20th Jul 2005 07:00
Rentokil Initial PLC20 July 2005 N E W S R E L E A S E RENTOKIL INITIAL PLC IMPACT OF ADOPTION OF IFRS Rentokil Initial plc ("the Group") today announced the preliminary impact of itsadoption of International Financial Reporting Standards ("IFRS") on its 2004results. To date, the Group has prepared its accounts in compliance with UK GenerallyAccepted Accounting Practice ("UK GAAP"). European Union ("EU") regulationsrequire the Group to adopt IFRS in its financial statements from 2005. The Groupbegan a detailed study during 2003 to review the changes required in order tomove from UK GAAP to IFRS. This news release provides a brief summary of theanticipated impact of transition to IFRS. A Transition Document, published onthe Group's website (rentokil-initial.com), provides more detail and shows thechanges required to restate the primary financial statements from a UK GAAPbasis on to a pro-forma IFRS basis. These statements are intended to show theimpact of transition to IFRS rather than give the exact presentation to be madeunder IFRS. The IFRS policies being adopted by the Group are based on the IFRS's expected tobe formally adopted by the EU as of 31st December 2005. However, these standardsstill remain subject to further amendment by and interpretative guidance fromthe International Accounting Standards Board ("IASB") as well as the ongoingreview and endorsement by the EU, which may lead to the need for furtherrefinement of the policies implemented by the Group. Consequently, the impact onthe financial statements as outlined below and included in the TransitionDocument are provisional and remain unaudited. Finalisation of the impact oftransition to IFRS will be performed during the audit of 2005 results. Commenting on the Group's adoption of the new accounting rules, Roger Payne,Finance Director, said " In common with many other companies, the adoption of IFRS will have some impact on the presentation of our financial statements but will not fundamentally change our strategy, risk management processes or our cash flows." "The main areas of impact on the 2004 results and the 2004 balance sheet remain as first indicated in our trading statement issued on 30th November 2004 (and subsequently reaffirmed with the Preliminary Announcement of 2004 results in February 2005) as being in the areas of IAS 19 (employee benefits) and IAS 38 (intangible assets)." "Clearly, and in conjunction with our auditors, we will continue to review the impact of additional IFRS implementation guidance which is being periodically issued by the IASB to ensure that our implementation of IFRS remains best practice." "2005 will be an important transitional year for all stakeholders. We aim to ensure that any presentational changes arising from the adoption of IFRS do not deflect from the current understanding of the key fundamentals in our business, particularly given the potential volatility arising from the "mark to market" requirements of IAS39 (financial instruments)." Summary Impact A full overview of the impact of adoption of IFRS on the financial statements ofthe Group in respect of 2004 is provided in the Transition Document referred toabove. For 2004 the financial impact of transition to IFRS remains in both thetwo key areas of employee benefits under IAS 19 and the recognition andamortisation of intangible assets under IAS 38 as indicated in both the November2004 Trading Statement and the 2004 Preliminary Results Announcement made inFebruary of this year. Other areas of lesser impact on 2004 results are IAS 17(leases), IFRS 2 (share based payments), IAS 21 (foreign currencies), IAS 10(events after the balance sheet date), and IAS 12 (income taxes). The totalimpact on profit before tax and net liabilities is shown in the two tables belowfollowed by brief descriptions of the more significant items that have or willbe likely to impact the Group's results. Tables giving an overview of the impacton the 2004 interim results are provided towards the end of this release. Overview of Financial Impact - Full Year 2004 IFRS UK GAAPFor the year ended 31st December 2004 Unaudited Audited £m £m Revenue 2,306.6 2,450.8 Operating profit - before exceptional items and amortisation of customer lists 382.7 391.4 - after exceptional items and amortisation of customer lists 325.5 342.0 Profit before tax 273.9 297.8 Earnings per share (including discontinued activities) - basic 10.53p 11.87p - basic before exceptional items and amortisation of customer lists 13.26p 14.30p Net liabilities 759.2 559.4 Changes in Revenue, Profit before tax and Net liabilities Revenue Profit before tax Net liabilities £m £m £m As reported under UK GAAP 2,450.8 297.8 (559.4) IAS 19 - Defined benefit pensions - (8.5) (287.7)IAS 19 - Other employee benefits - (0.4) (20.1)IAS 38 - Amortisation of customer lists - (22.2) (69.6)IAS 38 - Reversal of goodwill impairment - 14.4 14.4IAS 21 - Foreign currencies - (4.1) -IFRS 2 - Share based payments - (1.0) -IAS 10 - Dividends payable - - 86.1IAS 12 - Taxation - - 86.0Others - - (8.9)Presentation changes - discontinued activities (15.5) (0.4) - - franchisees (110.2) - - - associates (18.5) (1.7) - As reported under IFRS 2,306.6* 273.9* (759.2) *Excludes trading from discontinued activities and profit and loss on disposalof businesses. IAS 19 - Employee Benefits Under UK GAAP, pension costs were charged to the profit and loss account asoperating costs in accordance with SSAP 24. In addition, under the transitionaldisclosure requirements of FRS 17, the financial statements included detailednotes which disclosed any deficits in the pension schemes' assets compared withtheir liabilities. Under IAS 19 the value of the deficit approximating the pre-tax FRS 17 amountpreviously disclosed under UK GAAP, will be recorded as a liability on thebalance sheet. The Group has made the election, under the requirement of theamendments to IAS 19 which is yet to be endorsed by the EU, to take theactuarial gains and losses through the Statement of Recognised Income andExpenses. A separate annual charge will be made to the income statement, whichwill comprise a service cost and a finance cost, with the service cost chargedto operating profit and the finance charge forming part of finance costs.Expected return on pension plan assets is recognised as finance income. As a result an additional liability of £287.7 million (before tax) will berecorded on the balance sheet at 31st December 2004. The profit before taxcharge for 2004 will decrease by £8.5 million. The change in the accounting treatment of the Group's pension arrangements willhave no impact on the periodic calculations of the company's cash contributionto the pension schemes. These are determined during the triennial actuarialvaluation process. The company is currently in the process of agreeing the April2005 valuation prior to the agreement of the future contributions' schedule withthe Trustees. Whilst not material in the context of the annual charge to the profit and lossaccount, the treatment of the phasing of other employee benefits (mainly holidaypay) between the first half and the second half will result in a higher chargeto the first half of circa £8 million with a corresponding lower charge in thesecond half. IAS 38 / IFRS 3 - Intangible Assets and Business Combinations Under UK GAAP, individual intangible assets in businesses acquired were notseparately recorded but were subsumed within the overall value of goodwillrecognised and consolidated on acquisition. The Group ascribed an indefinitelife to this goodwill and, in accordance with FRS 10, was retained on thebalance sheet and tested for impairment annually. IFRS 3 requires the recognition of intangible assets on business combinations ifcertain criteria are met. For business combinations made by the Group, the valueattributable to customer lists or portfolios acquired is treated as anintangible asset and valued separately from goodwill which remains on thebalance sheet and is tested for impairment annually. The value attributable tothe customer lists or portfolios acquired (intangible asset) is then amortisedover the expected life of that asset. The Group has not taken the exemption available under IFRS 1 in respect ofacquisitions made since 1st January 1998. Instead, in order to aid thecomparability with the treatment of future acquisitions, all acquisitions madesince 1st January 1998, when FRS 10 was adopted, have been restated and thevalue attributed to intangible assets has been recognised and amortised over theexpected life of the asset. As a result a gross intangible asset totalling £155.2 million has beenrecognised at the date of transition and the Group has incurred an amortisationcharge of £22.2 million in 2004 under IFRS, which was not present under UK GAAP.Partly offsetting this amortisation charge is the reversal of the goodwillimpairment charge of £14.4 million made under UK GAAP. This charge is reversedas the total of the restated intangible assets, including goodwill, for therespective business combinations in the IFRS balance sheet at 31st December 2004are already below the level of impaired goodwill balances in the UK GAAPaccounts as a result of cumulative amortisation. The net effect of theseadjustments will be to increase net liabilities by £55.2 million. IAS 21 - Functional Currency / Foreign Currencies Under UK GAAP (SSAP 20), foreign currency borrowings that are regarded as partof the financing of an investment in a foreign subsidiary are considered 'quasiequity.' Exchange differences on re-translation of 'quasi equity' havepreviously been reported as movements in reserves. Under IAS 21, (foreign currencies), foreign exchange differences on directparent/subsidiary loan relationships which are considered 'quasi equity' willcontinue to be reported under reserves but the foreign exchange differences onloan relationships between fellow subsidiary companies (even if considered asfinancing of investments) will be included in the income statement. The foreign exchange effect arising from the adoption of IAS 21 (relating to thechange in functional currency) on the corporate entities has been reflected inthe restatement of the 2004 results. IAS 10 - Events After The Balance Sheet Date Under UK GAAP, dividends are provided at the balance sheet date on the basis ofthe dividend proposed by the Board. Under IFRS, a provision for dividends isonly made once the proposed dividend has been approved by shareholders. As aresult the dividends provided under UK GAAP have been removed giving rise to areduction in liabilities of £86.1 million. IAS 12 - Income Taxes The adjustment of £86.0 million represents, in the main, the tax effects of theIFRS adjustments reflected in the Transition Document. In addition, adjustmentshave been made for other temporary differences in respect of unremittedearnings, which were not recognised under UK GAAP. IAS 12 also requires therecognition of deferred tax liabilities arising on temporary differences inrespect of intangible assets in business combinations. This has been adjusted,for all the relevant business combinations since 1st January 1998. IAS 39 - Financial Instruments The Group is not required to and will not adopt IAS 39 (financial instruments)until 1st January 2005. There is, therefore, no impact on the 2004 resultssummarised above from IAS 39. The adoption of IAS 39 with effect from 1stJanuary 2005 will require certain financial assets and liabilities to be valuedon a "mark to market" basis at 30th June and 31st December. This will inevitablyintroduce a degree of volatility into future reported results with the carryingvalue of the Ashtead convertible loan note being one specific example. The Groupis applying "hedge accounting", with effect from 1st January 2005, for certainqualifying hedge relationships to reduce some of this volatility. Others Others includes adjustments in respect of IAS 17 (leases) and to equipment forrental assets, manufactured by group companies, to bring them back to grouphistoric cost. These adjustments had no year on year impact on net income for2004. Presentation Changes Under UK GAAP, the Group included turnover from associates and franchisees whenpresenting headline turnover to reflect the involvement by management in thesebusinesses. Under IFRS, this practice will be discontinued to align headlineturnover with that shown in the primary IFRS statements. Under IFRS, turnover relating to discontinued activities is not included in theprimary statements and profits and losses from these businesses are shown belowprofit after tax as separate disclosures. The presentation adjustments madereflect this practice. Under UK GAAP, the Group's share of profits of associates is shown gross oftaxation. Under IFRS, the Group's share of after tax profits of associates isshown as a single line item within profit before tax. Overview of Financial Impact - Interim 2004 IFRS UK GAAPFor the six months' ended 30th June 2004 Unaudited Audited £m £m Revenue 1,138.7 1,213.6 Operating profit - before amortisation of customer lists 187.9 199.7 - after amortisation of customer lists 176.8 199.7 Profit before tax 155.4 180.4 Earnings per share (including discontinued activities) - basic 6.08p 7.26p - basic before amortisation of customer lists 6.48p 7.26p Net liabilities 777.6 558.5 Changes in Revenue, Profit before tax and Net liabilities Revenue Profit before tax Net liabilities £m £m £m As reported under UK GAAP 1,213.6 180.4 (558.5) IAS 19 - Defined benefit pensions - (3.1) (213.9)IAS 19 - Other employee benefits - (8.4) (27.4)IAS 38 - Amortisation of customer lists - (11.1) (75.9)IAS 21 - Foreign currencies - (0.5) -IFRS 2 - Share based payments - (0.4) -IAS 10 - Dividends payable - - 34.8IAS 12 - Taxation - - 72.2Others - - (8.9)Presentation changes - discontinued activities (13.1) (0.7) - - franchisees (52.5) - - - associates (9.3) (0.8) - As reported under IFRS 1,138.7* 155.4* (777.6) *Excludes trading from discontinued activities and profit and loss on disposalof businesses. Transition Document A Transition Document, providing more detail and showing the changes required torestate the Primary Financial Statements from a UK GAAP basis on to a pro-formaIFRS basis, is available on the Group's website - rentokil-initial.com. Thestatements contained in that Transition Document are intended to show the impactof transition to IFRS rather than give the exact presentation to be made underIFRS. Contact Details Charles Grimaldi, Corporate Affairs Director 01342 833022 **************************************END*************************************** This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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