28th Sep 2005 06:01
FirstGroup plcRestatement of financial information under International Financial ReportingStandardsUnder EU regulations, FirstGroup Plc is required to report its half year andfull year result for 2005/06 under International Financial Reporting Standards("IFRS"). The results for the year ended 31 March 2006 will form the first setof report and accounts produced under IFRS, with comparatives restated for theyear ended 31 March 2005. The date of transition to IFRS is therefore 1 April2004.This report comprises a narrative explanation of the significant changes andthe impact of adopting IFRS for the first time. Full details of the accountingpolicies adopted under IFRS, with reconciliations for the Balance sheets andIncome statements of the movement from UK GAAP to IFRS for the half year ended30 September 2004 and for the year ended 31 March 2005 are available on ourwebsite www.firstgroup.com.The following financial information is unaudited. It represents our currentbest estimates and has been prepared on the basis of financial reportingstandards expected to be applicable at 31 March 2006. This is subject toongoing review and may be impacted by changes to IFRS or the interpretationthereof and is therefore still subject to change.Overview of impact: * 2004/05 Group net cash flow remains unchanged * 2004/05 Group profit before tax of ‚£155.7m (UK GAAP: ‚£128.9m) * Net assets at 31 March 2005 of ‚£216.3 m (UK GAAP: ‚£358.2m) * 2004/05 adjusted basic EPS of 28.9p (UK GAAP: 28.2p) Group profit before tax has increased by ‚£26.8m. This is due to three factors:the reversal of the amortisation of goodwill prohibited by IFRS 3; a reductionin the IAS 19 pensions charge compared to the SSAP 24 charge and; therecognition of a charge for share-based equity payments.As at 31 March 2005, net assets have decreased under IFRS by ‚£141.9m. The mostsignificant factors are : the recognition of defined benefit pensionliabilities, the recognition of of deferred tax on gains on property disposals;the derecognition of the final dividend proposed after year end and; thereversal of the amortisation of goodwill net of tax.First time adoption.The Group has applied IFRS 1 `First-time Adoption of International FinancialReporting Standards' to provide a starting point for reporting under IFRS. TheGroup's date of transition to IFRS is 1 April 2004 and all comparativeinformation in the financial statements is restated to reflect the Group'sadoption of IFRS, except where otherwise required or permitted under IFRS 1.IFRS 1 `First-time adoption of International Financial Reporting Standards'offers exemptions from full retrospective application of certain standards.The Group has applied the mandatory exceptions and certain of the optionalexemptions from full retrospective application of IFRS as follows: * Business combinations exemption - under IFRS 1, the Group has elected not to apply IFRS 3 `Business Combinations' retrospectively to transactions occurring prior to the date of transition to IFRS. * Cumulative translation differences exemption - the Group has elected to set cumulative translation differences to nil at the 1 April 2004 transition date * Financial instruments - IAS 32 `Financial Instruments: Disclosure and Presentation' and IAS 39 `Financial Instruments: Recognition and Measurement' will be applied from 1 April 2005 * Employee benefits - the Group has elected in accordance with IAS 19 `Employee benefits' to recognise all cumulative actuarial gains and losses on defined benefit schemes at the date of transition to be charged or credited to the Statement of Recognised Income and Expense in the period in which they arise. * Share based payments - the Group has applied IFRS 2 `Share-based payments' to equity-settled awards not vested at 1 April 2005 and granted on or after 7 November 2002. * Deemed cost - the Group has taken the option to measure individual items of land and buildings at the previous UK GAAP revaluation. This value is then deemed cost at date of transition. Key ChangesEmployee benefits - IAS 19Previously under UK GAAP, the Group applied SSAP 24 when accounting forpensions, with additional FRS 17 disclosures provided in the notes to theaccounts in accordance with the transitional provisions of FRS 17.Defined benefit schemesIAS 19 requires that all assets and liabilities of the Group's defined benefitschemes are recognised on the balance sheet. SSAP 24 balances previouslyrecognised have been reversed. The IAS 19 pre-tax deficit recognised at 1 April2004 was ‚£241.3m. The SSAP 24 prepayment of ‚£59.1m and SSAP 24 creditor of ‚£6.4m were reversed at 1 April 2004.The pension deficit will be recalculated at each year end. The income statementwill be charged with current service costs, the expected return on schemeassets, and the interest on pension scheme liabilities. Movements in thepension deficit relating to changes in actuarial assumptions or actuarial gainsor losses from experience adjustments will be taken to the statement ofrecognised income and expense in the period in which they arise.Railways Pension SchemeThe Railways Pension Scheme ("RPS") is an industry-wide defined benefit schemefor employees of companies previously owned by British Railways Board. GreatWestern Trains Company, First ScotRail Limited, First Great Western LinkLimited, GB Rail and TransPennine Express have sections in the RPS. EachFranchisee and train operating subsidiary is responsible for funding pensionobligations whilst it holds the relevant franchise, however all pensionobligations to the relevant section of the scheme will cease on expiration ofthe franchise. Consequently, only the Franchisee's and train operatingcompany's obligation to fund the defined benefit scheme over the term of thefranchise is recognised. A `franchise adjustment' is made to the pensionobligation to reflect this.Furthermore, on commencement of a franchise, an intangible asset has beenrecognised which represents the economic value derived from the franchiseagreement that is attributable to our share of the rail pension deficit. At 1April 2004, the Group recognised an intangible asset of ‚£4.1m in respect of theTransPennine Express franchise. During the year ended 31 March 2005, anadditional ‚£16.9m was recognised as an intangible in respect of the ScotRailfranchise. These intangible assets are being amortised over the terms of thefranchises.For the year ended 31 March 2005, the income statement charge was ‚£40.9m underIFRS, ‚£6.1m less than the SSAP 24 charge.Financial Instruments - IAS 32 and 39The exemption available under IFRS 1 `First-time adoption' has been taken inrespect of IAS 32 `Financial Instruments: Disclosure and Presentation' and IAS39 `Financial Instruments: Recognition and Measurement', which will be appliedfrom 1 April 2005. As permitted by this exemption, the year ended 31 March 2005and the six months ended 30 September 2004 have not been restated under IAS 32and IAS 39.The Group uses derivative contracts to manage interest rate, currency and fuelrisks.These derivative contracts will be recorded on the balance sheet at fair valuefrom 1 April 2005.Hedge accountingIAS 39 recognises three types of hedges for which hedge accounting ispermitted, these being a cash flow hedge, a fair value hedge and a hedge ofcurrency exposure from a net investment in a foreign operation.These three types of hedges have been applied from 1 April 2005. A fullyeffective hedge is one where the changes in cash flows, fair value or foreigncurrency value of the hedged item are offset exactly by changes in cash flows,fair value or foreign currency value of the hedging instrument respectively. Afully effective hedge will remove volatility from the income statement. Anyineffectiveness is recorded in the income statement during the period when itarises.Interest rate swapsAt 1 April 2005, interest rate swaps with a fair value of ‚£6m, used to hedgefair value movements in the ‚£250m Sterling fixed rate bond, will be recognisedas a liability and treated as a fair value hedge. Other interest rate swapstreated as cash flow hedges with a value of ‚£1.6m will also be recognised as aliability.Fuel DerivativesAt 1 April 2005 fuel derivatives of ‚£31.4m will be recognised as an asset onthe balance sheet and are treated as cash flow hedges.Cross currency interest rate swapsCross currency swaps are treated as hedges of foreign currency exposure inrelation to part of the Group's US investments and recognised separately as anasset on the balance sheet at 1 April 2005. At 31 March 2005, under UK GAAP, a‚£16.8m benefit of these swaps was included in the value of the ‚£250m bond andthis is therefore reclassified on adoption of IAS 39. In addition, accruedinterest of ‚£3.5m will be recognised in the value of the swaps on 1 April 2005.Long term Sterling bondsOn adoption of IAS 32 and IAS 39, the bonds with a par value of ‚£300m and ‚£250mwill be valued at amortised cost using the effective interest rate method andthe related accrued interest (‚£23.0m) is included in the bond values on thebalance sheet. In addition, the ‚£250m bond value is adjusted for movements inthe fair value of LIBOR interest rate risk.Business combinations - IFRS 3, IAS 36, IAS 38IFRS prohibits amortisation of goodwill, which is instead subject to annualimpairment review, or more frequently where there are indications ofimpairment. The Group has undertaken impairment reviews in accordance with IAS36 `Impairment of assets' at a cash generating unit level. Where the cash flowsdo not support the carrying value of the intangible assets attributed to thecash generating unit, there will be impairment. For the year ended 31 March2005, no impairments were identified. The goodwill amortised during the yearended 31 March 2005 (‚£25.8m) under UK GAAP was reversed.The Group has elected to utilise the exemption available under IFRS 1, not toapply IFRS 3 `Business combinations' retrospectively, prior to 1 April 2004.Consequently, at 1 April 2004 the value of goodwill has been retained at the UKGAAP amounts.Adoption of IFRS 3 and IAS 38 `Intangible assets' results in intangible assetsseparately recognised on the balance sheet. Previously these would have beensubsumed within goodwill. Intangibles are amortised on a straight-line basisover their estimated useful economic life.Intangibles identified on contracts acquired during the year of ‚£10.6m wererecognised and are being amortised over the expected life of the contracts.Share-based payments - IFRS 2Under IFRS 2 `Share-based payments', the Group is required to charge the incomestatement with the cost of share-based equity payments based on fair value.FirstGroup has recognised a charge to income representing the fair value ofoutstanding employee and executive share options awarded since 7 November 2002.The fair value has been calculated using the Black-Scholes and Monte Carlooption valuation models and is charged to the income statement over therelevant vesting periods, adjusted at each reporting date to reflect actual andexpected levels of vesting. The income statement charge for the year ended 31March 2005 was ‚£2.9m before tax.Events after balance sheet date - IAS 10Under IAS 10, only dividends declared before year end are presented as aliability at the balance sheet date. Therefore at 31 March 2005, the 2004/05proposed final dividend of ‚£34m was derecognised, as this was not declareduntil after the year end.ENDFIRSTGROUP PLCRelated Shares:
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