17th Jun 2005 07:00
Senior PLC17 June 2005 SENIOR plc NEWS RELEASE Friday 17 June 2005 Adoption of International Financial Reporting Standards ("IFRS")Restatement of 2004 Financial Information Overview of Impact • Underlying trading and cash flows unaffected. • Reported profit before tax and basic earnings per share significantly improved as a result of revised accounting for goodwill on disposals and goodwill amortisation. • Net assets improved due to revised accounting for goodwill and proposed dividends. • No material changes from the effects mentioned in the 2004 Annual Report. 2004 2004 IFRS (unaudited) UK GAAP (1) Sales - continuing subsidiaries £306.8m £306.8m Operating profit - continuing subsidiaries £16.8m £11.8m Profit before tax - continuing subsidiaries £12.9m £7.7m Loss from discontinued operations (£4.4m) (£12.9m) Profit / (loss) for the year £6.9m (£6.9m) Basic earnings / (loss) per share 2.25p (2.25p) Adjusted earnings per share (2) 3.65p 3.65p Net assets £83.8m £75.3m (1) The UK GAAP numbers are as reported in the 2004 Annual Report reformatted in line with the IFRS presentational requirements. (2) Adjusted earnings per share is calculated on earnings before goodwill amortisation, profit / (loss) on sale of operations and fixed assets and foreign exchange gains / (losses) on long-term intercompany loans. Contact For further information please contact: Mark Rollins, Group Finance Director 01923 714738 This announcement, together with other information on Senior plc may be foundat: www.seniorplc.com 1.Introduction The purpose of this statement is to provide a detailed update on the impact ofthe transition to International Financial Reporting Standards (IFRS) on the 2004published consolidated financial statements of Senior plc. A brief commentary on the expected impact was included in the Finance Director'sReview contained in the Group's 2004 Annual Accounts. Whilst this statementprovides greater detail on the transition to IFRS, the adjustments are consistent with the previous commentary. The information has been prepared by management using its best knowledge,judgement and interpretation of the expected standards and accounting policiesthat will be adopted when the Group prepares its first complete set of IFRSfinancial statements as at 31 December 2005. It is unaudited. It should be notedthat only a complete set of financial statements comprising an income statement,a balance sheet, a cash flow statement, a statement of changes in equitytogether with comparative financial information and explanatory notes canprovide a fair presentation of the Group's financial position and operatingperformance. This statement contains no information in respect of the Group's 2005performance under IFRS. Senior intends to report its interim accounts, covering the six months to 30June 2005, under IFRS, on Thursday 4 August 2005. 2.Transition to International Financial Reporting Standards Companies listed on security exchanges within the European Union are required toadopt IFRS for accounting periods beginning on or after 31 December 2004. Theadoption of IFRS will, therefore, first apply to the Group's financialstatements with effect from 1 January 2005. Comparative figures are required andconsequently, for Senior, the transition date is 1 January 2004, as determinedin accordance with IFRS 1 First-time Adoption of International AccountingStandards. During 2004/05 the Group undertook a project, overseen by the Audit Committee,to manage the transition to IFRS. This involved an analysis of each standard toidentify the differences between the Group's accounting policies under UK GAAPand those to be adopted under IFRS. The additional data required to restate theGroup's results and its financial position in accordance with IFRS with effectfrom the transition date has been collected and the ongoing reporting andconsolidation systems are being modified to meet IFRS requirements. The differences between UK GAAP and IFRS that have been identified as having themost significant effect on the Group's reported results are those arising fromthe implementation of IFRS 3 Business Combinations, the treatment of proposeddividends and presentational differences of the financial statements. These,along with some of the more minor changes, are discussed below: Section 3 coversthe Group Income Statement; Section 4, the Group Balance Sheet and Section 5,the Group Cash Flow Statement. The exemptions adopted by Senior in thetransition to IFRS, as permitted by IFRS 1, are explained at Section 10 and theAccounting Policies to be adopted by the Group under IFRS in Section 11. 3.Group Income Statement UK GAAP Adjustment IFRS Note Reformatted 2004 2004 2004 £m £m £mContinuing Operations 3.1Revenue 306.8 306.8 --------- -------- ------- Trading profit 16.4 (0.1) 16.3 3.2, 3.3Profit on sale of fixed assets 0.5 0.5 3.4Amortisation of goodwill (5.1) 5.1 - 3.6 --------- -------- -------Operating profit 11.8 5.0 16.8 3.2 --------- -------- ------- FX gains on long-termintercompany loans 0.2 0.2 3.5Interest receivable 2.2 (0.1) 2.1 3.7Interest payable and similar charges (5.1) 0.1 (5.0) 3.7Finance cost of netpension liability (1.2) (1.2) --------- -------- -------Profit before taxation 7.7 5.2 12.9 Taxation (1.7) 0.1 (1.6) --------- -------- -------Profit for the period fromcontinuing operations 6.0 5.3 11.3 --------- -------- ------- Discontinued OperationsProfit from operationsbefore taxtation 0.4 0.1 0.5 3.2Taxation (0.1) (0.1)Loss on disposal (13.3) 8.5 (4.8) 3.8 --------- -------- -------Loss for the period fromdiscontinued operations (12.9) 8.5 (4.4) --------- -------- ------- --------- -------- -------(Loss) / profit for the period (6.9) 13.8 6.9 3.9 --------- -------- ------- The profit for the period is wholly attributable to equity holders of theparent. Earnings / (loss) per share 3.10 Total GroupBasic (2.25)p 2.25pDiluted (2.25)p 2.22p Continuing operationsBasic 3.69pDiluted 3.64p 3.1 Format of the Income Statement The proforma IFRS income statement is structured differently to the layoutpreviously adopted. In particular the analysis between continuing anddiscontinued operations is shown differently, permitting a greater focus on thecontinuing operations. The format used above is based on a currentinterpretation of IFRS. It is subject to modification as standard practiceamongst UK listed entities evolves. 3.2 Trading and operating profit These headings have been created to highlight the performance of continuingoperations from trading activities (trading profit) and also the totalperformance prior to charges in respect of financing and taxation (operatingprofit). The reconciling items between trading profit and operating profit willbe any profit or loss arising on sale of fixed assets (see 3.4 below) and itemssuch as the costs of a major restructuring exercise. Trading profit isconsistent with amounts previously disclosed as operating profit before goodwillamortisation under UK GAAP. The segmental analysis will be based on operatingprofit as financing and taxation charges are considered to be of a Group natureand not allocable to individual segments. Furthermore, operating costs of aGroup nature that are not directly attributable to segments will be disclosedseparately, rather than being allocated to the operating segments as they wereunder UK GAAP. As a result, £0.1m of central cost previously allocated todiscontinued operations has been re-allocated to the continuing operations. Theimpact of any profit or loss arising on the sale of fixed assets will be shownon a segmental basis in order to permit the underlying trading performance to befully understood. 3.3 Share based payments Share based payment arrangements exist in relation to share and share optionschemes offered to senior management. Share options were issued in March 2003and it is considered that these may ultimately vest. No cost was included in UKGAAP accounts as the intrinsic value was nil. A cost of under £0.1m has beenincluded in the IFRS accounts. This expense has been based on the fair value atthe date of the award, as calculated according to the Black-Scholes pricingmodel. 3.4 Profit on sale of fixed assets Whilst this ultimately forms part of operating profit, it has been highlightedon the basis that significant disposals of fixed assets occur on an infrequentbasis and may give rise to profits or losses. As such it is considered thatreaders will have a better understanding of the underlying performance of theoperations if the impact of this item is separately identified. 3.5 Foreign exchange gains or losses on long-term intercompany loans This has been highlighted as a separate significant item in the income statement because of its inter-group nature and its potential future volatility.The Group has a range of funding arrangements in place at both Group andsubsidiary level. In many instances a significant source of subsidiary fundingis an inter-group loan. Under both UK GAAP and IFRS the exchange differencesthat arise on the re-translation of these loans is taken to the income statementunless the loan can be designated as part of the net investment in thesubsidiary, in which case the difference is dealt with through reserves.However, IFRS specifically disallows this latter treatment if the loans are in acurrency different to that of either counterparty or if the loan is between twosubsidiaries where one does not have an investment, either directly orindirectly, in the other. Consequently, a net translation gain of £0.2m has beentransferred from equity to the income statement in 2004 in respect of suchloans. 3.6 Goodwill amortisation Under UK GAAP, goodwill arising on acquisitions subsequent to 1 January 1998 wascapitalised and amortised over a period of up to 20 years. Under IFRS, goodwillis held at its carrying value (the UK GAAP net book value as at 31 December2003) and subjected to annual impairment testing. Hence the goodwillamortisation charge of £5.1m for 2004 under UK GAAP has been reversed for IFRSpurposes. 3.7 Interest receivable and interest payable A benefit of £0.1m arising from interest rate swap agreements was previouslyshown as interest receivable. This has now been offset against the relatedinterest payable amount. 3.8 Loss on disposal of discontinued operations Under UK GAAP, goodwill arising on acquisitions prior to 1 January 1998 waswritten off directly to equity. When such a company was subsequently disposed,the goodwill was 'recycled' through the income statement as part of the profitor loss on disposal. There is no such requirement under IFRS. Hence, the UK GAAPloss is reduced by £8.7m. Additionally, IFRS requires cumulative translationdifferences to be recognised in the disposal transaction. These amount to £0.2m,making the aggregate adjustment £8.5m. 3.9 Dividends Under UK GAAP, any dividends paid or proposed in respect of a year arerecognised in the income statement. Under IFRS, they are recognised asdistributions from equity. Hence the dividends of £6.1m, paid and proposed in2004, have been excluded from the income statement under IFRS. This is a formatchange only. 3.10 Earnings per share Basic earnings per share will be presented on the face of the income statement.In accordance with IAS33 ("Earnings per Share") this amount is required to besplit between continuing and discontinued businesses. Adjusted earnings pershare will now be shown in the notes to the accounts (see section 9 below). Itis intended that the definition of adjusted earnings per share will follow thatwhich was previously adopted under UK GAAP, except that it will also exclude theimpact of foreign exchange gains and losses arising on long-term intercompanyloans. 4.Group Balance Sheet UK GAAP Adjustment IFRS Note Reformatted 2004 2004 2004 £m £m £mAssetsNon-current assetsProperty, plant & equipment 70.0 (1.2) 68.8 4.2Goodwill 68.0 5.1 73.1 4.1Intangible assets - 1.2 1.2 4.2, 4.8Deferred tax assets 0.1 0.1Trade and other receivables 3.8 3.8 --------- -------- ------- 141.9 5.1 147.0 --------- -------- -------Current assetsInventories 38.4 38.4 4.8Construction contracts 4.5 4.5Trade and other receivables 55.5 55.5Cash and cash equivalents 7.4 7.4 --------- -------- ------- 105.8 - 105.8 --------- -------- -------Total Assets 247.7 5.1 252.8 --------- -------- ------- Current liabilitiesTrade and other payables (63.7) 4.1 (59.6) 4.3Tax liabilities (9.5) (9.5)Obligations under finance leases (0.3) (0.3)Bank overdrafts and loans (2.6) (2.6) --------- -------- ------- (76.1) 4.1 (72.0) --------- -------- -------Non current liabilitiesBank and other loans (52.6) (52.6)Retirement benefit obligations (41.2) (0.2) (41.4) 4.4Deferred tax liabilities (0.4) (0.5) (0.9) 4.5Obligations under finance leases (1.8) (1.8)Others (0.3) (0.3) --------- -------- ------- (96.3) (0.7) (97.0) --------- -------- -------Total Liabilities (172.4) 3.4 (169.0) --------- -------- -------Net Assets 75.3 8.5 83.8 --------- -------- ------- Capital and ReservesShare capital 30.7 - 30.7Share premium 3.5 - 3.5Other reserves 17.7 (0.7) 17.0 4.7Hedging and translation reserve - 0.5 0.5 4.7Equity reserve - 0.1 0.1 4.6Retained earnings 24.7 8.6 33.3Own shares (1.3) - (1.3) --------- -------- -------Total Equity 75.3 8.5 83.8 --------- -------- ------- 4.1 Goodwill amortisation Under UK GAAP, goodwill arising on acquisitions subsequent to 1 January 1998 wascapitalised and amortised over a period of up to 20 years. Under IFRS, goodwillis held at its carrying value (the UK GAAP net book value as at 31 December2003) and subjected to annual impairment testing. Hence the goodwillamortisation charge of £5.1m has been reversed, leading to an equivalentincrease in the goodwill value on the balance sheet at the end of 2004 underIFRS. 4.2 Intangible assets IFRS requires computer software to be recorded as an intangible asset andamortised over its useful life. Accordingly, £1.2m of net book value has beentransferred from within plant & equipment to intangible assets. At 31 December2003, the equivalent adjustment was a transfer of £1.6m. There is no net effectin the income statement, although £0.5m of depreciation will now be recorded asthe amortisation of intangibles. 4.3 Dividends Under UK GAAP, any dividend proposed in respect of a year is recognised in theincome statement and provided for in the closing balance sheet. Under IFRS, adeclared dividend does not constitute an adjusting post balance sheet event.Hence, the provision for the final dividend of £4.1m at the end of 2004 under UKGAAP has been reversed under IFRS. The same adjustment applies to the proposeddividend as at 31 December 2003. 4.4 Retirement benefit obligations IFRS requires that invested assets be valued at bid price, rather than atmid-price as required under UK GAAP, by FRS17. This revaluation causes theassets held by the funded plans to reduce in value by £0.2m, and consequentlythe net balance sheet pension deficit to increase by the same amount. The sameadjustment applies to the balance sheet as at 31 December 2003. 4.5 Deferred tax IFRS changes the focus of deferred tax from the income statement to the balancesheet and to the differences between the book value and tax base of assets andliabilities. Under IFRS, deferred tax is provided on all temporary differences,albeit that deferred tax assets are only recognised to the extent that they maybe regarded as recoverable. The Group has recognised a net increase in deferredtax liabilities of £0.5m relating to the taxation of deferred foreign exchangegains arising in overseas territories. The equivalent adjustment as at 31December 2003 was £0.6m. The movement in the year ended 31 December 2004 hasbeen credited directly to equity via the statement of recognised income andexpense. 4.6 Share based payments In 2003, under IFRS, a cost of £0.1m would have been recognised for shareoptions. In 2004, a further small cost was incurred, with the cumulativeprovision remaining at £0.1m at the end of 2004. 4.7 Share capital and reserves As noted later under the IFRS 1 exemptions, the cumulative translationdifferences have been set to zero at the transition date. The closing balance of£0.5m represents the amount arising in 2004. Also, as noted under the IFRS 1exemptions, the existing UK GAAP value of property, plant and equipment has beentaken as the deemed cost for IFRS. Hence, the revaluation reserve has been resetto zero, with the previous balance of £0.7m having been transferred to theprofit and loss reserve. 4.8 Research & development Under UK GAAP, all research and development costs were charged against revenueas incurred unless they were specifically recoverable through funded developmentcontracts or under contractual guarantees. If recoverable, the costs werecapitalised within inventory and charged to the income statement at the sametime as the related revenues were recognised. Under IFRS, the above treatment of specifically recoverable funded developmentengineering will continue whereas, amounts deemed recoverable as a result ofcontractual guarantees will be capitalised within intangible assets andamortised over the guarantee period. As at 31 December 2004 there were no suchamounts. Other ongoing development activities have been reviewed. Throughout the Group,the majority of development expenditure is directed to improvements in existingmanufacturing processes and product technology when the costs will continue tobe expensed as incurred under IFRS. Much of the investment in new products takes place prior to securing commercialproduction orders, and is incurred on an at risk basis. In such circumstancesthe costs will continue to be expensed. However, where there is greatercertainty as to the ultimate benefit and the timescale over which the benefitwill be achieved, the cost will be capitalised and amortised, provided that theproject also meets the criteria for recognition as an asset. As at 31 December2004, it was concluded that no projects met the criteria to capitalise any suchamounts. Further, IFRS does not permit assessments to be performed retrospectively andwith the benefit of hindsight. As at 31 December 2003 the appropriate reviewprocedures were not in place to carry out such an assessment and so no amountscould be capitalised at that date. 5.Group Cash Flow Statement IFRS 2004 £m Net cash inflow from operating activities (UK GAAP) 20.4less: interest paid (5.4)add: tax receipts 2.7 --------Net cash inflow from operating activities (IFRS) 17.7 Investing activitiesInterest received 2.5Disposal of subsidiaries 4.7Proceeds on disposal of property, plant & equipment 0.7Purchases of property, plant & equipment (9.8)Purchases of intangible assets - software (0.2)Acquisition of subsidiary (deferred consideration) (0.2) --------Net cash used in investing activities (2.3) Financing activitiesDividends paid (6.1)Repayment of borrowings (18.9)Repayments of obligations under finance leases (0.3)Cash inflow on forward contracts 4.5 --------Net cash used in financing activities (20.8) --------Net decrease in cash and cash equivalents (5.4) Cash and cash equivalents at beginning of year 11.5 Effects of foreign exchange rate changes (0.2) --------Cash and cash equivalents at end of year 5.9 -------- 2004 £mCash and cash equivalents comprise:Cash and cash equivalents 7.4Overdrafts (1.5) -------- 5.9 -------- Reconciliation of net cash inflow from operating activities to free cash flow UK GAAP IFRS £m £m Net cash inflow from operating activities 20.4 17.7less: interest paid (5.4)add: tax receipts 2.7add: interest received 2.5 2.5add: proceeds on disposal of property, plant & equipment 0.7 0.7less: purchases of property, plant & equipment - cash (10.0) (9.8)less: purchases of property, plant & equipment - financelease (0.4) (0.4)less: purchases of intangible assets - software - (0.2) -------- --------Free cash flow 10.5 10.5 -------- -------- Free cash flow will continue to be used as a non-statutory measure intended todemonstrate the total net cash generated by the Group prior to corporateactivity such as acquisitions, disposals and distributions to shareholders. 6.Statement of Recognised Income and Expense UK GAAP Adjustment IFRS Reformatted 2004 2004 2004 £m £m £m Currency variations (0.5) (0.5)Actuarial losses on retirement benefit obligations (0.3) (0.3)Tax on items taken directly to equity 0.9 0.1 1.0 -------- -------- --------Net gains not recognised in income statement 0.1 0.1 0.2(Loss) / profit for the financial year (6.9) 13.8 6.9 -------- -------- --------Total recognised (loss) / income for the year (6.8) 13.9 7.1 -------- -------- -------- 7.Reconciliation of Equity by Component of Equity 7.1 As at 1 January 2004 Share Share Other Translation Equity Profit Investment Total Capital Premium Reserves Reserve Reserve and in own Loss shares £m £m £m £m £m £m £m £m UK GAAP 30.7 3.5 17.7 - - 28.9 (1.3) 79.5 IFRS adjustments: Post retirementbenefit obligatiions (0.2) (0.2)Final dividend 4.1 4.1Deferred tax liability (0.6) (0.6)Revaluation reserve (0.7) 0.7 -Share options 0.1 (0.1) - ------ ------ ------ ------- ------ ------ ------- ------Total opening adjustments - - (0.7) - 0.1 3.9 - 3.3 ------ ------ ------ ------- ------ ------ ------- ------IFRS 30.7 3.5 17.0 - 0.1 32.8 (1.3) 82.8 ------ ------ ------ ------- ------ ------ ------- ------ 7.2 As at 31 December 2004 Share Share Other Translation Equity Profit Investment Total Capital Premium Reserves Reserve Reserve and in own Loss shares £m £m £m £m £m £m £m £mUK GAAP 30.7 3.5 17.7 - - 24.7 (1.3) 75.3IFRSadjustments: Total openingadjustments - - (0.7) - 0.1 3.9 - 3.3Change in profitfor the period 13.8 13.8Goodwill on disposal (8.7) (8.7)Translation reserve 0.5 (0.4) 0.1 ------ ------ ------ ------- ------ ------ ------- ------IFRS 30.7 3.5 17.0 0.5 0.1 33.3 (1.3) 83.8 ------ ------ ------ ------- ------ ------ ------- ------ £mOpening IFRS Equity per 7.1 above 82.8Add: total recognised income per 6 above 7.1 less: dividends paid to shareholders (6.1) ------Closing IFRS Equity as above 83.8 ------ 8.Segmental Analysis - by Industry Gross Inter- External Trading P&L on Operating Revenue Group Revenue Profit disposal Profit Revenue of fixed assets £m £m £m £m £m £mAerospace 139.6 (0.1) 139.5 11.1 - 11.1Automotive 122.9 (0.3) 122.6 8.0 0.5 8.5Industrial 44.9 (0.2) 44.7 1.0 - 1.0Unallocated costs - - - (3.8) - (3.8) ------- ------- ------- ------- -------- -------Total continuingoperations 307.4 (0.6) 306.8 16.3 0.5 16.8 ------- ------- ------- ------- -------- ------- Discontinuedoperations 19.1 - 19.1 0.5 - 0.5 ------- ------- ------- ------- -------- ------- 9.Earnings Per Share UK GAAP UK GAAP IFRS IFRS Earnings EPS Earnings EPS £m pence £m pence Profit for the period fromcontinuing operations 11.3 3.69Loss for the period fromdiscontinued operations (4.4) (1.44) ------- -------(Loss) / profit on ordinaryactivities after taxation (6.9) (2.25) 6.9 2.25Amortisation of goodwill 5.1 1.66 - -Profit on sale of fixed assets netof tax £0.2m (0.3) (0.10) (0.3) (0.10)Loss on disposal of discontinuedoperations 13.3 4.34 4.8 1.57FX gains on long-term intercompanyloans (0.2) (0.07) ------- -------- ------- -------Adjusted earnings after taxation 11.2 3.65 11.2 3.65 ------- -------- ------- ------- Weighted average number of shares & (loss)/earnings per share - basic continuing 306.5m 3.69p- basic discontinued 306.5m (1.44)p- basic 306.5m (2.25)p 306.5m 2.25p - diluted 306.5m (2.25)p 310.8m 2.22p - adjusted 306.5m 3.65p 306.5m 3.65p- adjusted & diluted 310.8m 3.60p The Group will continue to provide information on adjusted earnings per share,derived in accordance with the table above. This is used to identify theperformance of operations, from the time of acquisition or until the time ofdisposal, prior to the impact of the following items, to the extent that theyapply to any accounting period: (i) gains or losses arising from the disposal of fixed assets(ii) gains or losses arising from the disposal of discontinued operations(iii) gains or losses arising from the re-translation of long-term intercompany items(iv) charges for the impairment of goodwill 10.IFRS 1 Exemptions Senior has taken the following exemptions, as permitted by IFRS 1, in thetransition to IFRS. 10.1 Business combinations The accounting for acquisitions that occurred prior to the transition date of 1January 2004 has not been restated. It should be noted that the Group's mostrecent acquisition took place in 1999. 10.2 Employee benefits All cumulative actuarial gains and losses have been recognised in equity at thetransition date. This is consistent with the accounting treatment previouslyadopted under FRS17, which the Group adopted in full in its 2004 financialstatements, and also with the prospective accounting policy under IAS19. UnderIAS19 the Group intends to early adopt an amendment permitting the fullrecognition of actuarial gains and losses on an annual basis via the statementof recognised income and expense. 10.3 Cumulative translation differences Cumulative translation differences have been reset to zero at the transitiondate. The cumulative translation differences arising in the period on overseasoperations subsequently disposed of have been transferred into the incomestatement as part of the loss on disposal. 10.4 Share based payments Share and share option awards made prior to 7 November 2002, that remainoutstanding, have not been valued. In any event, based on the performanceconditions attached to these awards it is not expected that they will ultimatelyvest. Awards made subsequent to 7 November 2002, that remain outstanding, havebeen valued and an appropriate charge is included in the income statement. 10.5 Tangible fixed assets The Group has chosen not to restate property, plant and equipment to fair valueat the date of transition. These are carried at historic cost, or modifiedhistoric cost (a revaluation undertaken prior to 2000), which has been taken asthe effective cost for IFRS purposes. 10.6 Financial instruments The Group has taken the exemption available in IFRS 1 not to restatecomparatives for IAS32 (Financial Instruments: Disclosure and Presentation) andIAS39 (Financial Instruments: Recognition and Measurement). Consequently,information provided in this restatement, and the information that willultimately be presented as comparatives to the 2005 financial statements, willbe presented in accordance with UK GAAP. IAS32 and IAS39, which primarily relate to the accounting treatment anddisclosure of financial instruments, will be implemented with effect from 1January 2005. As indicated in the Finance Director's Review in the 2004 AnnualReport, the Group uses forward contracts, in addition to currency denominatedloans, to hedge the net investment in overseas operations. It also uses forwardcontracts to hedge transaction exposures and interest rate swaps to secure anappropriate mix of fixed and variable rate borrowing. Under UK GAAP, the Grouphas applied hedge accounting principles supplemented by the disclosures requiredby FRS13 ("Financial Instruments"). Under IFRS, the Group expects to continue this approach to hedging currency andinterest rate exposures. Hedging relationships have been formally documented andit is believed that hedge accounting will continue to be allowable under IAS39,subject to meeting hedge effectiveness tests. As at 31 December 2004, the fair value of interest rate instruments was aliability of £0.9m against a book value of £nil, and the fair value of forwardforeign exchange contracts was an asset of £0.6m against a book value of nil. Inboth cases the fair value will be incorporated on to the balance sheet. Thefuture impact is unpredictable, but it is considered that it is unlikely to bematerial to an understanding of the Group's results. 11.Significant Accounting Policies 11.1 Basis of accounting The financial statements will be prepared in accordance with InternationalFinancial Reporting Standards (IFRS) for the first time with effect from 1January 2005. They will be prepared on the historical cost basis, except for therevaluation of certain properties and financial instruments.The principal accounting policies expected to be adopted in the preparation ofthe 2005 Group accounts under IFRS are set out below. 11.2 Basis of consolidation The consolidated financial statements incorporate the financial statements ofSenior plc and the entities controlled by it (its subsidiaries) made up to 31December. Control is achieved when Senior plc has the power to govern thefinancial and operating policies of an invested 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 identifiable netassets acquired is recognised as goodwill. Any deficiency of the cost ofacquisition below the fair value of the identifiable net assets acquired (i.e.discount on acquisition) is credited to the income statement in the period ofacquisition. The interest of minority shareholders is stated at the minority'sproportion of the fair values of the assets and liabilities recognised.Subsequently, any losses applicable to the minority interest in excess of theminority interest are allocated against the interests of the parent. The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the effective date of acquisition orup to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used bythe Group. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. 11.3 Goodwill Goodwill arising on consolidation represents the excess of the cost ofacquisition over the Group's interest in the fair value of the identifiableassets and liabilities of a subsidiary, associate or jointly controlled entityat the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at leastannually. Any impairment is recognised immediately through the income statementand is not subsequently reversed. On disposal of a subsidiary, associate or jointly controlled entity, theattributable amount of goodwill is included in the determination of the profitor loss on disposal. Goodwill arising on acquisitions prior to the date of transition to IFRS hasbeen retained at the previous UK GAAP amount subject to being tested forimpairment at that date. Goodwill written off to reserves under UK GAAP prior to1998 has not been reinstated and is not included in determining any subsequentprofit or loss on disposal. 11.4 Revenue recognition Revenue 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 in accordance with theterms and conditions of the sale. Revenue from construction contracts is recognised in accordance with the Group'saccounting policy on construction contracts (see 11.5 below). Interest income is accrued on a time basis, by reference to the principaloutstanding and at the effective interest rate applicable. Dividend income from investments is recognised when the shareholders' legalrights to receive payment have been established. 11.5 Construction contracts Where the outcome of a construction contract can be estimated reliably, revenueand costs are recognised by reference to the stage of completion of the contractactivity at the balance sheet date. This is normally calculated in accordancewith the proportion that contract costs incurred for work performed to date bearto the estimated total contract costs, except where this would not berepresentative of the stage of completion. Variations in contract work andclaims are included to the extent that it is probable that they will berecovered from the customer. Where the outcome of a construction contract cannot be estimated reliably,contract revenue is only recognised to the extent that contract costs incurredwill probably be recoverable. When it is probable that total contract costs will exceed total contractrevenue, the expected loss is recognised as an expense immediately. 11.6 Leasing Leases are classified as finance leases whenever the terms of the leasesubstantially transfer all the risks and rewards of ownership to the lessee. Allother leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at theirfair value or, if lower, at the present value of the minimum lease payments,each determined at the inception of the lease. The corresponding liability tothe lessor is included in the balance sheet as a finance lease obligation. Leasepayments are apportioned between finance charges and a reduction of the leaseobligation in order to achieve a constant rate of interest on the remainingbalance of the liability. Finance charges are charged directly to the income statement. Rentals payable under operating leases are expensed on a straight-line basis over the term of the relevant lease. Benefits received and receivable as incentives to enter into an operating leaseare also spread on a straight-line basis over the lease term. 11.7 Foreign currencies Transactions in currencies other than pounds sterling are recorded at the ratesof exchange prevailing on the date of the transaction. At each balance sheetdate, monetary assets and liabilities that are denominated in foreign currenciesare retranslated at the rates prevailing on the balance sheet date. Gains andlosses arising on retranslation are included in net profit or loss for theperiod, except for exchange differences arising on non-monetary assets andliabilities where the changes in fair value are recognised directly in equity,subject to meeting the requirements under IAS21. In order to hedge its exposure to certain foreign exchange risks, the Groupenters into forward contracts (see 11.17 below for details of the Group'saccounting policies in respect of such derivative financial instruments). 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 periodunless exchange rates fluctuate significantly. Exchange differences arising, ifany, are classified as equity and transferred to the Group's translationreserve. Such translation differences are recognised as income or expense in theperiod in which the operation is disposed 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. 11.8 Government grants Government grants received for items of a revenue nature are recognised in theincome statement over the period necessary to match them with the related costs,and are deducted from that cost. Government grants relating to investment in property, plant and equipment arededucted from the initial carrying value of the related capital asset. 11.9 Operating profit Operating profit is stated after charging restructuring costs, and beforeinvestment income and finance costs, as they relate to external borrowings,retirement benefit obligations (see 11.10 below) and foreign exchange onlong-term intercompany loans. 11.10 Retirement benefit costs Payments to defined contribution retirement schemes are charged as an expense asthey fall due. Payments made to state-managed retirement benefit schemes aredealt with as payments to defined contribution schemes where the Group'sobligations under the schemes are equivalent to those arising in a definedcontribution retirement scheme. For defined benefit retirement schemes, the cost of providing benefits isdetermined using the Projected Unit Credit Method, with full actuarialvaluations being carried out on a triennial basis, and updated at each balancesheet date. Actuarial gains and losses are recognised in full in the period inwhich they occur. They are recognised outside the income statement and arepresented in the statement of recognised income and expense. Past service costs are recognised immediately to the extent that the benefitsare already vested. Otherwise, they are amortised on a straight-line basis overthe period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligation as adjusted for unrecognisedpast service costs, and as reduced by the fair value of scheme assets. Any netasset resulting from this calculation is limited to the past service cost plusthe present value of available refunds and reductions in future contributions tothe plan. 11.11 Taxation The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit not the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying value of deferred tax assets is reviewed at each balance sheet dateand reduced to the extent that it is no longer probable that sufficient taxableprofits will be available to allow all or part of the deferred tax asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. 11.12 Property, plant and equipment Land and buildings held for use in the production or supply of goods orservices, or for administrative purposes, are stated in the balance sheet attheir historic cost, or at modified historic cost, being a revaluationundertaken prior to the transition date to IFRS. Fixtures, plant and equipment are stated at cost less accumulated depreciationand any recognised impairment loss. Depreciation is charged on a straight-line basis over the estimated useful lifeof the asset, and is charged from the time an asset becomes available for itsintended use. Annual rates are as follows: Freehold buildings 2%Improvements to leasehold buildings according to remaining lease termPlant and equipment 5% - 33% Assets held under finance leases are depreciated over their expected usefullives on the same basis as owned assets or, where shorter, over the term of therelevant lease. The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sale proceeds and the carrying amount of the assetat disposal and is recognised in income. 11.13 Internally generated intangible assets - research and developmentexpenditure. An internally generated intangible asset arising from the Group's developmentactivities is recognised if all of the following conditions are met: (i) An asset is created that can be separately identified;(ii) It is probable that the asset created will generate future economic benefits; and(iii) The development cost of the asset can be measured reliably. Internally generated intangible assets are amortised on a straight-line basisover their useful lives. Development work is also carried out on a funded basis. In such circumstancesthe costs are accumulated in inventory and are recognised when the relatedbillings are made. Any amounts held in inventory are subject to normal inventoryvaluation principles. Otherwise expenditure on research and development activities is recognised as anexpense in the period in which it is incurred. 11.14 Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Where the asset does not generate cashflows that are independent from other assets, the Group estimates therecoverable amount of the cash-generating unit to which the asset belongs. The recoverable amount is the higher of the fair value less the costs to selland the value in use. In assessing the value in use, the estimated future cashflows are discounted to their present value using a pre-tax discount rate thatreflects current market assessments of the time value of money and the risksspecific to the asset for which the estimates of future cash flows have not beenadjusted. If the recoverable amount of an asset is estimated to be less than its carryingamount, the carrying amount of the asset is reduced to its recoverable amount.An impairment loss is recognised as an expense immediately, unless the relevantasset is carried at a revalued amount, in which case the impairment loss istreated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the assetis increased to the revised estimate of its recoverable amount, but so that theincreased carrying amount does not exceed the carrying amount that would havebeen determined had no impairment loss been recognised for the asset in prioryears. A reversal of an impairment loss is recognised as income immediately,unless the relevant asset is carried at a revalued amount, in which case thereversal of the impairment loss is treated as a revaluation increase. 11.15 Inventories Inventories are stated at the lower of cost and net realisable value. Costcomprises direct materials and, where applicable, direct labour costs and anappropriate allocation of production overheads. Cost is calculated using thefirst in first out method. Net realisable value represents the estimated sellingprice less the estimated costs of completion and the costs to be incurred inmarketing, selling and distribution. 11.16 Equity instruments Equity instruments issued by the Company are recorded at the value of proceedsreceived, net of direct issue costs. 11.17 Derivative financial instruments and hedging The group's activities expose it primarily to the financial risks of changes inforeign currency exchange rates and interest rates. The group uses foreignexchange contracts and interest rate swap contracts to hedge these exposures.The use of financial derivatives is governed by the Group's treasury policy asapproved by the board of directors, which provides written principles on the useof derivatives. The Group does not use derivative financial instruments forspeculative purposes. Changes in the fair value of derivative financial instruments that aredesignated and are effective as a cash flow hedge are recognised directly inequity and the ineffective portion is recognised immediately in the incomestatement. If the cash flow hedge of a firm commitment or forecasted transactionresults in the recognition of an asset or a liability, then, at the time theasset or liability is recognised, the associated gains or losses on thederivative that had previously been recognised in equity are included in theinitial measurement of the asset or liability. For hedges that do not result inthe recognition of an asset or a liability, amounts deferred in equity arerecognised in the income statement in the same period in which the hedged itemaffects net profit or loss. For an effective hedge of an exposure to changes in fair value, the hedged itemis adjusted for changes in fair value attributable to the risk being hedged withthe corresponding entry in the income statement. Gains or losses fromre-measuring the derivative are also recognised in the income statement. If thehedge is effective these entries will offset. Changes in the fair value of derivative financial instruments that do notqualify for hedge accounting are recognised in the income statement as theyarise. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated, or exercised, or no longer qualifies for hedge accounting. At thattime, any cumulative gain or loss on the hedging instrument recognised in equityis retained in equity until the forecasted transaction occurs. If a hedgedtransaction is no longer expected to occur, the net cumulative gain or lossrecognised in equity is transferred to net profit or loss for the period.Derivatives embedded in other financial instruments or other host contracts aretreated as derivatives when their risks and characteristics are not closelyrelated to those host contracts. 11.18 Provisions Provisions for restructuring costs are recognised when the Group has a detailedformal plan for the restructuring and the plan has been communicated to theaffected parties. 11.19 Share-based payments The Group has applied the requirements of IFRS 2 Share-based payments. 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 has issued equity-settled and cash-settled share-based payments tocertain employees. These payments have conditions that are non-market related.The fair value, as determined at the grant date, is expensed on a straight-linebasis over the vesting period, based on the Group's estimate of the number ofshares that will eventually vest. Fair value is measured by use of a Black-Scholes pricing model. The liability in respect of equity-settled amounts is included in equity,whereas the liability in respect of cash-settled amounts is included in currentand non-current liabilities as appropriate. 11.20 Segmental analysis Under IFRS, segmental detail is presented according to a primary segment and asecondary segment. The Group's primary segmental analysis will be based on theindustries that it serves; Aerospace, Automotive and Industrial. The secondaryanalysis will be presented according to geographic markets comprising NorthAmerica, Europe (split between the UK and Rest of Europe) and the Rest of theWorld. This is consistent with the way the Group manages itself and with theformat of the Group's internal financial reporting. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Senior