Cropper (J) Regulatory News (CRPR)

22 Nov 2005 07:30

Cropper(James) PLC22 November 2005 Issued by Citigate Dewe Rogerson Ltd, BirminghamDate: Tuesday, 22 November 2005Embargoed: 7.30am James Cropper PLC 'Specialist Paper Makers' Interim Results for the Half year ended 1 October 2005 Half year to Half year to Full year to 1 October 25 September 2 April 2005 2004 2005 as restated as restated Turnover £31.5m £31.0m £64.6m Group profit before tax Prior to net IFRS pensionadjustments £0.5m £1.2m £2.4m After net IFRS pensionadjustments £0.2m £0.7m £1.6m Earnings per share (IFRSbasis) 1.4p 6.0p 12.6p Dividend per sharedeclared 1.9p 1.9p 8.2p Gearing (IFRS basis) 45% 37% 43% Previous year's sales gains consolidated Paper Mill Shop turnover up 30% on first half of last year with 2 new outletsopened TFP US$ sales up 10% on first half of last year Average unit gas costs increased by 36% over the first half of last year "Speciality Papers experienced a challenging start to the current financialyear, against the backdrop of significant cost increases and subdued activity,particularly in European markets. Despite the competitive nature of the marketplace, the sales gains achieved in the previous year have been consolidated anddiscussions have begun with customers to find those areas where price increasesare achievable in order to mitigate the impact of rising costs. There was arecovery in sales to UK and Export markets in the second quarter". "In response to the ongoing challenging trading circumstances, the threemanufacturing subsidiaries will continue to focus their efforts on growingprofitable sales, while developing and implementing plans to improveprofitability through operational efficiencies and business optimisation". "The Paper Mill Shop will continue to expand, building on our strategy ofrelated business diversification". "While I am confident that the steps to reverse the current decline in theGroup's profitability will be effective, the impact of these measures will onlybe felt significantly in the next financial year. There is therefore apossibility that the difficulties we face in Speciality Papers may cause theGroup as a whole to make a loss before taxation in the current financial yearafter taking the net IFRS pension adjustments into account". J A Cropper, Chairman FULL STATEMENT ATTACHEDEnquiries:Alun Lewis, Chief ExecutiveJohn Denman, Group Finance Director Katie DaleJames Cropper PLC Citigate Dewe RogersonToday: 020 7638 9571 (8.00am - 11.30am) Today: 020 7638 9571Thereafter: 01539 722002 Thereafter: 0121 455 8370www.cropper.com Mobile: 07770 788624 -2- James Cropper PLC Interim Results for the Half year ended 1 October 2005 STATEMENT BY THE CHAIRMAN, J A CROPPERJames Cropper PLC has previously reported its results under UK GenerallyAccepted Accounting Principles ("UK GAAP"). Following adoption of Regulation1606/2002 by the European Parliament in July 2002 all EU listed companies arerequired to report their consolidated financial statements under IFRS adoptedfor use in the EU ("adopted IFRS") for accounting periods beginning on or after1 January 2005. These Interim Results for the half year ended 1 October 2005,have duly been prepared on this basis. The Group recorded a profit before tax of £163,000 for the period (£473,000prior to net IFRS pension adjustments). This compares with a profit before taxof £704,000 for the first half of the previous year (£1,165,000 prior to netIFRS pension adjustments). Group turnover was £31.5 million against £31.0million for the same period last year, an increase of 1%. The Board has declared that the interim dividend will be maintained at 1.9p pershare. James Cropper Speciality Papers ("Speciality Papers")Speciality Papers experienced a challenging start to the current financial year,against the backdrop of significant cost increases and subdued activity,particularly in European markets. Despite the competitive nature of the marketplace, the sales gains achieved in the previous year have been consolidated anddiscussions have begun with customers to find those areas where price increasesare achievable in order to mitigate the impact of rising costs. There was arecovery in sales to UK and Export markets in the second quarter. In my statement at the AGM on 3 August 2005 I drew attention to the adverseimpact that the rising cost of energy and pulp would have on profitability inthe current financial year. During the course of the previous financial yearenergy costs increased by 28% to £2.7 million. This trend has continued. Theaverage cost of natural gas in the first half was 30 pence per therm, against 22pence per therm in the same period last year, an increase of 36%. Forward marketprojections suggest that the cost in the second half will be substantiallyhigher. Northern Bleached Softwood Kraft ("NBSK") pulp, the market benchmark,opened the financial year at US$645 per tonne falling to US$585 by the end ofSeptember, whilst the cost of hardwood pulp increased from €450 per tonne to€490 over this period. Latest market indications suggest that the cost of NBSKcould move progressively upward towards US$630 by the end of the currentfinancial year. In recent years Speciality Papers has been subjected to significant increases inthe cost of waste water treatment by our local water services utility company.It is estimated that this will increase by some 19% in the current financialyear. Investment is planned for the next few years to minimise our dependence onexternal waste water treatment. Commissioning has commenced of an automated reel and sheet packaging line. This£800,000 investment characterises the innovative technical solutions required bythe business to maintain flexibility whilst improving throughput, productpresentation and productivity. The Paper Mill ShopAlthough The Paper Mill Shop has been affected by the current slow down inconsumer spending across the retail sector, the chain will continue to increasethe number of outlets over the course of the year to take advantage of marketopportunities. Turnover in the first half of the financial year was up 30% onthe same period last year, with two new outlets opened in Mansfield andHatfield. Further store openings are anticipated in the second half. continued... -3- Technical Fibre Products ("TFP")TFP's sales in the first six months were broadly in line with the same periodlast year in £sterling terms. US$ sales were 10% higher in the first half of thecurrent financial year compared with the previous period with growth largelyattributable to composite materials containing metal-coated carbon fibres. Themajority of these fibres are now supplied by Electro Fiber Technologies LLC("EFT"), the joint venture company in which TFP has a 50% share. EFT incurred asmall loss in the period. James Cropper Converting ("Converting")The modest strengthening of the US$ over the period eased margin pressure onmountboard sales to the USA. However the profitability of Converting continuedto be affected by competitive pressure on display board prices and increased rawmaterial costs. Turnover was slightly down on the first half of last year.Planned investment and product rationalisation over the coming months will allowthe decommissioning of older equipment with significant increases in capability,output and productivity of the remaining machines. Pensions and International Accounting Standard 19 ("IAS 19")IAS 19 requires that actuaries undertake annual valuations of companies' finalsalary schemes. Deficits revealed by these valuations are included on thesponsoring companies' Balance Sheets, movements being taken either directlyagainst Reserves or via the Income Statement. It should be noted that theassumptions underlying the IAS 19 valuation are based on financial conditions atthe Balance Sheet date. As market values of the scheme assets and the discountfactors applied to the scheme liabilities will fluctuate, this method ofvaluation will often lead to large variations in the "pension balance" fromperiod to period. Pension liabilities are discounted at the current rate ofreturn on an AA rated quality corporate bond of equivalent currency and term.The actual contributions paid by the Group to its two final salary schemes aredetermined by the actuaries' "on-going" valuation. The assumptions used by theactuaries for their IAS 19 valuations are more conservative than those that theyused with regard to their "on-going" valuations. An "on-going" valuation takesaccount of the projected growth in the pension schemes' assets by asset typeover the projected life of the scheme. Actual future service pension contributions paid in the period by the Group toits two final salary schemes in accordance with the actuaries' recommendations,resulting from their latest "on-going" valuations, were £524,000. Under IAS 19the charge against profit in the six-month period was £834,000, which was£310,000 in excess of the future service contributions that were actuallyrequired. Over the half-year the combined IAS 19 pension deficits, prior to deferred tax,reduced from £10.7m to £9.1m. The combined "on-going" deficits as at April 2005were valued at £6.9m prior to deferred tax. OutlookAlthough Speciality Papers traded profitably in the first half, theuncertainties surrounding forward quoted energy and pulp costs may result in thesubsidiary moving into a loss-making situation later in the year. In response to the ongoing challenging trading conditions, the threemanufacturing subsidiaries will continue to focus their efforts on growing salesof higher margin products, while developing and implementing plans to improveprofitability through operational efficiencies and business optimisation. The Paper Mill Shop will continue to expand, building on our strategy of relatedbusiness diversification. Cash outflow will increase in the second half of the financial year, as aconsequence of increased capital expenditure and higher pulp and energy costs.Additional pension contributions will be made in this period with regard to pastservice deficits arising from the "on-going" valuations. These additionalcontributions will not impact on profitability. continued... -4- While I am confident that the steps to reverse the current decline in theGroup's profitability will be effective, the impact of these measures will onlybe felt significantly in the next financial year. There is therefore apossibility that the difficulties we face in Speciality Papers may cause theGroup as a whole to make a loss before taxation in the current financial yearafter taking the net IFRS pension adjustments into account. -5- James Cropper PLC Interim Results Consolidated Income Statement for the Half year to 1 October 2005Unaudited Half year to Half year to Full year to 1 October 2005 25 September 2004 2 April 2005 £'000 as restated as restated £'000 £'000--------------------------------------------------------------------------------Continuing operations Turnover 31,459 31,020 64,568 ----------------------------------------------Operating profit 491 1,157 2,640 Interest payable andsimilar charges (318) (428) (823) Interest receivable andsimilar income 26 34 136 Share of loss of joint venture (36) (59) (114) Amounts written off investments - - (200) ---------------------------------------------- Profit before tax 163 704 1,639 Taxation (49) (204) (584) ---------------------------------------------- Profit for the periodattributable to equityholders of the company 114 500 1,055 ============================================== Earnings per share - basic& diluted 1.4p 6.0p 12.6p ----------------------------------------------Dividend declared in theperiod - pence per share 1.9p 1.9p 8.2p ---------------------------------------------- -6- James Cropper PLC Interim Results Consolidated Balance Sheet as at 1 October 2005Unaudited Half year to Half year to Full year to 1 October 2005 25 September 2004 2 April 2005 £'000 as restated as restated £'000 £'000--------------------------------------------------------------------------------AssetsNon-current assetsIntangible assets 1,231 1,284 1,292 Property, plant andequipment 24,257 24,350 24,613 Financial assets- Trade investments 195 395 195 Investments in jointventures 90 117 83 Deferred tax assets 2,731 4,181 3,212 ---------------------------------------------- 28,504 30,327 29,395 ----------------------------------------------Current assetsInventories 8,224 7,441 7,663 Trade and otherreceivables 13,676 12,360 13,205 Financial assets- Derivative financialinstruments 2 22 - Current tax assets - 29 -Cash and cash equivalents 311 1,366 88 ---------------------------------------------- 22,213 21,218 20,956 ----------------------------------------------LiabilitiesCurrent liabilitiesTrade and other payables (7,116) (7,611) (6,785) Financial liabilities- Borrowings (1,981) (2,092) (1,890)- Derivative financialinstruments (13) - (7) Current tax liabilities (643) (12) (489) ---------------------------------------------- (9,753) (9,715) (9,171) ----------------------------------------------Net current assets 12,460 11,503 11,785 ----------------------------------------------Non-current liabilitiesFinancial liabilities- Borrowings (7,444) (5,822) (6,548) Retirement benefitliabilities (9,103) (13,937) (10,707) Deferred tax liabilities (4,149) (4,331) (4,289) ---------------------------------------------- (20,696) (24,090) (21,544) ----------------------------------------------Net assets 20,268 17,740 19,636 ==============================================Shareholders' equityShare capital 2,090 2,090 2,090Share premium 454 454 454Other reserves 100 138 100Retained earnings 17,624 15,058 16,992 ----------------------------------------------Total shareholders' equity 20,268 17,740 19,636 ============================================== -7- James Cropper PLC Interim Results Consolidated Cash Flow Statement for the Half year to 1 October 2005Unaudited Half year to Full year to Half year to 25 September 2004 2 April 2005 1 October 2005 as restated as restated £'000 £'000 £'000-------------------------------------------------------------------------------------Cash flows from operatingactivities Profit before tax 163 704 1,639 Interest income and expense 292 394 687 Depreciation/amortisation 1,735 1,701 3,498(Increase)/decrease inworking capital (676) 893 (934) Other non-cash movements- Share of loss of joint venture 36 59 114 - Retirement benefit liabilities (128) 251 (847) - Amounts written off investments - - 200 - Profit on disposal ofproperty, plant and equipment - - (5) - Share-based payments 12 13 26 -----------------------------------------------Cash generated fromoperations 1,434 4,015 4,378 Interest received 46 44 125 Interest paid (359) (429) (840) Tax received/(paid) 3 (29) 384 -----------------------------------------------Net cash generated fromoperating activities 1,124 3,601 4,047 ----------------------------------------------- Cash flows from investingactivitiesInvestment in joint venture (43) (58) (85) Purchase of intangible assets (113) (187) (277) Purchase of property,plant and equipment (1,205) (972) (2,951) Proceeds from sale ofproperty, plant and equipment - - 5 ----------------------------------------------Net cash used in investingactivities (1,361) (1,217) (3,308) ---------------------------------------------- Cash flows from financing activitiesNet proceeds from issue ofnew bank loan 2,000 - 1,600 Finance lease capital payments (64) (154) (265) Repayment of bank loans (807) (954) (1,948) Dividends paid to shareholders (527) (493) (652) --------------------------------------------- Net cash provided by/(usedin) financing activities 602 (1,601) (1,265) --------------------------------------------- Net increase/(decrease) incash and cash equivalents 365 783 (526)in the period Cash and cash equivalentsat the start of the period (54) 472 472 ---------------------------------------------Cash and cash equivalentsat the end of the period 311 1,255 (54) ---------------------------------------------Cash and cash equivalents consistsof:Cash at bank and in hand 311 1,366 88Overdrafts included in borrowings - (111) (142) --------------------------------------------- 311 1,255 (54) --------------------------------------------- -8- James Cropper PLC Interim Results Consolidated Statement of Recognised Income and Expense for the Half year to 1October 2005 Half year to Half year to Full year to 1 October 25 September 2 April 2005 2004 2005 £'000 as restated as restated £'000 £'000--------------------------------------------------------------------------------Profit for the period 114 500 1,055 Currency translationdifferences on foreigncurrency investment - - (6) Retirement benefitliabilities - actuarialgains 1,476 89 2,221 Deferred tax on actuarialgains on retirementbenefit liabilities (443) (27) (666) --------------------------------------------Total recognised incomefor the period 1,147 562 2,604 -------------------------------------------- Consolidated Statement of Changes in Equity for the Half year to 1 October 2005Unaudited Half year to Half year to Full year to 1 October 25 September 2 April 2005 2004 2005 £'000 as restated as restated £'000 £'000--------------------------------------------------------------------------------Opening shareholders'funds 19,636 17,658 17,658 Total recognised incomeand expense for the period 1,147 562 2,604 Share-based payments 12 13 26 Dividends paid (527) (493) (652) --------------------------------------------Closing shareholders'funds 20,268 17,740 19,636 -------------------------------------------- -9- James Cropper PLC Interim Results Notes to the Unaudited Interim Results 1 Basis of the preparation of IFRS financial information a) Accounting standards and interpretationsThe IFRS financial information presented in this statement has been prepared onthe basis of the policies the directors expect to adopt for the Group's firstfull IFRS financial statements for the year to 1 April 2006. These policiesinclude all prevailing and applicable IFRS including International AccountingStandards ("IAS") and interpretations issued by the International AccountingStandards Board ("IASB") and its committees up to 30 April 2005. These standardsand interpretations are subject to ongoing amendment by the IASB, and subsequentendorsement by the European Commission, and are therefore subject to possiblechange. Further standards and interpretations may also be issued that will be applicablefor financial years beginning on or after 1 January 2005 or that will beapplicable to later accounting periods but may be adopted early. The Group'sfirst IFRS financial statements may, therefore, be prepared in accordance withdifferent accounting policies to those used to prepare the financial informationpresented in this announcement. In addition, as IFRS is a new reporting basisfor UK companies, accounting practice and interpretations of accountingstandards will develop as companies gain more experience of the new framework.Accordingly there may be changes in the common approaches currently adopted andthe final application of IFRS in the financial statements for the year to 1April 2006 may be subject to change. In preparing the IFRS financial information, the Group has assumed that theEuropean Commission will endorse the amendment to IAS19 "Employee Benefits -Actuarial Gains and Losses, Group Plans and Disclosures". b) Format of primary financial statementsThe primary financial statements set out in this announcement are presented inaccordance with IAS1 "Presentation of Financial Statements". However, there maybe changes in the formats generally adopted as best practice develops and thefinal presentational application of IFRS in the financial statements for theyear to 1 April 2006 may be subject to change. c) IFRS transitional arrangementsThe transitional arrangements for IFRS are set out in IFRS1 "First-time Adoptionof International Financial Reporting Standards". The Group's transition date toIFRS is 28 March 2004, being the first day of the comparative period to the 2April 2005 financial statements. In general, IFRS1 requires retrospectiveadoption of IFRS as if they were applicable prior to 28 March 2004 except in anumber of specific cases where an optional exemption is granted by the standard.The Group has taken advantage of the following exemptions: i) Fair value at deemed costIAS 16 "Property, plant and equipment" requires property, plant and equipment tobe included at cost and depreciated to the residual value of the asset over itsuseful life. The Group has elected to take advantage of the option thatrevaluations made under previous GAAP are used as the deemed cost. ii) Share-based paymentThe Group has elected to apply IFRS2 "Share-based Payment" only to share-basedpayment transactions granted after 7 November 2002 and not vested by 1 January2005. continued... -10- 2 Interim Statementa) The summarised results for the half year to 1 October 2005, which have notbeen audited or reviewed, have been prepared in accordance with the accountingpolicies to be adopted in the accounts for the year to 1 April 2006 subject tothe points raised in note 1. b) The financial information set out above does not constitute statutoryaccounts within the meaning of the Companies Act 1985. The figures for the yearto 2 April 2005 are a restated extract of the full accounts for that year whichhave been filed with the Registrar of Companies and on which the auditors gavean unqualified opinion. c) A copy of the interim statement is being sent to all shareholders and isavailable from the Company's registered office or from our website (www.cropper.com). 3 Earnings per shareBasic and diluted earnings per share for the half year to 1 October 2005 havebeen calculated on the profit available for distribution and on 8,359,114 (2004:8,359,114) Ordinary Shares, being the weighted average number of shares in issueduring the period. None of the potential Ordinary Shares are dilutive. 4 DividendAn interim dividend of 1.9p per Ordinary Share (2004: 1.9p per share) isproposed and will be paid on 13 January 2006 to holders on the register at theclose of business on 23 December 2005. The dividend relating to the year to 2April 2005 was made up of an interim payment of £159,000 (1.9p per share) and afinal dividend of £527,000 (6.3p per share). 5 Transition from UK GAAP to IFRSSet out below, in accordance with the provisions of IFRS 1 "First-time Adoptionof International Financial Reporting Standards" are the reconciliations of netassets and profit after tax from UK GAAP to IFRS. 25 September 2004 2 April 2005 28 March 2004 £'000 £'000 £'000--------------------------------------------------------------------------------Net assetsNet assets - UK GAAP 27,484 27,538 27,075 Adjustments to conform toIFRSPost employment benefits -accounting for pensions (9,619) (8,077) (9,592)(net of deferred tax) Employment benefits -provision for holiday pay (253) (243) (233) Post balance sheet events -reversal of dividend 159 527 493 Others 52 (41) (1) Deferred tax (83) (68) (84) ------------------------------------------Net assets - IFRS 17,740 19,636 17,658 ------------------------------------------ Half year to Full year to 25 September 2004 2 April 2005 £'000 £'000--------------------------------------------------------------------------------Profit after taxProfit after tax - UK GAAP 568 1,155 Adjustments to conform to IFRSPost employment benefits - accounting forpensions (net of deferred tax) (89) (39) Employment benefits - provision for holidaypay (20) (11) Share-based payments (13) (26) Others 53 (39) Deferred tax 1 15 ---------------------------Profit after tax - IFRS 500 1,055 --------------------------- continued... -11- Under IAS 7 "Cash Flow Statements", movements on cash and cash equivalents arereconciled; under UK GAAP the statement reconciles cash only. The change to IAS7 approach makes no difference to the levels of free cash generated by thegroup. i) Post employment benefitsUnder UK GAAP, the Group applied the provisions of SSAP24 to the accounting forits pension schemes. In respect of defined benefit pension schemes this resultedin the cost of pensions being charged over the relevant employees' workinglives. IAS19 adopts a balance sheet approach to accounting for pension schemes butprovides a number of options for accounting for actuarial gains and losses. TheGroup has chosen the option to account for such actuarial changes immediatelythrough the Statement of Recognised Income and Expense. The option to accountfor actuarial changes in this manner is included in an amendment to IAS19 whichis effective from 1 January 2006 with early adoption encouraged. This amendmentis subject to endorsement by the European Commission. The method of valuing assets and liabilities under IAS19 is similar to FRS17.The impact on the Group's balance sheet at each balance sheet date is reflectedin the following table. 25 September 2 April 2005 28 March 2004 2004 £'000 £'000 £'000--------------------------------------------------------------------------------Adjustments to conform to IFRSReversal of UK GAAP accounting SSAP 24 prepayments (140) (847) (263) SSAP 24 accruals 336 16 336 IAS 19 accounting adjustments IAS 19 deficit (13,937) (10,707) (13,775) -------------------------------------------- (13,741) (11,538) (13,702)Deferred tax 4,122 3,461 4,110 --------------------------------------------Adjustment to net assets (9,619) (8,077) (9,592) -------------------------------------------- The impact on the Group's profit after tax for the half year ended 25 September2004 and the year ended 2 April 2005 is reflected in the following table. Half year to Full year to 25 September 2004 2 April 2005 £'000 £'000--------------------------------------------------------------------------------Profit after tax - UK GAAP 568 1,155 Reversal of UK GAAP accounting SSAP 24 accrual movements 336 672 SSAP 24 prepayment movements (2) 24 Future service contributions 553 1,128 IAS 19 accounting adjustments Current service cost (828) (1,551) Finance costs (186) (330) -----------------------------After IAS 19 pension accounting 441 1,098 -----------------------------Impact of change in pension accountingbefore deferred tax adjustment (127) (57) Deferred tax adjustment 38 18 -----------------------------Impact of change in pension accountingafter deferred tax adjustment (89) (39) ----------------------------- continued... -12- ii) Share-based paymentsIFRS2 requires an expense for share-based payment awards to be recognised in thefinancial statements based upon their fair value at the date of grant. Thisexpense is recognised over the vesting period of the relevant awards. The additional charge arising from the adoption of IFRS2 on the Group's IncomeStatement is £13,000 for the half year to 25 September 2004 and £26,000 for theyear to 2 April 2005. iii) Post balance sheet eventsIAS10 "Events after the Balance Sheet Date" requires that dividends are notaccrued at the balance sheet date unless they represent a present obligation asdefined by IAS37 "Provisions, Contingent Liabilities and Contingent Assets". Thefinal and interim dividends have been added back to reserves at each balancesheet date as they did not meet the relevant criteria. iv) Other adjustments and reclassificationsThere are a number of other adjustments such as reclassifications of operatingleases as finance leases in accordance with IAS17 "Leases", additionaladjustments in respect of holiday pay arising from the application of IAS19 andfurther adjustments in connection with the application of other IFRS. Financialderivatives for forward currency contracts and interest rate caps have now beenincorporated in both the balance sheet and the income statement but this is notmaterial in either context. v) Deferred taxIAS12 "Income taxes" has a wider scope for recognising deferred tax thanexisting UK GAAP and requires full provision for all taxable temporarydifferences between the carrying amount of the Group's assets and liabilitiesand their tax bases. The approach to providing deferred tax under IAS12 comparedto UK GAAP results in more deferred tax assets and liabilities being recognisedon the Balance Sheet. The application of IAS12 results in a number of other differences between thedeferred tax balances and charges under IFRS compared to UK GAAP includingdifferences in the treatment of deferred tax on intra-group transactions. Thesedifferences result in an increase of £68,000 in the deferred tax liability at 2April 2005 (25 September 2004 an increase of £83,000 and 28 March 2004 anincrease of £84,000). It also results in a reduction in the tax charge for theyear to 2 April 2005 of £15,000 (half year to 25 September 2004 £1,000). vi) Research and developmentUnder UK GAAP, the Group adopted a policy whereby all research and developmentcosts were written off in the year incurred. On transition to IFRS, the Grouphas adopted IAS38 "Intangible Assets" and now requires development costs to becapitalised as an asset when specific recognition criteria relevant to theproposed product are met and when the amount recognised is expected to berecovered through future economic benefits. Any amounts capitalised areamortised over the expected life of the related product. IAS38 is applicable retrospectively. The Group has conducted a review ofresearch and development projects undertaken in recent years but no projectswere identified that meet the criteria for capitalisation, and therefore thereis no impact on the 2004 results or financial position as a result of theapplication of IAS38. continued... -13- 6 PensionsIAS 19 regards a sponsoring company and its pension schemes as a singleaccounting entity rather than two or more separate legal entities. The actuarialvaluation is the starting point for the creation of the IAS 19 accountingentity. The valuation determines the net position of a pension scheme, i.e. thedifference between its assets and liabilities. On the introduction of IAS 19 thenet position, surplus or deficit, is brought onto the sponsoring company'sBalance Sheet such that Reserves are immediately adjusted by the net positionreduced by deferred tax. This obviously results in either an increase ordecrease in the net asset value of the sponsoring company. Upon valuation atsubsequent year-ends the movement in value from the previous valuation isexpressed in the following component parts: Income StatementOperating costsCurrent service charge, being the cost of benefits earned in the current periodshown net of employees' contributions.Past service costs, being the costs of benefit improvements.Curtailment and settlement costs.Finance costs, being the net ofExpected return on pension scheme assetsInterest cost on the accrued pension scheme liabilities Statement of Recognised Income and ExpenseActuarial gains and losses arising from variances against previous actuarialassumptions. The above items are offset by actual contributions paid by the employer in theperiod. IAS19 deficits are shown below at the corresponding Balance Sheet dates. Half year to Half year to Full year to 1 October 2005 25 September 2004 2 April 2005 £'000 £'000 £'000--------------------------------------------------------------------------------IAS19 DEFICIT--------------------Current Service Charge (766) (828) (1,551) Finance costs (68) (186) (330) Future servicecontributions paid 524 553 1,128 Past service deficitcontributions paid 438 210 1,600 Actuarial gains or losses 1,476 89 2,221 Opening deficit (10,707) (13,775) (13,775) ----------------------------------------------- Closing deficit (9,103) (13,937) (10,707) Deferred Taxation @ 30% 2,731 4,181 3,212 -----------------------------------------------Net - Deficit (6,372) (9,756) (7,495) ----------------------------------------------- It should be noted that the assumptions underlying the IAS 19 valuation arebased on financial conditions at the Balance Sheet date. As market values of thescheme assets and the discount factors applied to the scheme liabilities willfluctuate, this method of valuation will often lead to large variations in the"pension balance" from period to period. Pension liabilities are discounted atthe current rate of return on an AA rated quality corporate bond of equivalentcurrency and term. The actual contributions paid by the Group to its two finalsalary schemes are determined by the actuaries' "on-going" valuation. Theassumptions used by the actuaries for their IAS 19 valuations are moreconservative than those that they used with regard to their "on-going"valuations. An "on-going" valuation takes account of the projected growth in thepension schemes' assets by asset type over the projected life of the scheme. continued... -14- Actual future service pension contributions paid in the period by the Group toits two final salary schemes in accordance with the actuaries' recommendations,resulting from their latest "on-going" valuations, were £524,000. Under IAS 19the charge against profit in the six-month period was £834,000, a difference of£310,000 in excess of the future service contributions that were actuallyrequired. This is shown in the table below. Half year to Half year to Full year to 1 October 2005 25 September 2004 2 April 2005 £'000 £'000 £'000--------------------------------------------------------------------------------PROFIT BEFORE TAX----------------------As reported 163 704 1,639 IAS 19 adjustments Current Service Charge (766) (828) (1,551) Finance costs (68) (186) (330) ----------------------------------------------- (834) (1,014) (1,881)Future servicecontributions paid 524 553 1,128 -----------------------------------------------Net pension adjustment (310) (461) (753) -----------------------------------------------Profit after contributionspaid but before 473 1,165 2,392IAS 19 adjustments ----------------------------------------------- Over the half year the combined IAS 19 pension deficits, prior to deferred tax,reduced from £10.7m to £9.1m. The combined "on-going" deficits as at April 2005were valued at £6.9m prior to deferred tax. 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