21st Nov 2005 13:46
Smiths Group PLC21 November 2005 Smiths Group: Transition to International Financial Reporting Standards (IFRS) Smiths Group is today publishing information about its IFRS accounting policiesand restating its results for the year ended 31 July 2005 and its July 2004 andJuly 2005 balance sheets in order to enable an understanding of the effect ofIFRS on the Company's financial reporting. This information updates andsupplements the IFRS information previously published by Smiths Group on 6 July2005. Smiths Group will report under IFRS for the first time in the 2005/2006interim results, which will be published in March 2006. The Company is not issuing a trading statement at this time. Highlights:2005 IFRS UK GAAP £m £m Turnover 3,005 3,017Operating profit headline* 435 420 goodwill amortisation and impairment (11) (60) acquired intangible asset amortisation (5) (1) exceptional/significant items (40) (48) 379 311 Pre-tax profit headline* 423 413 goodwill amortisation and impairment (11) (60) acquired intangible asset amortisation (5) (1) exceptional/significant items (40) (42) 367 310 Basic earnings per share Headline 55.3p 54.3p statutory basis 49.5p 39.3p * Before goodwill amortisation (including impairment), amortisation of otheracquired intangible assets and exceptional items (under UK GAAP) and beforeimpairment of goodwill and amortisation of other acquired intangible assets andsignificant items (under IFRS). The full text of this release may be downloaded from http://www.smiths-group.com/ir. o- Media: Investors:Chris Fox Russell Plumley+44 (0) 20 8457 8403 +44 (0) 20 8457 [email protected] [email protected] Smiths Group plc Adoption of International Financial Reporting Standards Introduction As a consequence of the adoption by the European Union ("EU") of InternationalFinancial Reporting Standards ("IFRS") Smiths Group plc ("Smiths"), in commonwith all companies quoted on the London Stock Exchange or other Europeanexchanges, is required to prepare its consolidated financial statements underIFRS for all periods commencing on or after 1 January 2005. Smiths will first adopt IFRS for the year commencing 1 August 2005 and ending 31July 2006, including the Interim Statement for the six months ending 31 January2006. However, the requirement to restate comparative figures on the same basisas the period then under review means that Smiths has:- i) Applied its new IFRS accounting policies to its consolidated 31 July 2004 balance sheet (previously prepared under UK Generally Accepted Accounting Standards ("UK GAAP")), in order to determine an appropriately adjusted opening position on transition to IFRS as at 1 August 2004 except in respect of IAS 32 and IAS 39, as explained below; and ii) Restated its results for the year ended 31 July 2005 and its balance sheet as at 31 July 2005 in line with its new IFRS accounting policies for such comparative purposes, except in respect of IAS 32 and IAS 39, as explained below. The impact of IFRS on the Smiths consolidated financial statements will betwo-fold:- a) Presentation The format and descriptions used in the balance sheet and income statement will change to accord with the new reporting requirements, and b) Measurement The recognition and measurement of certain assets, liabilities, income and expenses will change in order to comply with the new standards. This document sets out the changes that are required to the previously reported2004 balance sheet and the 2005 full year results in order to comply with IFRS,and the underlying reasons for those changes. Also included are theconsolidated Income Statement and Balance Sheet for the six months ended 31January 2005 under IFRS. The financial information represents the Company'scurrent best estimates, and may need to be revised subsequently due to changesin IFRS, or to the interpretation of its provisions. The appendices to thisdocument contain reconciliations of the 1 August 2004 opening Balance Sheet, andthe 31 July 2005 Balance Sheet and Income Statement and Cash Flow Statement, andthe 31 January 2005 Balance Sheet and Income Statement, from a UK GAAP to anIFRS basis and revised accounting policies under IFRS. A further balance sheethas been prepared as at 1 August 2005 to illustrate the effect of adopting IAS32 Financial Instruments: Disclosure and Presentation and IAS 39 FinancialInstruments: Recognition and Measurement as of that date. Summary of IFRS Impact - Balance Sheet (unaudited) The impact of IFRS on the Smiths Group plc consolidated shareholders' funds maybe summarised as follows:- 1 August 2004 31 July 2005 1 August 2005* £m £m £m Shareholders' funds under UK GAAP 1,122.5 1,204.8 1,204.8 Add: Development expenditure 65.1 111.3 111.3 capitalised Goodwill amortisation and - 45.9 45.9 impairment Dividend reversal 102.5 111.3 111.3 Deferred tax (2.9) (18.3) (15.4) Other adjustments (6.2) (2.7) (2.7) Adoption of IAS 39 - - (9.7) Shareholders' funds under IFRS 1,281.0 1,452.3 1,445.5 *Smiths has elected to adopt IAS 32 Financial Instruments: Disclosure andPresentation and IAS 39 Financial Instruments: Recognition and Measurement from1 August 2005 with no restatement of comparative information. Changes in the presentational format of the consolidated balance sheets toaccord with the new IFRS requirements are set out in Appendices D (1 August2004), F (31 July 2005) and I (31 January 2005). An analysis of UK GAAP - IFRS adjustments by category of assets and liabilitiesin the new IFRS format are set out in Appendices E (1 August 2004), G (31 July2005), H (1 August 2005) and J (31 January 2005). Summary of IFRS Impact - 2005 Income Statement (unaudited) Following restatement of the Smiths Group plc consolidated balance sheet at 1August 2004, the results for the year ended 31 July 2005 have been revised toconform with IFRS rules. The impact on the previously reported UK GAAP pre-taxprofit is summarised as follows:- Headline* Total £m £m UK GAAP profit before tax 412.6 309.8 Add: Development expenditure capitalised (net of amortisation) 36.3 36.3 Stock revaluation on acquisition (14.0) (14.0) Goodwill amortisation and impairment - 48.4 Amortisation of acquired intangible - (3.4) assets Share based payment (6.3) (6.3) Financing losses (4.5) (4.5) Other (1.6) 0.7 IFRS adjusted profit before tax 422.5 367.0 IFRS taxation (111.4) (88.7) IFRS adjusted profit after taxation 311.1 278.3 EPS - Basic 55.3p 49.5p * Before goodwill amortisation (including impairment), amortisation of otheracquired intangible assets and exceptional items (under UK GAAP) and beforeimpairment of goodwill and amortisation of other acquired intangible assets andsignificant items (under IFRS). Exceptional items in the year ended 31 July2005 comprised restructuring costs of £33.3m, costs of £14.9m incurred inrespect of the settlement of a patent dispute relating to the Cozmonitor insulinpump, gains on disposal of businesses of £8.7m and the write down of goodwill onanticipated future disposals of £2.3m. Under IFRS all of these items aresignificant items, with the exception of the write down of goodwill onanticipated future disposals. Under IFRS no such charge is recognised. Headline basic earnings per share (EPS) improves from 54.3p under UK GAAP to55.3p on an IFRS basis, and on a statutory basis from 39.3p under UK GAAP to49.5p on an IFRS basis. A restatement of the 2005 Income Statement and analysis of UK GAAP - IFRSadjustments is set out in Appendix A. Basis of preparation The unaudited financial information contained in this document has been preparedusing IFRS policies based on IFRS expected to be applicable to the Company andadopted formally by the EU as of 31 July 2006. As permitted, Smiths has adoptedearly the amendment to IAS 19 Employee Benefits published in December 2004,which is still pending endorsement by the EU. At this stage in the development of IFRS, matters such as the interpretation andapplication surrounding it are continuing to evolve. In addition IFRS currentlyin issue and endorsed by the EU are subject to interpretation by IFRIC andfurther standards may be issued by the IASB that will be endorsed by the EUbefore 31 July 2006. These uncertainties could result in the need to change thebasis of accounting or presentation of certain financial information from thatpresented in this document. Smiths is required to establish its IFRS accounting policies for the year ended31 July 2006, and apply these retrospectively to determine its opening IFRSbalance sheet at the transition date of 1 August 2004 and the comparativefinancial information for the year ending 31 July 2005. However advantage hasbeen taken of certain exemptions afforded by IFRS 1 First Time Adoption ofInternational Financial Reporting Standards as follows:- 1.Business combinations Business combinations prior to 1 August 2004, and in particular the merger withTI Group plc, which took place on 4 December 2000, have not been restated tocomply with IFRS 3 Business Combinations, which requires acquisition accountingfor all business combinations. The merger reserve of £235m will remain as apermanent item within shareholders' equity. 2. Cumulative translation differences IAS 21 The Effects of Changes in Foreign Exchange Rates requires annualtranslation differences arising on the opening net assets and net profit or lossof each foreign subsidiary to be treated as a separate component ofshareholders' equity, and the cumulative net surplus / deficit for eachsubsidiary carried forward and added to / subtracted from any gains / losses onthe future disposal of that subsidiary. Smiths has taken the option to set thesecumulative gains / losses at zero as at the date of transition to IFRS. Anygains and losses recognised in the income statement on subsequent disposals offoreign operations will therefore include only those translation differencesarising after 1 August 2004, the IFRS transition date. 3. Share-based payment Smiths has applied IFRS 2 Share-based Payment retrospectively only toequity-settled awards made after 7 November 2002 that had not vested at 1January 2005. 4. Financial Instruments Smiths has elected to adopt IAS 32 Financial Instruments : Disclosure andPresentation and IAS 39 Financial Instruments : Recognition and Measurement from1 August 2005 with no restatement of comparative information. Consequently, therelevant comparative financial information for the six months ended 31 January 2005 and the year ended 31 July2005 will not reflect the impact of these standards, but will include financialinstruments accounted for on a UK GAAP basis. Appendix H sets out the impact ofthese standards on the balance sheet as at 1 August 2005. Appendix L sets out the new Accounting Policies to be adopted by the companyunder IFRS. Smiths Group plc Consolidated Income Statement for the year ended 31 July 2005 (unaudited) Year ended 31 July 2005 As IFRS Total Reported Format Adjustments IFRS (UK GAAP) (UK GAAP) to IFRS Basis £m £m £m £m Continuing operations Turnover 3,016.8 Revenue 3,016.8 (11.4) 3,005.4Cost of sales (1,804.9) (9.8) (1,814.7) Gross profit 1,211.9 (21.2) 1,190.7 Sales and distribution costs (283.3) (283.3)Administrative expenses (617.4) 39.4 (578.0)Development costs - IFRS adjustment 41.2 41.2Profit on disposal of businesses 8.7 8.7Write-down of goodwill on anticipated future (2.3) 2.3disposal ** Operating profit 311.2 317.6 61.7 379.3 After Amortisation and impairment ofcharging: goodwill (59.8) (59.8) 48.4 (11.4) Amortisation of acquired intangible assets (1.2) (1.2) (3.4) (4.6) Exceptional costs * (48.2) (48.2) (48.2) Profit on disposal of 8.7 8.7 businesses Write-down of goodwill on anticipated future disposal ** (2.3) 2.3 Non-operating exceptional items - profit on disposal of businesses 8.7 - write-down of goodwill on anticipated (2.3)future disposal ** Profit before interest and tax 317.6 317.6 61.7 379.3 Interest receivable 15.0 15.0 15.0Interest payable (48.0) (48.0) (48.0)Financing gains 10.1 10.1 (4.5) 5.6Other finance income - retirement benefits 15.1 15.1 15.1 Profit before taxation 309.8 309.8 57.2 367.0 Taxation (89.0) (89.0) 0.3 (88.7) Profit for the period 220.8 220.8 57.5 278.3 An analysis of the above adjustments is provided in Appendix A. Segmental analysis of revenue, profits and assets under IFRS is provided inAppendix B. Exceptional and significant items * Exceptional costs in the year ended 31 July 2005 charged against operatingprofit comprised restructuring costs of £33.3m and costs of £14.9m incurred inrespect of the settlement of a patent dispute relating to the Cozmonitor insulinpump. ** The write-down of goodwill on anticipated future disposal relates to thepost-balance sheet disposal of an acquisition made before 1 August 1998, thegoodwill arising thereon having previously been set directly against reserves. Under IFRS all of these items are significant items, with the exception of thewrite down of goodwill on anticipated future disposals. Under IFRS no suchcharge is recognised. Smiths Group plc Consolidated Income Statement for the six months ended 31 January 2005(unaudited) 6 months ended 31 January 2005 As IFRS Total Reported Format adjustments IFRS (UK GAAP) (UK GAAP) to IFRS Basis £m £m £m £m Continuing operations Turnover 1,344.4 Revenue 1,344.4 (6.8) 1,337.6Cost of sales (812.0) 4.5 (807.5) Gross profit 532.4 (2.3) 530.1 Sales and distribution costs (145.0) (0.4) (145.4)Administrative expenses (264.0) 19.2 (244.8)Development costs - IFRS adjustment 18.5 18.5 Operating profit 123.4 123.4 35.0 158.4 After charging: Amortisation of goodwill (22.1) (22.1) 22.1 Operational restructuring (7.6) (7.6) (7.6) Interest receivable 10.9 10.9 10.9Interest payable (16.8) (16.8) (16.8)Financing gains 2.2 2.2Other finance income - retirement benefits 7.5 7.5 7.5 Profit before taxation 125.0 125.0 37.2 162.2 Taxation (35.7) (35.7) (6.9) (42.6) Profit for the period 89.3 89.3 30.3 119.6 An analysis of the above adjustments is provided in Appendix C. Smiths Group plc Consolidated Balance Sheet at 1 August 2004 (unaudited) UK GAAP Adjustments IFRS (IFRS Format) To IFRS Basis Total Total Total 2004 2004 2004 £m £m £m Non-current assets Goodwill 728.2 (0.5) 727.7Other intangible assets 129.7 129.7Property, plant and equipment 423.5 (12.2) 411.3 Financial Assets:TI Automotive Limited preference shares 325.0 325.0Other trade investments 2.3 2.3 Retirement benefit assets 103.9 103.9Deferred tax assets 116.4 (13.7) 102.7Trade and other receivables 9.2 (0.9) 8.3 1,708.5 102.4 1,810.9 Current assets Inventories 423.5 (3.8) 419.7Trade and other receivables 620.4 5.1 625.5Cash and cash equivalents 449.2 449.2 Total assets 3,201.6 103.7 3,305.3 Non-current liabilities Provisions for liabilities and charges (22.6) (22.6)Retirement benefit obligations (351.2) (1.8) (353.0)Deferred tax liabilities (49.4) 10.8 (38.6) Financial liabilities:Borrowings (446.5) (446.5) Other payables (53.1) (41.6) (94.7) Current liabilities Provisions for liabilities and charges (79.2) (79.2)Trade and other payables (665.9) 87.4 (578.5) Financial liabilities:Borrowings (275.4) (275.4) Current tax payable (135.8) (135.8) Total liabilities (2,079.1) 54.8 (2,024.3) Net assets 1,122.5 158.5 1,281.0 Shareholders' equity Share capital 140.3 140.3Share premium account 183.0 183.0Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 562.7 158.5 721.2 Total shareholders' equity 1,122.5 158.5 1,281.0 An analysis of the reclassifications required to represent the UK GAAP balance sheet inan IFRS format is provided in Appendix D, and the adjustments required to re-measurethe UK GAAP balance sheet on an IFRS basis in Appendix E. Smiths Group plc Consolidated Balance Sheet at 31 July 2005 (unaudited) 31 July 2005 UK GAAP Adjustments IFRS (IFRS Format) To IFRS Basis Total Total Total 2005 2005 2005 £m £m £m Non-current assets Goodwill 1,167.0 (15.8) 1,151.2Other intangible assets 58.6 267.5 326.1Property, plant and equipment 525.8 (22.7) 503.1 Financial Assets:TI Automotive Limited preference shares 325.0 325.0Other trade investments 3.5 3.5 Retirement benefit assets 134.6 134.6Deferred tax assets 174.0 25.1 199.1Trade and other receivables 9.9 14.8 24.7 2,398.4 268.9 2,667.3 Current assets Inventories 570.0 (5.7) 564.3Trade and other receivables 727.2 (7.6) 719.6Cash and cash equivalents 60.9 60.9 Total assets 3,756.5 255.6 4,012.1 Non-current liabilities Provisions for liabilities and charges (26.4) (26.4)Retirement benefit obligations (369.4) (1.8) (371.2)Deferred tax liabilities (52.2) (43.4) (95.6) Financial liabilities:Borrowings (937.7) (937.7)Other payables (74.4) (58.8) (133.2) Current liabilities Provisions for liabilities and charges (64.1) (64.1)Trade and other payables (812.7) 95.9 (716.8) Financial liabilities:Borrowings (54.0) (54.0) Current tax payable (160.8) (160.8) Total liabilities (2,551.7) (8.1) (2,559.8) Net assets 1,204.8 247.5 1,452.3 Shareholders' equity Share capital 140.9 140.9Share premium account 197.5 197.5Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 629.9 247.5 877.4 Total shareholders' equity 1,204.8 247.5 1,452.3 An analysis of the reclassifications required to represent the UK GAAP balancesheet in an IFRS format is provided in Appendix F, and the adjustments requiredto re-measure the UK GAAP balance sheet on an IFRS basis in Appendix G. Smiths Group plc Consolidated Balance Sheet at 1 August 2005 (unaudited) Restated under Financial Restated under IFRS at 31 July instruments IFRS at 1 August 2005 2005 Total Total Total 2005 2005 2005 £m £m £m Non-current assets Goodwill 1,151.2 1,151.2Other intangible assets 326.1 326.1Property, plant and equipment 503.1 503.1 Financial Assets:TI Automotive Limited preference shares 325.0 325.0Other trade investments 3.5 3.5 Retirement benefit assets 134.6 134.6Deferred tax assets 199.1 3.0 202.1Trade and other receivables 24.7 1.3 26.0 2,667.3 4.3 2,671.6 Current assets Inventories 564.3 564.3Trade and other receivables 719.6 9.1 728.7Cash and cash equivalents 60.9 664.5 725.4 Total assets 4,012.1 677.9 4,690.0 Non-current liabilities Provisions for liabilities and charges (26.4) (26.4)Retirement benefit obligations (371.2) (371.2)Deferred tax liabilities (95.6) (0.1) (95.7) Financial liabilities:Borrowings (937.7) (5.6) (943.3)Other payables (133.2) (5.6) (138.8) Current liabilities Provisions for liabilities and charges (64.1) (64.1)Trade and other payables (716.8) (7.8) (724.6) Financial liabilities:Borrowings (54.0) (665.6) (719.6) Current tax payable (160.8) (160.8) Total liabilities (2,559.8) (684.7) (3,244.5) Net assets 1,452.3 (6.8) 1,445.5 Shareholders' equity Share capital 140.9 140.9Share premium account 197.5 197.5Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 877.4 (3.5) 873.9Cash flow hedge reserve (3.3) (3.3) Total shareholders' equity 1,452.3 (6.8) 1,445.5 An analysis of the above adjustments is provided in Appendix H. Smiths Group plc Consolidated Balance Sheet at 31 January 2005 (unaudited) 31 January 2005 UK GAAP Adjustments IFRS (IFRS Format) to IFRS Basis Total Total Total 2005 2005 2005 £m £m £m Non-current assets Goodwill 748.6 21.3 769.9Other intangible assets 150.7 150.7Property, plant and equipment 434.6 (14.0) 420.6 Financial Assets:TI Automotive Limited preference shares 325.0 325.0Other trade investments 2.9 2.9 Retirement benefit assets 110.6 110.6Deferred tax assets 113.5 (8.7) 104.8Trade and other receivables 8.0 (0.9) 7.1 1,743.2 148.4 1,891.6 Current assets Inventories 484.9 (3.3) 481.6Trade and other receivables 620.4 620.4Cash and cash equivalents 343.0 343.0 Total assets 3,191.5 145.1 3,336.6 Non-current liabilities Provisions for liabilities and charges (25.5) (25.5)Retirement benefit obligations (342.2) (1.8) (344.0)Deferred tax liabilities (51.0) 3.0 (48.0) Financial liabilities:Borrowings (442.6) (442.6)Other payables (48.1) (44.2) (92.3) Current liabilities Provisions for liabilities and charges (72.8) (72.8)Trade and other payables (633.0) 39.1 (593.9) Financial liabilities:Borrowings (292.0) (292.0) Current tax payable (120.1) (120.1) Total liabilities (2,027.3) (3.9) (2,031.2) Net assets 1,164.2 141.2 1,305.4 Shareholders' equity Share capital 140.6 140.6Share premium account 190.4 190.4Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 596.7 141.2 737.9 Total shareholders' equity 1,164.2 141.2 1,305.4 An analysis of the reclassifications required to represent the UK GAAP balancesheet in an IFRS format is provided in Appendix I, and the adjustments required to re-measure the UK GAAP balance sheeton an IFRS basis in Appendix J. Smiths Group plc Consolidated Cash-flow Statement (unaudited) Year ended 31 July 2005 UK GAAP Adjustments IFRS (IFRS Format) to IFRS Basis Total Total Total 2005 2005 2005 £m £m £m Cash flows from operating activitiesProfit before taxation 309.8 57.2 367.0Net interest payable 22.9 4.5 27.4Other finance income - retirement benefits (15.1) (15.1) Operating profit 317.6 61.7 379.3Exceptional restructuring - charged against profits 48.2 48.2 - expended (35.2) (35.2)during yearAmortisation and impairment of goodwill and otherintangible assets 61.0 (45.0) 16.0Write-down of goodwill on anticipated future 2.3 (2.3)disposalProfit on disposal of businesses (8.7) (8.7)Depreciation of property plant and equipment 77.0 77.0Share based payment expense 6.3 6.3Retirement benefits (16.5) (16.5)Amortisation of capitalised development expenditure 24.6 24.6(net)Increase in inventories (91.2) 1.9 (89.3)Increase in trade and other receivables (53.6) (0.1) (53.7)Increase in trade and other payables 48.8 6.3 55.1Other non cash movements 14.0 14.0 Cash generated from operations 349.7 67.4 417.1Interest paid (19.9) (19.9)Tax paid (77.9) (77.9) Net cash inflow from operating activities 251.9 67.4 319.3 Cash flows from investing activitiesCapitalisation of development expenditure (67.4) (67.4)Acquisition of subsidiaries (410.0) (410.0)Disposals of businesses 0.5 0.5Purchases of property, plant and equipment (114.2) (114.2)Disposals of property, plant and equipment 9.3 9.3 Net cash flow used in investing activities (514.4) (67.4) (581.8) Cash flows from financing activitiesProceeds from issue of ordinary share capital 14.6 14.6Dividends paid to equity shareholders (154.5) (154.5)Increase in other borrowings 38.4 38.4 Net cash flow used in financing activities (101.5) (101.5) Net decrease in cash and cash equivalents (364.0) (364.0)Cash and cash equivalents at 1 August 2004 421.0 421.0Exchange differences (45.1) (45.1) Cash and cash equivalents at 31 July 2005 11.9 11.9 Cash and cash equivalents at 31 July 2005 comprise:Cash at bank and in hand 51.1 51.1Deposits 9.8 9.8Bank overdrafts (49.0) (49.0) 11.9 11.9 An analysis of the above adjustments is provided in Appendix K. Principal Impact of IFRS The key differences between UK GAAP and IFRS that will impact the Group are setout below. 1. Research and development Under UK GAAP Smiths wrote off research and development expenditure, other thanthat recoverable from third parties, in the year in which it was incurred. Under IAS 38 Intangible Assets, the company is required to capitalise the costof developments which meet certain recognition criteria, including the technicalfeasibility of, and probable future economic benefits arising from, the project.This expenditure is then amortised over the anticipated future life of theeconomic benefits arising. Customer-funded and unfunded development projects are treated on a similarbasis, although the increased risk implicit in most funded development projectsmeans that the criteria for capitalisation are less likely to be met. Wherecosts are capitalised on funded development contracts, the associated funding isheld as a deferred liability on the balance sheet, and released to the incomestatement in step with the amortisation of the capitalised intangible asset. Research costs, and development costs which do not meet the relevantcapitalisation criteria, are written off in the year in which they are incurred. As a result of this policy, net assets (before the associated deferred taxadjustment) have increased by £65.1m and £111.3m as at 1 August 2004 and 31 July2005 respectively. Operating profits have increased by £36.3m for the yearended 31 July 2005, represented by the capitalisation of £67.4m of costspreviously written off under UK GAAP, offset by £31.1m of amortisation ofamounts capitalised (net of deferred income). 2. Business combinations Under UK GAAP the difference between the consideration paid for an acquisitionand the fair value of the identifiable net assets of the acquired subsidiary atthe date of acquisition is recognised as goodwill. Identifiable net assetsinclude intangible assets which are capable of separate disposal withoutdisposing of the related business. Under IFRS intangible assets of an acquiredsubsidiary are separately recognised from goodwill if their fair value can bemeasured reliably. Intangible assets include trademarks, customer relationshipsand contracts and patented technologies. Intangible assets recognised are amortised over their useful life. Under thetransition rules the Company is not required to identify any acquired intangibleassets in respect of acquisitions completed prior to 1 August 2004. As a resultof acquisitions made during the year ended 31 July 2005, intangible assets of£71.8m have been reclassified out of goodwill arising on acquisition, with anassociated increase in the intangible asset amortisation charge of £3.4m for theyear ended 31 July 2005. Under UK GAAP the fair value of acquired stock is stated at the lower of cost ornet realisable value. Under IFRS the fair value of acquired inventory is basedon selling price, less the sum of costs to complete, costs of disposal and areasonable profit allowance for the completing and selling effort based onprofit for similar finished goods. As a result an adjustment of £14.0m was madeto the acquisition balance sheet of Medex. As at 31 July 2005 the upliftedinventory had been traded through the income statement, resulting in a £14.0mdecrease in profit before taxation for the year ended 31 July 2005. 3. Goodwill Under UK GAAP goodwill on businesses acquired by the Group after 1 August 1998is capitalised and amortised on a straight-line basis over its anticipatedfuture life up to a maximum of 20 years. Goodwill in respect of businessesacquired prior to 1 August 1998 was set off against reserves in the year ofacquisition. On subsequent disposal of a business acquired prior to 1 August1998 purchased goodwill previously set off against reserves is recycled andincluded in the profit or loss on disposal of the business. Under IFRS, from 1 August 2004 onwards, goodwill will no longer be amortised,but will instead be subject to annual impairment review. The amortisationcharge under UK GAAP for goodwill for the year ended 31 July 2005 of £53.3m hasbeen reversed from the income statement, resulting in a corresponding increasein the net book value of goodwill. On disposal of a business acquired before 1August 1998 goodwill set off against reserves will no longer be recycled as partof the profit or loss on disposal of that business. The exceptional write downof goodwill on anticipated future disposals of £2.3m recognised under UK GAAPhas been reversed from the income statement. 4. Dividends Under UK GAAP dividends relating to an accounting period but declared after thebalance sheet date are recognised as a liability even if the approval of thatdividend took place after the balance sheet date. Under IFRS, proposed dividends do not meet the definition of a liability untilsuch time as they have been declared, and in the case of the final dividend,approved by shareholders at the Annual General Meeting. This has resulted in abalance sheet reclassification from current liabilities to retained profit of£102.5m and £111.3m as at 1 August 2004 and 31 July 2005 respectively. 5. Share-based payment Smiths operates a number of share-based incentive schemes (both awards ofoptions and awards of shares) that are impacted by IFRS 2 Share-based Payment.Under UK GAAP Smiths recognises an expense based on the intrinsic value of theoptions (the difference between the exercise price and the market value at thedate of the award), other than for Save-As-You-Earn schemes for which UK GAAPincludes an exemption from recognising an expense. Under IFRS the cost of all share-based payments, based on the fair value of theoptions or shares at the date of grant and calculated using an appropriatepricing model, is recognised over the vesting period of the award. Accordinglyan adjustment has been recognised to reflect an additional charge of £6.3m inthe year ended 31 July 2005. 6. Retirement benefits Under UK GAAP the company had already adopted FRS 17 Retirement Benefits. UnderFRS 17 the assets and liabilities of the Group's defined benefit pension schemesare recognised at fair value in the balance sheet and the operating andfinancing costs of defined benefit pension schemes are recognised in the profitand loss account as operating costs and finance costs respectively. Variationsfrom expected costs arising from the experience of the plans or changes inactuarial assumptions are recognised immediately in the Statement of TotalRecognised Gains and Losses. The change to IAS 19 Employee Benefits does not give rise to any significantchange in the basis of accounting for pensions, as Smiths will adopt early theoption allowed under IAS 19 to take actuarial gains and losses immediately anddirectly to equity through the Statement of Recognised Income and Expense.Changes are largely confined to presentation, in that retirement benefit schemesurpluses and deficits must be aggregated separately on the face of the balancesheet, and shown gross, rather than net, of deferred taxation. The deferredtax balance under UK GAAP related to pensions amounted to assets of £116.4m andliabilities of £31.2m as at 1 August 2004 and assets of £127.3m and liabilitiesof £40.4m as at 31 July 2005. 7. Deferred taxation Under UK GAAP deferred tax is recognised in respect of all timing differencesthat have originated but not reversed at the balance sheet date wheretransactions or events have occurred at that date that will result in anobligation to pay more, or a right to pay less or to receive more tax. Under IFRS, deferred tax is recognised on all taxable temporary differencesbetween the tax base and the accounting base of balance sheet items included inthe balance sheet of the Group, except to the extent that such temporarydifferences arise on initial recognition of an asset or liability. This meansthat deferred tax is recognised on certain temporary differences that would nothave given rise to deferred tax under UK GAAP. The most significant differencesbetween UK GAAP and IFRS relate to the following: • Deferred tax provisions relating to tax deductible goodwill set offagainst reserves prior to 1 August 1998 under UK GAAP and not reinstated underIFRS are written back. For goodwill on which deductions are still to beclaimed, deferred tax assets, where recoverable, have been recognised ontransition to IFRS and are being amortised to offset the timing of the taxbenefit. The amortisation of the asset under IFRS corresponds to the build upof the liability under UK GAAP; and • Under IFRS deferred tax is provided on temporary differences arisingon investments in subsidiaries and associates (principally in respect ofunremitted earnings), except where the Group is able to control the timing ofthe reversal of the temporary difference and it is probable that the temporarydifference will not reverse in the foreseeable future. In addition to these adjustments the carrying values of deferred tax assets andliabilities in the balance sheet have been adjusted to reflect the restatementof newly recognised assets and liabilities arising from the adoption of IFRS. 8. Computer software Under UK GAAP all capitalised computer software was classified within tangiblefixed assets. IFRS requires capitalised software that is not an integral part ofthe hardware to be treated as an intangible asset. This has resulted in balancesheet reclassifications of approximately £12m and £23.0m respectively at 1August 2004 and 31 July 2005. 9. Financial instruments A summary of the impact of the principal differences and adjustments resultingfrom the adoption of IAS 32 and IAS 39 as they apply to the Group's balancesheet as at 1 August 2005 is set out below: i) Forward foreign exchange contracts and currency options - Smiths uses forward foreign exchange contracts and currency options for the purposes of hedging all material contractually committed and forecast foreign currency denominated future sales and purchases. Under UK GAAP a form of hedge accounting was applied to these forward foreign exchange contracts and currency options meaning that some derivatives were held off balance sheet for at least part of their lives. Under IFRS the fair value of all forward foreign exchange contracts and currency options is recognised on the balance sheet. IAS 39 places significant restrictions on the use of hedge accounting and changes the hedge accounting methodology. As a result, from 1 August 2005, Smiths will recognise all forward foreign exchange contracts and currency options on the balance sheet at fair value and will apply the new hedge accounting methodology to all significant qualifying relationships. Net assets increased by £0.4m at 1 August 2005. ii) Interest rate swaps - under UK GAAP only accrued interest in respect of interest rate swaps was recognised on the balance sheet. Under IFRS the fair value of interest rate swaps is also recognised on the balance sheet. Net assets decreased by £0.6m as at 1 August 2005. iii) Borrowings - under UK GAAP borrowings were recognised at initial proceeds received, comprising face values adjusted for issue fees, discounts and premia. Issue fees, discounts and premia were amortised over the life of the related borrowing and accrued interest was classified separately to the borrowing. Under IFRS, where hedge accounting has been applied the borrowings balance is adjusted for the fair value movement in the hedged risk and accrued interest is included within the value of the borrowing. iv) Embedded derivatives - under UK GAAP embedded derivatives were not recognised. Under IFRS the fair value of embedded derivatives not closely related to their host contract is recognised. A net derivative financial liability of £9.5m has been recognised at 1 August 2005. v) 'Gross up' of cash and overdrafts - under UK GAAP cash and overdraft balances within Smiths' UK and Euro cash pools are presented in the consolidated accounts on a 'net' basis. This notional pooling does not meet the strict off-set rules under IAS 32, and as a result the cash and overdraft balances must be reported 'gross' on the balance sheet. This has resulted in an increase in cash and overdrafts of £664.5m. Appendix A Smiths Group plc Consolidated Income Statement for the year ended 31 July 2005 (unaudited) Adjustments to IFRSContinuing operations As IFRS Goodwill Amortisation reported format amortisation Share- of acquired (UK (UK GAAP) Development and based intangible Other IFRS GAAP) costs impairment payment assets adjustments basis £m £m £m £m £m £m £m £m Turnover 3,016.8 Revenue 3,016.8 (11.4) 3,005.4Cost of sales (1,804.9) 6.5 (16.3) (1,814.7) Gross profit 1,211.9 (4.9) (16.3) 1,190.7 Sales and distribution costs (283.3) (283.3)Administrative expenses (617.4) 48.4 (6.3) (3.4) 0.7 (578.0)Development costs - IFRS 41.2 41.2adjustmentProfit on disposal of businesses 8.7 8.7Write down of goodwill onanticipatedfuture disposal (2.3) 2.3 Operating profit 311.2 317.6 36.3 48.4 (6.3) (3.4) (13.3) 379.3 After Amortisation andcharging: impairment of goodwill (59.8) (59.8) 48.4 (11.4) Amortisation of acquired intangible assets (1.2) (1.2) (3.4) (4.6) Exceptional items (48.2) (48.2) (48.2) Profit on disposal of businesses 8.7 8.7 Write down of goodwill on anticipated future disposal (2.3) 2.3 Non-operating exceptional items - profit on disposal of 8.7 businesses - write down of goodwill on anticipatedfuture disposal (2.3) Profit before interest and tax 317.6 317.6 36.3 48.4 (6.3) (3.4) (13.3) 379.3 Interest receivable 15.0 15.0 15.0Interest payable (48.0) (48.0) (48.0)Financing gains 10.1 10.1 (4.5) 5.6Other finance income - retirement 15.1 15.1 15.1benefits Profit before taxation 309.8 309.8 36.3 48.4 (6.3) (3.4) (17.8) 367.0 Taxation (89.0) (89.0) (13.4) 3.1 2.0 1.3 7.3 (88.7) Profit for the period 220.8 220.8 22.9 51.5 (4.3) (2.1) (10.5) 278.3 Appendix B Smiths Group plc Year ended 31 July 2005 Segmental analysis of revenue, profits and assets under IFRS Measurement changes to IFRS UK GAAP Development Stock Share Other s IFRS -based 2005 costs revaluation payment adjustment 2005 on acquisition £m £m £m £m £mRevenue MarketAerospace 1,157.6 (11.4) 1,146.2Detection 366.5 366.5Medical 563.3 563.3Specialty Engineering 466.2 466.2John Crane 463.2 463.2 3,016.8 (11.4) 3,005.4 Geographical originUnited Kingdom 821.4 (3.0) 818.4North America 1,744.6 (8.4) 1,736.2Europe 514.7 514.7Other overseas 245.2 245.2Inter-company (309.1) (309.1) 3,016.8 (11.4) 3,005.4 Headline * operating profit MarketAerospace 117.9 31.6 (2.4) 0.4 147.5Detection 66.8 2.4 (0.8) 0.1 68.5Medical 108.2 2.3 (14.0) (1.2) (1.9) 93.4Specialty Engineering 64.5 (1.0) 63.5John Crane 63.0 (0.9) (0.2) 61.9 420.4 36.3 (14.0) (6.3) (1.6) 434.8 Geographical originUnited Kingdom 62.9 8.1 (0.6) (5.3) (3.7) 61.4North America 249.6 27.7 (9.7) (1.0) 5.8 272.4Europe 74.6 0.5 (3.0) (3.2) 68.9Other overseas 33.3 (0.7) (0.5) 32.1 420.4 36.3 (14.0) (6.3) (1.6) 434.8* Before goodwill amortisationandexceptional items Assets Cumulative Final Goodwill Share - Other development dividend based reversal amortisation payment expenditure and (net of impairment deferred tax)MarketAerospace 661.0 65.2 31.2 9.9 8.1 777.6 2.2 Detection 356.7 4.0 17.7 16.3 2.6 397.3Medical 869.4 5.0 28.6 11.2 3.9 (5.3) 912.8Specialty Engineering 287.6 17.1 7.6 3.2 315.5John Crane 108.8 16.7 0.9 3.2 129.6 2,283.5 74.2 111.3 45.9 21.0 (3.1) 2,532.8Net borrowings (930.8) (930.8)Retirement net liabilitiesbenefits - (net of deferred tax) (147.9) (1.8) (149.7) 1,204.8 74.2 111.3 45.9 21.0 (4.9) 1,452.3 Geographical originUnited Kingdom 349.8 29.3 111.3 2.4 21.0 (13.0) 500.8North America 1,562.1 44.5 29.6 8.7 1,644.9Europe 285.1 0.4 12.8 (0.5) 297.8Other overseas 86.5 1.1 1.7 89.3 2,283.5 74.2 111.3 45.9 21.0 (3.1) 2,532.8 Appendix C Smiths Group plc Consolidated Income Statement for the 6 months ended 31 January 2005 (unaudited) Adjustments to IFRS Continuing operations As IFRS Format Development Goodwill Share-based Other IFRS reported (UK GAAP) (UK GAAP) costs amortisation payment adjustments Basis £m £m £m £m £m £m £m Turnover 1,344.4 Revenue 1,344.4 (6.8) 1,337.6Cost of sales (812.0) 4.5 (807.5) Gross profit 532.4 (2.3) 530.1 Sales and distribution costs (145.0) (0.4) (145.4)Administrative expenses (264.0) 22.1 (3.0) 0.1 (244.8)Development costs - IFRS 18.5 18.5adjustment Operating profit 123.4 123.4 16.2 22.1 (3.0) (0.3) 158.4 After Amortisation of (22.1) (22.1) 22.1charging: goodwill Operational (7.6) (7.6) (7.6) restructuring Interest receivable 10.9 10.9 10.9Interest payable (16.8) (16.8) (16.8)Financing gains 2.2 2.2Other finance income - 7.5 7.5 7.5retirement benefits Profit before taxation 125.0 125.0 16.2 22.1 (3.0) 1.9 162.2 Taxation (35.7) (35.7) (5.7) (2.2) 0.9 0.1 (42.6) Profit for the period 89.3 89.3 10.5 19.9 (2.1) 2.0 119.6 Appendix D Smiths Group plc Consolidated Balance Sheet as at 1 August 2004 - Reclassification to IFRS Format (unaudited) UK GAAP Reclassification UK GAAP Format changes IFRS Format Total Employee Total 2004 Benefits Other 2004 £m £m £m £m Non-current assets Intangible assets 728.2 728.2 Goodwill Other intangible assetsTangible assets 423.5 423.5 Property, plant and equipmentInvestments and advances: Financial assetsTI Automotive Limited preference shares 325.0 TI Automotive Limited preference 325.0 SharesOther 2.3 2.3 Other trade investments 103.9 103.9 Retirement benefit assets 116.4 116.4 Deferred tax assets 9.2 9.2 Trade and other receivables 1,479.0 220.3 9.2 1,708.5 Current assets Stocks 423.5 423.5 Inventories Debtors - amounts falling due within one 620.4 620.4 Trade and other receivables year - amounts falling due after more 9.2 (9.2) than one year Cash at bank and on deposit 449.2 449.2 Cash and cash equivalents Non-current liabilities Provisions for liabilities and charges (120.0) 97.4 (22.6) Provisions for liabilities and charges Retirement benefit liabilities (234.8) (116.4) (351.2) Retirement benefit obligations Pension assets 72.7 (72.7) (31.2) (18.2) (49.4) Deferred tax liabilities Creditors - amounts falling due after more (499.6) 499.6than one year (446.5) (446.5) Borrowings (53.1) (53.1) Other payables Current liabilities Creditors - amounts falling due within one (1,077.1) 1,077.1year (79.2) (79.2) Provisions for liabilities and charges (665.9) (665.9) Trade and other payables (275.4) (275.4) Borrowings (135.8) (135.8) Current tax payable 1,122.5 1,122.5 Shareholders' equity Share capital 140.3 140.3 Share capitalShare premium account 183.0 183.0 Share premium accountRevaluation reserve 1.7 1.7 Revaluation reserveMerger reserve 234.8 234.8 Merger reserveRetained earnings 562.7 562.7 Retained earnings Total shareholders' equity 1,122.5 1,122.5 The reconciliation above shows the changes to the presentation of the balancesheet that are required as a result of the adoption of IFRS. It does not dealwith the measurement changes that are required in moving from UK GAAP to IFRS,which are shown in Appendix E. Appendix E Smiths Group plc Consolidated Balance Sheet at 1 August 2004 (unaudited) Measurement changes to IFRS UK GAAP IFRS (IFRS Basis Format) Total Development Share-based Dividend Total 2004 costs payments reversal Other 2004 £m £m £m £m £m £m Non-current assets Goodwill 728.2 (0.5) 727.7Other intangible assets 116.6 13.1 129.7Property, plant and equipment 423.5 (12.2) 411.3 Financial Assets:TI Automotive LimitedpreferenceShares 325.0 325.0Other trade investments 2.3 2.3 Retirement benefit assets 103.9 103.9Deferred tax assets 116.4 4.3 (18.0) 102.7Trade and other receivables 9.2 (0.9) 8.3 1,708.5 116.1 4.3 (18.0) 1,810.9 Current assets Inventories 423.5 (3.8) 419.7Trade and other receivables 620.4 5.1 625.5Cash and cash equivalents 449.2 449.2 Total assets 3,201.6 116.1 4.3 (16.7) 3,305.3 Non-current liabilities Provisions for liabilities and (22.6) (22.6)chargesRetirement benefit obligations (351.2) (1.8) (353.0)Deferred tax liabilities (49.4) (21.9) 32.7 (38.6) Financial liabilities:Borrowings (446.5) (446.5) Trade and other payables (53.1) (41.4) (0.2) (94.7) Current liabilities Provisions for liabilities and (79.2) (79.2)chargesTrade and other payables (665.9) (9.6) 102.5 (5.5) (578.5) Financial liabilities:Borrowings (275.4) (275.4) Current tax payable (135.8) (135.8) Total liabilities (2,079.1) (72.9) 102.5 25.2 (2,024.3) Net assets 1,122.5 43.2 4.3 102.5 8.5 1,281.0 Shareholders' equity Share capital 140.3 140.3Share premium account 183.0 183.0Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 562.7 43.2 4.3 102.5 8.5 721.2 Total shareholders' equity 1,122.5 43.2 4.3 102.5 8.5 1,281.0 The reconciliation above starts with the 1 August 2004 UK GAAP balance sheetpresented in IFRS format, as set out in Appendix D. It then plots the measurement changes required in moving from UK GAAP to IFRS. Appendix F Smiths Group plc Consolidated Balance Sheet as at 31 July 2005 - Reclassification to IFRS Format (unaudited) UK GAAP Reclassification UK GAAP Format changes IFRS Format Total Employee Total 2005 Benefits Other 2005 £m £m £m £mNon-current assets Goodwill 1,167.0 1,167.0 Goodwill Other intangible assets 58.6 58.6 Other intangible assets Tangible assets 525.8 525.8 Property, plant and equipment Investments and advances: TI Automotive Limited preference shares 325.0 325.0 TI Automotive Limited preference shares Other 3.5 3.5 Other trade investments 134.6 134.6 Retirement benefit assets 127.3 46.7 174.0 Deferred tax assets 9.9 9.9 Trade and other receivables 2,079.9 261.9 56.6 2,398.4 Current assets Stocks 570.0 570.0 Inventories Debtors - amounts falling due within one 727.2 727.2 Trade and other receivables year - amounts falling due after more 56.6 (56.6) than one year Cash at bank and on deposit 60.9 60.9 Cash and cash equivalents Total assets 3,494.6 261.9 3,756.5 Non-current liabilities Provisions for liabilities and charges (102.3) 75.9 (26.4) Provisions for liabilities and charges Retirement benefit liabilities (242.1) (127.3) (369.4) Retirement benefit obligations Pension assets 94.2 (94.2) (40.4) (11.8) (52.2) Deferred tax liabilities Creditors - amounts falling due after more (1,012.1) 1,012.1than one year (937.7) (937.7) Borrowings (74.4) (74.4) Other payables Current liabilities Creditors - amounts falling due within one (1,027.5) 1,027.5year (64.1) (64.1) Provisions for liabilities and charges (812.7) (812.7) Trade and other payables (54.0) (54.0) Borrowings (160.8) (160.8) Current tax payable Total liabilities (2,289.8) (261.9) (2,551.7) Net assets 1,204.8 1,204.8 Shareholders' equityShare capital 140.9 140.9 Share capitalShare premium account 197.5 197.5 Share premium accountRevaluation reserve 1.7 1.7 Revaluation reserveMerger reserve 234.8 234.8 Merger reserveRetained earnings 629.9 629.9 Retained earnings Total shareholders' equity 1,204.8 1,204.8 The reconciliation above shows the changes to the presentation of the balancesheet that are required as a result of the adoption of IFRS. It does not dealwith the measurement changes that are required in moving from UK GAAP to IFRS,which are shown in Appendix G. Appendix G Smiths Group plc Consolidated Balance Sheet at 31 July 2005 (unaudited) Adjustments to IFRS UK GAAP (IFRS IFRS Format) Goodwill Basis Total Development amortisation Business Share-based Dividend Total 2005 costs and Combinations Payments reversal Other 2005 impairment £m £m £m £m £m £m £m £m Non-current assets Goodwill 1,167.0 (2.9) 45.9 (58.8) 1,151.2Other intangible assets 58.6 171.7 71.8 24.0 326.1Property, plant and 525.8 (22.7) 503.1equipment Financial Assets:TI Automotive Limited 325.0 325.0preference sharesOther trade investments 3.5 3.5 Retirement benefit assets 134.6 134.6Deferred tax assets 174.0 22.3 2.8 199.1Trade and other receivables 9.9 14.8 24.7 2,398.4 168.8 45.9 13.0 22.3 18.9 2,667.3 Current assets Inventories 570.0 (5.7) 564.3Trade and other receivables 727.2 (0.8) (6.8) 719.6Cash and cash equivalents 60.9 60.9 Total assets 3,756.5 168.0 45.9 13.0 22.3 6.4 4,012.1 Non-current liabilities Provisions for liabilities (26.4) (26.4)and chargesRetirement benefit (369.4) (1.8) (371.2)obligationsDeferred tax liabilities (52.2) (37.1) (23.2) 16.9 (95.6) Financial liabilities:Borrowings (937.7) (937.7) Other payables (74.4) (45.4) (1.3) (12.1) (133.2) Current liabilities Provisions for liabilities (64.1) (64.1)and chargesTrade and other payables (812.7) (11.3) 111.3 (4.1) (716.8) Financial liabilities:Borrowings (54.0) (54.0) Current tax payable (160.8) (160.8) Total liabilities (2,551.7) (93.8) (23.2) (1.3) 111.3 (1.1) (2,559.8) Net assets 1,204.8 74.2 45.9 (10.2) 21.0 111.3 5.3 1,452.3 Shareholders' equity Share capital 140.9 140.9Share premium account 197.5 197.5Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 629.9 74.2 45.9 (10.2) 21.0 111.3 5.3 877.4 Total shareholders' equity 1,204.8 74.2 45.9 (10.2) 21.0 111.3 5.3 1,452.3 The reconciliation above starts with the 31 July 2005 UK GAAP balance sheetpresented in IFRS format. It then plots the measurement changes required in moving from UK GAAP to IFRS, except for the impact of IAS 32 and IAS 39, dealtwith in Appendix H. Appendix H Smiths Group plc Consolidated Balance Sheet at 1 August 2005 (unaudited) Impact of adoption of IAS 32 and IAS 39 IFRS Interest Forward foreign Embedded Other IFRS rate At 31 July swaps exchange derivatives At 1 2005 contracts August 2005 Total Total £m £m £m £m £m £m Non-current assets Goodwill 1,151.2 1,151.2Other intangible assets 326.1 326.1Property, plant and equipment 503.1 503.1 Financial Assets:TI Automotive Limited preference shares 325.0 325.0Other trade investments 3.5 3.5 Retirement benefit assets 134.6 134.6Deferred tax assets 199.1 3.0 202.1Trade and other receivables 24.7 1.3 26.0 2,667.3 1.3 3.0 2,671.6 Current assets Inventories 564.3 564.3Trade and other receivables 719.6 8.6 0.5 728.7Cash and cash equivalents 60.9 664.5 725.4 Total assets 4,012.1 9.9 3.5 664.5 4,690.0 Non-current liabilities Provisions for liabilities and charges (26.4) (26.4)Retirement benefit obligations (371.2) (371.2)Deferred tax liabilities (95.6) (0.1) (95.7) Financial liabilities:Borrowings (937.7) (5.6) (943.3) Trade and other payables (133.2) (3.1) (2.5) (138.8) Current liabilities Provisions for liabilities and charges (64.1) (64.1)Trade and other payables (716.8) (0.6) 0.3 (7.5) (724.6) Financial liabilities:Borrowings (54.0) (1.1) (664.5) (719.6) Current tax payable (160.8) (160.8) Total liabilities (2,559.8) (0.6) (9.5) (10.1) (664.5) (3,244.5) Net assets 1,452.3 (0.6) 0.4 (6.6) 1,445.5 Shareholders' equity Share capital 140.9 140.9Share premium account 197.5 197.5Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 877.4 (0.6) 3.7 (6.6) 873.9Cash flow hedge reserve (3.3) (3.3) Total shareholders' equity 1,452.3 (0.6) 0.4 (6.6) 1,445.5 The reconciliation above starts with the 31 July 2005 IFRS balance sheet ( whichexcludes the impact of IAS 32 and IAS 39 ). It then plots the changes requiredin respect of the adoption of IAS 32 and IAS 39. Appendix I Smiths Group plc Consolidated Balance Sheet as at 31 January 2005 - Reclassification to IFRS Format (unaudited) UK GAAP UK GAAP Format IFRS Format Total Employee Total 2005 benefits Other 2005 £m £m £m £m Non-current assets Intangible assets 748.6 748.6 Goodwill Other intangible assets Tangible assets 434.6 434.6 Property, plant and equipment Investments and advances: TI Automotive Limited preference shares 325.0 325.0 TI Automotive Limited preference shares Other 2.9 2.9 Other trade investments 110.6 110.6 Retirement benefit assets 113.5 113.5 Deferred tax assets 8.0 8.0 Trade and other receivables 1,511.1 224.1 8.0 1,743.2 Current assets Stocks 484.9 484.9 InventoriesDebtors - amounts falling due within one 620.4 620.4 Trade and other receivables year - amounts falling due after more 8.0 (8.0) than one year Cash at bank and on deposit 343.0 343.0 Cash and cash equivalents Total assets 2,967.4 224.1 3,191.5 Non-current liabilities Provisions for liabilities and charges (116.1) 90.6 (25.5) Provisions for liabilities and charges Retirement benefit liabilities (228.7) (113.5) (342.2) Retirement benefit obligations Pension assets 77.4 (77.4) (33.2) (17.8) (51.0) Deferred tax liabilities Creditors - amounts falling due after morethan oneyear (490.7) 490.7 (442.6) (442.6) Borrowings (48.1) (48.1) Other payables Current liabilities Creditors - amounts falling due within one (1,045.1) 1,045.1year (72.8) (72.8) Provisions for liabilities and charges (633.0) (633.0) Trade and other payables (292.0) (292.0) Borrowings (120.1) (120.1) Current tax payable Total liabilities (1,803.2) (224.1) (2,027.3) Net assets 1,164.2 1,164.2 Shareholders' equityShare capital 140.6 140.6 Share capitalShare premium account 190.4 190.4 Share premium accountRevaluation reserve 1.7 1.7 Revaluation reserveMerger reserve 234.8 234.8 Merger reserveRetained earnings 596.7 596.7 Retained earnings Total shareholders' equity 1,164.2 1,164.2 The reconciliation above shows the changes to the presentation of the balancesheet that are required as a result of the adoption of IFRS. It does not dealwith the measurement changes that are required in moving from UK GAAP to IFRS,which are shown in Appendix J. Appendix J Smiths Group plc Consolidated Balance Sheet at 31 January 2005 (unaudited) Adjustments to IFRS UK GAAP IFRS (IFRS Format) Basis Total Development Share-based Dividend Total 2005 costs payments reversal Other 2005 £m £m £m £m £m £m Non-current assets Goodwill 748.6 (0.5) 21.8 769.9Other intangible assets 136.3 14.4 150.7Property, plant and equipment 434.6 (14.0) 420.6 Financial Assets:TI Automotive Limited preference shares 325.0 325.0Other trade investments 2.9 2.9 Retirement benefit assets 110.6 110.6Deferred tax assets 113.5 9.6 (18.3) 104.8Trade and other receivables 8.0 (0.9) 7.1 1,743.2 135.8 9.6 3.0 1,891.6 Current assets Inventories 484.9 (3.3) 481.6Trade and other receivables 620.4 620.4Cash and cash equivalents 343.0 343.0 Total assets 3,191.5 135.8 9.6 (0.3) 3,336.6 Non-current liabilities Provisions for liabilities and charges (25.5) (25.5)Retirement benefit obligations (342.2) (1.8) (344.0)Deferred tax liabilities (51.0) (27.8) 30.8 (48.0) Financial liabilities:Borrowings (442.6) (442.6) Other payables (48.1) (43.3) (0.9) (92.3) Current liabilities Provisions for liabilities and charges (72.8) (72.8)Trade and other payables (633.0) (11.3) (0.3) 52.0 (1.3) (593.9) Financial liabilities:Borrowings (292.0) (292.0) Current tax payable (120.1) (120.1) Total liabilities (2,027.3) (82.4) (0.3) 52.0 26.8 (2,031.2) Net assets 1,164.2 53.4 9.3 52.0 26.5 1,305.4 Shareholders' equity Share capital 140.6 140.6Share premium account 190.4 190.4Revaluation reserve 1.7 1.7Merger reserve 234.8 234.8Retained earnings 596.7 53.4 9.3 52.0 26.5 737.9 Total shareholders' equity 1,164.2 53.4 9.3 52.0 26.5 1,305.4 The reconciliation above starts with the 31 January 2005 UK GAAP balance sheetpresented in IFRS format. It then plots the measurement changes required inmoving from UK GAAP to IFRS. Appendix K Smiths Group plc Consolidated Cash Flow Statement for the year ended 31 July 2005 UK GAAP (IFRS Format) Goodwill IFRS amortisation Amortisation Stock Basis of revaluation 2005 Development and intangible on Share-based 2005 Total Costs impairment assets acquisition Payments Other Total £m £m £m £m £m £m £m £mCash flows from operatingactivitiesProfit before taxation 309.8 36.3 48.4 (3.4) (14.0) (6.3) 3.8) 367.0 Net interest payable 22.9 4.5 27.4Other finance income -retirementbenefits (15.1) (15.1) Operating profit 317.6 36.3 48.4 (3.4) (14.0) (6.3) 0.7 379.3Exceptional - charge 48.2 48.2restructuring - (35.2) (35.2) expended Amortisation of intangible 61.0 (48.4) 3.4 16.0assetsWrite-down of goodwill onanticipatedfuture disposal 2.3 (2.3)Profit on disposal of (8.7) (8.7)businessesDepreciation of propertyplant andequipment 77.0 77.0Share based payment expense 6.3 6.3Retirement benefits (16.5) (16.5)Amortisation of developmentexpenditure(net) 24.6 24.6Increase in inventories (91.2) 1.9 (89.3)Increase in trade and other (53.6) (0.1) (53.7)receivablesIncrease in trade and other 48.8 6.5 (0.2) 55.1payablesOther non cash movements 14.0 14.0 Cash generated from 349.7 67.4 417.1operationsInterest paid (19.9) (19.9)Tax paid (77.9) (77.9) Net cash inflow from 251.9 67.4 319.3operating activities Cash flows from investingactivitiesCapitalisation of development (67.4) (67.4)expenditureAcquisitions (410.0) (410.0)Disposals of businesses 0.5 0.5Purchases of property, plantandequipment (114.2) (114.2)Disposals of property, plantandequipment 9.3 9.3 Net cash flow used in (514.4) (581.8)investing activities Cash flows from financingactivitiesProceeds from issue ofordinary sharecapital 14.6 14.6Dividends paid to equity (154.5) (154.5)shareholdersIncrease in other borrowings 38.4 38.4 Net cash flow used in (101.5) (101.5)financing activities Net decrease in cash and cashequivalents (364.0) (364.0)Cash and cash equivalents at1 August2004 421.0 421.0Exchange differences (45.1) (45.1) Cash and cash equivalents at 11.9 11.931 July 2005 Cash and cash equivalents at31 July 2005comprise:Cash at bank and in hand 51.1 51.1Deposits 9.8 9.8Bank overdrafts (49.0) (49.0) 11.9 11.9 Appendix L Smiths Group plc Significant IFRS Accounting Policies - to be adopted 1 August 2005 These accounting policies comply with International Financial ReportingStandards issued up to the date of this announcement and applicable to thecompany for the period under review. All relevant International FinancialReporting Standards have been endorsed by the European Union, with the exceptionof an amendment to IAS 19 Retirement Benefits allowing actuarial gains andlosses to be recognised immediately within equity. As explained on page 3 ofthis document, there are uncertainties surrounding the development of IFRS whichmean that these polices may change before 31 July 2006, when the Company willpresent its first full financial statements under IFRS. Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and its subsidiaries. Subsidiaries are all entities over which the Company has the power to govern thefinancial and operating policies generally accompanying a shareholding of morethan one half of the voting rights. Subsidiaries are fully consolidated fromthe date on which control is transferred to the Company. They arede-consolidated from the date that control ceases. Foreign currencies The Company's presentational currency is sterling. The results and financialposition of all subsidiaries and associates that have a functional currencydifferent from sterling are translated into sterling as follows: • Assets and liabilities are translated at the closing rate at the date of that balance sheet; • Income and expenses are translated at average rates; and • All resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the netinvestment in foreign entities, and of borrowings and other currency instrumentsdesignated as hedges of such investments, are taken to shareholders equity.When a foreign operation is sold, the cumulative amount of such exchangedifferences is recognised in the income statement as part of the gain or loss onsale. Revenue Revenue comprises the fair value for the sale of goods and services, net oftrade discounts and sales related taxes, and the value of work undertaken duringthe year on long-term contracts. Revenue is recognised when the risks andrewards of the underlying sale have been transferred to the customer, which isusually where title passes. Long-term funded contracts Where the outcome of a contract can be estimated reliably, revenue and costs arerecognised by reference to the stage of completion of the contract activity atthe balance sheet date. The Group uses the 'percentage of completion method' todetermine the appropriate amount to recognise in a given period. The assessmentof the stage of completion is dependent on the nature of the contract, but willgenerally be based on the extent to which the Company has obtained the right toconsideration in exchange for performance under the contract. If a contract isexpected to be loss-making, a provision is recognised for the entire loss. Employee benefits Pension obligations and post-retirement benefits The Company has both defined benefit and defined contribution plans. For defined benefit plans the liability for each scheme recognised in thebalance sheet is the present value of the defined benefit obligation at thebalance sheet date less the fair value of plan assets. The defined benefitobligation is calculated annually by independent actuaries using the projectedunit credit method. The present value of the defined benefit obligation isdetermined by discounting the estimated future cash outflows using interestrates of high-quality corporate bonds that are denominated in the currency inwhich the benefits will be paid, and that have terms to maturity approximatingto the terms of the related pension liability. Actuarial gains and lossesarising from experience adjustments and changes in actuarial assumptions arerecognised in full in the period in which they occur, outside of the incomestatement and are presented in the statement of recognised income and expense.Past service costs are recognised immediately in income, unless the changes tothe pension plan are conditional on the employees remaining in service for aspecified period of time (the vesting period). In this case, the past servicecosts are amortised on a straight-line basis over the vesting period. For defined contribution plans, the Group pays contributions to publicly orprivately administered pension insurance plans on a mandatory, contractual orvoluntary basis. Contributions are expensed as incurred. Share based compensation The Company operates a number of equity settled share based compensation plans.The fair value of the employee services received in exchange for the grant ofshares or share options is recognised as an expense. The total amount to beexpensed over the vesting period is determined by reference to the fair value ofthe shares or share options granted, excluding the impact of any non-marketvesting conditions (for example profitability and sales growth targets). Fairvalue is determined by reference to option pricing models, principally Binomialmodels. The Company has applied the requirements of IFRS 2 Share-based Payment. Inaccordance with the transitional provisions, IFRS 2 has been applied only togrants of equity instruments after 7 November 2002 that had not vested as at 1January 2005. The intrinsic value of earlier grants remain charged to the incomestatement, as previously required under UK GAAP. Significant items Items which are non-recurring and sufficiently material are presented separatelywithin their relevant consolidated income statement category. The separatereporting of such items helps provide a better indication of the Company'sunderlying business performance. Events which may give rise to such itemsinclude the restructuring of businesses; gains and losses on their sale; andasset impairments. Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Company's share of the identifiable net assets of the acquired subsidiaryat the date of acquisition. Goodwill arising from acquisitions of subsidiaries after 1 August 1998 isincluded in intangible assets, is not amortised but is tested annually forimpairment and carried at cost less accumulated impairment losses. Gains andlosses on the disposal of an entity include the carrying amount of goodwillrelating to the entity sold. Goodwill arising from acquisitions of subsidiaries before 1 August 1998, whichwas set against reserves in the year of acquisition under UK GAAP, has not beenreinstated and is not included in determining any subsequent profit or loss ondisposal of the related entity. Goodwill is tested for impairment at least annually or whenever there is anindication that the asset may be impaired. Any impairment is recognisedimmediately in the income statement. Subsequent reversals of impairment lossesfor goodwill are not recognised. Research and development Expenditure on research and development is charged to the profit and lossaccount in the year in which it is incurred with the exception of: • amounts recoverable from third parties; and • expenditure incurred in respect of the development of certain major new product projects where the outcome of those projects is assessed as being reasonably certain as regards viability and technical feasibility. Such expenditure is capitalised and amortised over the expected useful life of the development, being the estimated period of sale for each product, commencing in the year sales of the product are first made. Other intangible assets The identifiable net assets acquired as a result of a business combination mayinclude intangible assets other than goodwill. Any such intangible assets areamortised over their expected future lives unless they are regarded as having anindefinite life, in which case they are not amortised, but subjected to annualimpairment testing in a similar manner to goodwill. Property plant and equipment Property, plant and equipment is stated at historical cost less accumulateddepreciation and any recognised impairment losses. Land is not depreciated. Depreciation is provided on other assets estimated towrite off the depreciable amount of relevant assets by equal annual instalmentsover their estimated useful lives. In general, the rates used are: Freehold andlong leasehold buildings - 2%, Short leasehold property - over the period of thelease, Plant, machinery, etc. - 10% to 20%, Motor vehicles - 25%, Tools andother equipment - 10% to 33%. Fixed assets held under finance leases are capitalised and depreciated inaccordance with the Company's depreciation policy, or over the lease term, ifshorter. The assets' residual values and useful lives are reviewed, and adjusted ifappropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amountif the asset's carrying amount is greater than its estimated recoverable amount. Leases Leases in which a significant portion of the risks and rewards of ownership areretained by the lessor are classified as operating leases. Payments made underoperating leases are charged to the income statement on a straight-line basisover the period of the lease. 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). Itexcludes borrowing costs. Net realisable value is the estimated selling pricein the ordinary course of business, less applicable variable selling expenses. Trade and other receivables Trade and other receivables are stated at cost after deducting adequateprovision for doubtful debts. Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand, highly liquidinterest-bearing securities with maturities of three months or less, and bankoverdrafts. Provisions Provisions for service guarantees and product liability, disposal indemnities,restructuring costs, vacant leasehold property and legal claims are recognisedwhen; the Company has a legal or constructive obligation as a result of a pastevent; it is probable that an outflow of resources will be required to settlethe obligation; and the amount has been reliably estimated. Provisions are notrecognised for future operating losses. Where there are a number of similar obligations, for example where a serviceguarantee has been given, the likelihood that an outflow will be required insettlement is determined by considering the class of obligations as a whole. Aprovision is recognised even if the likelihood of an outflow with respect to anyone item included in the same class of obligations may be small. Where a leasehold property is vacant, or sub-let under terms such that therental income is insufficient to meet all outgoings, provision is made for theanticipated future shortfall up to termination of the lease, or the terminationpayment, if smaller. Taxation The charge for taxation is based on profits for the year and takes into accounttaxation deferred because of temporary differences between the treatment ofcertain items for taxation and accounting purposes. Deferred tax is provided in full using the balance sheet liability method. Adeferred tax asset is recognised where it is probable that future taxable incomewill be sufficient to utilise the available relief. Tax is charged or creditedto the income statement except when it relates to items charged or crediteddirectly to equity, in which case the tax is also dealt with in equity. Deferred tax is provided on temporary differences arising on investments insubsidiaries and associates, except where the timing of the reversal of thetemporary differences is controlled by the Company and it is probable that thetemporary difference will not reverse in the foreseeable future. Financial assets Financial assets are initially recognised at fair value (i.e. original cost plustransaction costs). They are no longer recognised when the right to receive cashflows from the assets have expired or have been transferred, and the Company hastransferred substantially all of the risks and rewards of ownership. The subsequent measurement of financial assets depends on their classification.They are classified as either loans and receivables; held to maturityinvestments; available-for-sale financial assets; or financial assets wherechanges in fair value are charged (or credited) to the income statement. Theclassification depends on the purpose for which the financial assets wereacquired. Management determines the classification of financial assets atinitial recognition and re-evaluates their designation at each reporting date. Loans and receivables and held-to-maturity investments are subsequently measuredat amortised cost using the effective interest method. Available-for-salefinancial assets and financial assets where changes in fair value are charged(or credited) to the income statement are subsequently measured at fair value.Realised and unrealised gains and losses arising from changes in the fair valueof the 'financial assets at fair value through profit and loss' category areincluded in the income statement in the period in which they arise. Unrealisedgains and losses arising from changes in the fair value of non-monetarysecurities classified as available-for-sale are recognised in equity. Whensecurities classified as available-for-sale are sold or impaired, theaccumulated fair value adjustments are included in the income statement as gainsor losses from investment securities. Financial liabilities Borrowings made by the Company are initially recognised at the amount received,net of related transaction costs. These transaction costs and any discount orpremium on issue are subsequently amortised through the income statement asinterest over the life of the loan, and added to the liability disclosed in thebalance sheet. Borrowings are classified as current liabilities unless the Company has anunconditional right to defer settlement of the liability for at least one yearafter the balance sheet date. Derivative financial instruments and hedging activities Derivatives are initially recognised at fair value on the date a derivativecontract is entered into and are subsequently re-measured at their fair value.The method of recognising any resulting gain or loss depends on whether thederivative is designated as a hedging instrument, and if so, the nature of theitem being hedged. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fairvalue hedges are recorded in the income statement, together with any changes inthe fair value of the hedged asset or liability that are attributable to thehedged risk. Cash flow hedge The effective portion of changes in the fair value of derivatives that aredesignated and qualify as cash flow hedges are recognised in equity. The gainor loss relating to any ineffective portion is recognised immediately in theincome statement. Amounts accumulated in equity are recycled in the income statement in theperiods when the hedged item will affect profit or loss (for instance when theforecast sale that is hedged takes place). However, when a forecast transactionthat is hedged results in the recognition of a non-financial asset (for example,inventory) or a liability, the gains and losses previously deferred in equityare transferred from equity reserves and included in the initial measurement ofthe cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meetsthe criteria for hedge accounting, any cumulative gain or loss existing inequity at that time remains in equity and is recognised when the forecasttransaction is ultimately recognised in the income statement. When a forecasttransaction is no longer expected to occur, the cumulative gain or loss that wasreported in equity is immediately transferred to the income statement. Net investment hedge Hedges of net investments in foreign operations are accounted for similarly tocash flow hedges. Any gain or loss on the hedging instrument relating to theeffective portion of the hedge is recognised in equity; the gain or lossrelating to any ineffective portion is recognised immediately in the incomestatement. Gains and losses accumulated in equity are included in the income statement whenthe foreign operation is disposed of. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes inthe fair value of any derivative instruments that do not qualify for hedgeaccounting are recognised in the profit and loss account. Derivatives embedded in other financial instruments or other host contracts aretreated as separate derivatives when their risks and characteristics are notclosely related to those of the host contracts and the host contracts are notcarried at their fair value. Unrealised gains and losses on these embeddedderivatives are recognised in the profit and loss account. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Smiths Group