24th Nov 2005 10:00
Imperial Tobacco Group PLC24 November 2005 PRELIMINARY INFORMATION ON THE IMPLEMENTATION OF INTERNATIONAL FINANCIALREPORTING STANDARDS CONTENTS-------- Letter from R Dyrbus, Finance DirectorIntroductionInitial adoption of IFRSChanges to presentation of financial statementsAccounting policy changesReconciliation of UK GAAP to IFRS Balance sheet at 1 October 2004 Income statement for the year ended 30 September 2005 Balance sheet at 30 September 2005Accounting policies to be adopted for the year ended 30 September 2006 LETTER FROM R DYRBUS, FINANCE DIRECTOR-------------------------------------- Dear Shareholder Preliminary information on the implementation of International FinancialReporting Standards You will be aware that all European companies listed on a European Securitiesmarket are required to adopt EU endorsed International Financial ReportingStandards (IFRS) for accounting periods commencing on or after 1 January 2005.This means that the Group will prepare financial statements for the year ending30 September 2006 in accordance with IFRS. These financial statements willinclude comparative information for 2005. This publication is being made available to all shareholders and is intended toprovide an explanation of the main impacts of adopting IFRS, and we have nottherefore included the additional note disclosures. A cash flow statement hasalso not been presented as net cash flows will not be impacted. The impacts fallinto two main categories: • Presentational changes to the primary financial statements and disclosures • Changes to the accounting policies Within this publication, we have set out the preliminary reconciliation of thepresentational differences between existing UK Generally Accepted AccountingPrinciples (UK GAAP) and IFRS, and the impact of accounting policy changes, onthe Group balance sheets at 1 October 2004 and 30 September 2005. The Groupincome statement for the year ended 30 September 2005 shows the movements causedby changes in accounting policy only. This preliminary information has not beenaudited. The most significant change to the Group's income statement results from thenon-amortisation of goodwill. Basic earnings per share for the year ended 30September 2005 increased by 29.6p to 108.6p, of which 27.4p relates to goodwillamortisation. The Group's net assets increased by £263m and £565m at 1 October2004 and 30 September 2005 respectively, mainly as a result of includingpreviously unrecognised pension scheme assets and liabilities, removing theaccrual for the final dividend and adding back the 2005 goodwill amortisationcharge to the goodwill asset at 30 September 2005. Yours faithfully R DyrbusFinance Director 24 November 2005 INTRODUCTION------------ Imperial Tobacco Group PLC (the Group) currently prepares its financialstatements under UK Generally Accepted Accounting Principles (UK GAAP).Following a European Union regulation issued in 2002, from 1 October 2005 theGroup is required to prepare its consolidated financial statements in accordancewith International Financial Reporting Standards as adopted by the EU (IFRS). Accordingly, the Group's first Annual Report under IFRS will be for the yearended 30 September 2006. The interim report for the six months to 31 March 2006will be prepared in accordance with the accounting policies set out in thisdocument. As the 2006 financial statements include comparatives for 2005, theGroup's date of transition to IFRS under IFRS 1 ("First time adoption of IFRS")was 1 October 2004 and the 2005 comparatives have been restated to IFRS. To explain how the Group's reported performance and financial position areaffected by this change, this document includes reconciliations of key figuresunder UK GAAP for the year ended 30 September 2005 with unaudited restated IFRSresults. These reconciliations should be read in conjunction with the notes onthe basis of preparation and explanation of adjustments. The financial information has been prepared on the basis of the InternationalFinancial Reporting Standards (IFRSs) which include International AccountingStandards (IASs) and International Financial Reporting Interpretations Committee(IFRIC) interpretations that have been endorsed by the EU and those that areexpected to be endorsed by 30 September 2006. In particular, the amendment toIAS 19 "Employee Benefits" issued by the International Accounting StandardsBoard (IASB) in December 2004 has been adopted on the basis that it is expectedto be endorsed and applicable in respect of the year ending 30 September 2006. It is important to note that standards currently in issue are subject to ongoingreview and accordingly practice is continuing to evolve. Further standards orinterpretations may also be issued that will be applicable for the year ending30 September 2006, or that are mandatory for later accounting periods but thatcan be adopted early. The Group may need to review some of the accountingtreatments it has used for the purpose of preparing this document as a result ofemerging consensus on the practical application of IFRS and further technicalopinions that may arise in forthcoming months. This means that the financialinformation in this document may need modification when the first complete setof financial statements under IFRS is prepared for the financial year ending 30September 2006. INITIAL ADOPTION OF IFRS------------------------ IFRS 1 sets out the requirements that apply on first time adoption of IFRS.Amongst other things, it requires that the IFRS accounting policies to beapplied at 30 September 2006 are selected and then applied retrospectively inthe opening balance sheet at 1 October 2004. IFRS 1 permits certain exemptionsfrom the full requirements of IFRS in the transition period. The Group has takenthe following exemptions: IFRS 3 "Business Combinations" The Group has elected not to apply IFRS 3 retrospectively to businesscombinations that took place prior to the date of transition. In the openingbalance sheet, goodwill and other assets and liabilities acquired in previoustransactions remain at the same carrying value as under UK GAAP. IAS 21 "The Effects of Changes in Foreign Exchange Rates" Cumulative exchange differences on retranslation of net investments in overseassubsidiaries, which are recognised separately in equity under IFRS, are deemedto be nil at 1 October 2004. IFRS 2 "Share-based Payments" The Group has elected to apply IFRS 2 only to equity-based employee compensationschemes in respect of awards granted after 7 November 2002 that remain unvestedat 1 January 2005, the dates specified in IFRS 1. IAS 39 "Financial Instruments: Recognition and Measurement" and IAS 32"Financial Instruments: Disclosure and Presentation" IAS 32 and IAS 39 are being applied prospectively from 1 October 2005 andconsequently the restated figures for 2005 do not reflect the impact of thesestandards. IAS 19 "Employee Benefits" The Group has not taken advantage of the optional exemption to recognise allcumulative actuarial gains and losses with respect to employee retirementbenefit schemes in the shareholders' equity at 1 October 2004 since allactuarial gains and losses are recognised in full in the statement of recognisedincome and expense in the period in which they arise. CHANGES TO PRESENTATION OF FINANCIAL STATEMENTS----------------------------------------------- IAS 1 "Presentation of Financial Statements" prescribes the format of the IFRSGroup accounts, which is different to the UK GAAP presentation. While the formatof primary financial statements under UK GAAP is governed by the Companies Act1985, IAS 1 is less prescriptive in terms of the items that are required to bedisclosed, particularly with regard to the income statement. It is possible thatchanges may occur in the required format and presentation of the primaryfinancial statements as further interpretive guidance is published and bestpractice develops. Exceptional items IFRS does not contain the same specific presentation of "exceptional" items asUK GAAP but does require additional line items where necessary to aidunderstanding of financial performance. As a result, the Group intends tocontinue to separately identify items similar to those treated as exceptionalitems under UK GAAP. Material items of income and expense were disclosed on the face of the UK GAAPprofit and loss account where relevant to aid understanding of the Group'sfinancial performance. For the year ended 30 September 2005, these items relatedto a number of restructuring initiatives including the closure of our Montreal,Plattsburgh and Dublin factories, and the announced restructuring of ourEuropean cigarette operations and the closure of our South Wales factory. Thecosts mainly related to redundancy and employee related termination expenses andfixed asset write offs. Cash flow statement The format of the cash flow statement will change and the IFRS cash flowstatement will explain the change in cash and cash equivalents rather than justcash as under UK GAAP. Cash and cash equivalents under IFRS comprise cash andliquid investments available within 3 months that are readily convertible toknown amounts of cash and which have an insignificant risk of changing in value.A reconciliation of the net debt position will continue to be provided asadditional information. Although the format of the cash flow statement willchange, net cash flows will not be impacted and therefore, no reconciliation hasbeen provided. ACCOUNTING POLICY CHANGES------------------------- 1. Post employment benefits Under UK GAAP, the Group accounted for post employment benefits under Statementof Standard Accounting Practice 24 "Accounting for Pension Costs" (SSAP 24),whereby the cost of providing pensions was charged to the profit and lossaccount over the service lives of employees. Any variances arising fromactuarial valuations were charged or credited to profit over the estimatedremaining service lives of the employees. Under IFRS, the assets and liabilities of each defined benefit scheme are valuedat each balance sheet date to produce, for each scheme, a net asset or liabilityfor recognition on the balance sheet. Actuarial gains and losses are recognisedin full in the statement of recognised income and expense in the period in whichthey arise. All other service and interest costs and the expected return onassets are recognised in the income statement. This option is in accordance withthe amendment to IAS 19 issued by the IASB on 16 December 2004 that is expectedto be endorsed by the EU before 30 September 2006, and brings the methodology ofIAS 19 substantially into line with Financial Reporting Standard 17 "RetirementBenefits" (FRS 17). This means that subject to presentation differences andminor valuation differences, the impacts are similar to those given in the FRS17 disclosures provided under UK GAAP. Presentation differences include thefollowing: •IAS 19 allows the unwinding of the discounting on liabilities and the expected return on assets to be included in operating profit rather than in net finance costs as under FRS 17. •Under IAS 19, plan surpluses are classified as non-current assets, plan deficits are classified as non-current liabilities, and any associated deferred tax balances are disclosed separately. The adjustments to the UK GAAP balance sheet to reflect the adoption of IAS 19are: At 30 September 2005 At 1 October 2004In £'s million Retirement benefit assets 259 80Deferred tax assets 39 20Trade and other receivables (59) -Retirement benefit liabilities (50) (43)Deferred tax liabilities (77) (24)---------------------------- ------ -----Shareholders' funds 112 33---------------------------- ------ ----- The impact on retained profit for the year ended 30 September 2005 is anincrease of £14m, offset by £2m of related deferred tax. 2. Intangible assets - goodwill Under UK GAAP, goodwill on the balance sheet was amortised over its usefuleconomic life. Under IFRS 3, amortisation of goodwill is prohibited. Insteadgoodwill is subject to an impairment review, at least annually, and wheneverthere is an indicator of impairment. As a result, the value of the goodwill asset as at 1 October 2004 of £3,452mwill no longer be amortised. The results for the year ended 30 September 2005have been restated to reverse the goodwill amortisation charge of £198m recordedunder UK GAAP. The reversal of the goodwill amortisation charge does not affect the Group's taxcharge, because goodwill amortisation is not a deductible expense for taxpurposes. Impairment reviews were carried out at 1 October 2004 and 30 September 2005 inaccordance with IAS 36 "Impairment of Assets" and no impairments wereidentified. 3. Intangible assets - other Under UK GAAP, all computer software was included within tangible fixed assetsin the balance sheet. Under IFRS, only software that is integral to anotherfixed asset can be included with that asset in tangible fixed assets. All otherseparately identifiable software must be recorded separately as an intangibleasset. The charge to the income statement in respect of such software isclassified as amortisation under IFRS rather than depreciation under UK GAAP. At 1 October 2004 and 30 September 2005, £9m and £11m respectively of softwarewere reclassified from tangible fixed assets to intangible assets. Thedepreciation of this software for the year ended 30 September 2005 of £7m hasbeen reclassified from depreciation to amortisation. 4. Proposed final dividends Under UK GAAP, proposed final dividends were accrued as an adjusting postbalance sheet event in the accounting period to which they relate. Under IFRS,they are provided in the year that they are approved. Therefore, the proposed final dividend for the year ended 30 September 2005 of£278m is reversed out of the income statement and balance sheet. Similarly,there is an adjustment to the opening balance sheet at 1 October 2004 of £253mrepresenting the 2004 final dividend, which is recognised in the incomestatement for the year ended 30 September 2005. 5. Share-based payments Under UK GAAP, the Group recognised a charge to the profit and loss account forits share option schemes over the performance period based on the differencebetween the exercise price of the award and the share price at the date of grant(the intrinsic value). Under IFRS, the charge is based on the fair value of theshare options awarded at the date of grant spread over the vesting period. There is an adjustment to the opening balance sheet at 1 October 2004 of £1mbetween the profit and loss reserve and the IFRS transition reserve. The impact on operating profit for the year ended 30 September 2005 is anincrease of £4m, with the other side of the accounting entry being a debit toshareholders' funds as a reserves movement. There is therefore no impact on netassets. 6. Tax IAS 12 "Income Taxes" covers the accounting for both current and deferred tax.There is no difference in the accounting for current tax between IAS 12 and theUK standard FRS 16 "Current tax". The basis of accounting for deferred tax is different under IAS 12 compared tothe UK standard FRS 19 "Deferred tax". Under UK GAAP, deferred tax wasrecognised only on timing differences that arose from the inclusion of gains andlosses in tax assessments in periods different to those in which those gains andlosses were included in the financial statements. Under IFRS, subject tospecific exemptions, deferred tax is recognised on temporary differences, whichinclude timing differences, arising from the difference between the tax base andaccounting base of balance sheet items. The Group has made adjustments to the balance sheets at 1 October 2004 and 30September 2005 as follows: •An adjustment of £7m to reflect deferred tax on fair value adjustments made to property valuations as a result of the Reemtsma acquisition. •A further adjustment of £6m in respect of deferred tax on gains rolled over into replacement assets. As described in (1) above, adjustments have also been made to deferred tax inrespect of post employment benefits. 7. Holiday pay accrual Under previous UK reporting, the Group did not account for holiday pay accrualsunless legally obliged to make cash settlement. IAS 19 explicitly requiresappropriate provision to be made for the cost of holiday entitlements not takenat the balance sheet date. The impact of the change is a £10m reduction in netassets at both 1 October 2004 and 30 September 2005, therefore with no impact onthe income statement for the year ended 30 September 2005. 8. Spare parts Under UK GAAP, spare parts for plant and machinery were held within inventoriesand expensed when used. Under IFRS, spare parts should be held within fixedassets and transferred to the relevant asset when used and depreciatedaccordingly. At 1 October 2004 and 30 September 2005, £23m and £21m respectivelyof spare parts were reclassified from inventories to property, plant andequipment. There was no impact on the income statement for the year ended 30September 2005. 9. Financial Instruments The Group transacts derivative financial instruments to manage the underlyingexposure to foreign exchange and interest rate risks. Foreign currencyborrowings are also used to hedge foreign exchange risk. IAS 21 "The Effects of Changes in Foreign Exchange Rates" Under UK GAAP, where cross-currency swaps have been used to hedge exchange risk,the book value of the underlying debt reflected the effect of the swap. UnderIAS 21, the book value of these derivatives is shown separately on the balancesheet and the underlying debt is translated at the exchange rate ruling at thebalance sheet date. This results in the following classification adjustments: At 30 September 2005 At 1 October 2004In £'s million Derivative financial instruments - liabilities (57) (77)Decrease in borrowings 57 77 IAS 39 "Financial Instruments: Recognition and Measurement" Under UK GAAP, hedge accounting was applied to derivative financial instrumentssuch that changes in the market value of the instrument were matched againstchanges in the value of the underlying hedged exposure. With the exception ofcross-currency swaps, the instruments were kept off balance sheet and theirimpact disclosed in a note to the accounts. IAS 39 requires that all derivative financial instruments be recognised on thebalance sheet at fair value, with changes in the fair value being recognised inthe income statement unless the instrument satisfies the much more restrictivehedge accounting rules under IFRS. The Group has and continues to hedge underlying exposures in an efficient,commercial and structured manner. However the strict requirements of IAS 39 leadto some commercially effective hedge positions not being effective foraccounting purposes. As a result of the more stringent requirements, the Grouphas decided not to apply hedge accounting as permitted under IAS 39. As aconsequence of this, the reported annual financing charge under IFRS will bemore volatile. We have not adopted IAS 39 in the 2005 comparative figures. Consequently, thereis no impact on the balance sheets at 1 October 2004 and 30 September 2005. Asan indication, the fair value under UK GAAP of the derivative financialinstruments at 1 October 2004 and 30 September 2005 were a net liability of £37mand £72m respectively. RECONCILIATION OF UK GAAP TO IFRS--------------------------------- IFRS 1 requires an entity to explain how the transition from UK GAAP to IFRS hasaffected its financial performance and position. We have included reconciliations for the following: •Group balance sheet at 1 October 2004 •Group income statement for the year ended 30 September 2005 •Group balance sheet at 30 September 2005 The balance sheet reconciliations explain the transition in two stages. Thefirst stage shows the restatement of the UK GAAP balance sheet into the IFRSformat, using UK GAAP numbers. The second stage shows the movements caused bychanges in accounting policies between UK GAAP and IFRS. The income statementshows the movements caused by changes in accounting policies only. BALANCE SHEET AT 1 OCTOBER 2004 - EFFECT OF IAS 1 "PRESENTATION OF FINANCIAL----------------------------------------------------------------------------STATEMENTS" (UNAUDITED)----------------------- Pensions Provisions Debtors UK GAAP balances in IFRS formatUK GAAP balances £m £m £m £m £min UK GAAPformat---------------------------------------------------------------------------------- Fixed assets Non-current assets Intangible Intangible assets 3,547 3,547 assets Property,Tangible plant & assets 651 651 equipment OtherInvestments 7 7 investments Retirement benefit - assets Trade & other 2 2 receivables Deferred tax 11 11 assets ------ ------ ------- ------ ------ 4,205 - - 13 4,218 ------ ------ ------- ------ ------ Current assets Current assets Stocks 864 864 Inventories Trade & otherTrade debtors 898 (2) 896 receivables Corporate Current tax taxes 46 46 assetsDeferred tax 11 (11) -Other debtors and Trade & other prepayments 66 66 receivables Cash and cashInvestments 77 77 equivalents Cash and cashCash 262 262 equivalents ------ ------ ------- ------ ------ 2,224 - - (13) 2,211 ------ ------ ------- ------ ------ Creditors: Current amounts falling liabilities due within one year Borrowings (719) (719) BorrowingsTrade Trade & other creditors (125) (125) payablesCorporate Current tax taxes (167) (167) liabilitiesOther taxes, duties and social security Trade & other contributions (1,055) (1,055) payablesOther Trade & other creditors (88) (88) payablesAccruals and deferred Trade & other income (149) (149) payablesProposed Trade & other dividend (253) (253) payables (40) (40) Provisions ------ ------ ------- ------ ------ (2,556) - (40) - (2,596) ------ ------ ------- ------ ------ Creditors: Non-current amounts falling liabilities due after more than one year Borrowings (3,208) (3,208) Borrowings Derivative financial - instrumentsDeferred Trade & other consideration (58) (58) payablesAccruals and deferred Trade & other income (1) (1) payables Deferred tax (51) (51) liabilities Retirement benefit (340) (340) liabilities (39) (39) Provisions ------ ------ ------- ------ ------ (3,267) (340) (90) - (3,697) ------ ------ ------- ------ ------ Provisions for liabilities and charges Reorganisation and rationalisation (52) 52 -Unfunded pension obligations (340) 340 -Deferred taxation (51) 51 -Other (27) 27 - ------ ------ ------- ------ ------ (470) 340 130 - - ------ ------ ------- ------ ------ Net assets 136 - - - 136 Net assets ------ ------ ------- ------ ------ Capital and reserves Called up share capital 73 73 Share capitalShare premium Share premium account 964 964 accountProfit and loss account (919) (919) Reserves - IFRS reserve ------ ------ ------- ------ ------ Capital and reservesEquity attributable shareholders' to equity funds 118 - - - 118 holders Equity Equity minority minority interests 18 18 interests ------ ------ ------- ------ ------ 136 - - - 136 Total equity ------ ------ ------- ------ ------ BALANCE SHEET AT 1 OCTOBER 2004 - RECONCILIATION OF UK GAAP TO IFRS (UNAUDITED)------------------------------------------------------------------------------- IAS 19 IAS 10 IAS 12 IAS 21 PostUK GAAP employment Financial balances in benefits Dividends Income Tax instruments Others IFRS IFRS format £m £m £m £m £m £m £m Notes 1 4 6 9 3,5,7,8 Non-current assets Intangible assets 3,547 9 3,556Property, plant & equipment 651 14 665Other investments 7 7Retirement benefit assets - 80 80Trade & other receivables 2 2Deferred tax assets 11 20 31 ------ ------- ------- ------- ------- ------- ------- 4,218 100 - - - 23 4,341 ------ ------- ------- ------- ------- ------- ------- Current assets Inventories 864 (23) 841Trade & other receivables 962 962Current tax assets 46 46Cash and cash equivalents 339 339 ------ ------- ------- ------- ------- ------- ------- 2,211 - - - - (23) 2,188 ------ ------- ------- ------- ------- ------- ------- Current liabilities Borrowings (719) (719)Trade & other payables (1,670) 253 (1,417)Current tax liabilities (167) (167)Provisions (40) (10) (50) ------ ------- ------- ------- ------- ------- ------- (2,596) - 253 - - (10) (2,353) ------ ------- ------- ------- ------- ------- ------- Non-current liabilities Borrowings (3,208) 77 (3,131)Derivative financial instruments - (77) (77)Trade & other payables (59) (59)Deferred tax liabilities (51) (24) (13) (88)Retirement benefit liabilities (340) (43) (383)Provisions (39) (39) ------ ------- ------- ------- ------- ------- ------- (3,697) (67) - (13) - - (3,777) ------ ------- ------- ------- ------- ------- ------- Net assets 136 33 253 (13) - (10) 399 ------ ------- ------- ------- ------- ------- ------- Share capital 73 73Share premium account 964 964Reserves (919) (1) (920)IFRS reserve* - 33 253 (13) (9) 264 ------ ------- ------- ------- ------- ------- ------- Capital and reserves attributable to equity holders 118 33 253 (13) - (10) 381 Equity minority interests 18 18 ------ ------- ------- ------- ------- ------- -------Total equity 136 33 253 (13) - (10) 399 ------ ------- ------- ------- ------- ------- ------- * The IFRS reserve is disclosed separately for illustrative purposes only andwill be included within revenue reserves in the full financial statements. INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2005 (UNAUDITED)----------------------------------------------------------------- IAS 19 IFRS 3 IAS 10 IFRS 2 Post employment Share-based UK GAAP benefits Goodwill Dividends payments Restated balances £m £m £m £m £m £m Notes 1 2 4 5 Revenue including duty 11,255 11,255Duty (8,106) (8,106) ------- ------- ------- ------- ------- --------Revenue less duty 3,149 3,149 ------- ------- ------- ------- ------- --------Group operating profit 1,046 14 198 - 4 1,262 ------- ------- ------- ------- ------- --------Finance costs - net (184) (184) ------- ------- ------- ------- ------- --------Profit before taxation 862 14 198 - 4 1,078 ------- ------- ------- ------- ------- --------Taxation (286) (2) (288) ------- ------- ------- ------- ------- --------Profit after taxation 576 12 198 - 4 790 ======= ======= ======= ======= ======= ========Equity minority interests (6) (6)Dividends (398) 25 (373) ------- ------- ------- ------- ------- --------Retained profit for the year 172 12 198 25 4 411 ------- ------- ------- ------- ------- -------- Earnings per ordinary share for profit attributable to equity shareholders: Basic 79.0p 1.6p 27.4p - 0.6p 108.6pDiluted 78.6p 1.6p 27.3p - 0.6p 108.1p BALANCE SHEET AT 30 SEPTEMBER 2005 - EFFECT OF IAS 1 "PRESENTATION OF FINANCIAL-------------------------------------------------------------------------------STATEMENTS" (UNAUDITED)----------------------- UK GAAP balances UK GAAP in UK GAAP Pensions Provisions Debtors balances in format £m £m £m £m £m IFRS format Fixed assets Non-current assets Intangible Intangible assets 3,345 3,345 assets Property,Tangible plant & assets 632 632 equipment OtherInvestments 5 5 investments Retirement benefit - assets Trade & other 53 53 receivables Deferred tax 23 23 assets ------ ------ ------- ------ ------ 3,982 - - 76 4,058 ------ ------ ------- ------ ------ Current assets Current assets Stocks 878 878 Inventories Trade & otherTrade debtors 960 960 receivablesCorporate Current tax taxes 44 44 assetsDeferred tax 23 (23)Other debtors and Trade & other prepayments 115 (53) 62 receivables Cash and cashInvestments 25 25 equivalents Cash and cashCash 231 231 equivalents ------ ------ ------- ------ ------ 2,276 - - (76) 2,200 ------ ------ ------- ------ ------ Creditors: Current amounts falling liabilities due within one year Borrowings (707) (707) BorrowingsTrade Trade & other creditors (125) (125) payablesCorporate Current tax taxes (235) (235) liabilitiesOther taxes, duties and social security Trade & other contributions (1,134) (1,134) payablesDeferred Trade & other consideration (55) (55) payablesOther Trade & other creditors (49) (49) payablesAccruals and deferred Trade & other income (165) (165) payablesProposed Trade & other dividend (278) (278) payables (40) (40) Provisions ------ ------ ------- ------ ------ (2,748) - (40) - (2,788) ------ ------ ------- ------ ------ Creditors: Non-current amounts falling liabilities due after more than one year Borrowings (2,832) (2,832) Borrowings Derivative financial instrumentsDeferred Trade & other consideration (8) (8) payablesAccruals and deferred Trade & other income (1) (1) payablesOther Trade & other creditors (2) (2) payables Deferred tax (43) (43) liabilities Retirement benefit (388) (388) liabilities (56) (56) Provisions ------ ------ ------- ------ ------ (2,843) (388) (99) - (3,330) ------ ------ ------- ------ ------ Provisions for liabilities and chargesReorganisation and rationalisation (71) 71 -Unfunded pension obligations (388) 388 -Deferred taxation (43) 43 -Other (25) 25 - ------ ------ ------- ------ ------ (527) 388 139 - - ------ ------ ------- ------ ------ Net assets 140 - - - 140 Net assets ------ ------ ------- ------ ------ Capital and reserves Called up Share share capital 73 73 capitalShare premium Share premium account 964 964 accountProfit and loss account (916) (916) Reserves IFRS reserve---------------- ------ ------ ------- ------ ------ -------------- Capital and reservesEquity attributable shareholders' to equity funds 121 - - - 121 holders Equity Equity minority minority interests 19 19 interests ------ ------ ------- ------ ------ 140 - - - 140 Total equity ------ ------ ------- ------ ------ BALANCE SHEET AT 30 SEPTEMBER 2005 - RECONCILIATION OF UK GAAP TO IFRS----------------------------------------------------------------------(UNAUDITED)----------- IAS 19 IFRS 3 IAS 10 IAS 12 IAS 21 PostUK GAAP employment Financial balances in benefits Goodwill Dividends Income Tax instruments Others IFRS IFRS format £m £m £m £m £m £m £m £m Notes 1 2 4 6 9 3,5,7,8 Non-current assets Intangible assets 3,345 198 11 3,554Property, plant & equipment 632 10 642Other investments 5 5Retirement benefit assets - 259 259Trade & other receivables 53 (49) 4Deferred tax assets 23 39 62 ------ ------- ------ ------ ------ ------- ------ ------ 4,058 249 198 - - - 21 4,526 ------ ------- ------ ------ ------ ------- ------ ------ Current assets Inventories 878 (21) 857Trade & other receivables 1,022 (10) 1,012Current tax assets 44 44Cash and cash equivalents 256 256 ------ ------- ------ ------ ------ ------- ------ ------ 2,200 (10) - - - - (21) 2,169 ------ ------- ------ ------ ------ ------- ------ ------ Current liabilities Borrowings (707) (707)Trade & other payables (1,806) 278 (1,528)Current tax liabilities (235) (235)Provisions (40) (10) (50) ------ ------- ------ ------ ------ ------- ------ ------ (2,788) - - 278 - - (10) (2,520) ------ ------- ------ ------ ------ ------- ------ ------ Non-current liabilities Borrowings (2,832) 57 (2,775)Derivative financial instruments - (57) (57)Trade & other payables (11) (11)Deferred tax liabilities (43) (77) (13) (133)Retirement benefit liabilities (388) (50) (438)Provisions (56) (56) ------ ------- ------ ------ ------ ------- ------ ------ (3,330) (127) - - (13) - - (3,470) ------ ------- ------ ------ ------ ------- ------ ------ Net assets 140 112 198 278 (13) - (10) 705 ------ ------- ------ ------ ------ ------- ------ ------ Share capital 73 73Share premium account 964 964Reserves (916) 79 198 25 (1) (615)IFRS reserve* - 33 253 (13) (9) 264 ------ ------- ------ ------ ------ ------- ------ ------Capital and reserves attributable to equity holders 121 112 198 278 (13) - (10) 686 Equity minority interests 19 19 ------ ------- ------ ------ ------ ------- ------ ------Total equity 140 112 198 278 (13) - (10) 705 ------ ------- ------ ------ ------ ------- ------ ------ * The IFRS reserve is disclosed separately for illustrative purposes only andwill be included within revenue reserves in the full financial statements. ACCOUNTING POLICIES TO BE ADOPTED FOR THE YEAR ENDED 30 SEPTEMBER 2006---------------------------------------------------------------------- Basis of preparation These accounting policies are based on the EU adopted IFRSs, IASs and IFRICinterpretations that the Group expects to be applicable for the year ended 30September 2006. The standards and interpretations that will be applicable arenot known with certainty at the time of preparing this preliminary information.In particular, the amendment to IAS 19 issued by the International AccountingStandards Board (IASB) in December 2004 has been adopted on the basis that it isexpected to be endorsed and applicable in respect of the year ending 30September 2006. The 2006 financial statements will be the Group's first consolidated financialstatements prepared under IFRS, with a transition date of 1 October 2004.Consequently, the comparative figures for 2005 have been restated in accordancewith IFRS, with the exception of IAS 32 and IAS 39 on financial instrumentswhich have been applied prospectively from 1 October 2005, as permitted by IFRS1 "First time adoption of International Financial Reporting Standards". In addition, IFRS 1 allows certain further exemptions from retrospectiveapplication of IFRS in the opening balance sheet at 1 October 2004. Where thesehave been used, they are explained in the relevant policy below. The financial statements have been prepared in accordance with the historicalcost convention except as described in the policy for financial instrumentsbelow. Basis of consolidation---------------------- The consolidated accounts comprise Imperial Tobacco Group PLC (the Company) andits subsidiary undertakings, together with the Group's share of the results ofits associates. (i) SubsidiariesSubsidiaries are those entities controlled by the Company. Control exists whenthe Company has the power to govern the financial and operating policies of anenterprise taking into account any potential voting rights. The financialstatements of subsidiaries are included in the consolidated financial statementsfrom the date that control commences until the date that control ceases. The purchase method of accounting is used to account for the acquisition ofsubsidiaries. The cost of an acquisition is measured at the fair value of theconsideration plus costs directly attributable to the acquisition. The excess ofthe cost of the acquisition over the Group's share of the fair value of the netidentifiable assets of the subsidiary acquired is recorded as goodwill.Intragroup transactions, balances and unrealised gains on transactions betweenGroup companies are eliminated; unrealised losses are also eliminated unlesscosts cannot be recovered. Where necessary, accounting policies of subsidiarieshave been changed to ensure consistency with the policies adopted by the Group. (ii) AssociatesAssociates are those enterprises in which the Group has the power to exertsignificant influence, but not control, over the financial and operatingpolicies. The consolidated financial statements include the Group's share of thetotal recognised gains and losses of associates on an equity accounted basis,from the date that significant influence commences until the date thatsignificant influence ceases. Where the Group's share of losses exceeds thecarrying amount of the associate, the carrying amount is reduced to nil andrecognition of further losses is discontinued except to the extent that theGroup has incurred obligations in respect of the associate. Foreign currency---------------- Items included in the financial statements of each of the Group's entities aremeasured using the currency of the primary economic environment in which theentity operates (the functional currency). The income and cash flow statements of non-sterling denominated Group entitiesare translated to sterling (the Group's presentation currency) at average ratesof exchange in each period. Assets and liabilities of these undertakings aretranslated at rates of exchange ruling at the balance sheet date. Thedifferences between retained profits and losses translated at average andclosing rates are taken to reserves, as are differences arising on theretranslation to sterling of non-sterling denominated Group entity net assets atthe beginning of the year. Any differences that have arisen since 1 October 2004 are presented as aseparate component of equity. As permitted by IFRS 1, any differences prior tothis date are not included in this separate component of equity. Foreign currency transactions are initially recorded at the exchange rate rulingat the date of the transaction. Foreign exchange gains and losses resulting fromthe settlement of such transactions and from the translation at exchange ratesruling at the balance sheet date of monetary assets and liabilities denominatedin foreign currencies are recognised in the income statement, except whendeferred in equity as qualifying net investment hedges. Revenue recognition------------------- Revenue comprises the invoiced value for the sale of goods and services net ofsales taxes, rebates and discounts. Revenue from the sale of goods is recognisedwhen a Group entity has delivered products to the customer, the customer hasaccepted the products and collectibility of the related receivables isreasonably assured. Sales of services which include fees for distributing thirdparty products are recognised in the accounting period in which the services arerendered. Licence fees are recognised on an accruals basis in accordance withthe substance of the relevant agreements. Segmental reporting------------------- A segment is a distinguishable component of the Group that is engaged inproviding products or services within a particular economic environment. The principal activity of the Group is the manufacture, marketing and sale oftobacco and tobacco related products. The management structure is based ongeographical regions rather than by product group. These geographical regions ofUK, Germany, Rest of Western Europe and Rest of the World have been used as theprimary reporting segments. Different tobacco products are not subject tosignificantly different risks and returns and as a consequence, the Group hasonly one business segment and no secondary segment disclosure has been made. The prices agreed between Group companies for intragroup sales of materials,manufactured goods, charges for royalties, commissions and fees are based onnormal commercial practices which would apply between independent businesses.The central costs are allocated to segments on a consistent basis, reflectingactivity levels. Financial instruments--------------------- Financial assets and financial liabilities are recognised when the Group becomesa party to the contractual provisions of the relevant instrument. Financialassets are derecognised when the rights to receive benefits have expired or beentransferred, and the Group has transferred substantially all risks and rewardsof ownership. Financial liabilities are derecognised when the obligation isextinguished. Non-derivative financial assets are classified as either loans and receivablesor cash and cash equivalents. They are stated at amortised cost using theeffective interest method, subject to reduction for allowances for estimatedirrecoverable amounts. A provision for impairment of trade receivables isestablished when there is objective evidence that the Group will not be able tocollect all amounts due according to the original terms of receivables. Theamount of the provision is the difference between the asset's carrying amountand the present value of estimated future cash flows, and is recognised in theincome statement. For interest-bearing assets, their carrying value includesaccrued interest receivable. Cash and cash equivalents include cash in hand and deposits held on call,together with other short-term highly liquid investments. Non-derivative financial liabilities are stated at amortised cost using theeffective interest method. For borrowings, their carrying value includes accruedinterest payable, as well as unamortised issue costs. The Group transacts derivative financial instruments to manage the underlyingexposure to foreign exchange and interest rate risks. The Group does nottransact derivative financial instruments for trading purposes. However, as theGroup has decided not to hedge account for its derivative financial instruments,they are accounted for through the income statement. Derivative financial assets and liabilities are stated at fair value, whichincludes accrued interest receivable and payable where relevant. Changes in fairvalues are recognised in the income statement in the period in which they arise. Application of IAS 32 and IAS 39. As noted above, the Group has applied IAS 32and IAS 39 prospectively from 1 October 2005, as permitted by the two standards.For the year ended 30 September 2005, financial instruments are accounted for inaccordance with UK GAAP and therefore the amounts are not comparable with thosethat will be reported for 2006. Leased assets------------- Leases in which a significant portion of the risks and rewards of ownership arepassed to the lessee are classified as finance leases. Assets acquired under finance leases are capitalised and depreciated inaccordance with the Group's policy on property, plant and equipment over theshorter of the lease term and the useful life. The associated obligations areincluded in financial liabilities. Leases in which a significant portion of the risks and rewards are retained bythe lessor are classified as operating leases. Rentals payable under operatingleases are charged to the income statement as incurred, on a straight line basisover the period of the lease. Provisions---------- A provision is recognised in the balance sheet when the Group has a legal orconstructive obligation as a result of a past event, it is more likely than notthat an outflow of resources will be required to settle that obligation, and areliable estimate of the amount can be made. A provision for restructuring is recognised when the Group has approved adetailed and formal restructuring plan, and the restructuring has eithercommenced or has been publicly announced. Future operating losses are notprovided for. Where there are a number of similar obligations, the likelihood that an outflowwill be required in settlement is determined by considering the class ofobligations as a whole. A provision is recognised even if the likelihood of anoutflow with respect to any one item included in the same class of obligationsmay be small. Property, plant and equipment----------------------------- Land and buildings comprise mainly factories and offices. Property, plant and equipment are shown in the balance sheet at their historicalcost less depreciation. Historical cost includes expenditure that is directlyattributable to the acquisition of the items. Subsequent costs are included inthe assets' carrying amounts or recognised as a separate asset as appropriateonly when it is probable that future economic benefits associated with them willflow to the Group and the cost of the item can be measured reliably. All otherrepairs and maintenance are charged to the income statement as incurred. Land is not depreciated. Depreciation is provided so as to write off the initialcost of each asset to their residual values over their estimated useful lives asfollows: Buildings up to 50 years (straight line)Plant and equipment 2 - 20 years (straight line / reducing balance)Fixtures and motor vehicles 2 - 14 years (straight line) The assets' residual values and useful lives are reviewed and adjusted, ifappropriate, at each balance sheet date. Where the carrying amount of an assetis greater than its estimated recoverable amount, it is written down immediatelyto its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carryingamounts. These are included in the income statement. Intangible assets - goodwill---------------------------- Goodwill represents the excess of the cost of an acquisition over the fair valueof the net identifiable assets and liabilities acquired, both tangible andintangible. Goodwill arising on acquisitions made on or after 27 September 1998 iscapitalised. Previously all goodwill was written off through equity in theperiod of acquisition. Goodwill arising on acquisitions prior to 1 October 2004is stated in accordance with UK GAAP and has not been remeasured on transitionto IFRS as permitted by IFRS 1. Goodwill is tested at least annually forimpairment and carried at cost less accumulated impairment losses. Anyimpairment is recognised immediately in profit or loss and cannot besubsequently reversed. Goodwill is allocated to groups of cash-generating unitsfor the purpose of impairment testing. Each of these cash-generating unitsrepresents the Group's investment in each primary reporting segment. Gains orlosses on the disposal of an entity include the carrying amount of goodwillrelating to the entity sold. Goodwill previously written off directly to reserves under UK GAAP is notrecycled to the income statement on the disposal of the subsidiary or associateto which it relates. Intangible assets - other------------------------- These consist mainly of acquired trade marks and licences , and computersoftware which are carried at cost less accumulated amortisation. They areamortised on a straight line basis over their useful lives. For trade marks andlicences, the useful life does not exceed 20 years. Computer software is writtenoff over a period that does not exceed five years. Impairment of assets-------------------- Assets that have an indefinite life are not subject to amortisation and aretested at least annually for impairment. Assets that are subject to amortisationare reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. An impairment loss isrecognised in the income statement for the amount by which the carrying amountof the asset exceeds its recoverable amount. The recoverable amount is thehigher of the net selling price and the value in use. For the purpose ofassessing impairment, assets are grouped at the lowest levels for which thereare separately identifiable cash flows (cash-generating units). Retirement benefit costs------------------------ The asset or liability recognised in the balance sheet in respect of definedbenefit pension schemes is calculated in accordance with IAS 19, based on thepresent value of the defined benefit obligation at the balance sheet date lessthe fair value of plan assets. The actuarial assumptions used to calculate thebenefit obligations vary according to the economic conditions of the country inwhich the plan is located. Where the calculation results in a benefit to theGroup, the asset is only recognised where it represents a future economicbenefit which is actually available to the Group. The asset is limited to thenet total of any cumulative unrecognised past service costs and the presentvalue of any future refunds from the schemes or reductions in futurecontributions to the schemes. Actuarial gains and losses arise when the values of plan assets and liabilitiesare re-measured at the balance sheet date. They result where actual eventsduring the year differ from the actuarial assumption in the previous valuation(experience adjustments), changes in actuarial assumptions and amendments topension schemes. They are recognised in full in the statement of recognisedincome and expense in the period in which they arise. The Group has not taken advantage of the optional exemption under IFRS 1 torecognise all cumulative actuarial gains and losses with respect to employeeretirement benefit schemes in the shareholders' equity at 1 October 2004 sinceall actuarial gains and losses are recognised in full in the statement ofrecognised income and expense in the period in which they arise. Dividends--------- Final dividends are recognised as a liability in the Group's financialstatements in the period in which the dividends are approved by shareholders,while interim dividends are recognised in the period in which the dividends arepaid. Inventories----------- Inventories are stated at the lower of cost and net realisable value. Cost isdetermined using the first-in, first-out (FIFO) method. The cost of finishedgoods and work in progress comprises raw materials, direct labour, other directcosts and related production overheads (based on normal operating capacity) butexcludes borrowing costs. Net realisable value is the estimated selling price inthe ordinary course of business, less the estimated costs of completion andselling expenses. Tobacco inventories which have an operating cycle that exceeds twelve months areclassified as current assets, consistent with recognised industry practice. Taxes----- Income tax on the profit or loss for the year comprises current and deferredtax. Current tax is the expected tax payable on the taxable income for the year,using tax rates substantially enacted at the balance sheet date, and anyadjustments to tax payable in respect of previous years. Deferred tax is provided in full on temporary differences between the carryingamount of assets and liabilities in the financial statements, and the tax base.Deferred tax assets are recognised only to the extent that it is probable thatfuture taxable profits will be available against which the temporary differencescan be utilised. Deferred tax assets and liabilities are not discounted. Deferred tax is determined using the tax rates that have been enacted orsubstantially enacted by the balance sheet date, and are expected to apply whenthe deferred tax liability is settled or the deferred tax asset is realised. Deferred tax is provided on temporary differences arising on investments insubsidiaries and associates, except where the timing of the reversal of thetemporary difference is controlled by the Group and it is probable that thetemporary difference will not reverse in the foreseeable future. Tax is recognised in the income statement, except where it relates to itemsrecognised directly in equity, in which case it is recognised in equity. Share-based payments-------------------- The Group applies the requirements of IFRS 2 to equity-based employeecompensation schemes in respect of awards granted after 7 November 2002 whichremain unvested at 1 January 2005, the dates specified in IFRS 1. The cost of employees' services received in exchange for the grant of options ismeasured at the fair value of the options granted and is expensed. The totalamount to be expensed over the vesting period is determined by reference to thefair value of the options granted, excluding the impact of any non-marketvesting conditions (e.g. earnings per share). Non-market vesting conditions areincluded in assumptions about the number of options that are expected to becomeexercisable. At each balance sheet date, the Group revises its estimates of thenumber of options that are expected to become exercisable. It recognises theimpact of the revision of original estimates, if any, in the income statement,and a corresponding adjustment to equity. The fair value is measured based on anappropriate valuation model, taking into account the terms and conditions uponwhich the options were granted. In order to hedge the related exposure, the Group buys the number of sharesnecessary to satisfy rights to shares arising on the exercise of share optionsand on the vesting of the share matching and performance related share awards.These shares are accounted for as a deduction from shareholders' funds. Noadditional shares are issued as a result of the equity compensation plan. Whenthe options are exercised, equity is increased by the amount of the proceedsreceived. Share capital------------- Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or optionsare shown in equity as a deduction, net of tax, from the proceeds. Where any Group company purchases the Company's equity share capital (Treasuryshares), the consideration paid, including any directly attributable incrementalcosts (net of income taxes), is deducted from equity attributable to theCompany's equity holders until the shares are cancelled, reissued or disposedof. Where such shares are subsequently sold or reissued, any considerationreceived, net of any directly attributable incremental transaction costs and therelated income tax effects, is included in equity attributable to the Company'sequity holders. Enquiries Alex Parsons Group Media Relations Manager Tel: +44 (0)117 933 7241 Simon Evans Group Media Relations Executive Tel: +44 (0)117 933 7357 John Nelson-Smith Investor Relations Manager Tel: +44 (0)117 933 7032 Copies of our announcements are available on our website: www.imperial-tobacco.com This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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