tax as reported under IFRS 2,832 9,124 Basis of preparation These extracts of the Group's financial statements have been prepared inaccordance with International Accounting and Financial Reporting Standards ("IFRS") and interpretations. This restatement document has been prepared on thebasis that all IFRSs, International Financial Reporting Interpretation Committee("IFRIC") and Standing Interpretations Committee ("SIC") interpretations issued,and expected to be effective in the preparation of the annual report for theyear ending 31 March 2006, have been applied retrospectively except wherecertain exceptions apply. As listed companies are adopting IFRS for the first time, there is limitedestablished practice upon which to draw upon in terms of interpretation andapplication. Furthermore, it is possible that new standards, revisions toexisting standards and new interpretations may be issued which affect the Group.Consequently, it is not possible at this stage to definitively quantify theimpact of the adoption of IFRS, and therefore the comparative information in the2005/06 interim and annual reports may differ from that presented in thisdocument. In preparing this document, the Group has assumed that the European Commissionwill endorse the amendment to IAS 19, "Employee Benefits - Actuarial Gains andLosses, Group Plans and Disclosures". The UK GAAP financial information contained in this document does not constitutestatutory accounts as defined in section 240 of the Companies Act 1985. Theauditors have issued unqualified opinions on the Group's UK GAAP financialstatements for the years ended 31 March 2004 and 31 March 2005. The UK GAAPfinancial statements for the years ended 31 March 2004 and 31 March 2005 havebeen delivered to the Registrar of Companies. IFRS 1 exemptions The Group has applied IFRS 1, "First Time Adoption of International FinancialReporting Standards" to provide a starting point for reporting under IFRS. TheGroup's date of transition to IFRS is 1 April 2004 and all comparativeinformation in the financial statements is restated to reflect the Group'sadoption of IFRS, except where otherwise required or permitted under IFRS 1.IFRS 1 requires an entity to comply with each IFRS effective at the reportingdate (31 March 2006) for its first IFRS financial statements. As a generalprinciple, IFRS 1 requires the standards effective at the reporting date to beapplied retrospectively. However, retrospective application is prohibited insome areas, particularly where retrospective application would requirejudgements by management about past conditions after the outcome of theparticular transaction is already known. A number of optional exemptions fromfull retrospective application of IFRSs are granted where the cost of complianceis deemed to exceed the benefits to users of the financial statements. TheGroup has elected to take the following optional elections under IFRS 1: i. Business combinations that occurred before the date oftransition (1 April 2004) The Group has elected not to apply IFRS 3 , "Business Combinations"retrospectively to business combinations that took place before the date oftransition. As a result, the carrying amount of goodwill in the opening IFRSbalance sheet (£1.3m) is that recorded under UK GAAP at the date of transition. ii. Employee benefits-actuarial gains and losses The Group has elected to recognise all cumulative actuarial gains and losses inrelation to the UK defined benefit pension scheme at the date of transition.The Group has recognised actuarial gains and losses in full in the period inwhich they occur in the statement of recognised income and expense in accordancewith the amendment to IAS 19, issued on 16 December 2004. iii. Share-based payments The Group has elected to apply IFRS 2, "Share-based payments" to share optionsgranted after 7 November 2002 but not fully vested at 1 April 2004 and not toretrospectively apply the standard to share options granted prior to 7 November2002. iv. Financial instruments The Group has elected not to apply IAS 32, "Financial Instruments: Disclosureand Presentation" or IAS 39, "Financial Instruments: Recognition and Measurement" therefore the comparative information presented has not been restated from UKGAAP. The Group will apply these standards from 1 April 2005. v. Cumulative translation differences Under IFRS 1, the Group is not required to record cumulative translationdifferences arising prior to the transition date. In utilising this exemption,all cumulative translation differences are deemed to be zero as at 1 April 2004and all subsequent disposals shall exclude any translation differences arisingprior to the date of transition. AVEVA Group plcConsolidated income statement prepared under IFRSSix months ended 30 September 2004 UK GAAP IFRS adjustments IFRS £'000 £'000 £'000 Revenues 24,368 (290) 24,078 Cost of sales (8,118) 1,322 (6,796) Gross profit 16,250 1,032 17,282 Operating expensesAdministrative expenses (5,669) 1,498 (4,171)Selling costs (10,632) 665 (9,967) Total operating expenses (16,301) 2,163 (14,138) Operating (loss)/profit (51) 3,195 3,144 Finance income 5 - 5 Finance expense (117) (200) (317) (Loss)/profit before tax (163) 2,995 2,832 Tax (240) (848) (1,088) (Loss)/profit for the period attributable to equity (403) 2,147 1,744shareholders of the parent (Loss)/earnings per share Basic earnings per share (pence) (1.94) 8.39 Diluted earnings per share (pence) (1.94) 8.37 Weighted average number of shares for basic EPS 20,777,391 20,777,391 Weighted average number of shares for diluted EPS 20,823,511 20,823,511 AVEVA Group plcConsolidated statement of recognised income and expenseSix months ended 30 September 2004 IFRS adjustments IFRS UK GAAP (IFRS format) £'000 £'000 £'000 Exchange differences arising on translation of foreign 21 - 21operations Actuarial gain on defined benefit pension scheme - 500 500 Exchange differences on retranslation of goodwill and - 94 94intangibles Share based payments - 8 8 Deferred tax on items recognised directly in equity - (177) (177) Net income recognised directly in equity 21 425 446 (Loss)/profit for the financial period (403) 2,147 1,744 Total recognised (losses)/gains relating to the period (382) 2,572 2,190attributable to equity shareholders AVEVA Group plcConsolidated income statement prepared under IFRSYear ended 31 March 2005 UK GAAP IFRS adjustments IFRS £'000 £'000 £'000 Revenues 57,543 (380) 57,163 Cost of sales (19,079) 858 (18,221) Gross profit 38,464 478 38,942 Operating expensesAdministrative expenses (13,376) 2,577 (10,799)Selling costs (19,293) 505 (18,788)Total operating expenses (32,669) 3,082 (29,587) Operating profit 5,795 3,560 9,355 Finance income 70 - 70 Finance expense (101) (200) (301) Profit before tax 5,764 3,360 9,124 Tax (2,882) (1,129) (4,011) Profit for the period attributable to equity shareholders of 2,882 2,231 5,113the parent Earnings per share Basic earnings per share (pence) 13.48 23.91 Diluted earnings per share (pence) 13.41 23.78 Weighted average number of shares for basic EPS 21,387,290 21,387,290 Weighted average number of shares for diluted EPS 21,499,172 21,499,172 AVEVA Group plcConsolidated statement of recognised income and expenseYear ended 31 March 2005 UK GAAP IFRS adjustments IFRS (IFRS format) £'000 £'000 £'000 Exchange differences arising on translation of foreign 150 - 150operations Actuarial gain on defined benefit pension scheme - 900 900 Exchange differences on retranslation of goodwill and - 93 93intangibles Share based payments - 23 23 Deferred tax on items recognised directly in equity - (102) (102) Net income recognised directly in equity 150 914 1,064 Profit for the financial period 2,882 2,231 5,113 Total recognised gains relating to the period attributable to 3,032 3,145 6,177equity shareholders AVEVA Group plcConsolidated balance sheet prepared under IFRS31 March 2004 (opening balance sheet) UK GAAP IFRS adjustments IFRS IFRS format £'000 £'000 £'000Non-current assetsGoodwill 1,313 - 1,313Other intangible assets 1,977 456 2,433Property, plant and equipment 5,046 (456) 4,590Deferred tax assets - 2,108 2,108 8,336 2,108 10,444 Current assetsInventories 217 - 217Trade and other receivables 18,830 - 18,830Cash and cash equivalents 8,713 - 8,713 27,760 - 27,760 TOTAL ASSETS 36,096 2,108 38,204 EquityIssued share capital 1,747 - 1,747Share premium 8,210 - 8,210Retained earnings 11,613 (5,595) 6,018 Total equity shareholders' funds 21,570 (5,595) 15,975 Current liabilitiesFinance lease obligations 71 - 71Trade and other payables 13,318 (462) 12,856Current tax liabilities 761 - 761 14,150 (462) 13,688Non-current liabilitiesDeferred tax liabilities 335 (335) -Finance lease obligations 41 - 41Retirement benefit obligations - 8,500 8,500 376 8,165 8,541 TOTAL EQUITY AND LIABILITIES 36,096 2,108 38,204 AVEVA Group plcConsolidated balance sheet prepared under IFRS30 September 2004 UK GAAP IFRS adjustments IFRS IFRS format £'000 £'000 £'000Non-current assetsGoodwill 24,521 (9,247) 15,274Other intangible assets 1,801 12,098 13,899Property, plant and equipment 5,570 (323) 5,247Deferred tax assets - 1,681 1,681 31,892 4,209 36,101 Current assetsInventories 217 - 217Trade and other receivables 17,504 172 17,676Current tax assets 1,532 - 1,532Cash and cash equivalents 9,467 - 9,467 28,720 172 28,892 TOTAL ASSETS 60,612 4,381 64,993 EquityIssued share capital 2,194 - 2,194Share premium 27,918 - 27,918Retained earnings 10,656 (3,326) 7,330 Total equity shareholders' funds 40,768 (3,326) 37,442 Current liabilitiesBank overdraft 108 - 108Finance lese obligations 38 - 38Trade and other payables 16,272 (557) 15,715Current tax liabilities 977 - 977 17,395 (557) 16,838Non-current liabilitiesProvisions 1,094 - 1,094Deferred tax liabilities 335 2,963 3,298Finance lease obligations 20 - 20Retirement benefit obligations 1,000 5,301 6,301 2,449 8,264 10,713 TOTAL EQUITY AND LIABILITIES 60,612 4,381 64,993 AVEVA Group plcConsolidated balance sheet prepared under IFRS31 March 2005 UK GAAP IFRS adjustments IFRS IFRS format £'000 £'000 £'000Non-current assetsGoodwill 26,395 (9,238) 17,157Other intangible assets 1,625 14,177 15,802Property, plant and equipment 5,099 (220) 4,879Deferred tax assets 153 1,585 1,738 33,272 6,304 39,576 Current assetsTrade and other receivables 26,489 - 26,489Current tax assets 749 - 749Cash and cash equivalents 12,114 - 12,114 39,352 - 39,352 TOTAL ASSETS 72,624 6,304 78,928 EquityIssued share capital 2,204 - 2,204Share premium 24,323 - 24,323Merger reserve 3,921 - 3,921Retained earnings 13,122 (2,201) 10,921 Total equity shareholders' funds 43,570 (2,201) 41,369 Current liabilitiesBank overdraft 903 - 903Finance lease obligations 41 - 41Trade and other payables 24,131 (721) 23,410Current tax liabilities 2,293 - 2,293 27,368 (721) 26,647Non-current liabilitiesProvisions 824 - 824Deferred tax liabilities - 4,354 4,354Retirement benefit obligations 862 4,872 5,734 1,686 9,226 10,912 TOTAL EQUITY AND LIABILITIES 72,624 6,304 78,928 Explanatory notes on the impact of IFRS The following notes explain the impact that the adoption of IFRS has had on theGroup's consolidated results which is summarised on pages 5 to 11. The detailedreconciliations are set out at appendix A which show the impact on the incomestatement for the six months ended 30 September 2004 and year ended 31 March2005 together with the impact on the balance sheet at 31 March 2004, 30September 2004 and 31 March 2005 (the latter two showing the cumulative effectof the IFRS adjustments). 1. Business combinations Acquisition of Tribon Solutions AB On 19 May 2004, the Group acquired Tribon Solutions AB, a Swedish group thatdevelops, markets and supports software solutions for use in the design andproduction processes in the marine industry. The fair value of the consideration was £20,277,000. Under UK GAAP, goodwill of£23,859,000 arose on acquisition. The Group has accounted for the Tribon acquisition in accordance with IFRS 3, "Business Combinations". Under IFRS 3, intangible assets purchased as part of abusiness combination may meet the criteria set out in IFRS 3 for categorisationas intangible assets other than goodwill and are amortised over their usefuleconomic lives. Under UK GAAP, intangible assets purchased as part of abusiness combination are included within the goodwill balance unless the assetcan be identified and sold separately without disposing of the business as awhole. The Group has recognised two intangible assets relating to the Tribonacquisition. These are customer relationships and developed technology whichare being amortised over their estimated useful economic lives of twenty yearsand five years respectively. The customer relationships and the developedtechnology have been valued at £6.3m and £5.8m respectively. These valuationshave been carried out by a leading firm of accountants other than the auditorsErnst & Young.. Under IAS 12, "Income Taxes", the difference between the book value of theseintangible assets for accounting purposes and the tax value of these assetsgives rise to a temporary difference. A deferred tax liability of £3.3m hastherefore been recorded at acquisition which is being released to the incomestatement in proportion to the amortisation of the related intangibles. A reconciliation of goodwill recognised under UK GAAP compared to IFRS is setout in the following table: £'000Goodwill recognised under UK GAAP 23,859 AdjustmentsRecognition of intangible assetsTechnology (5,800)Customer relationships (6,300)Corresponding deferred tax liability 3,388 Other adjustments (274) Deferred tax asset re losses (794) Goodwill recognised under IFRS 14,079 In accordance with IFRS 3 and IAS 12, a deferred tax asset has been recognisedin the acquisition balance sheet to the extent that tax losses have beenutilised post acquisition up to the date that the acquisition fair values havebeen finalised. Acquisition of RealityWave Inc, On 31 March 2005, the Group acquired RealityWave Inc, a software developmentcompany based in Boston, Massachusetts, USA. The fair value of theconsideration was £3.2m and the goodwill arising under UK GAAP was £3.6m. The Group has also accounted for this acquisition in accordance with IFRS 3 andhas recognised the developed technology as an intangible asset as it meets thecriteria for recognition under IFRS. A leading firm of accountants (other thanthe auditors Ernst & Young). has carried out a valuation of the developedtechnology. Explanatory notes on the impact of IFRS (continued) A reconciliation of goodwill recognised under UK GAAP compared to IFRS is setout in the following table: £'000Goodwill recognised under UK GAAP 3,554 AdjustmentsRecognition of intangible assetsDeveloped technology (2,980) Corresponding deferred tax liability 1,281 Goodwill recognised under IFRS 1,855 A deferred tax liability of £1.3m has been recorded at acquisition which isbeing released to the income statement in proportion to the amortisation of thedeveloped technology intangible. Intangible assets and goodwill arising on overseas acquisitions are treated asforeign currency assets of the acquired entities under IFRS and accordinglyrelated foreign exchange movements have been recorded in reserves. Under UKGAAP, these balances were treated as if they were denominated in poundssterling. 2. Intangible assets a) Goodwill IAS 38, "Intangible Assets" requires that goodwill is not amortised but isinstead subject to an annual impairment review. As the Group has elected not toapply IFRS 3, "Business Combinations" retrospectively to business combinationsprior to the date of transition (1 April 2004) under IFRS, the UK GAAP goodwillbalance of £1.3m has been included in the opening IFRS consolidated balancesheet and is no longer amortised. In addition, goodwill which arose on theacquisitions of Tribon Solutions AB and RealityWave is not amortised either inaccordance with IAS 38. The credit arising from the adoption of IAS 38 on the Group's consolidatedincome statement in respect of goodwill amortisation is set out below: Six months ended 30 Year ended 31 March September 2004 2005 £'000 £'000Cost of sales (108) (217)Administrative expenses (914) (2,114)Total (1,022) (2,331) IFRS 1 requires that an impairment review of goodwill be conducted in accordancewith IAS 36, "Impairment of Assets" at the date of transition irrespective ofwhether an indication exists that goodwill may be impaired. No impairments werenecessary as at 1 April 2004 following the review carried out in accordance withthis standard. Furthermore, goodwill relating to the Tribon acquisition andhistorical acquisitions was tested for impairment at 31 March 2005 and noimpairment was noted. b) Other intangibles The amortisation charge in respect of the intangible assets acquired as part ofthe Tribon business combination is as follows: Six months ended 30 Year ended 31 March September 2004 2005 £'000 £'000Cost of sales - technology 423 1,027Selling costs - customer relationships 115 279 Total 538 1,306 There is no amortisation charge In respect of the RealityWave technology in theperiods presented due to the acquisition having completed on 31 March 2005. c) Computer software Under UK GAAP, all capitalised computer software is included within tangiblefixed assets on the balance sheet. Under IFRS, only computer software that isintegral to a related item of hardware should be included as property, plant andequipment. All other computer software should be recorded as an intangibleasset. Accordingly, the following reclassifications have been made: At 31 March At 30 September At 31 March 2005 2004 2004 £'000 £'000 £'000Other intangible assets 456 323 220Tangible assets (456) (323) (220) 3. Employee benefits a) Retirement benefit schemes The Group accounted for its UK defined benefit pension scheme in accordance withSSAP 24, "Accounting for pension costs" under UK GAAP and provided the detaileddisclosure required by FRS17, "Retirement Benefits". Under SSAP 24, a regular pension cost for defined benefit schemes was determinedusing actuarial methods and charged to the income statement. Variations fromregular cost caused by, for example, retroactive changes in benefits, changes inactuarial assumptions, and experience gains and losses, were spread over theaverage remaining service lives of the employees. The cumulative differencebetween the income statement expense and employer contributions was held in thebalance sheet either as a provision or a prepayment. Under IFRS, the Group applies IAS 19 "Employee Benefits". This standard followsa balance sheet approach which is similar to that of FRS 17 whereby schemedeficits or surpluses are recognised on the balance sheet. The income statementexpense comprises the current service cost, the interest cost, the expectedreturn on any plan assets and the appropriate portion of any past service cost. The Group has elected to adopt early the amendment to IAS 19, "Employee Benefits" issued by the IASB on 16 December 2004 which allows all actuarial gains andlosses to be charged or credited to equity. The impact of adopting IAS 19 is as follows: At 31 March At 30 At 31 March 2004 September 2005 2004 £'000 £'000 £'000Balance sheetNet liability (8,500) (5,301) (4,872) Deferred tax asset 2,550 1,592 1,462 The impact on the income statement is as follows: Six months Year ended 31 ended 30 March September 2005 2004 £'000 £'000Income statementCost of sales (1,637) (1,668)Administrative expenses (482) (476)Selling costs (780) (784)Operating credit (2,899) (2,928)Net finance expense 200 200Total credit to income statement (2,699) (2,728) The credit to the income statement is analysed as follows: Six months Year ended 31 ended 30 March September 2005 2004 £'000 £'000Current service cost 740 1,299Finance cost (net) 200 200Employer contributions (539) (1,127) 401 372 Past service credit (3,100) (3,100) Total credit to income statement (2,699) (2,728) The actuarial gains which been recognised directly in equity are as follows: Six months Year ended 31 ended 30 March September 2005 2004 £'000 £'000Statement of recognised income and expenseActuarial gain 500 900 A credit to operating expenses arises in the six months ended 30 September 2004and year ended 31 March 2005 due to the scheme being converted to a CareerAverage Revalued Earnings basis on 30 September 2004 which resulted in a pastservice credit of £3.1m. The valuation of the net deficit at 30 September 2004 has been calculated byrolling forward the deficit from 31 March 2004 using the actuarial assumptionsused in the valuation of the scheme at 31 March 2004. b) Share-based payment IFRS 2, "Share-based Payment" requires that an expense for equity instrumentsgranted be recognised in the financial statements based on their fair value atthe date of grant. The expense is recognised over the vesting period of theshare options. Under UK GAAP, a charge was recorded only when an award has an intrinsic valueon the date of grant. The expense only relates to share options which have been granted after 7November 2002 which have not fully vested by 1 April 2004. In the periodspresented in this document, there have been a total of 30,000 share optionsgranted under the terms of the AVEVA Long Term Incentive Plan (LTIP). The fairvalue of the award of these shares under the LTIP has been adjusted to take intoaccount total shareholder return (TSR) as a market-based performance condition,using a pricing model that takes into account expectations about volatility andthe correlation of share price returns in the comparator group. The modelfollows similar principles as the Monte Carlo approach and takes into accountthat TSR vesting and share price performance are not independent. The charges arising from the adoption of IFRS 2 in the Group's income statementis as follows: Six months Year ended 31 ended 30 March 2005 September 2004 £'000 £'000Administrative expenses 8 23 Deferred tax is provided based upon the expected future tax deductions relatingto share-based payment transactions, and is recognised over the vesting periodof the schemes concerned. In addition, a deferred tax asset has been recognisedrelating to share options granted prior to 7 November 2002 which have not beenexercised because a temporary difference arises between the future tax deductionand the accounting base. The tax benefit is recorded directly in equity. Asummary of the deferred tax assets recognised in respect of share options is asfollows: At 31 March At 30 At 31 March 2004 September 2005 2004 £'000 £'000 £'000Deferred tax assetRecorded in income statement - 2 7Recorded in equity 85 118 304Total deferred tax asset recognised 85 120 311 c) Holiday pay liabilities In common with many UK companies, the Group did not provide for holiday payliabilities in respect of its UK employees. IAS 19 requires that a liability is recorded for all accrued entitlements forholiday at each balance sheet date. The impact on the Group is to increaseemployee benefits expense and to introduce additional seasonality to operatingprofit. The impact on the Group's balance sheet is as follows: At 31 March At 30 At 31 March 2004 September 2005 2004 £'000 £'000 £'000Balance sheetTrade and other payables 237 127 227 The credit arising in the Group's income statement is as follows: Six months Year ended 31 ended 30 September March 2005 2004 £'000 £'000Administrative expenses (110) (10) A corresponding deferred tax asset has been recorded in respect of the holidaypay adjustment. 4. Other adjustments Other adjustments represent exchange differences arising on the revaluation offoreign currency denominated goodwill and intangibles and associated deferredtax impact, reversal of the deferred revenue adjustment made on acquisition ofTribon and reclassification of deferred tax balances. 5. Taxation Deferred tax under UK GAAP was provided on all timing differences that hadoriginated but not reversed at the balance sheet date. Timing differences arisewhen gains and losses are included in tax computations in a later or earlierperiod from that in which they appear in the Group's financial statements. IAS 12, "Income Taxes" has a balance sheet focused approach. The standardrequires that full provision be made for all taxable temporary differencesexcept those arising on goodwill. A temporary difference is the differencebetween the carrying amount of an asset or liability in the balance sheet andits associated tax base. A temporary difference is a taxable temporarydifference if it will give rise to taxable amounts in the future when the assetor liability is settled. The principal impact of adopting IAS 12 has been to recognise deferred tax onthe defined benefit pension scheme, intangible assets recognised in accordancewith IFRS 3 relating to the Tribon and RealityWave acquisitions, non-qualifyingfixed assets and share options. In accordance with IAS 12, deferred tax assets and liabilities of the sametaxable entity have been offset which relate to taxes levied by the same taxableauthority and the entity has a legally enforceable right to set off current taxassets against current tax liabilities. 6. Dividends Under UK GAAP, dividends were recognised as an expense in the income statement.An accrual was made for dividends that were proposed by directors after thebalance sheet date but prior to the date of the signing of the financialstatements and a corresponding expense was recognised. Distributions to equity holders are not recognised in the income statement underIFRS, they are disclosed as a component of the movement in shareholders' equity.A liability is recorded for a final dividend when the dividend is approved bythe company's shareholders and for an interim dividend when the dividend isdeclared. The impact of IFRS is to remove the accrual for the 2004/05 interim dividend inthe balance sheet at 30 September 2004 and to remove the accrual for the 2004/05final dividend in the balance sheet at 31 March 2005. 7. Earnings per share Earnings per share under IFRS is calculated in a similar manner to UK GAAP. TheGroup will continue to present adjusted earnings per share. The Group's policyin calculating adjusted earnings per share will be to use the earnings measureused in basic earnings per share from continuing operations, but beforeintangible amortisation and exceptional items net of tax. Both adjusted basicand adjusted diluted earnings per share will be presented in the notes to thefinancial statements in accordance with IAS 33 'Earnings per Share'. 8. Cash flow statement Although there is no effect on the underlying cash generation and expendituresof the Group, there will be some presentational changes on the adoption of IAS 7'Cash Flow Statements'. The cash flow statement under IFRS will show themovement in cash and cash equivalents. The format of the cash flow statement will change to show cash flows analysedbetween operating, investing and financing activities. Cash flows relating tointerest and tax will be classified within operating cash flows whereas under UKGAAP these items were classified separately outside of cash flows from operatingactivities. 9. Segment information The Group will report segment information by class of business and bygeographical area. The Group's primary segment reporting format, for which moredetailed disclosures are required, will be by geographical area. The secondarysegment reporting format will be by class of business. AVEVA Group plc Appendix A Reconciliation of consolidated income statements (i) Six months ended 30 September 2004 UK GAAP Goodwill Defined Holiday Share Intangible Deferred Deferred Deferred IFRS amortisation benefit pay based amortisation revenue tax on tax re reversal pension payment revaluation losses £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenues 24,368 - - - - - (290) - - 24,078 Cost of sales (8,118) 108 1,637 - - (423) - - - (6,796) Gross profit 16,250 108 1,637 - - (423) (290) - - 17,282 OperatingexpensesAdministrative (5,669) 914 482 110 (8) - - - - (4,171)expensesSelling costs (10,632) - 780 - - (115) - - - (9,967)Total (16,301) 914 1,262 110 (8) (115) - - - (14,138)operatingexpenses Operating (51) 1,022 2,899 110 (8) (538) (290) - - 3,144(loss)/profit Finance income 5 - - - - - - - - 5 Finance (117) - (200) - - - - - - (317)expense (Loss)/profit (163) 1,022 2,699 110 (8) (538) (290) - - 2,832before tax Tax (240) - (810) (33) 2 150 82 3 (242) (1,088) (Loss)/profit (403) 1,022 1,889 77 (6) (388) (208) 3 (242) 1,744for the periodattributes toequityshareholdersof the parent (Loss)/earnings pershare Basic earnings (1.94) 8.39per share(pence) Diluted (1.94) 8.37earnings pershare (pence) Weighted 20,777,391 20,777,391average numberof shares forbasic EPS Weighted 20,823,511 20,823,511average numberof shares fordiluted EPS AVEVA Group plc Appendix A Reconciliation of consolidated income statements (ii) Year ended 31 March 2005 UK GAAP Goodwill Defined Holiday Share Intangible Deferred Deferred Deferred IFRS amortisation benefit pay based amortisation revenue tax on tax re reversal pension payment revaluation losses £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenues 57,543 - - - - - (380) - - 57,163 Cost of sales (19,079) 217 1,668 - - (1,027) - - - (18,221) Gross profit 38,464 217 1,668 - - (1,027) (380) - - 38,942 OperatingexpensesAdministrative (13,376) 2,114 476 10 (23) - - - - (10,799)expensesSelling costs (19,293) - 784 - - (279) - - - (18,788)Total (32,669) 2,114 1,260 10 (23) (279) - - - (29,587)operatingexpenses Operating 5,795 2,331 2,928 10 (23) (1,306) (380) - - 9,355profit Finance income 70 - - - - - - - - 70 Finance (101) - (200) - - - - - - (301)expense Profit before 5,764 2,331 2,728 10 (23) (1,306) (380) - - 9,124tax Tax (2,882) - (818) (3) 7 366 106 7 (794) (4,011) (Loss)/profit 2,882 2,331 1,910 7 (16) (940) (274) 7 (794) 5,113for the periodattributes toequityshareholdersof the parent Earnings pershare Basic earnings 13.48 23.91per share(pence) Diluted 13.41 23.78earnings pershare (pence) Weighted 21,387,290 21,387,290average numberof shares forbasic EPS Weighted 21,499,172 21,499,172average numberof shares fordiluted EPS AVEVA Group plc Appendix A Reconciliation of consolidated balance sheets (i) As at 31 March 2004 (opening balance sheet) UK GAAP Dividend Employee Other Software Share IFRS accrual benefits taxation options IFRS reversal format £'000 £'000 £'000 £'000 £'000 £'000 £'000 Non-current assetsGoodwill 1,313 - - - - - 1,313Other intangible assets 1,977 - - - 456 - 2,433Property, plant and equipment 5,046 - - - (456) - 4,590Deferred tax assets - - 2,621 (598) - 85 2,108 8,336 2,621 (598) - 85 10,444Current assetsInventories 217 - - - - - 217Trade and other receivables 18,830 - - - - - 18,830Cash and cash equivalents 8,713 - - - - - 8,713 27,760 - - - - - 27,760TOTAL ASSETS 36,096 - 2,621 (598) - 85 38,204 EquityIssued share capital 1,747 - - - - - 1,747Share premium 8,210 - - - - - 8,210Retained earnings 11,613 699 (6,116) (263) - 85 6,018Total equity shareholders' funds 21,570 699 (6,116) (263) - 85 15,975 Current liabilitiesFinance lease obligations 71 - - - - - 71Trade and other payables 13,318 (699) 237 - - - 12,856Current tax liabilities 761 - - - - - 761 14,150 (699) 237 - - - 13,688 Non-current liabilitiesDeferred tax liabilities 335 - - (335) - - -Finance lease obligations 41 - - - - - 41Retirement benefit obligations - - 8,500 - - - 8,500 376 - 8,500 (335) - - 8,541 TOTAL EQUITY AND LIABILITIES 36,096 - 2,621 (598) - 85 38,204 AVEVA Group plc Appendix A Reconciliation of consolidated balance sheets (ii) As at 30 September 2004 UK Dividend Goodwill Tribon Employee Other Software Other Share Intangible IFRS GAAP accrual business benefits taxation options amortisation IFRS reversal combination Format £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Non-current assetsGoodwill 24,521 - 1,022 (10,151) - - - (118) - - 15,274Other intangible 1,801 - - 12,100 - - 323 213 - (538) 13,899assetsProperty, plant and 5,570 - - - - - (323) - - - 5,247equipmentDeferred tax assets - - - 794 1,628 (861) - - 120 - 1,681 31,892 - 1,022 2,743 1,628 (861) - 95 120 (538) 36,101Current assetsInventories 217 - - - - - - - - - 217Trade and other 17,504 - - 172 - - - - - - 17,676receivablesCurrent tax assets 1,532 - - - - - - - - - 1,532Cash and cash 9,467 - - - - - - - - - 9,467equivalents 28,720 - - 172 - - - - - - 28,892 TOTAL ASSETS 60,612 - 1,022 2,915 1,628 (861) - 95 120 (538) 64,993 EquityIssued share capital 2,194 - - - - - - - - - 2,194Share premium 27,918 - - - - - - - - - 27,918Retained earnings 10,656 395 1,022 - (3,800) (501) - (174) 120 (388) 7,330 Total equity 40,768 395 1,022 - (3,800) (501) - (174) 120 (388) 37,442shareholders' funds Current liabilitiesBank overdraft 108 - - - - - - - - - 108Finance lease 38 - - - - - - - - - 38obligationsTrade and other 16,272 (395) - (579) 127 - - 290 - - 15,715payablesCurrent tax 977 - - - - - - - - - 977liabilities 17,395 (395) - (579) 127 - - 290 - - 16,838 Non-currentliabilitiesProvisions 1,094 - - - - - - - - - 1,094Deferred tax 335 - - 3,494 - (360) - (21) - (150) 3,298liabilitiesFinance lease 20 - - - - - - - - - 20obligationsRetirement benefit 1,000 - - - 5,301 - - - - - 6,301obligations 2,449 - - 3,494 5,301 (360) - (21) - (150) 10,713 TOTAL EQUITY AND 60,612 - 1,022 2,915 1,628 (861) - 95 120 (538) 64,993LIABILITIES AVEVA Group plc Appendix A Reconciliation of consolidated balance sheets (iii) As at 31 March 2005 Reality/ Wave UK Tribon In- busi- GAAP Dividend business Other tangible ness IFRS accrual combina- Employee taxa- Soft- Share amorti- combin- Format reversal Goodwill tion benefits tion ware Other options sation ation IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Non-currentassetsGoodwill 26,395 - 2,331 (9,780) - - - (90) - - (1,699) 17,157Otherintangibleassets 1,625 - - 12,100 - - 220 183 - (1,306) 2,980 15,802Property,plant andequipment 5,099 - - - - - (220) - - - - 4,879Deferred taxassets 153 - - 794 1,530 (1,050) - - 311 - - 1,738 33,272 - 2,331 3,114 1,530 (1,050) - 93 311 (1,306) 1,281 39,576CurrentassetsTrade andotherreceivables 26,489 - - - - - - - - - - 26,489Current taxassets 749 - - - - - - - - - - 749Cash and cashequivalents 12,114 - - - - - - - - - - 12,114 39,352 - - - - - - - - - - 39,352 TOTAL 72,624 - 2,331 3,114 1,530 (1,050) - 93 311 (1,306) 1,281 78,928ASSETS EquityIssued sharecapital 2,204 - - - - - - - - - - 2,204Share 24,323 - - - - - - - - - - 24,323premiumMerger 3,921 - - - - - - - - - - 3,921reserveRetainedearnings 13,122 948 2,331 - (3,569) (1,050) - (232) 311 (940) - 10,921Total equityshareholders'funds 43,570 948 2,331 - (3,569) (1,050) - (232) 311 (940) - 41,369 CurrentliabilitiesBank 903 - - - - - - - - - - 903overdraftFinance leaseobligations 41 - - - - - - - - - - 41Trade andother 24,131 (948) - (380) 227 - - 380 - - - 23,410payablesCurrent taxliabilities 2,293 - - - - - - - - - - 2,293 27,368 (948) - (380) 227 - - 380 - - - 26,647Non-currentliabilitiesProvisions 824 - - - - - - - - - - 824Deferred taxliabilities - - - 3,494 - - - (55) - (366) 1,281 4,354Retirementbenefitobligations 862 - - - 4,872 - - - - - - 5,734 1,686 - - 3,494 4,872 - - (55) - (366) 1,281 10,912 TOTAL EQUITYANDLIABILITIES 72,624 - 2,331 3,114 1,530 (1,050) - 93 311 (1,306) 1,281 78,928 AVEVA Group plc Appendix B Summary of significant accounting policies The following are the principal accounting policies that the group has appliedin preparing the restated financial information under IFRS contained in thisdocument. The same policies are expected to be used in preparation of the 2005/06 interim and annual reports subject to amendments necessary to reflect theadoption of IAS 32 and 39 from 1 April 2005. Basis of Preparation The financial statements have been prepared on the historical cost basis exceptfor pension assets which are measured at fair value and pension liabilitieswhich are measured at the present value of defined benefit obligations. Theconsolidated financial statements are presented in pounds sterling and allvalues are rounded to the nearest thousand (£'000) except when otherwiseindicated. The preparation of financial statements in conformity with generally acceptedaccounting principles requires the use of estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Although theseestimates are based on management's best knowledge of current events andactions, actual results ultimately may differ from those estimates. Basis of Consolidation The consolidated financial statements comprise the financial statements of AVEVAGroup plc and its subsidiaries as at 31 March each year. The financialstatements of subsidiaries are prepared for the same reporting year as theparent company, using existing GAAP for each country of operation. Adjustmentsare made to translate any differences that may exist between the respectivelocal GAAP's and IFRS. Inter-company 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 obtained by theGroup and cease to be consolidated from the date on which control is transferredout of the Group. On acquisition, assets and liabilities of subsidiaries are measured at theirfair values at the date of acquisition with any excess of the cost ofacquisition over this value being capitalised as goodwill. Revenue Turnover comprises fees in respect of initial and extension licences, annuallicences, and rentals together with income from consultancy and other relatedservices (excluding VAT and similar taxes). For each revenue stream, no revenue is recognised unless and until: • a clear contractual arrangement can be evidenced;• delivery has been made in accordance with that contract;• if required, contractual acceptance criteria have been met; and• the fee has been agreed and collectability is probable. Users can pay an initial licence fee upon installation for a set number of userstogether with an obligatory annual fee. Additional users can be licenced at anytime on payment of an extension fee similar to the initial and annual fees. Thefees cover right to use and post contract support which includes core productenhancements and remote support services. The fees related to the right to useare recognised once the above conditions have been met. Post contract supportfees are recognised rateably over the period of the contract. As an alternative to the initial/extension licence plus annual fee model, theGroup also supplies its software under two different types of rental contract. Rentals which are invoiced monthly and which are cancellable by the customer arerecognised on a monthly basis. Other rental contracts are invoiced at the start of the contracted period, arenon-cancellable and consist of two separate components, the right to use and theright for post contract support. Revenue in respect of the right to use isrecognised once the above conditions have been met and revenue for post contractsupport is recognised rateably over the period of the contract. AVEVA Group plc Appendix B Summary of significant accounting policies (continued) Revenue (continued) The Group also licences its software using a token licencing model. Under thismodel, a "basket of tokens" representing licences to use the software over adefined period with the customer able to draw these down as and when required.Where the customer commits in advance to a specified number of tokens over adefined period, a proportion of revenue is recognized with an appropriateelement deferred for post contractual support obligations subject to the aboverecognition conditions being met. Where the customer is charged in arrears,revenue is recognised based on actual number of tokens used. The revenue and profit of development contracts is recognised on a percentagecompletion basis when the outcome of the contract can be estimated reliably.The stage of contract completion is usually determined by reference to the costsincurred to date as a proportion of the total estimated costs. Only costs thatreflect the services performed to date and to be performed are included in costsincurred to date and the estimate of total costs. When the contract cannot beestimated reliably, revenue is recognised to the extent that costs can berecovered otherwise costs are expensed as incurred. Income from consultancy and other related services is recognised as the servicesare provided. Foreign Currencies The functional and presentational currency of AVEVA Group plc is pounds sterling(£). Transactions in foreign currencies are initially recorded in thefunctional currency rate ruling at the date of the transaction. Monetary assetsand liabilities denominated in foreign currencies are retranslated at thefunctional currency rate of exchange ruling at the balance sheet date. Alldifferences are taken to the consolidated income statement. Non-monetary itemsthat measured in terms of historical cost in a foreign currency are translatedusing the exchange rate as at the date of initial transaction. The subsidiaries have a number of different functional currencies. As at thereporting date, the assets and liabilities of these overseas subsidiaries aretranslated into pounds sterling (£) at the rate of exchange ruling at thebalance sheet date, and their income statements are translated at the weightedaverage exchange rates for the year. Exchange differences arising on theretranslation are taken directly to a separate component of equity. Prior to 31March 2004, cumulative exchange differences were reported as part of retainedearnings. The Group has taken advantage of the transitional provisions of IFRS1 and is not required to record cumulative translation differences arising priorto the transition date. In utilising this exemption, all cumulative translationdifferences are deemed to be zero as at 1 April 2004 and all subsequentdisposals shall exclude any translation differences arising prior to the date oftransition and the deferred cumulative amount recognised in equity relating tothat particular foreign operation shall be recognised in the income statement. Goodwill Goodwill which arose on acquisitions in the year ended 31 March 1998, andearlier periods, was written off to reserves in accordance with the UK GAAPaccounting standard then in force. As permitted by FRS 10 which replaced theprevious standard, the goodwill previously written off to reserves was not beenreinstated in the balance sheet. On disposal or closure of a previously acquiredbusiness, the attributable amount of goodwill previously written off to reservesis included in determining the profit or loss on disposal. For acquisitions arising between 31 March 1998 and 31 March 2004, goodwillarising on the acquisition of subsidiary undertakings and businesses,representing any excess of the fair value of the consideration given over thefair value of the identifiable assets and liabilities acquired, was capitalisedunder UK GAAP and written off on a straight-line basis over its useful economiclife. The Group has elected not to apply IFRS 3 , "Business Combinations"retrospectively to business combinations that took place before 1 April 2004.As a result, the carrying amount of goodwill in the opening IFRS balance sheetis that recorded under UK GAAP at 1 April 2004 (date of transition). Goodwill on acquisitions after 1 April 2004 is initially measured at cost beingthe excess of the cost of the business combination over the acquirer's interestin the net fair value of the identifiable assets, liabilities and contingentliabilities. Following initial recognition, goodwill is measured at cost lessany accumulated impairment losses. Goodwill already carried in the balancesheet is not amortised after 1 April 2004. Goodwill (continued) Where goodwill forms part of a cash generating unit and part of the operationwithin that unit are disposed of, the goodwill associated with the operationdisposed of is included in the carrying amount of the operation when determiningthe gain or loss on disposal of the operation. Goodwill disposed of in thiscircumstance is measured on the basis of the relative values of the operationdisposed of and the portion of the cash-generating unit retained. Intangible Assets Intangible assets acquired separately are capitalised at cost and from abusiness acquisition are capitalised at fair value as at the date ofacquisition. Following initial recognition, the cost model is applied to eachclass of intangible assets as set out below. Useful lives are also examined on an annual basis and adjustments, whereapplicable are made on a prospective basis. Amortisation is calculated on astraight-line basis over the estimated useful economic lives of the asset whichare as follows: Purchased software rights 10 yearsOther software 4 yearsTechnology 5 yearsCustomer relationships 20 years Research and Development expenditure Research and development expenditure is written off in the year of expenditure. Property, Plant and Equipment Property, plant and equipment is stated at cost less depreciation and anyaccumulated impairment losses. Depreciation is calculated on a straight-line basis to write down the assets totheir estimated residual value over the useful economic life of the asset asfollows: Computer equipment 25% per annumFixtures, fittings and office equipment 12-15% per annumMotor vehicles 25% per annum Assets held under finance leases and leasehold improvements are amortised on astraight-line basis over the period of the lease or useful economic life ifshorter. Borrowing costs related to the purchase of fixed assets are not capitalised. Impairment of Assets Goodwill arising on acquisition is allocated to cash-generating units expectedto benefit from the combination's synergies and represent the lowest level atwhich goodwill is monitored for internal management purposes and generates cashflows which are independent of other cash generating units. The recoverableamount of the cash-generating unit to which goodwill has been allocated istested for impairment annually or when events or changes in circumstanceindicate that it might be impaired. The carrying values of property, plant andequipment, and intangible assets other than goodwill are reviewed for impairmentwhen events or changes in circumstance indicate the carrying value may beimpaired. If any such indication exists and where the carrying values exceed theestimated recoverable amount, the assets or cash-generating units are writtendown to their recoverable amount. The recoverable amount is the greater of netselling price and value in use. In assessing value in use, the estimated futurecash flows are discounted to their present value using a pre-tax discount ratethat reflects current market assessments of the time value of money and therisks specific to the asset. For an asset that does not generate largelyindependent cash inflows, the recoverable amount is determined for thecash-generating unit to which the asset belongs. Impairment losses are recognised in the income statement in administrativeexpenses line item. Trade and Other Receivables Trade receivables, which generally have 30-90 day terms, are recognised andcarried at original invoice amount less an allowance for any uncollectibleamounts. An estimate for doubtful debts is made when collection of the fullamount is no longer probable. Bad debts are written off when identified. Cash and Cash Equivalents Cash 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, where there is a legal right of set off and theGroup intends to settle on a net basis. Otherwise bank overdrafts areclassified as borrowings. Derivative Financial Instruments As permitted by IFRS 1, IAS 32 and IAS 39, the Group has applied its UK GAAPpolicies for financial instruments in the preparation of the comparativeinformation for the year ended 31 March 2005 and the six months ended 30September 2004. The group uses derivative financial instruments to reduce exposure to foreignexchange risk. The group does not hold or issue derivative financial instrumentsfor speculative purposes. For a forward foreign exchange contract to be treatedas a hedge the instrument must be related to actual foreign currency assets orliabilities or to a probable commitment. It must involve the same currency orsimilar currencies as the hedged item and must also reduce the risk of foreigncurrency exchange movements on the group's operations. Gains and losses arisingon these contracts are deferred and recognised in the profit and loss account,or as adjustments to the carrying amount of fixed assets, only when the hedgedtransaction has itself been reflected in the group's financial statements. Leases Finance 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 estimateduseful life of the asset or the lease term. Leases where the lessor retains substantially all the risks and benefits ofownership of the asset are classified as operating leases. Operating leasepayments are recognised as an expense in the income statement on a straight-linebasis over the lease term. Taxation Deferred income tax is provided, using the liability method, on all temporarydifferences at the balance sheet date between the tax bases of assets and liabilities and their carrying amountsfor financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporarydifferences: • except where the deferred income tax liability arises from goodwillamortisation or the initial recognition of an asset or liability in atransaction that is not a business combination and, at the time of thetransaction, affects neither the accounting profit nor taxable profit or loss;and • in respect of taxable temporary differences associated withinvestments in subsidiaries , except where the timing of the reversal of thetemporary differences can be controlled and it is probable that the temporarydifferences 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 deductibletemporary difference arises from the initial recognition of an asset orliability in a transaction that is not a business combination and, at the timeof the transaction, affects neither the accounting profit nor taxable profit orloss; and • in respect of deductible temporary differences associated withinvestments in subsidiaries, deferred tax assets are only recognised to theextent that it is probable that the temporary differences will reverse in theforeseeable future and taxable profit will be available against which thetemporary differences can be utilised. Taxation (continued) 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 deferred income 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. Revenues, expenses and assets are recognised net of the amount of VAT except: • where the VAT incurred on a purchase of goods and services is notrecoverable from the taxation authority, in which case the VAT is recognised aspart of the cost of acquisition of the asset or as part of the expense item asapplicable; and • receivables and payables are stated with the amount of VAT included. The net amount of VAT recoverable from, or payable to, the taxation authority isincluded as part of receivables or payables in the balance sheet Post Retirement Benefits The Group operates defined benefit pension schemes in the UK, Sweden andGermany. The UK defined benefit pension scheme, previously available to all UK employeeswas closed to new applicants in 2002. UK employees are now offered membership ofa defined contribution scheme. The German unfunded defined benefit scheme is closed to new applicants andprovides benefits to five deferred members following an acquisition in 1992 byTribon. No current employees participate in the scheme. Full provision has beenmade for the liability on the balance sheet. The Group provides pension arrangements to its Swedish employees through anindustry wide defined benefit scheme. It is not possible to identify the shareof the underlying assets and liabilities in the scheme which is attributable tothe company on a fair and reasonable basis. Therefore the Group has applied the provisions in IAS19 to account for thescheme as if it was a defined contribution scheme. For the defined benefit schemes, the defined benefit obligation is calculatedannually by independent actuaries using the projected unit credit method. Theretirement benefit liability in the balance sheet represents the present valueof the defined benefit obligation as reduced by the fair value of plan assetsand unrecognised past service cost. The current service cost is recognised inthe income statement as an employee benefit expense. The interest cost,resulting from the increase in the present value of the defined benefitobligation over time and the expected return on plan assets, is recognised asnet interest expense or income. A past service cost is recognised immediately to the extent that benefits arealready vested, or is otherwise amortised on a straight-line basis over theaverage period until the benefits become vested. Actuarial gains and losses arising from experience adjustments or changes inactuarial assumptions are charged or credited in the statement of recognisedincome and expense in the period in which they arise. The Group also operates defined contribution pension schemes for a number of UKand non-UK employees. Contributions to defined contribution plans are charged to operating profit asthey become payable. Share-based Payments Under UK GAAP, the intrinsic value (representing the difference between themarket value of the underlying shares at date of grant and the exercise price)of share options granted was recorded as a charge to operating expenses. Thecharge was spread over the period to which the performance criteria relate orwhere there was no performance period the charge was spread over the period thatthe employee became unconditionally entitled to the share options. Under IFRS, the cost of equity-settled transactions with employees is measuredby reference to the fair value at the date at which they are granted. The fairvalue is determined by an external valuer using a model based on Monte Carloprinciples, further details of which are given in note ( ). In valuingequity-settled transactions, no account is taken of any performance conditions,other than conditions linked to the price of the shares of AVEVA Group plc ('market conditions'). Share-based Payments (continued) The cost of equity-settled transactions is recognised, together with acorresponding increase in equity, over the period in which the performanceconditions are fulfilled, ending on the date on which the relevant employeesbecome fully entitled to the award ('vesting date'). The cumulative expenserecognised for equity settled transactions at each reporting date until thevesting date reflects the extent to which the vesting period has expired and thenumber of awards that, in the opinion of the directors of the Group at thatdate, based on the best available estimate of the number of equity instrumentsthat will ultimately vest. No expense is recognised for awards that do not ultimately vest, except forawards where vesting is conditional upon a market condition, which are treatedas vesting irrespective of whether or not the market condition is satisfied,provided that all other performance conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum an expenseis recognised as if the terms had not been modified. In addition, an expense isrecognised for any increase in the value of the transaction as a result of themodification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested onthe date of cancellation, and any expense not yet recognised for the award isrecognised immediately. However, if a new award is substituted for the cancelledaward, and designated as a replacement award on the date that it is granted, thecancelled and new awards are treated as if they were a modification of theoriginal award, as described in the previous paragraph. The dilutive effect of outstanding options is reflected as additional sharedilution in the computation of earnings per share (see note ( )). 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 on or before 31 March2004. Provisions Provisions are recognised when the Group has a present obligation (legal orconstructive) as a result of a past event, 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 income statement net of any reimbursement. If theeffect of the time value of money is material, provisions are determined bydiscounting the expected future cash flows at a pre-tax rate that reflectscurrent market assessments of the time value of money and, where appropriate,the risks specific to the liability. Where discounting is used, the increase inthe provision due to the passage of time is recognised as a borrowing cost. Independent Auditors' Report to the Directors of AVEVA Group plc on thepreliminary IFRS Financial Statements for the year ended 31 March 2005 We have audited the accompanying preliminary International Financial ReportingStandards ("IFRS") financial statements of the company for the year ended 31March 2005 which comprise the opening IFRS Consolidated Balance Sheet as at 1April 2004, the Consolidated Income Statement and the Consolidated Statement ofRecognised Income and Expense for the year ended 31 March 2005 and theConsolidated Balance Sheet as at 31 March 2005, together with the relatedaccounting policies note set out on pages 24 to 29. This report is made solely to the directors in accordance with our engagementletter dated 5 September 2005. Our audit work has been undertaken so that wemight state to the directors those matters we are required to state to them inan auditors' report and for no other purpose. To the fullest extent permittedby law, we do not accept or assume responsibility or liability to anyone otherthan the company for our audit work, for this report, or for the opinions wehave formed. Respective responsibilities of directors and auditors These preliminary IFRS financial statements are the responsibility of theCompany's directors and have been prepared as part of the Company's conversionto IFRS. They have been prepared in accordance with the basis set out on page4, 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 March2006. Our responsibility is to express an independent opinion on the preliminary IFRSfinancial statements based on our audit. We read the other informationaccompanying the preliminary IFRS financial statements and consider whether itis consistent with the preliminary IFRS financial statements. This otherinformation comprises the explanatory notes on the impact of IFRS on pages 12 to18, and the reconciliation from UK GAAP to IFRS on pages 19 to 23. We considerthe implications for our report if we become aware of any apparent misstatementsor material inconsistencies with the preliminary IFRS financial statements. Ourresponsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with United Kingdom Auditing Standardsissued by the Auditing Practices Board. Those Standards require that we planand perform the audit to obtain reasonable assurance about whether thepreliminary IFRS financial statements are free of material misstatement. Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the preliminary IFRS financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall presentation of the preliminaryIFRS financial statements. We believe that our audit provides a reasonablebasis for our opinion. Emphasis of matter Without qualifying our opinion, we draw attention to the fact that the basis ofpreparation on page 4 explains why there is a possibility that the preliminaryIFRS financial statements may require adjustment before constituting the finalIFRS financial statements. Moreover, we draw attention to the fact that, underIFRSs only a complete set of financial statements with comparative financialinformation and explanatory notes can provide a fair presentation of theCompany's financial position, results of operations and cash flows in accordancewith IFRSs. Opinion In our opinion, the preliminary IFRS financial statements for the year ended 31March 2005 have been prepared, in all material respects, in accordance with thebasis set out on page 4, which describes how IFRS have been applied under IFRS1, including the assumptions management has made about the standards andinterpretations expected to be effective, and the policies expected to beadopted, when management prepares its first complete set of IFRS financialstatements as at 31 March 2006. Ernst & Young LLP 21 September 2005 Cambridge This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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