6th Dec 2005 07:02
Victrex PLC06 December 2005 Victrex plc Explanation of transition to IFRS Restatement of financial information for the year ended 30 September 2005 As released to the Stock Exchange on 6th December 2005 International Financial Reporting Standards ('IFRS') became mandatory for alllisted companies within the EU for accounting periods which began on or after 1January 2005. Accordingly, Victrex plc adopted IFRS with effect from 1 October2005. Victrex plc will therefore publish its results for the six months ending31 March 2006 and the year ending 30 September 2006 in accordance with IFRS. A restated consolidated income statement under IFRS for the year ended 30September 2005 together with consolidated balance sheets as at 30 September 2004and 2005 are set out on pages 2 to 3. This unaudited information is for guidanceonly and will only be finalised when Victrex publishes its financial statementsfor the year ending 30 September 2006. The principal differences for Victrex between reporting on the basis of IFRScompared to current UK Generally Accepted Accounting Practice ('UK GAAP') are asfollows: a) Proposed dividends which have not been declared at the balance sheet date can no longer be recognised in the financial statements; b) The fair value of all employee share options has to be charged through the income statement. Previously under UK GAAP only options granted under the Directors' LTIP were charged; c) The deferred tax provision has to be adjusted as a result of: (i) Discounting no longer being permitted; (ii) IFRS being more prescriptive regarding the recognition of deferred tax assets and, (iii) Changes in accounting for employee benefits. d) Amortisation of goodwill is no longer permitted; e) The deficit in the defined benefit section of Victrex's principal pension scheme has to be recognised on the balance sheet. The movement in the deficit as a result of current service cost, contributions and other finance expenditure has to be recognised in the income statement, with all other movements (predominantly actuarial gains and losses) reflected through the statement of recognised income and expense and, f) The fair value of forward foreign currency contracts has to be recognised on the balance sheet and Victrex has continued to hedge account. A more detailed explanation of the principal differences between UK GAAP andIFRS affecting the Group is set out in note 2 on pages 4 to 6 andreconciliations of the statements from UK GAAP to IFRS are set out in note 3 onpages 7 to 11. Consolidated income statement - restated for IFRS (unaudited) 2005For the year ended 30 September £m_______________________________________________________________________________Revenue 100.9Cost of sales (43.6)_______________________________________________________________________________Gross profit 57.3Sales, marketing and administrative expenses (22.8)_______________________________________________________________________________Operating profit 34.5Finance income 0.4Finance costs (0.1)Share of operating profit of Japanese joint venture 0.5_______________________________________________________________________________Profit before tax 35.3Tax expense (11.2)_______________________________________________________________________________Profit for the year attributable to equity holders ofthe parent 24.1_______________________________________________________________________________Earnings per ordinary share Basic 29.9p Diluted 29.5p_______________________________________________________________________________ Consolidated statement of recognised income and expense - restated for IFRS(unaudited) 2005For the year ended 30 September £m_______________________________________________________________________________Cash flow hedges (0.3)Exchange differences on translation of foreign operations 0.1Actuarial gains on defined benefit pension schemes 0.8Tax on items taken directly to or transferred from equity (0.2)_______________________________________________________________________________Net income recognised directly in equity 0.4Profit for the year 24.1_______________________________________________________________________________Total recognised income and expense for the year attributable to equity shareholders of the parent 24.5_______________________________________________________________________________ Consolidated statement of changes in equity - restated for IFRS (unaudited) Share Share Translation Hedging Reserve Retained Total capital premium reserve reserve for own earnings equity shares £m £m £m £m £m £m £mAt beginning of year 0.8 13.4 - 0.5 (2.3) 60.4 72.8Total recognised income andexpense - - 0.1 (0.3) - 24.7 24.5Share options exercised - 1.8 - - 0.3 - 2.1Purchase of own shares held - - - - (0.1) - (0.1)Dividends to shareholders - - - - - (7.1) (7.1)_______________________________________________________________________________________________________________At end of year 0.8 15.2 0.1 0.2 (2.1) 78.0 92.2_______________________________________________________________________________________________________________ Consolidated balance sheet - restated for IFRS (unaudited) As at 30 September 2005 2004ASSETS £m £m_______________________________________________________________________________ Non-current assetsProperty, plant and equipment 63.8 49.3Intangible assets 10.1 6.7Investment in Japanese joint venture share of gross 2.2 1.9 assets share of gross (2.2) (1.6) liabilitiesDeferred tax assets 3.9 3.2_______________________________________________________________________________ 77.8 59.5_______________________________________________________________________________Current assetsInventories 20.0 18.8Trade and other receivables 12.8 10.1Deferred tax assets 0.2 0.2Derivative financial instruments 1.4 1.5Cash and cash equivalents 15.7 16.8_______________________________________________________________________________ 50.1 47.4_______________________________________________________________________________ Total assets 127.9 106.9_______________________________________________________________________________ LIABILITIES_______________________________________________________________________________Non-current liabilitiesDeferred tax liabilities (9.6) (7.9)Retirement benefit obligations (7.8) (8.2)_______________________________________________________________________________ (17.4) (16.1)_______________________________________________________________________________Current liabilitiesDerivative financial instruments (1.0) (0.4)Trade and other payables (17.3) (17.6)_______________________________________________________________________________ (18.3) (18.0)_______________________________________________________________________________ Total liabilities (35.7) (34.1)_______________________________________________________________________________ _______________________________________________________________________________Total assets less totalliabilities 92.2 72.8_______________________________________________________________________________ EQUITY_______________________________________________________________________________Capital and reserves attributable toequity holdersShare capital 0.8 0.8Share premium account 15.2 13.4Translation reserve 0.1 -Hedging reserve 0.2 0.5Reserve for own shares (2.1) (2.3)Retained earnings 78.0 60.4_______________________________________________________________________________Equity shareholders' funds 92.2 72.8_______________________________________________________________________________ Selected notes to the IFRS statements 1. Basis of preparation The restated financial statements for the year ended 30 September 2005 and theopening balance sheet at 1 October 2004 have been prepared in accordance withInternational Accounting Standards ('IAS') and International Financial ReportingStandards ('IFRS') issued by the International Accounting Standards Board('IASB') for illustrative purposes only. These are subject to ongoing review andpossible amendment by interpretative guidance from the IASB. Victrex alsocontinues to conduct an ongoing review of changes, interpretations and bestpractice and hence further restatement may occur up until the financialstatements for the year ending 30 September 2006 are published. The principal differences between UK GAAP and IFRS for the Group are set out innote 2. The main disclosures required by IFRS 1 - First-time Adoption of InternationalFinancial Reporting Standards regarding the transition from UK GAAP to IFRS areset out in note 3. 2. Principal differences between UK GAAP and IFRS a) Dividend recognition Under current UK GAAP, proposed dividends are recognised in the financial results for the period to which they relate. However, under IFRS, a dividend can only be recognised if it has been formally declared during the accounting period being reported. The Victrex Board declare interim and final dividends after the end of each accounting period at the same time as approving the interim and annual reports. Hence, we will no longer accrue proposed dividends in the financial period to which they relate. Consequently the final dividend for 2004 is not recognised as a liability in the opening balance sheet (£5.0m) and the proposed final dividend will not be recognised as a liability on the balance sheet as at 30 September 2005 (£7.5m). b) Share based payments Under UK GAAP there is no charge to the profit and loss account relating to options granted under the Victrex Employee share option scheme, Executive plan, Save as you earn scheme, Sharesave plan or Stock purchase plan. As regards the LTIP, under UK GAAP, the profit and loss account is charged over the performance period with an amount equal to the market price on the date of the award, subject to meeting performance targets. However, IFRS 2 - Share Based Payments, requires that the fair value of all such relevant instruments granted since 7 November 2002, which have not vested by 1 January 2005, be charged to the income statement over the relevant option vesting periods (adjusted for actual and expected levels). Fair values have been calculated using the recognised stochastic options valuation model. Victrex receives a tax credit, as appropriate, which relates to share options and awards when exercised, based on the gains the award holders make. A deferred tax asset representing an estimate of the future tax relief for this gain has to recognised under IFRS and is based on the potential gains available to the option or award holders at the balance sheet date. The profit impact of this adjustment in 2005 is a net charge of £0.1m, offset by a deferred tax credit of £0.6m. A corresponding deferred tax asset of £0.6m has been recognised at 30 September 2005. c) Deferred taxation Under UK GAAP the option to calculate deferred tax on a discounted basis was adopted by Victrex. However, under IAS 12 - Income Taxes, this discounted basis is not permitted and hence the deferred tax provision has to be stated at the gross amount. The effect on the opening balance sheet is an increase in the deferred tax provision of £1.7m, the impact on the year's results is an increased deferred tax charge of £0.9m and the resulting adjustment to the closing balance sheet as at 30 September 2005 is an increase of £2.6m. In addition, IAS 12 requires separate recognition of deferred tax assets and liabilities on the Group balance sheet. IAS 12 is also more prescriptive than UK GAAP and hence an additional deferred tax asset of £0.7m has been recognised on the opening balance sheet. The impact on the year's results is a decreased deferred tax charge of £0.3m and the resulting effect on the balance sheet as at 30 September 2005 is an increase of £1.0m. The combined impact on the income statement is an increased deferred tax charge of £0.6m. The specific deferred taxation impact of changes in accounting for pensions and share based payments is set out in sections e) and b) respectively. d) Goodwill amortisation Under UK GAAP, goodwill is amortised by equal installments over its estimated useful economic life. However, under IFRS 3 - Business Combinations, amortisation of goodwill is prohibited but is replaced by a requirement for annual impairment testing. Victrex has decided to take advantage of the IFRS 1 exemption whereby IFRS 3 can be applied prospectively from the date of transition, hence removing the need to restate previous business combinations. The carrying value of goodwill on the opening IFRS balance sheet has therefore been restricted to that £3.5m net carrying amount previously reported under UK GAAP. The profit impact of this adjustment in 2005 is a credit of £0.7m, being the reversal of amortisation previously charged under UK GAAP on the goodwill which arose on the acquisition of the DFDPM business from Laporte in 1999 (note that there is no change in the treatment of the knowhow arising from that transaction). On 1 April 2005 Victrex announced the purchase of certain operations from Degussa AG. This included the purchase of goodwill which, in accordance with IFRS, will not be amortised, but will be subject to annual impairment testing. The profit impact of this adjustment in 2005 is a credit of £0.2m, being the reversal of amortisation previously charged under UK GAAP. e) Pensions Under UK GAAP, Victrex has accounted for pensions in accordance with SSAP 24, which spreads the costs of the defined benefit section of Victrex's principal scheme over the employees' working lives within the Group. Victrex has also made additional disclosures giving details of the pension fund deficit, liabilities and operating charges on the valuation methodologies in accordance with FRS 17. IAS 19 - Employee Benefits requires the actuarial deficit arising under the defined benefit pension scheme to be recognised on the balance sheet based on fair valuations of the assets and liabilities at the balance sheet date. The movement in deficit as a result of current service cost, contributions and other finance expenditure has to be recognised in the income statement and it is Victrex's intention to take advantage of the option under IAS 19 to recognise actuarial gains and losses through the statement of recognised income and expense as opposed to the income statement. Note that similar adjustments would have been required under UK GAAP once FRS 17 becomes fully applicable. Consequently, a deficit of £8.2m and a corresponding deferred tax asset of £2.5m have been recognised on the balance sheet at the date of transition and a deficit of £7.8m and a deferred tax asset of £2.3m as at 30 September 2005. The movement during the year as a result of current service cost, contributions and other finance income of £0.3m has been recognised in the income statement with all other movements in the deficit (predominantly actuarial gains/losses) reflected through the statement of recognised income and expense. f) Accounting for foreign currency transactions and financial instruments Victrex has a policy of taking out forward foreign currency contracts to cover forecast foreign currency income streams providing medium term predictability in its results. Under UK GAAP Victrex uses the effective exchange rates from the forward contracts for translation of its foreign currency transactions and where appropriate the consolidation of its overseas entities. Under IFRS, Victrex will continue to hedge account (as defined by IAS 39 - Financial Instruments: Recognition and Measurement) resulting in largely unchanged profit and loss recognition. However, IAS does require changes to the mechanics of how this is achieved: • Under IAS 21 - Effects of Changes in Foreign Exchange Rates, all transactions and consolidations are recognised using spot rates; • Under IAS 39 the fair value of forward foreign currency contracts has to be recognised on the balance sheet. Victrex has adopted hedge accounting and therefore the movement in fair value can be deferred in a hedging reserve until the associated transaction occurs at which point the cumulative movement is released to the income statement. Whilst the above does not materially affect overall profitability, there are minor changes in categorisation within the detail with a reduction in turnover of £0.7m offset by a reduction in cost of sales of £0.2m and indirect overheads of £0.3m. The opening balance sheet as at 30 September 2004 recognises a financial asset of £1.5m and a financial liability of £0.4m, which account for the fair value of derivative financial instruments (forward contracts). The corresponding hedging reserve is £0.5m which reflects the fair value of forward contracts relating to future transactions as at the balance sheet date. These effects are offset by the effect of revaluing all balance sheet categories to closing spot rate. The balance sheet as at 30 September 2005 recognises a financial asset of £1.4m and a financial liability £1.0m and a corresponding hedging reserve of £0.2m. 3. Reconciliation of UK GAAP to IFRS (i) Reconciliation of the consolidated income statement for the year ended 30 September 2005 Audited Dividend Share Deferred Goodwill Pensions Accounting Unaudited UK GAAP recognition based taxation amortisation for foreign year ended In IFRS payments currency 30 Sept 05 format transactions restated and under IFRS financial instruments £m £m £m £m £m £m £m £m a b c d e f__________________________________________________________________________________________________________________Revenue 101.6 - - - - - (0.7) 100.9Cost of sales (43.6) - - - - (0.2) 0.2 (43.6)__________________________________________________________________________________________________________________Gross profit 58.0 - - - - (0.2) (0.5) 57.3Sales,marketing andadministrativeexpenses (23.7) - (0.1) - 0.9 (0.2) 0.3 (22.8)__________________________________________________________________________________________________________________Group operatingprofit 34.3 - (0.1) - 0.9 (0.4) (0.2) 34.5Finance income 0.4 - - - - - - 0.4Finance costs (0.1) - - - - - - (0.1)Share ofoperatingprofit ofJapanese jointventure 0.5 - - - - - - 0.5__________________________________________________________________________________________________________________Profit beforetax 35.1 - (0.1) - 0.9 (0.4) (0.2) 35.3Tax expense (11.4) - 0.6 (0.6) - 0.1 0.1 (11.2)__________________________________________________________________________________________________________________Profit for theyear attributableto equityholders of theparent 23.7 - 0.5 (0.6) 0.9 (0.3) (0.1) 24.1 ____________________________________________________________________Equitydividends paidand proposed (9.7) 9.7______________________________________________Retainedprofit for thefinancial year 14.0 9.7______________________________________________Earnings perordinary share Basic 29.3p 29.9p Diluted 29.0p 29.5p__________________________________________________________________________________________________________________ (ii) Reconciliation of the consolidated statement of recognised income and expense for the year ended 30 September 2005 Audited UK GAAP Dividend Share based Deferred Goodwill Pensions Accounting Unaudited in IFRS recognition payments taxation Amortisation for foreign year ended Format currency 30 Sept 05 transactions restated and financial under IFRS Instruments £m £m £m £m £m £m £m £m a b c d e f_______________________________________________________________________________________________________________________Cash flowhedges - - - - - - (0.3) (0.3) Exchangedifferenceson translationof foreign operations (0.1) - - - - - 0.2 0.1 Actuarialgains ondefined benefitpension schemes - - - - - 0.8 - 0.8 Tax on itemstaken directlyto ortransferred - - - - - (0.2) - (0.2)from equity _______________________________________________________________________________________________________________________Net incomerecogniseddirectly inequity (0.1) - - - - 0.6 (0.1) 0.4Profit forthe year 23.7 - 0.5 (0.6) 0.9 (0.3) (0.1) 24.1Dividends (9.7) 9.7 - - - - - -_______________________________________________________________________________________________________________________Total recognisedincome andexpense forthe yearattributableto equityshareholdersof the parent 13.9 9.7 0.5 (0.6) 0.9 0.3 (0.2) 24.5_______________________________________________________________________________________________________________________ (iii) Reconciliation of the consolidated balance sheet at 30 September 2005 Audited UK GAAP Dividend Share based Deferred Goodwill Pensions Accounting Unaudited in IFRS recognition payments taxation Amortisation for foreign restated Format currency under IFRS transactions 30 Sept 05 and financial Instruments ASSETS £m £m £m £m £m £m £m £m a b c d e f_______________________________________________________________________________________________________________________Non-current assetsProperty, plant andequipment 63.8 - - - - - - 63.8Goodwill 6.2 - - - 0.9 - - 7.1Other intangibleassets 3.0 - - - - - - 3.0Investment inJapanese jointventure- share ofgross assets 2.3 - - - - - (0.1) 2.2- share ofgross liabilities (2.3) - - - - - 0.1 (2.2)Deferred taxassets - - 0.6 1.0 - 2.3 - 3.9_______________________________________________________________________________________________________________________ 73.0 - 0.6 1.0 0.9 2.3 - 77.8_______________________________________________________________________________________________________________________Current assetsInventories 20.0 - - - - - - 20.0Trade and otherreceivables 13.0 - - - - - (0.2) 12.8Deferred taxassets 0.2 - - - - - - 0.2Derivativefinancialinstruments - - - - - - 1.4 1.4Cash and cashequivalents 15.8 - - - - - (0.1) 15.7_______________________________________________________________________________________________________________________ 49.0 - - - - - 1.1 50.1_______________________________________________________________________________________________________________________Total assets 122.0 - 0.6 1.0 0.9 2.3 1.1 127.9_______________________________________________________________________________________________________________________ LIABILITIES_______________________________________________________________________________________________________________________Current liabilitiesDerivativefinancialinstruments - - - - - - (1.0) (1.0)Othercreditors (24.8) 7.5 - - - - - (17.3)_______________________________________________________________________________________________________________________ (24.8) 7.5 - - - - (1.0) (18.3)_______________________________________________________________________________________________________________________Non-currentliabilitiesDeferred taxliabilities (7.0) - - (2.6) - - - (9.6)Retirementbenefitobligations - - - - - (7.8) - (7.8)_______________________________________________________________________________________________________________________ (7.0) - - (2.6) - (7.8) - (17.4)_______________________________________________________________________________________________________________________Totalliabilities (31.8) 7.5 - (2.6) - (7.8) (1.0) (35.7)_______________________________________________________________________________________________________________________ Total assetsless totalliabilities 90.2 7.5 0.6 (1.6) 0.9 (5.5) 0.1 92.2_______________________________________________________________________________________________________________________ EQUITY_______________________________________________________________________________________________________________________Capital andreservesattributableto equityholdersShare capital 0.8 - - - - - - 0.8Share premiumaccount 15.2 - - - - - - 15.2Translationreserve - - - - - - 0.1 0.1Hedging reserve - - - - - - 0.2 0.2Reserve forown shares (2.1) - - - - - - (2.1)Retained earnings 76.3 7.5 0.6 (1.6) 0.9 (5.5) (0.2) 78.0_______________________________________________________________________________________________________________________Equityshareholders'funds 90.2 7.5 0.6 (1.6) 0.9 (5.5) 0.1 92.2_______________________________________________________________________________________________________________________ (iv) Reconciliation of the consolidated balance sheet at 1 October 2004 Audited Dividend Deferred Goodwill Pensions Accounting for Unaudited UK GAAP recognition taxation amortisation foreign restated in IFRS currency under IFRS format transactions 30 Sept 04 and financial instruments £m £m £m £m £m £m £mASSETS a c d e f_______________________________________________________________________________________________________Non-currentassetsProperty,plant andequipment 49.3 - - - - - 49.3Goodwill 3.5 - - - - - 3.5Otherintangibleassets 3.2 - - - - - 3.2Investment inJapanese jointventure- share ofgross assets 2.1 - - - - (0.2) 1.9- share ofgrossliabilities (1.8) - - - - 0.2 (1.6)Deferred taxassets 0.2 - 0.7 - 2.5 - 3.4_______________________________________________________________________________________________________ 56.5 - 0.7 - 2.5 - 59.7_______________________________________________________________________________________________________Current assetsInventories 18.8 - - - - - 18.8Trade andotherreceivables 10.6 - - - - (0.5) 10.1Derivativefinancialinstruments - - - - - 1.5 1.5Cash and cashequivalents 17.0 - - - - (0.2) 16.8_______________________________________________________________________________________________________ 46.4 - - - - 0.8 47.2_______________________________________________________________________________________________________Total assets 102.9 - 0.7 - 2.5 0.8 106.9_______________________________________________________________________________________________________ LIABILITIES_______________________________________________________________________________________________________CurrentliabilitiesDerivativefinancialinstruments - - - - - (0.4) (0.4)Othercreditors (22.7) 5.0 - - - 0.1 (17.6)_______________________________________________________________________________________________________ (22.7) 5.0 - - - (0.3) (18.0)_______________________________________________________________________________________________________Non-currentliabilitiesDeferred taxliabilities (6.2) - (1.7) - - - (7.9)Retirementbenefitobligations - - - - (8.2) - (8.2)_______________________________________________________________________________________________________ (6.2) - (1.7) - (8.2) - (16.1)_______________________________________________________________________________________________________Totalliabilities (28.9) 5.0 (1.7) - (8.2) (0.3) (34.1)_______________________________________________________________________________________________________ Total assetsless totalliabilities 74.0 5.0 (1.0) - (5.7) 0.5 72.8_______________________________________________________________________________________________________ EQUITYCapital andreservesattributable toequityholdersShare capital 0.8 - - - - - 0.8Share premiumaccount 13.4 - - - - - 13.4Hedgingreserve - - - - - 0.5 0.5Reserve forown shares (2.3) - - - - - (2.3)Retainedearnings 62.1 5.0 (1.0) - (5.7) - 60.4_______________________________________________________________________________________________________Equityshareholders'funds 74.0 5.0 (1.0) - (5.7) 0.5 72.8_______________________________________________________________________________________________________ (v) Reconciliation of the cash flow statement for the year ended 30 September 2005 It is believed that there are no material differences between the cash flowstatement presented under UK GAAP and that under IFRS. 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