15th Sep 2005 07:02
ArmorGroup International plc15 September 2005 15th September 2005 ArmorGroup International plc International Financial Reporting Standards ArmorGroup International plc today releases financial information prepared underInternational Financial Reporting Standards (IFRS) for the year ended 31December 2004 and explains the impact of the adoption of IFRS on these results. Under IFRS, the Group's profit before tax for the year ended 31 December 2004reduced from US$13.4m under UK GAAP to US$12.6m under IFRS. Net assets at 31December 2004 increased from US$66.0m under UK GAAP to US$66.3m. ArmorGroup's Chief Financial Officer, David Seaton, said, "It is mainly IAS 19,Employee Benefits, that affects the Group's income statement as we recognise thecost of accruing holiday pay. The impact of IFRS on the Group's net assetposition is minor. The adoption of IFRS represents an accounting change onlyand does not affect the Group's underlying business or its cashflows." Enquiries ArmorGroup International plc Jerry Hoffman, Chief Executive Officer Tel: + 44 (0) 207 808 5800Dave Seaton, Chief Financial OfficerNick Melson, Communications Manager Citigate Dewe Rogerson Patrick Toyne Sewell / Sarah Gestetner Tel: + 44 (0) 207 638 9571 Notes to Editors • For all periods up to and including the year ended 31 December 2004 the Group has prepared its financial statements under UK Generally Accepted Accounting Practice (UK GAAP). • In accordance with EU regulations, the Group is required to adopt IFRS for all accounting periods beginning on or after 1 January 2005. • The Group's first Annual Report prepared under IFRS will be for the year ended 31 December 2005 and the first interim financial statements will be for the six months ended 30 June 2005. • This financial information is being released at the same time as the Group's maiden interim financial statements for the six months ended 30 June 2005. This is because the comparative information for 30 June 2004 contained in this announcement has not previously been publicly available therefore making an earlier release impractical. ArmorGroup, which has its headquarters in London and a major office inWashington DC, has over 7,800 employees and operations in over 28 countries. Itprovides its services principally to first world national governments, majorinternational inter-governmental organisations and multinational corporations.It operates principally in regions of the world with diminished law and order orwith a high risk of terrorism or which were former areas of conflict includingthe Middle East, Africa, South America, the CIS and Asia. The Group listed onthe London Stock Exchange in December 2004. For more information please visitwww.armorgroup.com Contents IntroductionOverviewRestated consolidated income statementRestated consolidated balance sheetRestated consolidated cash flow statementExplanatory notes on the impact of IFRS Appendices: Appendix 1 Reconciliations of the consolidated income statements for the year ended 31 December 2004 and the six months ended 30 June 2004 Appendix 2 Reconciliations of the consolidated balance sheets at 31 December 2004 and 30 June 2004 Appendix 3 Reconciliation of net assets / total equity at 1 January 2004 Appendix 4 Reconciliations of cash flows for the year ended 31 December 2004 and the six months ended 30 June 2004 Appendix 5 Accounting policies under IFRS Introduction All listed companies in the European Union ("EU") are required to prepareconsolidated financial statements under EU adopted International FinancialReporting Standards ("IFRS") for accounting periods beginning on or after 1January 2005. Previously ArmorGroup International plc ("the Group") preparedits consolidated financial statements under UK Generally Accepted AccountingPrinciples ("UK GAAP"). The Group's first set of IFRS results will be its interim results for the sixmonths ended 30 June 2005 and its first Annual Report under IFRS will be for theyear ending 31 December 2005. Comparatives will be restated under IFRS and willform an integral part of the 2005 Interim and Annual Reports. The purpose of this document is to explain the accounting policy changes arisingfrom the adoption of IFRS and their impact on the financial statementspreviously prepared under UK GAAP for the year ended 31 December 2004 and sixmonths ended 30 June 2004. The summary financial information contained in this document has been preparedon the basis of those International Financial Reporting Standards, InternationalAccounting Standards ("IAS") and International Financial ReportingInterpretations Committee ("IFRIC") and Standard Interpretations Committee ("SIC") interpretations that are expected to be applicable to 31 December 2005financial reporting. These are subject to ongoing review and endorsement by theEuropean Commission, whilst the application of the standards continues to besubject to interpretation by IFRIC as well as emerging industry consensus. As aconsequence, further refinements to the accounting policies may need to be madein the first annual IFRS financial statements for the year ending 31 December2005. The financial information in this document does not constitute statutoryaccounts within the meaning of Section 240 of the Companies Act 1985 (asamended). The financial information in this document is unaudited. The adoption of IFRS represents an accounting change only and does not affectthe ongoing operations or cash flows of the Group for the year ended 31 December2004. For 2004 the most significant changes arising on the transition to IFRSare as follows: - the treatment of goodwill;- holiday pay; and- foreign exchange translation Overview of impact in 2004 The following table summarises the effect of the adoption of IFRS on the Group'sprofit before taxation for the year ended 31 December 2004 and six months ended30 June 2004. Year ended Six months ended 31 December 2004 30 June 2004 US$'000 US$'000 Profit before taxation under UK GAAP 13,351 4,438 Reversal of goodwill amortisation 697 349 Holiday pay accrual (1,366) (930) Foreign exchange translation (56) 20 Profit before taxation under IFRS 12,626 3,877 Restated Consolidated Income Statement Year ended Six months ended 31 December 30 June 2004 2004 US$'000 US$'000 Turnover 190,190 80,606Cost of sales (140,464) (60,869)Gross profit 49,726 19,737Administrative expenses (33,270) (14,527)Net profit on sale of businesses 592 372Operating profit 17,048 5,582Interest receivable and similar income 48 21Interest payable and similar charges (4,470) (1,726)Profit before income tax 12,626 3,877Income tax expense (4,229) (1,360)Profit for the period 8,397 2,517 Profit attributable to:Equity holders of the Company 8,353 2,497Minority Interest 44 20 8,397 2,517 Earnings per share for profitattributable to the equity holders ofthe Company during the period per 1pence share (US cents) - basic 33.91 10.76 - diluted 33.73 10.33 All amounts included above are derived from continuing operations. Restated Consolidated Balance Sheet 31 December 2004 30 June 2004 US$'000 US$'000Non-current assetsGoodwill 13,898 13,898Intangible assets 380 333Property, plant and equipment 12,245 12,743Deferred tax assets 1,753 771 28,276 27,745Current assetsInventories 178 249Trade and other receivables 43,802 41,236Cash and cash equivalents 14,699 3,971 58,679 45,456 Total assets 86,955 73,201 Current liabilitiesBorrowings (1,257) (16,180)Trade and other payables (15,623) (18,105)Current income tax liabilities (3,168) (3,029)Provisions and other liabilities (167) - (20,215) (37,314) Net current assets 38,464 8,142Total assets less current liabilities 66,740 35,887 Non-current liabilitiesBorrowings (407) (31,651)Provisions and other liabilities (18) (1) (425) (31,652)Net assets 66,315 4,235 Capital and reservesCalled up share capital 1,027 36Share premium account 56,784 2,450Capital redemption reserve 96 -Warrant reserve - 266Cumulative translation adjustment (49) (130)Retained earnings 8,457 1,613Total equity shareholders' funds 66,315 4,235 Restated Consolidated Cash Flow Statement 31 December 30 June 2004 2004 US$'000 US$'000Cash flows from operating activitiesCash inflow/(outflow) from operations 11,880 (1,533)Interest received 48 21Interest paid (2,802) (225)Income tax paid (5,110) (1,384)Net cash inflow/(outflow) from operatingactivities 4,016 (3,121) Cash flows from investing activitiesPurchase of businesses (40) (40)Disposal of businesses (net of cashdisposed) 641 646 Purchase of property, plant and equipment (13,271) (7,803)Purchase of intangible assets (209) (138)Proceeds from sale of property, plant andequipment 458 144 Net cash from investing activities (12,421) (7,191) Cash flows from financing activitiesNet proceeds from issue of ordinary sharecapital 45,764 - Net proceeds from issue of new bank loans 1,760 866Issue of new convertible debt 10,000 -Issue costs of new borrowings (320) -Finance lease principle payments (47) (31)Repayment of borrowings (37,154) (500)Net cash from financing activities 20,003 335Net increase/(decrease) in cash and cashequivalents 11,598 (9,977) Cash and cash equivalents at beginning ofperiod 2,877 2,877 Exchange gains on cash and bank overdrafts 91 2 Cash and cash equivalents at end of period 14,566 (7,098) Explanatory notes The notes below explain the effect that the transition from UK GAAP to IFRS hashad on the financial information presented on pages 2 to 5. The notes areintended to support the reconciliations contained in Appendices 1 to 4. 1 Goodwill Under UK GAAP, goodwill was capitalised and amortised over its useful economiclife of 20 years. The Group has taken the exemption allowed by IFRS 1 for business combinations.As a result of this exemption the net book value of goodwill under UK GAAP at 31December 2003 of $13,898,000 became the deemed cost of goodwill under IFRS atthe date of transition. Under IFRS 3 "Business Combinations" goodwill is nolonger amortised, but is subject to an annual impairment review. The effect of adopting IFRS 3 is to reverse the goodwill amortisation chargedunder UK GAAP from the date of transition. As a result the carrying value ofgoodwill has increased at 30 June 2004 and 31 December 2004 by $349,000 and$697,000 respectively. 2 Other intangible assets Under UK GAAP all capitalised software costs were disclosed in the accountswithin property, plant and equipment and depreciated over their useful economiclives. IAS 38 "Intangible Assets" requires that software that is an integral part ofthe related hardware should continue to be treated as property, plant andequipment. Software that is not an integral part of the related hardware mustbe capitalised as an intangible asset and amortised over its useful economiclife. The effect of adopting IAS 38 is to reclassify certain software costs fromcomputer equipment to intangible assets, and to reclassify the relateddepreciation expense to amortisation expense in the income statement. As a result the net book value of intangible assets has increased and property,plant and equipment has decreased as at 30 June 2004 and 31 December 2004 by$333,000 and $331,000 respectively. 3 Employee benefits Under UK GAAP no accrual was made by the Group for holiday pay. IAS 19 "Employee Benefits" requires the expected cost of compensated short-termabsences (eg. holidays) to be recognised when the employee rendered the servicethat increases their entitlement. As a result, an accrual should be made forholidays earned but not taken. The effect of adopting IAS 19 is to reduce operating profit for the six monthsended 30 June 2004 and the year ended 31 December 2004 by $930,000 and$1,366,000 respectively, and reduce profit after tax for the six months ended 30June 2004 and the year ended 31 December 2004 by $651,000 and $956,000respectively. 4 Foreign exchange (i) Translation of results of overseas subsidiaries Under UK GAAP the Group's accounting policy was to translate the results ofoverseas subsidiary undertakings, whose functional currency was denominated in acurrency other than US dollars, into US dollars using the closing rate. IAS 21 "The effects of Changes in Foreign Exchange Rates" does not permit thisand requires the results of overseas subsidiaries to be translated at theaverage exchange rate for the period. This change in accounting policy has been applied from the transition date of 1January 2004. The effect of adopting IAS 21 is to increase profit beforetaxation for the six months ended 30 June 2004 by $20,000 and decrease profitbefore taxation for the year ended 31 December 2004 by $56,000, and increaseprofit after tax for the six months ended 30 June 2004 by $17,000 and decreaseprofit after tax for the year ended 31 December 2004 by $45,000. (ii) Cumulative translation differences As permitted by IFRS 1, cumulative foreign exchange differences have been set tozero at the date of IFRS transition. This has not had an effect on net equity. 5 Share based payments As a result of the transition to IFRS, the Group has reclassified the cost ofpre-IPO share options outstanding at 31 December 2004 from liabilities toequity. At the date of grant, the Group had not determined whether to settlethe pre-IPO share options in the form of cash or equity. Following the adoption of IFRS 2 "Share Based Payments", the Group hasdetermined that all share options will be equity rather than cash settled. 6 Net profit on sale of businesses Under UK GAAP, in accordance with FRS 3 "Reporting Financial Performance",profit on sale of businesses was presented after operating profit. IAS 1 "Presentation of Financial Statements" does not permit this presentation and as aresult profit on sale of businesses has been reclassified and included withinoperating profit. There is no impact on profit before taxation as a result ofthis change in presentation. 7 Cash flow statement On adoption of IAS 7 "Cash Flow Statements", there has been no effect on theunderlying cash generation and expenditures of the Group. However there have been some presentational changes. The format of the cashflow statement has changed to show cash flows analysed between operating,investing and financing activities. The cash flow statement continues to bepresented using the indirect method. Appendix 1 Reconciliation of consolidated income statement for year ended 31 December 2004 UK GAAP Effect of transition to IFRS IFRS US$'000 US$'000 US$'000 Turnover 191,114 (924) 190,190Cost of sales (139,839) (625) (140,464)Gross profit 51,275 (1,549) 49,726Administrative expenses (34,095) 825 (33,270)Net profit on sale of businesses - 592 592Operating profit 17,180 (132) 17,048Net profit on sale of businesses 592 (592) -Interest receivable and similar income 48 - 48Interest payable and similar charges (4,469) (1) (4,470)Profit before income tax 13,351 (725) 12,626Income tax expense (4,650) 421 (4,229)Profit for the period 8,701 (304) 8,397 Analysis of IFRS adjustments for the year ended 31 December 2004 Reclassification Effect of Foreign Holiday pay of net profit on transition Goodwill exchange accrual sale of businesses to IFRS US$'000 US$'000 US$'000 US$'000 US$'000 Turnover - (924) - - (924)Cost of sales - 741 (1,366) - (625)Gross profit - (183) (1,366) - (1,549)Administrative expenses 697 128 - - 825Net profit on sale ofbusinesses - - - 592 592 Operating profit 697 (55) (1,366) 592 (132)Net profit on sale ofbusinesses - - - (592) (592) Interest receivable andsimilar income - - - - - Interest payable andsimilar charges - (1) - - (1) Profit before income tax 697 (56) (1,366) - (725)Income tax expense - 11 410 - 421Profit for the period 697 (45) (956) - (304) Reconciliation of consolidated income statement for six months ended 30 June2004 UK GAAP Effect of transition to IFRS IFRS US$'000 US$'000 US$'000 Turnover 80,676 (70) 80,606Cost of sales (60,141) (728) (60,869)Gross profit 20,535 (798) 19,737Administrative expenses (14,764) 237 (14,527)Net profit on sale of businesses - 372 372Operating profit 5,771 (189) 5,582Net profit on sale of businesses 372 (372) -Interest receivable and similar income 21 - 21Interest payable and similar charges (1,726) - (1,726)Profit before income tax 4,438 (561) 3,877Income tax expense (1,636) 276 (1,360)Profit for the period 2,802 (285) 2,517 Analysis of IFRS adjustments for the six months ended 30 June 2004 Reclassification Effect of Foreign Holiday pay of net profit on transition to Goodwill exchange accrual sale of businesses IFRS US$'000 US$'000 US$'000 US$'000 US$'000 Turnover - (70) - - (70)Cost of sales - 68 (796) - (728)Gross profit - (2) (796) - (798)Administrative expenses 349 22 (134) - 237Net profit on sale ofbusinesses - - - 372 372Operating profit 349 20 (930) 372 (189)Net profit on sale ofbusinesses - - - (372) (372)Interest receivable andsimilar income - - - - -Interest payable andsimilar charges - - - - -Profit before income tax 349 20 (930) - (561)Income tax expense - (3) 279 - 276Profit for the period 349 17 (651) - (285) Appendix 2 Reconciliation of consolidated balance sheet at 31 December 2004 UK GAAP Effect of transition to IFRS IFRS US$'000 US$'000 US$'000Non-current assetsGoodwill 13,201 697 13,898Intangible assets 49 331 380Property, plant and equipment 12,576 (331) 12,245Deferred tax assets 1,127 626 1,753 26,953 1,323 28,276Current assetsInventories 178 - 178Trade and other receivables 43,802 - 43,802Cash and cash equivalents 14,699 - 14,699 58,679 - 58,679 Total assets 85,632 1,323 86,955 Current liabilitiesBorrowings (1,257) - (1,257)Trade and other payables (14,620) (1,003) (15,623)Current income tax liabilities (3,168) - (3,168)Provisions and other liabilities - (167) (167) (19,045) (1,170) (20,215) Net current assets 39,634 (1,170) 38,464Total assets less current liabilities 66,587 153 66,740 Non-current liabilitiesBorrowings (407) - (407)Provisions and other liabilities (185) 167 (18) (592) 167 (425)Net assets 65,995 320 66,315 Capital and reservesCalled up share capital 1,027 - 1,027Share premium account 56,784 - 56,784Capital redemption reserve 96 - 96Cumulative translation adjustment (94) 45 (49)Retained earnings 8,182 275 8,457Total equity shareholders' funds 65,995 320 66,315 Analysis of IFRS adjustments at 31 December 2004 Effect of Foreign Holiday pay Share based transition Goodwill Software exchange accrual payments to IFRS US $'000 US $'000 US $'000 US $'000 US $'000 US $'000Non-current assetsGoodwill 697 - - - - 697Intangible assets - 331 - - - 331Property, plant andequipment - (331) - - - (331)Deferred tax assets - - - 626 - 626Total assets 697 - - 626 - 1,323 Current liabilitiesTrade and other payables - - - (2,087) 1,084 (1,003)Provisions and otherliabilities - - - - (167) (167) Net current assets - - - (2,087) 917 (1,170)Total assets less currentliabilities 697 - - (1,461) 917 153 Non-current liabilitiesProvisions and otherliabilities - - - - 167 167 Net assets 697 - - (1,461) 1,084 320 Capital and reservesCumulative translationadjustment - - 45 - - 45 Retained earnings 697 - (45) (1,461) 1,084 275Total equityshareholders' funds 697 - - (1,461) 1,084 320 Reconciliation of consolidated balance sheet at 30 June 2004 UK GAAP Effect of transition to IFRS IFRS US$'000 US$'000 US$'000Non-current assetsGoodwill 13,549 349 13,898Intangible assets - 333 333Property, plant and equipment 13,076 (333) 12,743Deferred tax assets 276 495 771 26,901 844 27,745Current assetsInventories 249 - 249Trade and other receivables 41,236 - 41,236Cash and cash equivalents 3,971 - 3,971 45,456 - 45,456 Total assets 72,357 844 73,201 Current liabilitiesBorrowings (16,180) - (16,180)Trade and other payables (16,454) (1,651) (18,105)Current income tax liabilities (3,029) - (3,029) (35,663) (1,651) (37,314) Net current assets 9,793 (1,651) 8,142Total assets less current liabilities 36,694 (807) 35,887 Non-current liabilitiesBorrowings (31,651) - (31,651)Provisions and other liabilities (1) - (1) (31,652) - (31,652)Net assets 5,042 (807) 4,235 Capital and reservesCalled up share capital 36 - 36Share premium account 2,450 - 2,450Warrant reserve 266 - 266Cumulative translation adjustment (113) (17) (130)Retained earnings 2,403 (790) 1,613Total equity shareholders' funds 5,042 (807) 4,235 Analysis of IFRS adjustments at 30 June 2004 Effect of Foreign Holiday pay transition Goodwill Software exchange accrual to IFRS US $'000 US $'000 US $'000 US $'000 US $'000Non-current assetsGoodwill 349 - - - 349Intangible assets - 333 - - 333Property, plant and equipment - (333) - - (333)Deferred tax assets - - - 495 495Total assets 349 - - 495 844 Current liabilitiesTrade and other payables - - - (1,651) (1,651)Net current assets - - - (1,651) (1,651)Net assets 349 - - (1,156) (807) Capital and reservesCumulative translation adjustment - - (17) - (17)Retained earnings 349 - 17 (1,156) (790)Total equity shareholders' funds 349 - - (1,156) (807) Appendix 3 Reconciliation of net assets / equity at 1 January 2004 US $'000 Total net assets / equity under UK GAAP 2,373 Holiday pay accrual adjustment (721)Tax effect of holiday pay accrual 216 Total net assets / equity under IFRS 1,868 Appendix 4 Reconciliation of cash flows for the year ended 31 December 2004 Effect of transition to UK GAAP IFRS IFRS US $'000 US $'000 US $'000 Cash flows from operating activitiesCash inflow from operations 11,900 (20) 11,880Interest received 48 - 48Interest paid (2,802) - (2,802)Income tax paid (5,110) - (5,110)Net cash inflow from operating activities 4,036 (20) 4,016 Cash flows from investing activitiesPurchase of businesses (40) - (40)Disposal of businesses (net of cashdisposed) 641 - 641 Purchase of property, plant and equipment (13,429) 158 (13,271)Purchase of intangible assets (51) (158) (209)Proceeds from sale of property, plant andequipment 458 - 458 Net cash from investing activities (12,421) - (12,421) Cash flows from financing activitiesNet proceeds from issue of ordinary sharecapital 45,764 - 45,764 Net proceeds from issue of new bank loans 1,760 - 1,760Issue of new convertible debt 10,000 - 10,000Issue costs of new borrowings (320) - (320)Finance lease principle payments (47) - (47)Repayment of borrowings (37,154) - (37,154)Net cash from financing activities 20,003 - 20,003Net increase in cash and cash equivalents 11,618 (20) 11,598 Cash and cash equivalents at beginning ofperiod 2,877 - 2,877 Exchange gains on cash and bank overdrafts 71 20 91 Cash and cash equivalents at end of period 14,566 - 14,566 Cash inflow/(outflow) from operations for the year ended 31 December 2004 Effect of transition to UK GAAP IFRS IFRS US$'000 US$'000 US$'000 Profit after tax 8,701 (304) 8,397Adjustments for:Net profit on sale of businesses (592) - (592)Interest receivable (48) (48)Interest payable 4,469 1 4,470Taxation 4,650 (421) 4,229Depreciation 9,018 (82) 8,936Loss on disposal of property, plant andequipment 169 - 169 Amortisation of intangible assets 699 (615) 84Compensation charge in respect of sharebased payments - 1,084 1,084 27,066 (337) 26,729Changes in working capital (excludingeffects of acquisition and disposal ofsubsidiaries)Decrease in inventories 17 - 17Increase in trade and other receivables (19,002) 47 (18,955)Increase in payables 3,634 270 3,904Increase in provisions 185 - 185 Cash inflow from operations 11,900 (20) 11,880 Analysis of cash and cash equivalents at 31 December 2004 US$'000 Cash at bank and in hand 14,699Bank overdrafts (133) 14,566 Reconciliation of cash flows for the six months ended 30 June 2004 Effect of transition to UK GAAP IFRS IFRS US $'000 US $'000 US $'000Cash flows from operating activitiesCash outflow from operations (1,533) - (1,533)Interest received 21 - 21Interest paid (225) - (225)Income tax paid (1,384) - (1,384)Net cash outflow from operating activities (3,121) - (3,121) Cash flows from investing activitiesPurchase of businesses (40) - (40)Disposal of businesses (net of cashdisposed) 646 - 646 Purchase of property, plant and equipment (7,941) 138 (7,803)Purchase of intangible assets - (138) (138)Proceeds from sale of property, plant andequipment 144 - 144 Net cash from investing activities (7,191) - (7,191) Cash flows from financing activitiesNet proceeds from issue of new bank loans 866 - 866Finance lease principle payments (31) - (31)Repayment of borrowings (500) - (500)Net cash from financing activities 335 - 335Net decrease in cash and cash equivalents (9,977) - (9,977) Cash and cash equivalents at beginning ofperiod 2,877 - 2,877 Exchange gains on cash and bank overdrafts 2 - 2 Cash and cash equivalents at end of period (7,098) - (7,098) Cash outflow from operations for the six months ended 30 June 2004 Effect of transition to UK GAAP IFRS IFRS US$'000 US$'000 US$'000 Profit after tax 2,802 (285) 2,517Adjustments for:Net profit on sale of businesses (372) - (372)Interest receivable (21) - (21)Interest payable 1,726 - 1,726Taxation 1,636 (276) 1,360Depreciation 3,297 (67) 3,230Loss on disposal of property, plant andequipment 56 - 56 Amortisation of intangibles 349 (282) 67 9,473 (910) 8,563Changes in working capital (excludingeffects of acquisition and disposal ofsubsidiaries)Increase in inventories (27) - (27)Increase in trade and other receivables (16,816) (36) (16,852)Increase in payables 5,837 946 6,783 Cash outflow from operations (1,533) - (1,533) Analysis of cash and cash equivalents at 30 June 2004 US$'000 Cash at bank and in hand 3,971Bank overdrafts (11,069) (7,098) Appendix 5 Basis of preparation The summary financial information contained in this document has been preparedon the basis of those International Financial Reporting Standards ("IFRS"),International Accounting Standards ("IAS") and International Financial ReportingInterpretations Committee ("IFRIC") and Standard Interpretations Committee ("SIC") interpretations that are expected to be applicable to 31 December 2005financial reporting. These are subject to ongoing review and endorsement by theEuropean Commission, whilst the application of the standards continues to besubject to interpretation by IFRIC as well as emerging industry consensus. As aconsequence, further refinements to the accounting policies may need to be madein the first annual IFRS Financial Statements for the year ending 31 December2005. The accounting policies and basis of preparation differ from those set out inthe Annual Report for the year ended 31 December 2004 which was prepared inaccordance with UK Generally Accepted Accounting Principles ("UK GAAP"). A summary of the significant accounting policies used in the preparation of thisfinancial information under IFRS is provided below. The financial informationhas been prepared under the historical cost convention. The same accountingpolicies will be used in the preparation of the interim report for the sixmonths ended 30 June 2005 and are expected to be used in the preparation of theAnnual Report for the year ending 31 December 2005. IFRS 1 "First time adoption of International Financial Reporting Standards" setsout the requirements for companies preparing financial statements under IFRS forthe first time and requires the accounting policies to be appliedretrospectively. IFRS 1 contains the option to take advantage of certainexemptions to the retrospective application. The Group has applied optionalexemptions as follows: (a) Business combinations IFRS 3 "Business Combinations" has been applied prospectively from 1 January2004, the Group's date of transition to IFRS. (b) Cumulative translation differences The Group has elected to reset all cumulative translation gains and losses tozero at 1 January 2004. (c) Share based payments The Group has applied IFRS 2 "Share-based payments" from 1 January 2004 only tothose options granted after 7 November 2002 and that had not vested on or before31 December 2004. (d) IAS 32 and IAS 39 Comparative information for IAS 32 "Financial instruments - Disclosure andPresentation" and IAS 39 "Financial Instruments - Recognition and Measurement"is not restated for 2004. The provisions of the two standards will be adoptedfrom 1 January 2005 and comparative information for 2004 will be presented onthe existing UK GAAP basis. IFRS 1 requires companies preparing financial statements under IFRS for thefirst time to provide certain reconciliations between financial statements underthe Group's prior reporting under UK GAAP and the amounts under IFRS. Thesereconciliations are included on pages 8 to 18. Accounting policies (a) Consolidation The consolidated financial information includes financial information in respectof the Company and its subsidiary undertakings. Subsidiary undertakings arethose entities over which the Group has the power to govern the financial andoperating policies generally accompanying a shareholding of more than one halfof the voting rights. Subsidiary undertakings are fully consolidated from thedate on which control is transferred to the Group. From the date on whichcontrol ceases they are no longer consolidated. Inter-company transactions andbalances are eliminated. (b) Revenue recognition Turnover represents the amounts (excluding value added tax and other salestaxes) derived from the provision of services to third party customers, plusrecharges of other contract expenses including insurance, equipment, travel andout-of-pocket expenses at cost or cost plus a handling fee. Revenue is recognised as services are provided in accordance with the terms ofeach contract on a contract-by-contract basis over the term of the contract. (c) Segment reporting The Groups provides services that are subject to different risks and returnsacross different business segments and across different geographical segments. The primary segment assessed for the Group is business segment. (d) Foreign currency translation Functional and presentational currency Transactions included in the financial statements of each of the Group'sentities are measured using the currency of the primary economic environment inwhich the entity operates (the "functional currency"). The consolidatedfinancial information is presented in United States Dollars ("US$") which is theGroup's functional and presentation currency. At 30 June 2005 the exchange rateto sterling was £1/$1.8041 (31 December 2004: £1/$1.926, 30 June 2004: £1/$1.8070) and the average exchange rate to sterling for the six months ended 30June 2005 was £1/$1.8736 (31 December 2004: £1/$1.8314, 30 June 2004 £1/$1.8214). Transactions and balances Foreign currency transactions are translated into the functional currency usingthe exchange rates prevailing at the dates of the transactions. Foreignexchange gains and losses resulting from the settlement of foreign currencytransactions and from the translation at period end exchange rates of monetaryassets and liabilities denominated in foreign currencies are recognised in theincome statement. Foreign exchange differences on loan relationships betweensubsidiary undertakings are charged/credited to the income statement. Group companies For consolidation purposes, the results and financial position of all Groupentities (none of which has the currency of a hyperinflationary economy) thathave a functional currency different from US Dollars are translated into USDollars on the following basis: • assets and liabilities are translated at the closing rate at the date of that balance sheet; • income and expenses are translated at average exchange rates; and • all resulting exchange differences are recognised as a separate component of equity (cumulative translation adjustment). Exchange differences arising from the translation of the net investment inforeign entities are taken to shareholders' equity on consolidation. When aforeign operation is sold, such exchange differences are recognised in theincome statement as part of the gain or loss on sale. As permitted by IFRS 1, goodwill and fair value adjustments arising on theacquisition of foreign entities before 1 January 2004 are treated as assets andliabilities of the acquiring entities and measured in the acquiring entities'functional currency. Goodwill and fair value adjustments arising on theacquisition of a foreign entity after 1 January 2004 will be treated as assetsand liabilities of the foreign entity and translated at the closing rate. (e) Property, plant and equipment All property, plant and equipment is shown at cost less depreciation and anyprovision for impairment, except for land, which is shown at cost lessimpairment. The cost of property, plant and equipment is purchase cost togetherwith other expenditure that is directly attributable to the acquisition. Depreciation is provided to write off the cost less the estimated residual valueof each asset on a straight-line basis over its estimated useful economic lifeas follows: Freehold buildings 50 years Leasehold properties over the term of the lease (or the useful economic life if shorter) Plant and equipment 1 year* or 4-5 years Office equipment 1 year* or 4-5 years Fixtures and fittings 5 years Motor vehicles (held outside Iraq) 4-5 years * Relates to fixed assets held in Iraq. Effective 1 January 2005 the cost of armoured vehicles and motor vehicles heldin Iraq less the estimated residual value are depreciated on a non-linear basisover the estimated useful economic life of 3 years, on the basis of theestimated recoverable value at the end of each of the three years. Prior tothis date, the estimated useful economic life of armoured vehicles and motorvehicles held in Iraq was one year. Assets' residual values and useful economic lives are reviewed, and adjusted ifappropriate, at each balance sheet date. An asset's carrying amount is writtendown immediately to its recoverable amount if the asset's carrying amount isgreater than its estimated recoverable amount. Gains and losses on disposal of assets are included in the income statement andare determined by comparing proceeds with carrying amount. (f) Intangible assets Goodwill Goodwill represents the excess of the fair value of the consideration paid onacquisition of a business over the fair value of the assets, including anyintangible assets identified, and liabilities acquired at the date ofacquisition. Goodwill is not amortised but is tested annually for impairmentand carried at cost less accumulated impairment losses. Gains and losses on thedisposal of an entity include the carrying amount of goodwill relating to theentity sold. Goodwill is allocated to cash-generating units for the purpose of impairmenttesting. As permitted by IFRS 1, goodwill arising on acquisitions before 1January 2004 has been frozen at the UK GAAP amounts, subject to being tested forimpairment at that date. Patents and trademarks Patents and trademarks acquired are capitalised at cost. This amount isincluded in "intangible assets" and amortised on a straight line basis over theestimated useful economic lives of between one and ten years based on the termof the relevant patent or trademark. Computer software Acquired computer software licenses are capitalised on the basis of the costsincurred to acquire and bring to use the specific software. These costs areincluded in "intangible assets" and amortised over their estimated usefuleconomic lives of between one and three years. (g) Impairment testing of assets Assets that are subject to depreciation or amortisation are tested forimpairment whenever events or changes in circumstance indicate that the carryingamount may not be recoverable. An impairment loss is recognised for the amountby which the asset's carrying amount exceeds its recoverable amount. Therecoverable amount is the higher of an asset's fair value less costs to sell andvalue in use. (h) Investments Investments in subsidiaries are stated at cost to the Company less any provisionfor impairment in value. (i) Inventories Inventories are stated at the lower of cost and net realisable value. Cost isdetermined using the first-in, first-out method. Net realisable value is theestimated selling price in the ordinary course of business, less applicablevariable selling expenses. (j) Trade receivables Trade receivables are first assessed individually for impairment, orcollectively where the receivables are not significant. Where there is noobjective evidence of impairment for an individual receivable, it is included ina group of receivables with similar credit risk characteristics and these arecollectively assessed for impairment. Movements in the provision for doubtfultrade receivables are recorded in the income statement. (k) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks, other short-term highly liquid investments with original maturities ofthree months or less, and bank overdrafts. Bank overdrafts are shown withinborrowings in current liabilities on the balance sheet. (l) Borrowings Borrowings are recognised initially at fair value, net of transaction costsincurred. Borrowings are subsequently stated at amortised cost; any differencebetween the proceeds (net of transaction costs) and the redemption value isrecognised in the income statement over the period of borrowings using theeffective interest method, or over a shorter period where it is more likely thannot that the lender will require earlier repayment or where the borrower intendsor is required to redeem early. (m) Provisions Provisions are made when the Group has a present legal or constructiveobligation as a result of past events and it is more likely than not that anoutflow of resources will be required to settle the obligations and the amountcan be reliably estimated. Provisions are measured at the present value ofmanagement's best estimate of the expenditure required to settle the presentobligation at the balance sheet date. (n) Deferred income tax Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. Deferredincome tax is determined using tax rates and laws that have been enacted orsubstantially enacted by the balance sheet date and are expected to apply whenthe related deferred tax asset is realised or the deferred income tax liabilityis settled. Deferred tax assets are recognised to the extent that it is probable that futuretaxable profit will be available against which the temporary differences can beutilised. Deferred income tax is provided on temporary differences arising on investmentin subsidiaries except where the timing of the reversal of the temporarydifference is controlled by the Group and it is probable that the temporarydifference will not reverse in the foreseeable future. Deferred income tax is recognised in the income statement except to the extentthat it relates to items recognised directly in equity, in which case it isrecognised in equity. (o) Employee benefits Bonus plans The Group recognises a liability and expense for bonuses, taking intoconsideration the probability of certain performance criteria being achieved. Aprovision is recognised where a contractual obligation exists or where pastpractice indicates that there is a constructive obligation to make such paymentsin the future. Holiday pay Paid holidays are regarded as an employee benefit and as such are charged to theincome statement as the benefits are earned. An accrual is made at the balancesheet to reflect the fair value of holidays earned but not yet taken. Pension costs Pension costs for the Group's defined contribution schemes are charged to theincome statement during the period in which the related services are performed.The assets of the schemes are held separately from those of the Group inindependently administered funds. Termination benefits Termination benefits are payable when employment is terminated before the normalretirement date, or when an employee accepts voluntary redundancy in exchangefor these benefits. The Group recognises termination benefits when it isdemonstrably committed to either: terminating the employment of currentemployees according to a detailed formal plan without possibility of withdrawal;or providing termination benefits as a result of an offer made to encouragevoluntary redundancy. Share-based plans The Group operates a number of equity-settled, share-based plans. In accordancewith IFRS 2 "Share-based payment", equity-settled share based payments aremeasured at fair value at the date of grant. The fair value determined at thegrant date is expensed on a straight-line basis over the vesting period, basedon the Group's estimate of the number of options that will eventually vest. Ateach balance sheet date, the Group reviews its estimate of the number of optionsthat are expected to vest. The proceeds received net of any directlyattributable transaction costs are credited to share capital and share premiumwhen the options are exercised. (p) Employee benefits (continued) Share-based plans (continued) The Group has taken advantage of the exemption available and has applied theprovisions of IFRS 2 only to those options granted after 7 November 2002 andwhich had not vested on or before 31 December 2004. For those options grantedafter 7 November 2002 and which had vested on or before 31 December 2004, theGroup recognised as a share option charge over the vesting period the amount bywhich the fair market value of the shares under options exceeded theirrespective exercise prices at the date of grant. (q) Employer's taxes on share options Employer's National Insurance in the UK and equivalent taxes in otherjurisdictions are payable on the exercise of certain share options. Provisionis made calculated using the fair value of options at the balance sheet date andthe charge is recognised over the vesting period of the options. (r) Leases Leases where the lessor retains substantially all the risks and rewards ofownership are classified as operating leases. Payments made under operatingleases are charged to the income statement on a straight line basis over theperiod of the lease. Leases of property, plant and equipment where the Group has substantially allthe risks and rewards of ownership are classified as finance leases. Assetsheld under finance leases are capitalised at the lower of the fair value of theleased property and the present value of the minimum lease payments of theinception of the agreements. Each lease payment is allocated between theliability and finance charges so as to achieve a constant rate on the financebalance outstanding. The corresponding rental obligations, net of financecharges, are included in liabilities. The interest element of the finance costis charged to the income statement over the lease period so as to produce aconstant periodic rate of interest on the remaining balance of the liability foreach period. Assets held under finance leases are depreciated over the shorterof the asset's useful life and the lease term. (s) Dividend distribution Dividend distribution to the Company's shareholders is recognised as a liabilityin the Group's financial statements in the period in which the dividends areapproved by the Company's shareholders. (t) Warrants From 1 January 2004 to 31 December 2004 warrants issued as part of loanagreements were fair valued at the date of issue. The fair value reduced theamount of the related loan and was recognised as a warrant reserve. The amountby which the loan had been reduced was amortised to the income statement overthe period of the loan. On issue of the shares to satisfy the warrant, thewarrant reserve was eliminated. There were no outstanding warrants at 31December 2004. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
ARG.L