31st Aug 2005 06:02
Serco Group plcTransition to International Financial Reporting Standards ('IFRS')This announcement provides further details of Serco's transition to IFRS.Separately today, we have announced our interim results and released ourBusiness Review. Copies of these documents are available on our website http://www.serco.com/1. IntroductionDuring 2002, and in order to implement a "financial reporting strategy" adoptedby the European Commission in June 2000, the European Union (EU) approved anAccounting Regulation requiring all EU listed companies to follow InternationalFinancial Reporting Standards ('IFRS') in their consolidated financialstatements for financial years commencing on or after 1 January 2005. Inaccordance with these requirements, Serco Group plc (the 'Group') will adoptIFRS in its financial statements for the year ended 31 December 2005. Thesefinancial statements will include comparatives for the year ended 31 December2004 restated under IFRS. The Group is required to report under IFRS for thefirst time in the Group's interim results for the six months ended 30 June2005, with comparatives for the six months ended 30 June 2004.There is no change to the Group's underlying performance under IFRS and, inparticular, there is no impact on the Group's cash flow. The restatements result in:an increase of ‚£6.6m (11.5%) in 2004 full year profit before tax to ‚£64.0m, andan increase of ‚£2.6m (9.3%) for the six months ended 30 June 2004 to ‚£30.7ma decrease of ‚£135.2m (44.4%) in net assets at 31 December 2004 to ‚£169.2m; and‚£27.0m (16.0%) decrease in net assets at 1 January 2005 to ‚£142.3m on therecognition of financial instruments (see section 9)Restatements and changes in disclosure arise primarily as a result of:inclusion of a proportionate share of joint ventures' financial performance andposition;goodwill no longer being amortised;reclassification of franchise assets from goodwill to intangible assets;recognition of all employee benefit related assets and obligations, principallydefined benefit pension schemes;inclusion of a fair value charge in relation to share-based payment;dividend liability recognised when approved;change in recognition of deferred tax; andrecognition of certain financial instruments at fair value at 1 January 2005.2. Purpose of this reportThis report explains how the Group's previously reported financial performanceand position are reported under IFRS. This includes, on an IFRS basis:the Group's consolidated balance sheet at 1 January 2004, the Group's date oftransition to IFRS;the Group's consolidated balance sheets at 30 June 2004, 31 December 2004 and 1January 2005; andthe Group's consolidated income statement for the year ended 31 December 2004and the six months ended 30 June 2004.The significant changes as a result of the adoption of IFRS compliantaccounting policies are discussed below, and the detailed restatements of thefinancial results follow on pages 9 to 20. The Group's significant accountingpolicies under IFRS are set out in section 10.This financial information has been prepared on the basis of financialreporting standards expected to be applicable at 31 December 2005. These aresubject to ongoing review and endorsement by the European Union or possibleamendment by interpretive guidance from the International Accounting StandardsBoard ('IASB') and the International Financial Reporting InterpretationsCommittee ('IFRIC') and are therefore still subject to change.The report covers the period from 1 January 2004 to 1 January 2005. The reportalso includes the independent auditors' (Deloitte & Touche LLP) report to theGroup in relation to the reconciliations of the consolidated balance sheets at1 January 2004 and 31 December 2004 and the consolidated income statement forthe year ended 31 December 2004 between UK GAAP and IFRS.3. IFRS 1 'First-time Adoption of International Financial Reporting Standards'IFRS 1 establishes the transitional requirements for the preparation offinancial statements in accordance with IFRS for the first time. The generalprinciple is that the IFRS effective at the first-time adoption reporting date(31 December 2005 for the Group) are to be applied retrospectively to theopening IFRS balance sheet (1 January 2004), the comparative period (2004) andthe reporting period (2005). Outlined below is the Group's position in relation to key exemptions andexceptions that are available under IFRS.Business combinationsThe Group has adopted the exemption not to apply IFRS 3 'Business Combinations'in respect of acquisitions occurring prior to 1 January 2004.The Group has accounted for acquisitions prior to 1 January 2004 as follows:the carrying amount of goodwill recognised under UK GAAP as at 1 January 2004has not been adjusted, other than an adjustment for the recognition ofintangible assets acquired but previously not separately recognised;from the date of transition to IFRS (1 January 2004) goodwill is no longeramortised.there has been no remeasurement of original 'fair values' determined at thedate ofacquisition.In February 2003, the Group acquired a 10-year franchise from the province ofOntario, Canada, relating to Ontario Driving Examination Services (DES). Ontransition to IFRS, the right to manage and operate the franchise has beenrecognised as an intangible asset, with a corresponding reduction in goodwill.Employee benefitsUnder IAS 19 'Employee Benefits', the Group is required to reflect itsobligations or surpluses under defined benefit pension schemes on the balancesheet. The Group has elected under IFRS 1 to recognise all cumulative actuarial gainsand losses on defined benefit pension schemes at the date of transition toIFRS. Actuarial gains and losses are recognised in full in the period in whichthey occur. They are recognised outside the income statement and are presentedin the consolidated statement of recognised income and expense.On transition to IFRS, the Group has recognised the full IAS 19 liability inrespect of the Serco Pension and Life Assurance Scheme (SPLAS). In addition,the Group has an obligation to contribute to defined benefit pension schemes asa result of contracts and franchises that it operates and manages. The Grouphas recognised as a liability its share of the obligation that it will fundover the period of the contract or franchise.Cumulative translation differencesThe Group has adopted the exemption to set cumulative translation differencesfor all foreign operations to zero at 1 January 2004. The gain or loss on asubsequent disposal of any foreign operation will exclude translationdifferences that arose before 1 January 2004, but will include latertranslation differences.Share-based PaymentIFRS 2 has been applied to all grants of equity instruments after 7 November2002 that had not vested as at 1 January 2005.Under UK GAAP, the Group's shares held in the Employee Share Ownership Plan(ESOP) trust were amortised within the ESOP reserve and charged to the profitand loss account. Under IFRS 2, the fair value of all share and share option awards is calculatedand then amortised in the income statement over the vesting period. Thecarrying amount of the ESOP reserve on transition to IFRS has been maintainedat the carrying amount under UK GAAP at that date. On transition to IFRS, thecumulative IFRS 2 charge has been shown within a separate Share-based Paymentreserve within Equity.Financial InstrumentsThe Group has adopted IAS 32 'Financial Instruments: Disclosure andPresentation' and IAS 39 'Financial Instruments: Recognition and Measurement'effective from 1 January 2005 and therefore there is no impact on the Group'sbalance sheet as at 1 January 2004 or 31 December 2004 on transition to IFRS. Adjustments arising from adopting IAS 39 impact the opening balance sheet at1 January 2005 as certain financial instruments, notably interest rate swaps,are recognised at fair value. The effect of these adjustments is shown insection 9.Movements in the fair value of these financial instruments are recognisedwithin a separate Hedging and Translation reserve within Equity.Accounting for PFI contractsIn March 2005, the International Financial Reporting Interpretations Committee('IFRIC') issued a draft interpretation on accounting for service concessionarrangements (PFI/PPP). The IFRIC is currently considering the commentsreceived on this draft guidance, with the final guidance expected to be issuedover coming months.Until the final guidance is issued and endorsed by the EU and in the absence ofspecific guidance within IFRS, the Group has, from 1 January 2005, recognisedthe PFI debtors relating to concession arrangements held by PFI companies atamortised costs as defined by IAS 39. The effect of adopting this policy is tomaintain an accounting treatment consistent with UK GAAP whilst ensuring thatthe accounting treatment remains consistent with existing IFRS.The draft guidance from IFRIC, if it were issued in final form, wouldpotentially require a number of changes to the accounting treatment of serviceconcession arrangements. One of the more significant aspects would be therequirement to recognise the assets associated with concession arrangements atfair value. This requirement could potentially produce a significant increasein the carrying value of the Group's PFI debtors held within PFI companies.4. Key IFRS adjustments and their impact on the financial statementsKey IFRS adjustments are outlined below, with summary financial details for thespecific accounting periods being provided in sections 5, 6, 8 and 9.IAS 31 'Interests in Joint Ventures'IAS 31 requires that interests in joint ventures are recognised usingproportionate consolidation or the alternative equity method of accounting. This is a change from the gross equity method required under UK GAAP.The Group has elected to recognise its interests in joint ventures using theproportionate consolidation method whereby the Group's share of each of theassets, liabilities, income and expenses of its joint ventures is combined lineby line with similar items in the Group's financial statements or reported asseparate line items within the Group's financial statements.Consequently, the presentation of information on joint ventures is nowcomprehensive.There is no impact on profit for the year as a result of the change.IFRS 3 'Business Combinations'IFRS prohibits the amortisation of goodwill. The goodwill amortisation chargeunder UK GAAP of ‚£15.9m for the year ended 31 December 2004 and ‚£8.1m for thesix months ended 30 June 2004 has been reversed in the IFRS restated results.IAS 38 'Intangible Assets'Franchise assets which are identifiable non-monetary assets have beenreclassified as intangible assets in accordance with IFRS requirements. Theeffect of this is to reclassify assets from goodwill to other intangible assetsof ‚£47.7m as at 1 January 2004, ‚£59.0m as at 31 December 2004 and ‚£55.8m as at30 June 2004. Net assets are not affected by this adjustment.The amortisation charge relating to these franchise assets was ‚£5.4m for theyear ended 31 December 2004 and ‚£3.0m for the six months ended 30 June 2004.In addition where the Group has recognised its share of a defined benefitpension obligation that it will fund over the period of a contract orfranchise, the liability recognised on transition to IFRS or at the beginningof the contract or franchise is treated as an intangible asset representing therights to the future economic benefits of the contract or franchise. IAS 19 'Employee Benefits': Pension scheme adjustmentsIn accordance with IAS19, the Group has recognised retirement benefitobligations in relation to defined benefit schemes. Where the Group takes on acontract and assumes the obligation to contribute variable amounts to thedefined benefit scheme throughout the contract, and it is not virtually certainthat these contributions will be recovered from the customer, the Group hasrecognised its proportionate share of the pension scheme obligations togetherwith a corresponding amount as an intangible asset, representing the right tothe future economic benefits of operating the contract or franchise over itslife. Where it is virtually certain that pension contributions will berecovered, the Group has recognised a financial asset in trade and otherreceivables.The Group has potential deferred tax assets in respect of the deficits ondefined benefit pension schemes. Under IAS 12, these are recognised to theextent that it is probable that taxable profits will be available against whichthe deductible temporary difference can be utilised. These changes have resulted in the following adjustments to the balance sheet: As at 1 As at 31 As at 30 January 2004 December 2004 June 2004 ‚£m ‚£m ‚£m Other intangible assets 4.1 15.5 16.3 Deferred tax asset 42.0 50.8 33.5 Trade and other receivables 12.1 20.0 1.2 Deferred tax liabilities - (4.0) - Retirement benefit obligation (169.9) (204.5) (161.2) Net assets (111.7) (122.2) (110.2) Under UK GAAP, the pension charge was included in cost of sales andadministrative expenses. The IAS 19 pension charge includes a service costwhich is included in cost of sales and administrative expenses, and interest onpension obligations net of the return on pension fund assets which is includedin finance costs. The amortisation of intangible assets is included withinother operating expenses. The net effect is to increase profit before tax by ‚£0.4m for the year ended 31 December 2004 and to reduce profit before tax by ‚£0.3m for the six months ended 30 June 2004.IAS 19 'Employee Benefits'; Employee benefit accruals and provisionsIAS 19 requires that when employees provide a service to a company, theestimated amount that will be paid in exchange for those services should berecognised.On transition to IFRS, the Group has recognised employee benefit accruals andprovisions in respect of holiday pay, long-term disability benefits andlong-term service award benefits. The adjustment on transition reflects acumulative adjustment for the services provided by employees up to the date oftransition. Following transition, the movement on these accruals andprovisions reflects the current period service cost.Arising from the recognition of these accruals and provisions, net of deferredtax, net assets have reduced by ‚£16.0m as at 1 January 2004, ‚£17.5m as at 31December 2004, and ‚£16.7m as at 30 June 2004.IAS 10 'Events After the Balance Sheet Date'Under IAS 10, dividends declared after the balance sheet date are notrecognised as a liability at the balance sheet date. Dividends are recorded in the Group's consolidated financial statements in theperiod in which they are approved by the Group's shareholders.The dividends proposed but not approved at the balance sheet date have beenreversed from the financial statements. This has the effect of increasing thenet assets of the Group by the amount of the proposed dividend of ‚£7.0m as at 1January 2004, ‚£8.3m as at 31 December 2004 and ‚£3.5m as at 30 June 2004.IFRS 2 'Share-based Payment'IFRS 2 'Share-based Payment' requires the recognition of an expense in relationto all share-based payments such as the Group's share and share optionschemes. The Group issues equity-settled share-based payments to certain employees andoperates an Inland Revenue approved Save As You Earn share option scheme opento eligible employees which allows the purchase of shares at a discount to themarket value. These are measured at fair value at the date of grant. The fairvalue is expensed on a straight-line basis over the vesting period, based onthe Group's estimate of shares that will eventually vest.Fair value is measured by use of the Black Scholes, Binomial or Monte CarloSimulation models depending on the type of scheme. Under UK GAAP, the Group's shares held in the ESOP trust were amortised withinthe ESOP reserve and charged to the profit and loss account. This charge hasbeen reversed and replaced with the IFRS 2 charge.The IFRS 2 charge for 2004 was ‚£4.6m and after reversing the amortisation ofshares held in the ESOP reserve of ‚£1.2m, the net effect is to reduce profitbefore tax by ‚£3.4m for the year ended 31 December 2004 and ‚£1.2m for the sixmonths ended 30 June 2004. A related deferred tax asset of ‚£0.5m as at 1January 2004, ‚£1.4m as at 31 December 2004 and ‚£0.8m as at 30 June 2004 hasbeen recognised and will be realised as and when share options vest and areexercised.IAS 12 'Income Taxes'The income tax adjustments required under IAS12 fall into two categories:Firstly, deferred tax that needs to be provided in respect of other IFRSrestatement accounting adjustments (for example, pension scheme adjustments,employee benefits accruals, goodwill). Secondly, specific deferred taxadjustments that arise on the different recognition criteria of deferred taxbalances between UK GAAP (FRS19) and IFRS (IAS12) (for example, PFI contractsand unremitted earnings from overseas subsidiaries, joint ventures andinvestments).The most significant taxation adjustments for the Group relate to the deferredtax treatment of pensions and PFI contracts. The Group has accounted fordeferred tax assets in respect of the pension related assets and deficits(refer to the above note regarding pension scheme adjustments under IAS19). The principles for the calculation of and recognition of deferred tax for PFIcontracts under IAS12 are different to those applied under FRS19. Specifically, IAS12 requires that whenever a PFI debtor is acquired as part ofa business combination, deferred tax needs to be provided upon recognition ofthat debtor for all future tax that will become payable as the debtor isrecovered. For the Group, this has resulted in additional deferred taxliabilities being recognised at the date of transition. In addition, IAS12further requires that whenever a PFI debtor is recognised but not by way of abusiness combination, deferred tax is only recognised as the debtor isrecovered - no additional deferred tax is recognised in transition and thistherefore leads to smaller deferred tax liabilities in early periods of thecontract with an increasing effective tax rate over the project life. As aresult of the change in accounting for deferred tax on PFI debtors, the taxcharge has reduced by ‚£2.5m for the year ended 31 December 2004 and ‚£0.8m forthe six months ended 30 June 2004. The additional deferred tax in the balancesheet has led to a reduction in net assets of ‚£17.6m as at 1 January 2004, ‚£18.7m as at 31 December 2004 and ‚£18.0m as at 30 June 2004. IAS 39 'Financial Instruments: Recognition and Measurement' The Group adopted IAS39 'Financial Instruments: Recognition and Measurement' on1 January 2005; the standard therefore had no effect on the Group's financialstatements prior to that date. Adoption of IAS39 resulted in a ‚£26.9m reductionin opening net assets (‚£37.9m net of a tax credit of ‚£11.0m) on1 January 2005. This represents the net effect of marking to market theinterest rate swaps, cross-currency swaps and other derivatives held by theGroup. The effect on opening net assets has been reflected in reserves. Thesederivatives are mainly held to convert the floating rate interest obligationsof PFI special purpose companies into fixed rate obligations, and to hedge theGroup's obligations under its long-term loan notes.Where the Group has elected to apply hedge accounting, all hedges are "highlyeffective" underIAS 39 on 1 January 2005 and are expected to remain so.5. 1 January 2004 - presentational changes, and equity reconciliationa) Impact of IAS1 'Presentation of Financial Statements' on the consolidatedbalance sheet as at 1 January 2004This table highlights the presentational impact of IFRS on the consolidatedbalance sheet as at 1 January 2004. Assets, liabilities and shareholders'funds are stated under UK GAAP values and format and are mapped from thisstarting position to the line item classification required under IFRS. IAS 1 Presentational changes UKGAAP UKGAAP values values in and format IFRS format ‚£m ‚£m ‚£m Fixed assets Non-current assets Intangible assets 223.0 (1.1) 221.9 Goodwill Other intangible 1.1 1.1 assets Property, plant Tangible assets 77.3 77.3 and equipment Investments in joint Investment in joint ventures 24.9 24.9 ventures Debtors due after more than one year Amounts recoverable under contracts Amounts due by joint ventures PFI Debtor PFI Assets in the course of construction Pension Prepayment Other debtors Deferred tax 1.7 1.7 asset Trade and other 395.9 395.9 receivables 325.2 397.6 722.8 Current assets Current assets Stocks 39.5 39.5 Inventories Amounts recoverable under contracts Amounts due by joint ventures Other debtors Prepayments Tax recoverable PFI debtor Debtors: Amounts Trade and other due within one year 278.9 20.4 299.3 receivables Debtors: Amounts due after more than one year 419.6 (419.6) Cash at bank and Cash and cash in hand 170.9 170.9 equivalents 908.9 (399.2) 509.7 Creditors : Amounts falling due within one year Current liabilities Trade and other Trade creditors (81.3) (257.4) (338.7) payables 1.7 1.7 Tax liabilities Obligations under (5.9) (5.9) finance leases (4.5) (4.5) Loans Accruals and deferred income (177.9) 177.9 Obligations under finance leases Other Taxes and Social Security Other creditors Amounts owed to joint ventures < 1 Year Non recourse loans Other Loans Other creditors including taxation and social security (90.9) 90.9 Proposed dividend (7.0) (7.0) Proposed dividend (357.1) 2.7 (354.4) Non-current liabilities Obligations under (17.5) (17.5) finance leases Creditors: Amounts falling due after more than one year (539.7) 17.5 (522.2) Loans (27.9) (27.9) Deferred tax liabilities Provisions for liabilities and charges (56.5) 56.5 - Provisions Retirement benefit (29.7) (29.7) obligation (596.2) (1.1) (597.3) Net assets 280.8 - 280.8 Net assets Called up share capital 8.7 8.7 Share capital Share premium Share premium account 190.8 190.8 account Own shares (16.9) (16.9) reserve Capital redemption Capital redemption reserve 0.1 0.1 reserve Profit and loss account 98.1 98.1 Retained earnings Equity shareholders' funds 280.8 - 280.8 Total equity b) Reconciliation of equity at 1 January 2004This table highlights the financial impact of the key IFRS adjustments coveredin section 4 on the consolidated balance sheet as at 1 January 2004. IAS 31 IAS138 IAS19 IAS19 IAS10 IFRS2 IAS12 Interest Employee Employee Share in joint Intangible benefits benefits based Income ventures assets -pensions -other Dividends payment taxes Other UKGAAP IFRS ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Non-current assets Goodwill 221.9 5.2 (47.7) - - - - - 0.4 179.8 Other intangible assets 1.1 - 47.7 4.1 - - - - 2.4 55.3 Property, plant and equipment 77.3 15.1 - - - - - - 1.7 94.1 Investment in joint ventures 24.9 (24.9) - - - - - - - - Deferred tax assets 1.7 - - 42.0 5.5 - 0.5 4.7 0.3 54.7 Trade and other receivables 395.9 61.2 - 42.7 - - - - (2.0) 497.8 722.8 56.6 - 88.8 5.5 - 0.5 4.7 2.8 881.7 Current assets Inventories 39.5 3.0 - - - - - - - 42.5 Trade and other receivables 299.3 50.2 - (30.6) - - - - (1.2) 317.7 Cash and cash equivalents 170.9 13.7 - - - - - - 184.6 509.7 66.9 - (30.6) - - - - (1.2) 544.8 Total assets 1,232.5 123.5 - 58.2 5.5 - 0.5 4.7 1.6 1,426.5 Current liabilities Trade and other payables (338.7) (36.9) - - (15.4) - - - 0.6 (390.4) Tax liabilities 1.7 (3.4) - - - - - - - (1.7) Obligations under finance leases (5.9) (1.3) - - - - - - (0.5) (7.7) Loans (4.5) (11.0) - - - - - - - (15.5) Proposed dividend (7.0) - - - - 7.0 - - - - (354.4) (52.6) - - (15.4) 7.0 - - 0.1 (415.3) Non-current liabilities Obligations under finance leases (17.5) (5.5) - - - - - - (1.2) (24.2) Loans (522.2) (54.6) - - - - - - - (576.8) Deferred tax liabilities (27.9) (8.6) - - (0.1) - - (22.3) - (58.9) Provisions - - - - (6.0) - - - - (6.0) Trade and other payables - - - - - - - - (3.0) (3.0) Retirement benefit obligations (29.7) (1.6) - (169.9) - - - - 2.6 (198.6) (597.3) (70.3) - (169.9) (6.1) - - (22.3) (1.6) (867.5) Net assets 280.8 0.6 (111.7) (16.0) 7.0 0.5 (17.6) 0.1 143.7 Equity Share capital 8.7 - - - - - - - - 8.7 Share premium 190.8 - - - - - - - - 190.8 Own shares reserve (16.9) - - - - - - - - (16.9) Capital redemption reserve 0.1 - - - - - - - - 0.1 Retained earnings 98.1 - 1.9 (16.0) 7.0 (1.2) (17.6) (0.6) 71.6 Share-based payment reserve - - - - - - 1.7 - - 1.7 Retirement benefit obligations reserve - - - (113.6) - - - - - (113.6) Translation reserve - - - - - - - - 0.7 0.7 280.8 - - (111.7) (16.0) 7.0 0.5 (17.6) 0.1 143.1 Minority interest - 0.6 - - - - - - - 0.6 Total equity 280.8 0.6 - (111.7) (16.0) 7.0 0.5 (17.6) 0.1 143.7 6. 31 December 2004 - presentational changes, and equity and profitreconciliationsa) Impact of IAS1 'Presentation of Financial Statements' on the consolidatedprofit and loss account for the year ended 31 December 2004This table highlights the presentational impact of IFRS on the consolidatedprofit and loss account for the year ended 31 December 2004. Income andexpense are stated under UK GAAP values and format and are mapped from thisstarting position to the line item classification required under IFRS. IAS1 Presenta- tional changes UKGAAP values UKGAAP values and format in IFRS format Profit and Loss Income Statement account ‚£m ‚£m ‚£m Turnover: Group and share of joint ventures 1,636.9 1,636.9 Less; Share of joint ventures (255.5) (255.5) Group turnover 1,381.4 1,381.4 Revenue Cost of sales (1,190.5) (1,190.5) Cost of sales Gross profit 190.9 190.9 Gross profit Amortisation of Other operating intangible assets (16.5) (16.5) expenses Other administrative Administrative expenses (139.7) (139.7) expenses Operating profit Profit from continuing operations 34.7 34.7 operations Share of operating Joint venture profit in joint ventures 25.4 25.4 operating profit Interest receivable and similar income 35.3 35.3 Investment income Interest payable and similar charges (38.0) (38.0) Finance costs Profit on ordinary activities before Profit before taxation 57.4 57.4 tax Taxation on profit on ordinary activities (20.4) (20.4) Tax Profit on ordinary activities after Profit for the taxation 37.0 37.0 year Share of joint venture minority interest (0.6) 0.6 Minority interest (0.4) 0.4 Attributable to: Equity holders 36.0 of the parent 1.0 1.0 Minority interest Profit for the financial year 36.0 1.0 37.0 Equity dividends (11.8) Retained profit for the financial year 24.2 Earnings per ordinary share (EPS) Basic EPS 8.37p 8.37p Diluted EPS 8.27p 8.27p b) Reconciliation of the income statement for the year ended 31 December 2004This table highlights the financial impact of the key IFRS adjustments coveredin section 4 on the consolidated income statement for the year ended 31December 2004. IAS 31 IFRS 3 IAS38 IAS 19 IFRS 2 IAS 12 Interest in Business Employee Share- joint combina- Intangible Benefits based Income ventures tions assets -pensions payments taxes Other UK GAAP IFRS ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Revenue 1,381.4 255.5 - - - - - - 1,636.9 Cost of sales (1,190.5) (207.1) - - 3.9 - - (0.6) (1,394.3) Gross profit 190.9 48.4 - - 3.9 - - (0.6) 242.6 Other operating expenses (16.5) - 15.9 (5.4) (1.2) - - - (7.2) Administrative expenses (139.7) (23.0) - - 0.2 (3.4) - (0.3) (166.2) Profit from operations 34.7 25.4 15.9 (5.4) 2.9 (3.4) - (0.9) 69.2 Joint venture operating profit 25.4 (25.4) - - - - - - - Investment income 35.3 *- - - - - - - 35.3 Finance costs (38.0) *- - - (2.5) - - - (40.5) Profit before tax 57.4 - 15.9 (5.4) 0.4 (3.4) - (0.9) 64.0 Tax (20.4) *- (1.5) - (0.2) 0.9 2.5 (0.8) (19.5) Profit for the year 37.0 - 14.4 (5.4) 0.2 (2.5) 2.5 (1.7) 44.5 Attributable to: Equity holders of the parent 36.0 - 14.4 (5.4) 0.2 (2.5) 2.5 (1.7) 43.5 Minority interest 1.0 - - - - - - - 1.0 37.0 - 14.4 (5.4) 0.2 (2.5) 2.5 (1.7) 44.5 Earnings per share (EPS) Basic 8.37p 10.11p Diluted 8.27p 9.99p *UK GAAP values include the Group's share of joint venture investment income,finance costs and tax.c) Impact of IAS1 'Presentation of Financial Statements' on the consolidatedbalance sheet as at 31 December 2004This table highlights the presentational impact of IFRS on the consolidatedbalance sheet as at 31 December 2004. Assets, liabilities and shareholders'funds are stated under UK GAAP values and format and are mapped from thisstarting position to the line item classification required under IFRS. IAS1 UKGAAP Presenta- UKGAAP values and tional values in format changes IFRS format ‚£m ‚£m ‚£m Non-current Fixed assets assets Intangible assets 215.2 (7.0) 208.2 Goodwill Other intangible - 7.0 7.0 assets Property, plant Tangible assets 79.5 - 79.5 and equipment Investments in Investment in joint ventures 27.2 - 27.2 joint ventures Other Other investments 13.7 - 13.7 investments Debtors due after more than one year Amounts recoverable under contracts Amounts due by joint ventures PFI Debtor PFI Assets in the course of construction Pension Prepayment Other debtors Trade and other 296.9 296.9 receivables 335.6 296.9 632.5 Current assets Current assets Stocks 36.2 (13.2) 23.0 Inventories Amounts recoverable under contracts Amounts due by joint ventures Other debtors Prepayments Tax recoverable PFI debtor Debtors: Amounts Trade and due within one other year 293.6 49.4 343.0 receivables Debtors: Amounts due after more than one year 333.6 (333.6) Cash and Cash at bank cash and in hand 173.9 173.9 equivalents 837.3 (297.4) 539.9 Creditors : Amounts falling due within one year Current liabilities Trade and Trade creditors (76.9) (275.3) (352.2) other payables Retirement benefit (0.4) (0.4) obligations Obligations under (6.5) (6.5) finance leases (23.5) (23.5) Loans Accruals and deferred income (192.0) 192.0 Obligations under finance leases Other Taxes and Social Security Other creditors Amounts owed to joint ventures < 1 Year Non recourse loans Other Loans Other creditors including taxation and social security (114.2) 114.2 Proposed dividend (8.3) (8.3) Proposed dividend (391.4) 0.5 (390.9) Non-current liabilities Creditors: Amounts falling due after more than one Obligations under year (415.1) 401.5 (13.6) finance leases (401.5) (401.5) Loans Deferred tax (32.2) (32.2) liabilities Trade and - - other payables Provisions for liabilities and charges (62.0) 62.0 - Provisions Retirement benefit (29.8) (29.8) obligation (477.1) - (477.1) Net assets 304.4 - 304.4 Net assets Called up share capital 8.7 - 8.7 Share capital Share premium Share premium account 191.5 - 191.5 account Own shares ESOP reserve (15.8) - (15.8) reserve Capital Capital redemption redemption reserve 0.1 - 0.1 reserve Profit and Retained loss account 119.9 2.7 122.6 earnings Translation (2.7) (2.7) reserve Equity shareholders' funds 304.4 - 304.4 Total equity d) Reconciliation of equity at 31 December 2004This table highlights the financial impact of the key IFRS adjustments coveredin section 4 on the consolidated balance sheet as at 31 December 2004. IAS 31 IFRS3 IAS 38 IAS19 IAS19 IAS10 IFRS2 IAS12 UK Interest Business Employee Employee Share GAAP in joint combin- Intangible benefits benefits based Income ventures ations assets -pensions -other Dividends payment taxes Other IFRS ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Non-current assets Goodwill 208.2 11.4 15.9 (59.0) - - - - - 0.9 177.4 Other intangible assets 7.0 - - 53.6 15.5 - - - - (1.1) 75.0 Property, plant and equipment 79.5 16.0 - - - - - - - 0.7 96.2 Investment in joint ventures 27.2 (27.2) - - - - - - - - - Other investments 13.7 - - - - - - - - - 13.7 Deferred tax assets - 1.3 - - 50.8 5.4 - 1.4 (12.2) 3.4 50.1 Trade and other receivables 296.9 62.6 - - 32.3 - - - - (1.2) 390.6 632.5 64.1 15.9 (5.4) 98.6 5.4 - 1.4 (12.2) 2.7 803.0 Current assets Inventories 23.0 3.9 - - - - - - - - 26.9 Trade and other receivables 343.0 56.7 - - (12.3) - - - - 2.7 390.1 Cash and cash equivalents 173.9 27.2 - - - - - - - (0.6) 200.5 539.9 87.8 - - (12.3) - - - - 2.1 617.5 Current liabilities Trade and other payables (352.2) (47.4) - - - (16.9) - - - (0.5) (417.0) Retirement benefit obligation (0.4) - - - 0.4 - - - - - Tax liabilities - (3.9) - - - - - - - (1.9) (5.8) Obligations under finance leases (6.5) (1.3) - - - - - - - (0.3) (8.1) Loans (23.5) (22.6) - - - - - - - (0.3) (46.4) Proposed dividend (8.3) - - - - - 8.3 - - - - (390.9) (75.2) - - 0.4 (16.9) 8.3 - - (3.0) (477.3) Non-current liabilities Obligations under finance leases (13.6) (4.2) - - - - - - - (0.4) (18.2) Loans (401.5) (50.1) - - - - - - - 0.3 (451.3) Deferred tax liabilities (32.2) (10.4) (1.5) - (4.0) - - - (6.5) (0.4) (55.0) Trade and other payables - (1.1) - - - - - - - 0.5 (0.6) Provisions - - - - - (6.0) - - - - (6.0) Retirement benefit obligations (29.8) (9.2) - - (204.9) - - - - 1.0 (242.9) (477.1) (75.0) - - (208.9) (6.0) - - (6.5) 1.0 (774.0) Net assets 304.4 1.7 14.4 (5.4) (122.2) (17.5) 8.3 1.4 (18.7) 2.8 169.2 Equity Share capital 8.7 - - - - - - - - - 8.7 Share premium 191.5 - - - - - - - - - 191.5 Own shares reserve (15.8) - - - - - - (0.6) - - (16.4) Capital redemption reserve 0.1 - - - - - - - - - 0.1 Retained earnings 122.6 - 14.4 (5.4) 2.2 (17.5) 8.3 (4.2) (18.7) 2.7 104.4 Share-based payment reserve - - - - - - - 6.2 - - 6.2 Retirement benefit obligations reserve - - - - (124.4) - - - - - (124.4) Translation reserve (2.7) - - - - - - - - 0.1 (2.6) 304.4 - 14.4 (5.4) (122.2) (17.5) 8.3 1.4 (18.7) 2.8 167.5 Minority interest - 1.7 - - - - - - - - 1.7 Total equity 304.4 1.7 14.4 (5.4) (122.2) (17.5) 8.3 1.4 (18.7) 2.8 169.2 7. Independent Auditors' Report To The Board Of Directors Of SercoGroup Plc On The 2004 Reconciliations We have audited the reconciliations of the consolidated balance sheet at 1January 2004 and 31 December 2004 and consolidated income statement for theyear ended 31 December 2004 between UK GAAP and International FinancialReporting Standards ('IFRS'), (together "the 2004 Reconciliations").This report is made solely to the Board of Directors, in accordance with ourengagement letter dated 30 August March2004 2005 and solely for the purpose ofassisting with the transition to IFRS. Our audit work has been undertaken sothat we might state to the Company's board of directors those matters we arerequired to state to them in an auditors' report and for no other purpose. Tothe fullest extent permitted by law, we will not accept or assumeresponsibility to anyone other than the company for our audit work, for ourreport, or for the opinions we have formed.Respective responsibilities of directors and auditorsThe Company's directors are responsible for ensuring that the Company and theGroup maintains proper accounting records and for the preparation of the 2004Reconciliations on the basis set out in section 10, which describes how IFRSwill be applied under IFRS 1, including the assumptions the directors have madeabout the standards and interpretations expected to be effective, and thepolicies expected to be adopted, when the company prepares its first completeset of IFRS financial statements as at 31 December 2005. Our responsibility isto audit the 2004 Reconciliations in accordance with relevant United Kingdomlegal and regulatory requirements and auditing standards and report to you ouropinion as to whether the 2004 Reconciliations are prepared, in all materialrespects, on the basis set out in section 10.Basis of audit opinionWe conducted our audit in accordance with United Kingdom auditing standardsissued by the Auditing Practices Board. An audit includes examination, on atest basis, of evidence relevant to the amounts and disclosures in the 2004Reconciliations. It also includes an assessment of the significant estimatesand judgements made by the directors in the preparation of the 2004Reconciliations and of whether the accounting policies are appropriate to thecircumstances of the Group, consistently applied and adequately disclosed.We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the 2004 Reconciliationsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion, we also evaluated the overalladequacy of the presentation of information in the 2004 Reconciliations.Without qualifying our opinion, we draw attention to section 10 which explainswhy there is a possibility that the 2004 Reconciliations may require adjustmentbefore constituting the final 2004 Reconciliations. Moreover, we drawattention to the fact that, under IFRS, only a complete set of financialstatements comprising a balance sheet, income statement, statement of changesin equity, cash flow statement, together with comparative financial informationand explanatory notes, can provide a fair presentation of the Group's financialposition, results of operations and cash flows in accordance with IFRS.OpinionIn our opinion the 2004 Reconciliations are prepared, in all material respects,on the basis set out in section 10 which describes how IFRS will be appliedunder IFRS 1, including the assumptions the directors have made about thestandards and interpretations expected to be effective, and the policiesexpected to be adopted, when the company prepares its first complete set ofIFRS financial statements as at 31 December 2005.Deloitte & Touche LLPChartered AccountantsLondon31 August 2005 8. 30 June 2004 - presentational changes, and equity and profit reconciliationsa) Impact of IAS1 'Presentation of Financial Statements' on the consolidatedprofit and loss account for the six months ended 30 June 2004This table highlights the presentational impact of IFRS on the consolidatedprofit and loss account for the six months ended 30 June 2004. Income andexpense are stated under UK GAAP values and format and are mapped from thisstarting position to the line item classification required under IFRS. IAS1 UKGAAP UKGAAP Presenta- values values and tional in IFRS format changes format Income Statement Profit and Loss account ‚£m ‚£m ‚£m Turnover: Group and share of joint venture 804.5 804.5 Less: Share of joint ventures (120.4) (120.4) Group turnover 684.1 684.1 Revenue Cost of Cost of sales (589.5) (589.5) sales Gross Gross profit 94.6 94.6 profit Other Amortisation of operating intangible assets (8.4) (8.4) expenses Other administrative Administrative expenses (68.9) (68.9) expenses Operating profit continuing Profit from operations 17.3 17.3 operations Share of Joint venture operating profit operating in joint ventures 11.8 11.8 profit Investment 17.5 17.5 income Finance (18.5) (18.5) costs Net interest and similar income (1.0) 1.0 Profit on ordinary activities before Profit before taxation 28.1 - 28.1 tax Taxation on profit on ordinary activities (10.1) (10.1) Tax Profit on ordinary activities Profit for after taxation 18.0 18.0 the year Share of joint venture minority interest (0.1) 0.1 Attributable to: Minority interest (0.1) 0.1 Equity holders 17.8 of the parent Minority 0.2 0.2 interest Profit for the financial year 17.8 0.2 18.0 Equity dividends (3.5) Retained profit for the financial year 14.3 Earnings per ordinary share (EPS) Basic EPS 4.14p 4.14p Diluted EPS 4.09p 4.09p b) Reconciliation of the income statement for the six months ended 30 June 2004This table highlights the financial impact of the key IFRS adjustments coveredin section 4 on the consolidated income statement for the six months ended 30June 2004. IAS 31 IFRS3 IAS38 IAS19 IFRS2 IAS12 Interest Business Employee Share- in joint combina- Intangible Benefits - based Income ventures tions assets pensions payments taxes Other UKGAAP IFRS ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Revenue 684.1 120.4 - - - - - - 804.5 Cost of sales (589.5) (99.4) - - 1.3 - - (0.3) (687.9) Gross profit 94.6 21.0 - - 1.3 - - (0.3) 116.6 Other operating expenses (8.4) - 8.1 (3.0) (0.4) - - - (3.7) Administrative expenses (68.9) (9.2) - - - (1.2) - (0.7) (80.0) Profit from operations 17.3 11.8 8.1 (3.0) 0.9 (1.2) - (1.0) 32.9 Joint venture operating profit 11.8 (11.8) - - - - - - - Investment income 17.5 *- - - - - - - 17.5 Finance costs (18.5) *- - - (1.2) - - - (19.7) Profit before tax 28.1 - 8.1 (3.0) (0.3) (1.2) - (1.0) 30.7 Tax (10.1) *- (0.9) - 0.1 0.3 0.8 0.1 (9.7) Profit for the year 18.0 - 7.2 (3.0) (0.2) (0.9) 0.8 (0.9) 21.0 Attributable to: Equity holders of the parent 17.8 - 7.2 (3.0) (0.2) (0.9) 0.8 (0.9) 20.8 Minority interest 0.2 - - - - - - - 0.2 18.0 - 7.2 (3.0) (0.2) (0.9) 0.8 (0.9) 21.0 Earnings per share (EPS) Basic EPS 4.14p 4.84p Diluted EPS 4.09p 4.78p *UK GAAP values include the Group's share of joint venture investment income,finance costs and tax. c) Impact of IAS1 'Presentation of Financial Statements' on the consolidatedbalance sheet as at 30 June 2004This table highlights the presentational impact of IFRS on the consolidatedbalance sheet as at 30 June 2004. Assets, liabilities and shareholders' fundsare stated under UK GAAP values and format and are mapped from this startingposition to the line item classification required under IFRS. IAS1 UKGAAP Presenta- UKGAAP values and tional values in format changes IFRS format ‚£m ‚£m ‚£m Non-current Fixed assets assets Intangible assets 215.1 (1.1) 214.0 Goodwill Other intangible 1.0 1.0 assets Tangible Property, plant assets 72.0 72.0 and equipment Investments in Investment in joint ventures 27.5 27.5 joint ventures Debtors due after more than one year Amounts recoverable under contracts Amounts due by joint ventures PFI Debtor PFI Assets in the course of construction Pension Prepayment Other debtors Trade and 378.0 378.0 other receivables 314.6 377.9 692.5 Current assets Current assets Stocks 41.0 (13.3) 27.7 Inventories Amounts recoverable under contracts Amounts due by joint ventures Other debtors Prepayments Tax recoverable PFI debtor Debtors: Amounts due within one Trade and year 276.2 45.7 321.9 other receivables Debtors: Amounts due after more than one year 410.4 (410.4) Cash at bank Cash and and in hand 168.3 - 168.3 cash equivalents 895.9 (378.0) 517.9 Creditors : Amounts falling due within one year Current liabilities Trade and Trade creditors (70.7) (247.5) (318.2) other payables (6.8) (6.8) Tax liabilities Obligations under finance (5.7) (5.7) leases (0.6) (0.6) Loans Accruals and deferred income (174.5) 174.5 Obligations under finance leases Other Taxes and Social Security Other creditors Amounts owed to joint ventures < 1 Year Non recourse loans Other Loans Other creditors including taxation and social security (86.1) 86.1 Proposed dividend (3.5) (3.5) Proposed dividend (334.8) - (334.8) Non-current liabilities Obligations under finance (15.5) (15.5) leases Creditors: Amounts falling due after more than one year (526.0) 15.6 (510.4) Loans Deferred tax (27.7) (27.7) liabilities Provisions for liabilities and charges (56.2) 56.2 - Provisions Retirement benefit (28.5) (28.5) obligation (582.2) 0.1 (582.1) Net assets 293.5 - 293.5 Net assets Called up share capital 8.7 8.7 Share capital Share premium Share premium account 190.9 190.9 account Own shares ESOP reserve (16.2) (16.2) reserve Capital Capital redemption redemption reserve 0.1 0.1 reserve Profit and loss Retained account 110.0 110.0 earnings Equity shareholders' funds 293.5 - 293.5 Total equity d) Reconciliation of equity at 30 June 2004This table highlights the financial impact of the key IFRS adjustments coveredin section 4 on the consolidated balance sheet as at 30 June 2004. IAS 31 IFRS3 IAS 38 IAS19 IAS19 IAS10 IFRS2 IAS12 Interest in Business Employee Employee Share joint combina- Intangible Benefits Benefits based Income ventures tions assets -pensions -other Dividends payment taxes Other UK GAAP IFRS ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Non-current assets Goodwill 214.0 5.1 8.1 (55.8) - - - - - (4.6) 166.8 Other intangible assets 1.0 - - 52.8 16.3 - - - - 0.8 70.9 Property, plant and equipment 72.0 13.7 - - - - - - - 1.2 86.9 Investment in joint ventures 27.5 (27.5) - - - - - - - - - Deferred tax assets - 0.9 - - 33.5 5.5 - 0.8 (3.7) 1.7 38.7 Trade and other receivables 378.0 61.6 - - 1.2 - - - - (1.7) 439.1 692.5 53.8 8.1 (3.0) 51.0 5.5 - 0.8 (3.7) (2.6) 802.4 Current assets Inventories 27.7 2.3 - - - - - - - - 30.0 Trade and other receivables 321.9 52.5 - - - - - - - 0.4 374.8 Cash and cash equivalents 168.3 15.8 - - - - - - - - 184.1 517.9 70.6 - - - - - - - 0.4 588.9 Current liabilities Trade and other payables (318.2) (33.9) - - - (16.2) - - - - (368.3) Tax liabilities (6.8) (4.0) - - - - - - - - (10.8) Obligations under finance leases (5.7) (1.4) - - - - - - - (0.4) (7.5) Loans (0.6) (16.2) - - - - - - - (0.1) (16.9) Proposed dividend (3.5) - - - - - 3.5 - - - (334.8) (55.5) - - - (16.2) 3.5 - - (0.5) (403.5) Non-current liabilities Obligations under finance leases (15.5) (4.7) - - - - - - - (0.6) (20.8) Loans (510.4) (51.3) - - - - - - - - (561.7) Deferred tax liabilities (27.7) (7.8) (0.9) - - - - - (14.3) - (50.7) Provisions - - - - - (6.0) - - - - (6.0) Trade and other payables - (4.3) - - - - - - - - (4.3) Retirement benefit obligations (28.5) - - - (161.2) - - - - - (189.7) (582.1) (68.1) (0.9) - (161.2) (6.0) - - (14.3) (0.6) (833.2) Net assets 293.5 0.8 7.2 (3.0) (110.2) (16.7) 3.5 0.8 (18.0) (3.3) 154.6 Equity Share capital 8.7 - - - - - - - - - 8.7 Share premium 190.9 - - - - - - - - - 190.9 Own shares reserve (16.2) - - - - - - (0.7) - - (16.9) Capital redemption reserve 0.1 - - - - - - - - - 0.1 Retained earnings 112.4 - 7.2 (3.0) 1.1 (16.7) 3.5 (2.0) (18.0) 0.9 85.4 Share-based payment reserve - - - - - - 3.5 - - 3.5 Retirement benefit obligations reserve - - - - (111.3) - - - - - (111.3) Translation reserve (2.4) - - - - - - - - (4.2) (6.6) 293.5 - 7.2 (3.0) (110.2) (16.7) 3.5 0.8 (18.0) (3.3) 153.8 Minority interest - 0.8 - - - - - - - - 0.8 Total equity 293.5 0.8 7.2 (3.0) (110.2) (16.7) 3.5 0.8 (18.0) (3.3) 154.6 9. Reconciliation of equity at 1 January 2005 as a result of adopting IAS 32and IAS 39 As at 31 IAS 32 and As at 1 December 2004 IAS 39 January 2005 Restated under Financial Restated IFRS instruments under IFRS ‚£m ‚£m ‚£m Non-current assets 803.0 11.0 814.0 Current assets 617.5 - 617.5 Current liabilities (477.3) (4.3) (481.6) Non-current liabilities (774.0) (33.6) (807.6) Net assets 169.2 (26.9) 142.3 10. Significant accounting policiesThe financial information has been prepared on the basis of financial reportingstandards expected to be applicable at 31 December 2005. These are subject toongoing review and endorsement by the European Union or possible amendment byinterpretive guidance from the International Accounting Standards Board('IASB') and the International Financial Reporting Interpretations Committee('IFRIC') and are therefore still subject to change.The financial information has been prepared on the historical cost basis. Theprincipal accounting policies adopted are set out below.Presentation of financial informationThe primary statements within the financial information contained in thisdocument have been presented substantially in accordance with IAS 1'Presentation of Financial Statements'. However, this format and presentationmay require modification in the event that further guidance is issued and aspractice develops.Basis of consolidationThe consolidated financial statements incorporate the financial statements ofthe Company, entities controlled by the Company (its subsidiaries) and entitiesjointly controlled by the Company (its joint ventures) made up to 31 Decembereach year. Control is achieved where the Company has the power to govern thefinancial and operating policies of an investee entity so as to obtain benefitsfrom its activities.On acquisition, the assets and liabilities and contingent liabilities of asubsidiary are measured at their fair values at the date of acquisition. Anyexcess of the cost of acquisition over the fair values of the identified netassets acquired is recognised as goodwill. Any deficiency of the cost ofacquisition below the fair values of the identifiable net assets acquired (i.e.discount on acquisition) is credited to the profit and loss account in theperiod of acquisition. The results of subsidiaries and joint ventures acquired or disposed of duringthe year are included in the consolidated income statement from the effectivedate of acquisition or up to the effective date of disposal as appropriate.Where necessary, adjustments are made to the financial statements ofsubsidiaries and joint ventures to bring accounting policies used into linewith those used by the Group.All intragroup transactions, balances, income and expenses are eliminated onconsolidation.Investments in joint venturesThe Group's investments in joint ventures are reported in the financialstatements using the proportionate consolidation method, whereby the Group'sshare of each of the assets, liabilities, income and expenses of its jointventures is combined line by line with similar items in the Group's financialstatements or reported as separate line items within the Group's financialstatements.GoodwillGoodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiable netassets and liabilities of a subsidiary, or jointly-controlled entity at thedate of acquisition.Goodwill is recognised as an asset. Goodwill is not amortised and is reviewedfor impairment at least annually. Any impairment is recognised immediately inthe income statement and is not subsequently reversed.On disposal of a subsidiary or jointly-controlled entity, the attributableamount of goodwill is included in the determination of the profit or loss ondisposal.Goodwill arising on acquisitions before the date of transition to IFRS has beenretained at the previous UK GAAP amounts subject to being tested for impairmentat that date. Goodwill written off to reserves under UK GAAP prior to 1998 hasnot been reinstated.Revenue recognitionRevenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for goods and services provided inthe normal course of business, net of discounts, VAT and other sales-relatedtaxes.Sales of goods are recognised when goods are delivered and title has passed.Revenue from long-term project-based contracts is recognised in accordance withthe Group's accounting policy below.Interest income is accrued on a time basis, by reference to the principaloutstanding and at the effective interest rate applicable, which is the ratethat exactly discounts estimated future cash receipts through the expected lifeof the financial asset to that asset's net carrying amount.Dividend income from investments is recognised when the shareholders' rights toreceive payment have been established.Segmental informationSegmental information is based on two segment formats: the primary formatreflects the Group's management structure, whereas the secondary format isgeographically-orientated.Unallocated items comprise mainly corporate expenses. Specific corporateexpenses are allocated to the corresponding segments. Segment assets comprisegoodwill, other intangible assets, property, plant and equipment, other debtorsand prepayments, inventories, and trade and other receivables (excludingcorporation tax recoverable). Liabilities comprise trade and other payables,retirement benefit obligations, and other creditors. Eliminations representinter-company balances between the different segments.Long-term project-based contractsThe Group has a number of long-term contracts for the provision of complex,project-based services. Where the outcome of such long-term project-basedcontracts can be measured reliably, revenue and costs are recognised byreference to the stage of completion of the contract activity at the balancesheet date. This is measured by the proportion that contract costs incurredfor work performed to date bear to the estimated total contract costs, exceptwhere this would not be representative of the stage of completion. Variationsin contract work, claims and incentive payments are included to the extent thatthey have been agreed with the customer.Where the outcome of a long-term project-based contract cannot be estimatedreliably, contract revenue is recognised to the extent of contract costs thatit is probable will be recovered. Contract costs are recognised as expenses inthe period in which they are incurred.When it is probable that the total contract costs will exceed total contractrevenue, the expected loss is recognised as an expense immediately.All bid costs are expensed through the income statement up to the point wherecontract award (or full recovery of costs) is virtually certain. Bid costsincurred after this point are then capitalised within trade and otherreceivables. On contract award these bid costs are amortised through theincome statement over the contract period by reference to the stage ofcompletion of the contract activity at the balance sheet date.LeasesLeases are classified as finance leases whenever the terms of the leasetransfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.Assets held under finance leases are recognised as assets of the Group at fairvalue or, if lower, at the present value of minimum lease payments determinedat the inception of the lease. The corresponding liability to the lessor isincluded in the balance sheet as a finance lease obligation. Lease paymentsare apportioned between finance charges and reduction of the lease obligationso as to achieve a constant rate of interest on the remaining balance of theliability. Finance charges are charged directly against income, unless theyare directly attributable to a qualifying asset, in which case they arecapitalised in accordance with the Group's policy on borrowing costs (seebelow).Rentals payable under operating leases are charged to income on a straight-linebasis over the term of the relevant lease.Foreign currenciesTransactions in currencies other than pounds sterling are recorded at the ratesof exchange on the dates of the transactions. At each balance sheet date,monetary assets and liabilities that are denominated in foreign currencies areretranslated at the rates prevailing on the balance sheet date. Non-monetaryassets and liabilities carried at fair value that are denominated in foreigncurrencies are translated at the date when the fair value was determined. Gains and losses arising on retranslation are included in the net profit orloss for the period, except for exchange differences arising on non-monetaryassets and liabilities where the changes in fair value are recognised directlyin equity.On consolidation, the assets and liabilities of the Group's overseas operationsare translated at exchange rates prevailing on the balance sheet date. Incomeand expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are classified as equity and transferredto the Group's translation reserve. Such translation differences arerecognised as income or expenses in the period in which the operation isdisposed of.Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate.Borrowing costsBorrowing costs directly attributable to the acquisition, construction orproduction of qualifying assets, which are assets that necessarily take asubstantial period of time to get ready for their intended use or sale, areadded to the cost of those assets, until such time as the assets aresubstantially ready for their intended use or sale.All other borrowing costs are recognised in profit or loss in the period inwhich they are incurred.Profit from operationsProfit from operations is stated after charging restructuring costs and beforeinvestment income and finance costs.Retirement benefit costsPayments to defined contribution pension schemes are charged as an expense asthey fall due.For defined benefit pension schemes, the cost of providing benefits isdetermined using the Projected Unit Credit Method, with actuarial valuationsbeing carried out at each balance sheet date. Actuarial gains and losses arerecognised in full in the period in which they occur. They are recognisedoutside the income statement and are presented in the consolidated statement ofrecognised income and expense.Past service cost is recognised immediately to the extent that the benefits arealready vested, and is amortised on a straight-line basis over the averageperiod until the benefit becomes vested.The retirement benefit obligation recognised in the balance sheet representsthe present value of the defined benefit obligation as adjusted forunrecognised past service costs, and as reduced by the fair value of schemeassets. Any asset resulting from this calculation is limited to past servicecost, plus the present value of available refunds and reductions in futurecontributions to the plan.Defined benefit obligations arising from contractual obligationsWhere the Group takes on a contract and assumes the obligation to contributevariable amounts to the defined benefit pension scheme throughout the period ofthe contract and it is not virtually certain that the contributions will berecovered from the customer, the Group's share of the defined benefitobligation less its share of the pension scheme assets that it will fund overthe period of the contract is recognised as a liability at the start of thecontract with a corresponding amount being recognised as an intangible asset. The intangible assets which reflects the Group's right to manage and operatethe contract, is amortised over the contract period. Subsequent actuarial gainsand losses in relation to the Group's share of pension obligation arerecognised outside the income statement and are presented in the consolidatedstatement of recognised income and expense.Where the Group takes on a contract and assumes the obligation to contributevariable amounts to the defined benefit pension scheme throughout the period ofthe contract and it is virtually certain that the contributions will berecovered from the customer, the Group's share of the defined benefitobligation less its share of the pension scheme assets are recognised as aliability at the start of the contract with a corresponding amount beingrecognised as a financial asset at fair value, being the fair value of thereimburseable rights. In the consolidated income statement, the expenserelating to the defined benefit plan is presented net of the amount recognisedfor reimbursement. Subsequent actuarial gains and losses in relation to theGroup's share of pension obligations are recognised outside the incomestatement and are presented in the consolidated statement of recognised incomeand expense. The change in fair value of the reimburseable right that is notpresented in the income statement is reported in the consolidated statement ofrecognised income and expense.Multi-employer pension schemesMulti- employer pension schemes are classified as a defined contributionpension scheme or a defined benefit scheme under the terms of the scheme.When sufficient information is not available to use defined benefit accountingfor a multi-employer defined benefit pension scheme, the Group accounts for thescheme as if it were a defined contribution scheme.TaxationThe tax expense represents the sum of current tax expense and deferred taxexpense.Current tax expense is based on taxable profit for the year. Taxable profitdiffers from net profit as reported in the income statement because it excludesitems of income or expense that are taxable or deductible in other years and itfurther excludes items that are never taxable or deductible. The Group'sliability for current tax is calculated using tax rates that have been enactedor substantively enacted by the balance sheet date.Deferred tax is provided, using the liability method, on temporary differencesat the balance sheet date between the tax bases of assets and liabilities andtheir carrying amounts for accounting purposes.Deferred tax liabilities are generally recognised for all taxable temporarydifferences. Deferred tax assets are generally recognised for all deductibletemporary differences, carry forward of unused tax credits and unused taxlosses, to the extent that it is probable that taxable profit will be availableagainst which these items can be utilised.Such assets and liabilities are not recognised if the temporary differencearises from goodwill or from the initial recognition of an asset and liabilityin a transaction that is not a business combination and, at the time of thetransaction, affects neither the tax profit nor the accounting profit.Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and joint ventures, except where theGroup is able to control the reversal of the temporary difference and it isprobable that the temporary difference will not reverse in the foreseeablefuture.The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to beutilised.Deferred tax is measured at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised, based upon taxrates and legislation that have been enacted or substantively enacted at thebalance sheet date. Deferred tax is charged or credited to the incomestatement, except where it relates to items charged or credited directly toequity, in which case the deferred tax is also recognised in equity.Property, plant and equipmentAssets held for use in the rendering of services, or for administrativepurposes, are stated in the balance sheet at cost, net of accumulateddepreciation and any provision for impairment.Depreciation is provided on a straight-line basis at rates to reduce the assetsto their residual value over their estimated useful lives.The principal annual rates used are:Freehold buildings 2.5% Short-leasehold The higher of 10% building or the rate improvements produced by lease term Machinery 15% - 20% Motor vehicles 18% - 50% Furniture 10% Office equipment 20% - 33% Leased equipment The higher of the rate produced by lease term or useful life The gain or loss arising on the disposal or retirement of an asset isdetermined as the difference between the sales proceeds and the carrying amountof the asset and is recognised in income.Other intangible assetsDevelopment expenditure relating to software is capitalised as an intangibleasset only if all of the following conditions are met:An asset is created that can be identifiedIt is probable that the asset created will generate future economic benefitsThe development cost of the asset can be measured reliablyDevelopment expenditure is amortised over the period in which the Group isexpected to benefit. This period is between three to five years, or the lengthof the contract if longer. Provision is also made for impairment. All otherdevelopment expenditure is written off as incurred.Licences comprise premiums paid for the acquisition of licences, which areamortised on a straight line basis over the life of the licence.Franchises represent bid costs relating to costs incurred in obtainingfranchise rights, and franchise goodwill arising on the acquisition offranchises. These are amortised on a straight-line basis over the life of thefranchise. Impairment of tangible and intangible assets excluding goodwillAt each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indicationthat those assets have suffered an impairment loss. If any such indicationexists, the recoverable amount of the asset is estimated in order to determinethe extent of the impairment loss (if any). Where the asset does not generatecash flows that are independent from other assets, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use the estimated future cash flows are discountedto their present value using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to theasset for which the estimates of future cash flows have not been adjusted.If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset(cash-generating unit) is reduced to its recoverable amount. An impairmentloss is recognised as an expense immediately.Where an impairment loss subsequently reverses, the carrying amount of theasset (cash-generating unit) is increased to the revised estimate of itsrecoverable amount, but so that the increased carrying amount does not exceedthe carrying amount that would have been determined had no impairment loss beenrecognised for the asset (cash-generating unit) in prior years. A reversal ofan impairment loss is recognised as income immediately.Impairment losses and reversals are included within administrative expenseswithin the income consolidated statement.InventoriesInventories are stated at the lower of cost and net realisable value. Whereapplicable, cost includes an appropriate proportion of direct material andlabour.Share-based paymentThe Group has applied the requirements of IFRS 2 'Share-based Payment'. Inaccordance with the transitional provisions, IFRS 2 has been applied to allgrants of equity instruments after 7 November 2002 that were unvested as of 1January 2005.The Group issues equity-settled share-based payments to certain employees andoperates an Inland Revenue approved Save As You Earn share option scheme opento eligible employees which allows the purchase of shares at a discount. Theseare measured at fair value at the date of grant. The fair value is expensed ona straight-line basis over the vesting period, based on the Group's estimate ofshares that will eventually vest.Fair value is measured by use of the Black Scholes, Binomial or Monte CarloSimulation models depending on the type of scheme. The expected life used inthe models has been adjusted, based on management's best estimate, for theeffects of non-transferability, exercise restrictions, and behaviouralconsiderations. Where relevant, the value of the option has also been adjustedto take account of market conditions applicable to the option.Accounting for PFI contractsWithin Public Private Partnership (PPP) projects (including Private FinanceInitiative (PFI) projects), where the concession agreement transfers limitedrisks and rewards associated with ownership to the contractors, during theperiod of initial asset construction costs incurred as a direct consequence offinancing, designing and constructing the asset are shown as "PFI assets in thecourse of construction" within trade and other receivables. On completion ofthe asset construction phase the asset is transferred within trade and otherreceivables to a "PFI debtor."Revenues received from the customer are apportioned between capital repaymentsand operating revenue. The 'finance income' element of the capital repayment isshown as notional interest receivable within investment income.The Group has fully owned Special Purpose Companies (SPC) which are used forthe purpose of running the PFI business. All other SPCs are joint ventures andaccounted for using the proportionate consolidation method.Cash and cash equivalentsCash and cash equivalents comprise cash in hand and balances with banks andsimilar institutions, which are readily convertible to known amounts of cashand which are subject to insignificant changes in value and have a maturity ofthree months or less. This definition is also used for the consolidated cashflow statement.DividendsDividends are recorded in the Group's consolidated financial statements in theperiod in which they are approved by the Group's shareholders.DebtDebt is initially stated at the amount of the net proceeds after deduction ofissue costs. The carrying amount is increased by the finance cost in respectof the accounting period and reduced by payments made in the period.Debt of certain Special Purpose Companies and joint ventures is described asnon recourse debt. Debt is described as non recourse debt only if the debtfunds the construction or ownership of a specific asset and the securitygranted to the relevant lenders is limited to the shares in the borrowingcompany and the assets and cash flows of the borrowing company.Derivative financial instruments and hedging activitiesThe Group has adopted IAS39 'Financial Instruments: Recognition andMeasurement' with effect from1 January 2005. Derivatives are initially accounted and measured at fair valueon the date a derivative contract is entered into and subsequently measured atfair value. The gain or loss on re-measurement is taken to the incomestatement except where the derivative is a designated cash flow hedginginstrument. The accounting treatment of derivatives classified as hedgesdepends on their designation, which occurs on the date that the derivativecontract is committed to. The Group designates derivatives as:A hedge of the fair value of an asset or liability ('fair value hedge').A hedge of the income/cost of a highly probable forecast transaction orcommitment ('cash flow hedge').A hedge of net investment in a foreign entity.Gains or losses on fair value hedges that are regarded as highly effective arerecorded in the income statement with the gain or loss on the hedged itemattributable to the hedged risk.Gains or losses on cash flow hedges that are regarded as highly effective arerecognised in equity. Where the forecast transaction results in a financialasset or liability only gains or losses previously recognised in equity arereclassified to profit or loss in the same period as the asset or liabilityaffects profit or loss. Where the forecast transaction or commitment resultsin a non-financial asset or a liability, then any gains or losses previouslydeferred in equity are included in the cost of the related asset or liability. If the forecast transaction or commitment results in future income orexpenditure, gains or losses deferred in equity are transferred to the incomestatement in the same period as the underlying income or expenditure. Theineffective portion of the gain or loss on the hedging instrument is recognisedin profit or loss.For the portion of hedges deemed ineffective or transactions that do notqualify for hedge accounting under IAS 39, any change in assets or liabilitiesis recognised immediately in the income statement. Where a hedge no longermeets the effectiveness criteria, any gains or losses deferred in equity areonly transferred to the income statement when the committed or forecasttransaction is recognised in the income statement. However, where cash flowhedge accounting has been applied for a forecast or committed transaction thatis no longer expected to occur, then the cumulative gain or loss that has beenrecorded in equity is transferred to the income statement. When a hedginginstrument expires or is sold, any cumulative gain or loss existing in equityat that time remains in equity and is recognised when the forecast transactionis ultimately recognised in the income statement.Where the group hedges net investments in foreign entities through currencyborrowings, the gains or losses on the translation of the borrowings arerecognised in equity. Gains and losses accumulated in equity are included inthe income statement when the foreign operation is disposed of.For further information please contact Serco Group plc: +44 (0) 1256 745 900Dominic Cheetham, Corporate Communications DirectorRichard Hollins, Head of Investor Relationswww.serco.comENDSERCO GROUP PLCRelated Shares:
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