16th Aug 2005 09:02
French Connection Group PLC16 August 2005 FRENCH CONNECTION GROUP PLC TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS 16th August 2005 Overview • A paper summarising the impact of change to International Financial Reporting Standards is published today. • The financial statements for the year-ended 31 January 2005 prepared under UK GAAP reported a profit before tax and amortisation of goodwill amounting to £33.0m. Under IFRS it is expected that the restated profit before tax for the same year will amount to £33.7m, an increase of £0.7m. • Profit on ordinary activities before taxation is expected to increase by £1.4m to £33.7m. • On the same basis adjusted earnings per share will increase from 24.0p to 24.3p. • Net assets at 31 January 2005 are expected to increase by £1.5m to £120.3m. • There is no impact on the underlying business. Further enquiries: Roy Naismith, Group Finance Director 020 7399 7063Lucie Anne Brailsford, Brunswick 020 7404 5959 TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS Introduction French Connection Group PLC ("the Group") will adopt International AccountingStandards (IAS) and International Financial Reporting Standards (IFRS) for allfuture reporting of financial performance. The new standards differ from theprevious accounting and reporting policies ("UK GAAP") adopted by the Group andthis statement explains the impact of the changes on the financial reports ofthe Group. The changes represent accounting and reporting changes only and donot affect the strategy or operations of the business. The change applies to all financial reporting for accounting periods beginningon or after 1 January 2005 and consequently the Group's interim report for thesix-month period ended 31 July 2005 and the full year results for the periodending 31 January 2006 will both be presented under IFRS. The comparative datawithin those reports will be restated in accordance with IFRS. The table below summarises the expected impact on the Group's profit before taxand balance sheet for the year ended 31 January 2005. Further discussion of thechanges is included in the notes below. The financial information presented within this statement is unaudited and hasbeen prepared on the basis of all IAS and IFRS and interpretations issued by theInternational Accounting Standards Board ("IASB") available at the time ofpublication. These are subject to ongoing amendment by the IASB and subsequentendorsement by the European Union and are therefore subject to change. Summary of major items affecting financial reports The standards giving rise to the most significant changes to the reported profitbefore tax of the Group are: •IFRS 3 Business combinations •IAS 17 Leases •IAS 36 Impairment of assets In addition, IFRS 2, Share-based payment, is likely to have an impact on theresults in the future and a review prompted by IAS 14, Segment reporting, hasresulted in a change to the reported segmental analysis of the business,although there is no change to the organisational structure. In addition, standards having an impact on the balance sheet include: •IAS 10 Events after the balance sheet date •IAS 39 Financial instruments: recognition and measurement The following table summarises the headline figures for the year ended 31January 2005: UK GAAP IFRS ChangeTurnover £265.7m £265.7m ------------------------------------------------- --------- --------- --------Operating profit before amortisation of goodwill £32.9m £33.6m +£0.7mAmortisation of goodwill £(0.7)m - +£0.7m------------------------------------------------ --------- --------- --------Operating profit £32.2m £33.6m +£1.4mProfit on ordinary activities before taxation £32.3m £33.7m +£1.4mProfit on ordinary activities after taxation £22.3m £23.3m +£1.0m Basic earnings per share 23.1p 24.1p +1.0pDiluted earnings per share 22.9p 23.9p +1.0pAdjusted earnings per share 24.0p 24.3p +0.3p Net assets at 31 January 2005 £118.8m £120.3m +£1.5m The changes arise as follows: Impact on profit before taxStandard Description FY 2005 £ millionIFRS 3 Removal of amortisation of goodwill 0.7IAS 17 Change in treatment of lease incentives/premiums (0.1)IAS 36 Provision for the impairment of assets 0.8--------------------------------------------------------------------------------Impact of change of standards 1.4 Profit before tax - UK GAAP 32.3-------------------------------------------------------------------------------- Profit before tax - IFRS 33.7-------------------------------------------------------------------------------- Impact on balance sheetStandard Description FY 2005 £ millionIFRS 3 Removal of amortisation of goodwill 0.7IAS 17 Change in treatment of lease incentives/premiums (1.1)IAS 36 Provision for the impairment of assets (2.8)IAS 10 Removal of accrued year-end dividends 3.6IAS 12 Consequential change in tax balances 1.1--------------------------------------------------------------------------------Impact of change of standards 1.5 Net assets - UK GAAP 118.8--------------------------------------------------------------------------------Net assets - IFRS 120.3-------------------------------------------------------------------------------- IFRS 1 exemptions IFRS 1 First-time Adoption of International Financial Reporting Standardspermits those companies adopting IFRS for the first time to take certainexemptions from the full requirements of IFRS in the transition period. TheGroup has taken the following key exemptions: • Business combinations: The Group has elected not to apply the accounting under IFRS 3 to business combinations that occurred prior to the date of transition.• Fair value or revaluation at deemed cost: The Group has adopted the exemption to use the revalued amount of its freehold property, performed under a previous GAAP revaluation, as the "deemed cost" of this asset from the date of transition.• Cumulative translation differences: IAS 21 The Effects of Changes in Foreign Exchange Rates requires that, on disposal of an operation, the cumulative amount of exchange differences previously recognised directly in equity for that foreign operation are to be transferred to the income statement as part of the profit or loss on disposal. The Group has adopted the exemption allowing these cumulative translation differences to be deemed to be zero at the transition date.• Share-based payments: The Group has adopted the exemption to apply IFRS 2 Share-based payment only to equity instruments granted after 7 November 2002. Outline explanation of adjustments IAS 1 Presentation of financial statements •Beginning with the interim statement for the period ended 31 July 2005, the format of the primary financial statements will be in accordance with IAS 1. Although similar, such a presentation differs from its UK GAAP equivalent. IFRS 3 Business combinations •The Group has elected not to apply the requirements of IFRS 3 to transactions prior to March 2004 as allowed under IFRS 1. •Goodwill is no longer amortised but held at carrying value on the balance sheet and tested annually for impairment. •Goodwill of £0.7m previously charged to the profit and loss account will not now be charged resulting in an increase in reported profit before tax for FY 2005 of £0.7m. •The impact on the balance sheet is to increase the goodwill asset by £0.7m. IAS 17 Leases •Under IFRS 17 the accounting benefit of lease incentives, including monetary contributions and rent-free periods, is to be released to the profit and loss account over the whole of the lease term. Previously such benefit was released over the period to the first rent review. •Similarly lease premiums are now charged to the profit and loss account over the whole of the lease term instead of to the first rent review. •The combined impact of these changes is to decrease reported profit before tax for FY 2005 by £0.1m. The cash expenditure in relation to leases is not affected by the change. •The combined balance sheet impact is to decrease net assets by £1.1m including an increase in creditors of £1.4m relating to lease incentives received yet to be released to the profit and loss account and an increase in debtors of £0.3m relating to lease premiums paid yet to be charged to the profit and loss account. •The effect on the taxation charge in the year is inconsequential. The effect on the corporation tax liability is a reduction of £0.3m. IAS 36 Impairment of assets •IAS 36 requires that each retail store is to be considered as a separate "cash generating unit" for the purposes of any impairment review. •Under this narrower definition, a number of assets have been identified which require a provision for impairment. •The effect on the reported operating profit under UK GAAP has two elements: a) any impairment provision required in the year, offset by b) a reduction in depreciation arising from the impact of earlier impairment provisions. •The net impact on the reported operating profit for the year ended 31 January 2005 is to increase profit by £0.8m. •The balance sheet impact is to reduce the net book value of assets by £2.8m. •The change in depreciation charge has a consequential impact on the deferred taxation in the year although it does not affect any tax payments. The effect on the tax charge is to increase the charge in the year by £0.4m. IAS 10 Events after the balance sheet date •Proposed dividends are no longer accrued until approved by the Annual General Meeting. •The adjustment at January 2005 is to reverse the UK GAAP accrued final dividend paid in July 2005. •The effect on the balance sheet is to reduce creditors and increase net assets by the final dividend of £3.6m. •Dividends will no longer be shown on the face of the profit and loss account but recognised through reserves. IAS 12 Income Taxes •The transition to IFRS has a consequential impact on the tax balances of the Group as at 31 January 2005. •The change in the accounting treatment of lease incentives/premiums has the effect of reducing the corporation tax liability by £0.3m. •The provision for the impairment of assets has the impact of increasing the deferred tax asset by £0.9m. •A deferred tax liability of £0.1m has been recognised on the future crystallisation of the revaluation reserve. IFRS 2 Share-based payment •The Group operates share option incentive schemes. The nature of the schemes has meant that under UK GAAP no charge to the profit and loss account arose in relation to share options granted. •IFRS requires the recognition of an expense based on the fair value of the option at the date of the award using an option valuation model. •The Group has adopted the exemption to apply IFRS 2 only to equity instruments granted after 7 November 2002. The charge arising on options granted since that date is immaterial. IAS 39 Financial instruments •The Group's policy is to reduce the risk associated with purchases denominated in foreign currencies by using forward fixed rate currency purchase contracts. •Under IFRS hedging instruments are measured at fair value with any changes in the fair value of effective instruments recognised in reserves and any changes in the ineffective part of the hedge recognised in the profit and loss account. •Since the Group's hedge is considered to be entirely effective, there is no profit and loss impact arising from the forward currency contracts. •The balance sheet impact is to recognise the fair value of the contracts at the year-end with any gain or loss recorded in reserves. •This standard is effective for the year-ended 31 January 2006. IAS 28 Investments in associates •Under UK GAAP, the Group used the equity method of consolidation, where the Group's share of the joint ventures' operating results was included in a single line on the face of the profit and loss account. •Under IFRS, joint ventures can be recognised using proportionate consolidation or the equity method. •The Group has decided to continue to use the equity method of consolidation. IAS 14 Segment reporting •The Group has reviewed and amended the segmental reporting presented in the report and accounts in the light of the guidance contained under IFRS. •The major changes are that the intra-group trading between the wholesale business and the retail business has been eliminated entirely and the results of the retail divisions now reflect the entire margin generated by the Group on the sale of product in that division. •Further, the central costs of operations have been separately identified, recognising their separation from the operating divisions. •The table below represents the revised segmental analysis of operating profit for the year ended 31 January 2005. ---------- ---------------- --------------- ----- -----FY 2005 UK/Europe North America Rest of World Other Group(IFRS) ---------- ---------------- --------------- ----- ----- ------ ---------- ------ ------ ---------- ------ ---------- ----- ----- Retail Whole-sale Total Retail Whole-sale Total Whole-sale £m £m £m £m £m £m £m £m £m Turnover 110.6 101.3 211.9 33.2 12.8 46.0 7.8 265.7 ----- ------ ------ ------ ------ ------ ------ ----- ------Gross 70.7 40.3 111.0 21.3 4.5 25.8 1.5 4.2 142.5profitGross 63.9% 39.8% 52.4% 64.2% 35.2% 56.1% 19.2% 53.6%marginOverheads (60.7) (13.4) (74.1) (19.6) (3.6) (23.2) (1.1) (98.4) ----- ------ ------ ------ ------ ------ ------ ----- ------Operatingprofit 10.0 26.9 36.9 1.7 0.9 2.6 0.4 4.2 44.1 ----- ------ ------ ------ ------ ------ ------ ----- ------Commonoverheads (6.4) (2.7) - (9.1)Other income 6.0 - 2.7 (4.2) 4.5 Divisionaloperating ------ ------ ------ ----- ------profit 36.5 (0.1) 3.1 - 39.5 ------ ------ ------ -----Groupmanagementoverheads (5.9) ------ Operatingprofit 33.6 ------ "Common overheads" include advertising, marketing and accounting costs. "Groupmanagement overheads" include senior management, legal department and legalcosts, insurance costs and IT. "Other" represents the elimination ofinter-divisional brand licensing fees and buying office commission included inthe cost of sales of the licensed businesses but reported as "other income" inthe recipient businesses. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
FCCN.L