26th May 2005 07:01
Babcock International Group PLC26 May 2005 Thursday 26 May 2005 BABCOCK INTERNATIONAL GROUP PLC INTERNATIONAL FINANCIAL REPORTING STANDARDS - UPDATE Babcock International Group PLC, ("the Group"), today releases an update on howInternational Financial Reporting Standards (IFRS) are likely to affect theGroup's earnings and net assets. Separately today, the Group has announced its preliminary results for the yearended 31 March 2005. These results were prepared under UK Generally AcceptedAccounting Principles. The key points to note in respect of the application of IFRS are as follows: • Minimal impact on the Group's underlying earnings (1)• The Group's cash performance is unaffected• The Group's ability to pay dividends is unaffected• On adoption of International Accounting Standard 19 in respect of pensions, net assets will reduce on recognition of pension scheme deficits. This is also likely to lead to greater balance sheet volatility in the future. Following the EU's adoption of Regulation No. 1606/2002 on the use ofInternational Financial Reporting Standards (IFRS) by EU-listed companies, thegroup is implementing IFRS from 1 April 2005. The first financial informationto be reported by the group in accordance with IFRS will be for the six monthsending 30 September 2005 but the requirement to present comparative informationmeans that a balance sheet as at 31 March 2004 and primary statements for 2005prepared in accordance with IFRS will also be required. The group has continuedto report its consolidated accounts in accordance with UK GAAP for 2005. Although the presentational requirements of IFRS will differ from thosecurrently applied under UK GAAP, the Group will continue to provide details ofunderlying earnings, which under IFRS will be defined as earnings beforesignificant non-recurring items and before amortisation of intangibles arisingon acquisitions. Interpretation of the standards is still evolving, consequently informationgiven in this announcement is subject to change and is un-audited. However, inorder to assist stakeholders in understanding the potential impact ofapplication of the standards on the group's reported profit before tax for theyear to 31 March 2005 and its net assets at 31 March 2005, estimates of the mainchanges are set out in the table below. This does not represent full IAS1compliant financial information. (1) Earnings before significant non-recurring items and amortisation ofintangibles arising on acquisition. UK GAAP Share Pension Goodwill Intangibles Dividends Other IFRS/IAS based payments schemes £m £m £m £m £m £m £m £m Note (1) (2) (3) (4) (5) (6) (7) Profit before interest,tax,goodwill amortisationandexceptional items 41.3 (0.5) (8.7) 0.1 32.2 Net interest & similar (6.2) 8.8 0.2 2.8charges Profit before tax, goodwillandexceptional items 35.1 (0.5) 0.1 0.3 35.0 Goodwill and acquisition (6.6) 6.6 (4.4) (4.4)intangible amortisation Operating exceptional 1.5 5.6 (0.1) (8.8) (1.8)items Non-operating exceptional (1.6) (1.6)items Profit before tax 28.4 (0.5) 5.7 6.5 (13.2) 0.3 27.2 Tax (pre-exceptional) (8.1) 0.1 0.0 (8.0)Exceptional 0.4 (1.4) (0.3) 1.3 0.0tax Profit after 20.7 (0.4) 4.3 6.2 (11.9) 0.3 19.2tax Basic eps pre-goodwillandexceptionals 14.20 14.22 Net assets* 174.0 0.1 (82.6) 7.7 9.0 5.4 (1.2) 112.4 * Each of these adjustments include the deferred tax effect. 1. Share based payments Under IFRS 2 'Share based payments', share options and other share basedremuneration are expensed through the profit and loss account based on theirfair value at the date of grant to employees and spread over the vesting period,taking into account the number expected to vest. Under UK GAAP only theintrinsic value is expensed. As a result additional expense will be recognisedin the IFRS income statement. 2. Pension schemes Under UK GAAP, the group currently accounts for defined benefit pension schemesin accordance with SSAP 24 Accounting for Pension Costs (SSAP24). The groupalso reports the transitional disclosures required in accordance with FRS 17Retirement Benefits (FRS 17). The methodology and assumptions used to calculate the value of pension assetsand liabilities under FRS 17 are substantially consistent with the requirementsof IAS 19 Employee Benefits (IAS 19). In accordance with the requirements ofIAS 19, the group will be reviewing the allocation of the IAS pension deficit /surplus to the underlying group subsidiary companies. The above adjustments reflect a full balance sheet recognition interpretation ofthe Standard whereby the full pension deficit / surplus is reflected within thebalance sheet with actuarial movements going through the Statement of RecognisedIncome and Expense. The Group will finalise its policy in this area whenfurther clarity emerges as to generally adopted accounting practise. 3. Pension curtailment Under IAS 19 any significant change in the active pension population will resultin either a curtailment gain or loss. During the year a number of redundanciesin one of the Group's subsidiaries has resulted in an exceptional curtailmentgain reflected above. The resultant tax charge (£1.4m) is also consideredexceptional. 4. Goodwill Babcock has elected to utilise the exemption under IRFS 1 'First Time adoptionof International Financial Reporting Standards' to not restate businesscombinations prior to the transition date. Goodwill arising before 31 March2004 will not therefore be restated with the exception of negative goodwill.Under IFRS 3 negative goodwill is credited to reserves as at 1 April 2004. Thismeans that the previously held negative goodwill (£4.7m) is eliminated on thetransition to IFRS. Under IFRS goodwill is no longer amortised and, is insteadassessed annually for impairment. This results in a reversal of the currentyear amortisation charge of £6.6 million. 5. Intangibles Other intangible assets arising from acquisitions after 1 April 2004 areseparately identified and will be amortised over their useful economic lives.These intangibles represent the estimated value of contracts and relationshipswhich previously formed part of general goodwill. Intangible amortisation inthe current year is £4.4 million. The exceptional gain realised on the earlytermination of the Rail Maintenance contracts of £8.8m is valued in theacquisition balance sheet as an intangible asset and fully amortised in theyear. 6. Dividends Under SSAP 17 Post Balance Sheet Events, proposed dividends are accrued for asan adjusting post balance sheet event in the accounting period to which theyrelate. Under IAS 10 Events after the balance sheet date, dividends arerecognised in the accounting period in which they are declared. The finaldividend accrual is therefore reversed in the consolidated IFRS accounts for theperiod. 7. Other 7.1. Holiday pay As a result of further more prescriptive guidance in IAS 19, holiday payaccruals and prepayments are definitively required and have been included above. 7.2. Long term contracts Under IFRS all contracts which are in progress at a reporting date are accountedfor as long term contracts. Under UK GAAP only 'significant' contracts areaccounted for as long term. This results in a small profit change due to thedifference in timing. Additionally disclosure and balance sheet classificationsdiffer under IFRS, although not creating net asset changes. 7.3. Discounting debtors Under IAS 18 'Revenue', account must be taken of any inbuilt financing withinextended payment terms. Where payment terms are deemed to fall into thiscategory the related debtor is stated at the present value after discounting atprevailing interest rates. The deemed financing element of the debt is creditedto profit and loss as interest income as the discount unwinds. Application ofthis standard has resulted in a small adjustment to profit before tax and netassets for extended credit in non-UK subsidiaries. This adjustment is a timingdifference only. 7.4. Financial instruments Babcock has elected to utilise the exemption under IFRS 1 'First Time adoptionof International Financial Reporting Standards' to not restate comparatives forIAS 32 'Financial Instruments: disclosure and presentation' and IAS 39 'Financial Instruments: recognition and measurement'. These reporting standardswill be implemented from 1 April 2005 onwards. On the implementation of IAS 39 there are specific transitional arrangements. 7.5. Joint ventures Under IFRS 31 'Financial Reporting of Interests in Joint Ventures' the group hasthe option of adopting the equity investment method or proportionalconsolidation method for reporting interests in joint ventures. Under the IFRSadjustments shown above results for joint ventures are accounted for under theequity method and are given net of interest and tax within the share of jointventures. This treatment will be reviewed and a firm policy adopted prior tothe reporting of the interim results. 7.6. Tax Under IAS 12 'Income Taxes' certain temporary differences, some of which werenot recognised under UK GAAP, will be recognised. Contact: Bill Tame, Finance Director Franco Martinelli, Financial Controller Babcock International plc Telephone: 020 7291 5000 Andrew Lorenz Rob Gurner Financial Dynamics Telephone: 020 7269 7291 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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