ICP.L Regulatory News (ICP)

16 Sep 2005 07:30

Intermediate Capital Group PLC16 September 2005 INTERMEDIATE CAPITAL GROUP PLC TRANSITIONAL STATEMENT TO INTERNATIONAL FINANCIAL REPORTING STANDARDS For further details please contact: John Curtis, ICG 020 7628 9898 Paul Piper, ICG 020 7628 9898 CONTENTS Page numberIntroductionand Summary 3 SECTION 1 Results for the year to 31 January 2005 under IFRS, 5 excluding IAS 32 and 39 Statutory Consolidated Balance Sheet at 1 February 5 2004 prepared under IFRS Statutory Consolidated Balance Sheet at 31 July 2004 6 prepared under IFRS Statutory Consolidated Balance Sheet at 31 January 7 2005 prepared under IFRS Statutory Consolidated Income Statement at 31 July 2004 8 and 31 January 2005 prepared under IFRS SECTION 2 IFRS restatement of the Balance Sheet at 1 February 9 2005 Reconciliation of UK GAAP reserves to Statutory IFRS 12 reserves SECTION 3 Pro-forma Income Statement for the year to 31 January 13 2005 under IFRS including IAS 32 and 39 SECTION 4 Key differences in accounting treatment between IFRS 16 and UK GAAP APPENDIX 1: Principal IFRS accounting policies 20APPENDIX 2: Report of Independent Auditors 23 Introduction and Summary This document sets out our approach to International Financial ReportingStandards ("IFRS") and also explains the impact that the introduction of thesestandards is expected to have on our results. IFRS applies to the financial statements of all UK listed groups whose financialyear commences on or after 1 January 2005. We have a year-end of 31 January andtherefore the first financial statements that we need to prepare under IFRS willbe for the period commencing 1 February 2005, with the comparative figures forthe previous year being restated as necessary. Our interim results for the sixmonths to 31 July 2005 will also required to be prepared under IFRS, with arestatement of the comparatives. There are a number of changes that result:- As with most other financial services businesses, we have not adopted IAS 32'Financial Instruments: Disclosure and Presentation' ("IAS 32") and IAS 39'Financial Instruments; Recognition and Measurement' ("IAS 39") for the year to31 January 2005. However, had we adopted these standards for this period, ourunaudited proforma results would show an increase in Core Income of £1.4m and anincrease in Net Capital Gains of £10.1m (both these terms are defined on page15). These increases are primarily due to the earlier recognition of capital profitsand non-cash interest and from the valuation of certain financial instruments,including warrants, shares and derivatives. The earlier recognition of capitalgains and non-cash interest is likely to lead to increased volatility in ourprofits going forward.Although, in the long term, there will be no change to the quantum of suchprofits, we believe that this change in accounting policies is potentially lessprudent than those applied under UK GAAP. Such policies are addressed in moredetail in Section 4. Our audited restated opening reserves at 1 February 2004 increase under IFRS by£17m. This is primarily due to the exclusion of the dividends declared after thebalance sheet date. Our audited restated statutory accounts for the year to 31 January 2005 show adecrease in profits after tax of £0.5m. This is due to the expense relating tofair valuing the unexercised share options. The audited restated opening reserves at 1 February 2005, which includes theadoption of IAS 32 and IAS 39 for the first time, show an increase of £40m. Thismovement is detailed in the reconciliation of reserves on page 12. IFRS restatements Our opening balance sheet as at 1 February 2004 and our statutory results foryear ended 31 January 2005 are presented for the first time under IFRS inSection 1, together with our statutory results for the six months ended 31 July2004. This excludes IAS 32 and IAS 39 as we have, along with other financialservices businesses, elected to take advantage of the provisions of IFRS 1,First-time Adoption of International Financial Reporting Standards, ("IFRS 1")not to restate comparatives. Section 2 contains the IFRS restatement of our opening balance sheet as at 1February 2005, including the impact of adopting IAS 32 and IAS 39. Section 3 contains our pro-forma income statement for the year to 31 January2005. This has been prepared on the basis that IAS 32 and IAS 39 had beenapplied throughout this period in order to provide a more meaningful comparisonof the full effects of IFRS, compared to the statutory results for the full year2005.Section 4 explains the key differences between UK GAAP and IFRS, as applicableto ICG, and their impact on our financial statements. The principle accounting policies that we expect to adopt under IFRS areincluded in Appendix 1. The accounting policies and disclosures adopted in thisdocument reflect our view of the standards that will be in force for the periodcommencing 1 February 2005, which may, of course, be subject to change. SECTION 1 Results for the year to 31 January 2005, prepared under IFRS Under the transitional rules, set out in IFRS 1, we are required to produce anopening balance sheet as at 1 February 2004 and comparative balances for theyear to 31 January 2005 (as part of our 2006 Annual Report and Accounts) and thesix months to 31 July 2004 (as part of our interim results as at 31 July 2005).The purpose of this section is to set out these comparative figures and how theywill be presented. As we have taken advantage of the option not to apply IAS 32 and IAS 39 in thecomparative period, the impacts of IFRS are restricted to dividends and sharebased payments as detailed on page 16. Statutory Consolidated Balance Sheet as at 1 February 2004 - Restated StatutoryComparatives (excluding IAS 32/39) UK GAAP Effect of IFRS Notes As at transition to As at 31 January IFRS (excl 1 February 2004 2004 IAS 32 and (Audited) (Audited) IAS 39) £m £m £m Non current assetsProperty, plant and 1.4 - 1.4equipmentFinancial assets; loansand 1093.9 - 1093.9InvestmentsDeferred tax assets - 1.0 1.0 1 Current assetsTrade and other 19.2 - 19.2receivablesFinancial assets; loansand 27.5 - 27.5InvestmentsCash and cash equivalents 38.6 - 38.6 85.3 - 85.3 Total assets 1,180.6 1.0 1,181.6 Capital and reservesCalled up share capital 13.8 - 13.8Share premium account 170.0 - 170.0Capital redemption 1.4 - 1.4reserveReserve for share basedpayments - 0.2 0.2 1Retained earnings 137.6 17.4 155.0 1, 2 Equity shareholders' 322.8 17.6 340.4fundsNon current liabilitiesFinancial liabilities 730.0 730.0Current LiabilitiesTrade and other payables 51.2 (16.6) 34.6 2Financial liabilities 61.2 61.2Liabilities for current 15.4 15.4tax Total capital and 1,180.6 1.0 1,181.6liabilities Notes 1. Under UK GAAP no charge has been made to profit for the cost of shareoptions, as ICG grants all such options at the then ruling market price. IFRS 2requires the fair value of share option awards to be expensed in the incomestatement over the vesting period of the options, with a corresponding amountrecorded in the 'Reserve for share-based payments'. A deferred tax asset hasbeen recognised for the future tax deductions in respect of share awards. 2. Under UK GAAP, dividends are recorded in the year to which they relate. IAS10 requires that dividends are recorded in the year that they are declared. Statutory Consolidated Balance Sheet as at 31 July 2004 - Restated StatutoryComparatives (excluding IAS 32/39) UK GAAP Effect of IFRS Notes As at transition to As at 31 July 04 IFRS (excl. 31July 04 (Unaudited) IAS 32 and (Unaudited) £m IAS 39) £m £m Non current assetsProperty, plant and 1.3 - 1.3equipmentFinancial assets; loans andInvestments 1,033.5 - 1,033.5Deferred tax assets - 0.9 0.9 1 Current assetsTrade and other receivables 25.5 - 25.5Financial assets; loans andInvestments 1.4 - 1.4Cash and cash equivalents 83.3 - 83.3 110.2 - 110.2Total assets 1,145.0 0.9 1,145.9 Capital and reservesCalled up share capital 13.9 - 13.9Share premium account 172.4 - 172.4Capital redemption reserve 1.4 - 1.4Reserve for share based - 0.5 0.5 1paymentsRetained earnings 157.0 8.6 165.6 1, 2 Equity shareholders' funds 344.7 9.1 353.8Non current liabilitiesFinancial liabilities 649.3 - 649.3Current liabilitiesTrade and other payables 65.1 (8.2) 56.9 2Financial liabilities 69.1 - 69.1Liabilities for current tax 16.8 - 16.8 Total capital and 1,145.0 0.9 1,145.9liabilities Notes 1. Under UK GAAP no charge has been made to profit for the cost of shareoptions, as ICG grants all such options at the then ruling market price. IFRS 2requires the fair value of share option awards to be expensed in the incomestatement over the vesting period of the options, with a corresponding amountrecorded in the 'Reserve for share-based payments'. A deferred tax asset hasbeen recognised for the future tax deductions in respect of share awards. 2. Under UK GAAP, dividends are recorded in the year to which they relate. IAS10 requires that dividends are recorded in the year that they are declared. Statutory Consolidated Balance Sheet as at 31 January 2005 - Restated StatutoryComparatives (excluding IAS 32/39) UK GAAP Effect of IFRS Notes As at transition to As at 31 January IFRS (excl 31 January 05 IAS 32 and 05 (Audited) IAS 39) (Audited) £m £m £m Non current assetsProperty, plant and equipment 1.3 - 1.3Financial assets; loans andInvestments 1,182.8 - 1,182.8Deferred tax assets 0.8 0.8 1 Current assetsTrade and other receivables 20.2 - 20.2Financial assets; loans andInvestments 40.9 - 40.9Cash and cash equivalents 55.6 - 55.6 116.7 - 116.7Total assets 1,300.8 0.8 1,301.6 Capital and reservesCalled up share capital 13.9 - 13.9Share premium account 172.5 - 172.5Capital redemption reserve 1.4 - 1.4Reserve for share based - 0.7 0.7 1paymentsRetained earnings 171.7 19.7 191.4 1, 2 Equity shareholders' funds 359.5 20.4 379.9Non current liabilitiesFinancial liabilities 711.4 - 711.4Current LiabilitiesTrade and other payables 78.5 (19.6) 58.9 2Financial liabilities 131.5 - 131.5Liabilities for current tax 19.9 19.9 Total capital and liabilities 1,300.8 0.8 1,301.6 Notes 1. Under UK GAAP no charge has been made to profit for the cost of shareoptions, as ICG grants all such options at the then ruling market price. IFRS 2requires the fair value of share option awards to be expensed in the incomestatement over the vesting period of the options, with a corresponding amountrecorded in the 'Reserve for share-based payments'. A deferred tax asset hasbeen recognised for the future tax deductions in respect of share awards. 2. Under UK GAAP, dividends are recorded in the year to which they relate. IAS10 requires that dividends are recorded in the year that they are declared. Consolidated Income Statement - Restated Statutory Comparatives (excluding IAS32/39)Statutory Consolidated Income Statement for the six months ended 31 July 2004 UK GAAP Effect of IFRS Notes Six months transition to Six months ended IFRS (excl ended 31 July 04 IAS 32 and 31 July 04 (unaudited) IAS 39) (unaudited) £m £m £m Interest and dividend income 46.9 - 46.9Capital gains 23.7 - 23.7Fee and other operating 12.5 - 12.5income 83.1 - 83.1Interest payable and similarcharges (11.8) - (11.8)Provisions against loans andinvestments (13.0) - (13.0)Administrative expenses (17.5) (0.3) (17.8) 1Profit on ordinaryactivities 40.8 (0.3) 40.5before taxationTax on profit on ordinaryactivities (13.2) - (13.2)Profit on ordinaryactivitiesafter taxation and 27.6 (0.3) 27.3attributableto shareholdersEarnings per share 39.9p 39.3p Statutory Consolidated Income Statement for the year ended 31 January 2005 UK GAAP Effect of IFRS Notes Year transition to Year ended IFRS (excl ended 31 January 05 IAS 32 and 31 January 05 (Audited) IAS 39) (Audited) £m £m £m Interest and dividend 101.6 - 101.6incomeCapital gains 62.9 - 62.9 Fee and other operating 27.4 - 27.4income 191.9 - 191.9 Interest payable andsimilar (26.5) - (26.5)chargesProvisions against loansand (28.2) - (28.2)investmentsAdministrative expenses (41.7) (0.5) (42.2) 1Profit on ordinaryactivities 95.5 (0.5) 95.0before taxationTax on profit onordinary (33.5) - (33.5)activitiesProfit on ordinaryactivitiesafter taxation and 62.0 (0.5) 61.5attributable toshareholdersEarnings per share 89.4p 88.6p Diluted earnings per 88.7p 88.0pshare Notes 1 IFRS 2 requires the fair value of share option awards to be expensed in theincome statement over the vesting period of the options, with a correspondingamount recorded in the 'Reserve for share-based payments'. SECTION 2 IFRS Restatement of the Balance Sheet at 1 February 2005 This section sets out the full impact of the adoption of IFRS, including IAS 32and IAS 39 on the opening balance sheet as at 1 February 2005 together with areconciliation of the movement on reserves. The primary differences on the adoption of IAS 32 and IAS 39 compared to currentaccounting treatment under UK GAAP are set out below: • Mezzanine loans and loan stock will be held on balance sheet at amortised cost using the effective interest rate ("EIR") method. Underwriting and agency fees will be reclassified to interest income and included in the EIR calculation as part of amortised cost. Under UK GAAP, loans are held at cost plus capitalised interest less provisions. The related fees are currently recognised when received. • Impairment will be recognised when there is objective evidence that an event has occurred which will result in reduced future cash flows. Once an impairment event has occurred, an amended amortised cost will be calculated by discounting the revised expected future cash flows by the original effective interest rate. Under UK GAAP, a specific provision is made against the principal amount of any loan whose value is impaired or uncertain. • Under IFRS, shares are classified as available-for-sale assets and warrants are included as derivatives (see below). Shares will be measured at fair value when this can be reliably determined. Movements in their value will be taken to reserves until realisation or impairment, at which point they will be recycled through the income statement. Under UK GAAP, investments are largely recorded at cost less provisions for impairment and gains or losses are recorded only on realisation. • All derivatives, including warrants, will be recorded on the balance sheet at fair value (unless fair value cannot be reliably measured). Movements in fair value will be recorded directly in the income statement. Under UK GAAP, derivatives are held at either the same basis as the underlying hedged item or valued at cost. These differences are explained more fully in Section 4. Statutory Consolidated Balance Sheet at 1 February 2005 (including IAS 32 andIAS 39) UK GAAP Effect of Notes Effects of Notes IFRS As at transition to Implementing As at 31 January IFRS (excl IAS 32 and 1 February 05 05 IAS 32 and IAS 39 (incl IAS 32 (Audited) IAS 39) £m and 39) £m £m (Audited) £m Non currentassetsProperty,plant 1.3 - - 1.3and equipmentFinancialassets;loans and 1,182.8 - 70.7 3, 5, 1253.5Investments 6, 7 CurrentassetsTrade andother 20.2 - (9.8) 3 10.4receivablesFinancialassets;loans and 40.9 - 1.0 3 41.9InvestmentsCash and cashequivalents 55.6 - - 55.6 116.7 - (8.8) 107.9Total 1,300.8 - 61.9 1,362.7assets Capital andreservesCalled upshare 13.9 - - 13.9capitalShare premiumaccount 172.5 - - 172.5Capitalredemptionreserve 1.4 - - 1.4Equity - 0.7 1 - 0.7reserveRetained 171.7 19.7 1, 2 20.1 9 211.5earningsEquityshareholders'funds 359.5 20.4 20.1 400.0Non currentliabilitiesFinancialliabilities 711.4 - 25.5 4, 7 736.9Deferred taxliabilities - (0.8) 1 16.8 8 16.0 711.4 (0.8) 42.3 752.9CurrentLiabilitiesTrade andother 78.5 (19.6) 2 3.1 4 62.0payablesFinancialliabilities 131.5 - (3.6) 4, 7 127.9Liabilitiesfor 19.9 - - 19.9current taxTotal capitaland 1,300.8 - 61.9 1,362.7liabilities NotesNon IAS 32 and 39 amendments1. Under UK GAAP no charge has been made to profit for the cost of shareoptions, as ICG grants all such options at the then ruling market price. IFRS 2requires the fair value of share option awards to be expensed in the incomestatement over the vesting period of the options, with a corresponding amountrecorded in the 'Reserve for share-based payments'. Deferred tax has beencalculated on the taxable value of the share options. 2. Under UK GAAP, dividends are recorded in the year to which they relate. IAS10 requires that dividends are recorded in the year that they are declared. IAS 32 and 39 amendmentsEIR calculation3 Accrued cash interest receivable forms part of the EIR calculation under IFRSand, therefore, is now included in the value of loans and investments. EIRcalculations have increased the value of mezzanine loans in comparison to therecognition of assets under UK GAAP. 4 Accrued cash interest payable forms part of the EIR calculation under IFRSand, therefore, is now included in the value of financial liabilities; . Alsoincludes the net impact of EIR calculations on borrowings and IFRS 1 fair valuehedging adjustment relating to the hedging of borrowings for currency andinterest rate risk.Valuation of investments5 Increase in fair value of warrants and the fair value of quoted and unquotedinvestments; Impairment of assets6.The difference between the effect of discounting the expected future cashflows on impaired assets under IFRS and provisions made under UK GAAP. Derivatives7. IFRS requires that derivatives are recorded at fair value rather than beingaccounted for in the same way as the underlying hedged item. Taxation and reserves8 Impact of IFRS on deferred tax provision9 The reconciliation of reserves as detailed on page 12 Reconciliation of Retained Earnings from UK GAAP to IFRS including IAS 32 and 39 31 January Notes 2005 £m Retained Earnings under UK GAAP 171.7Share based payments (0.7) 9Proposed dividend 19.6 10Deferred taxation 0.8Retained Earnings under IFRS (excl IAS 32/39) 191.4EIR effect on mezzanine loans 9.3 1EIR effect on borrowings (8.0) 2MTIS on non-cash interest (2.7) 3Impairment of loans and investments (0.5) 4MTIS on increased value of warrants (2.0) 5Fair value and EIR effect on investments 18.7 6Increased value of warrants 13.0 7Fair value of derivatives 9.1 8Tax effect of above adjustments (16.8) 11Retained Earnings under IFRS 211.5 Notes EIR calculation1. The increase in value of mezzanine loans is due to the change in incomerecognition policy as part of the EIR calculation.2. Net impact of EIR calculations on borrowings and IFRS 1 fair value hedgingadjustment relating to the hedging of borrowings for currency and interest raterisk.3. As the value of non-cash interest has increased under IFRS, an increase inthe accrual for bonus on the non-cash interest is required. Impairment of assets4.The difference between the effect of discounting the expected future cashflows on impaired assets under IFRS and provisions made under UK GAAP. Valuation of investments5. The increased charge for the Medium Term Incentive Scheme due to increase inwarrants in the year6. Investments are held at their fair value or on an amortised cost basis underIFRS rather than cost. This increase relates primarily to quoted shares.7. Under IFRS warrants (and warrants now held as shares) previously valued atcost are now fair valued where this can be reliably measured. Derivatives8. IFRS requires that derivatives are recorded at fair value rather than beingaccounted for in the same way as the underlying hedged item. Non IAS 32/IAS 39 adjustments9. IFRS 2 requires the fair value of share option awards to be expensed in theincome statement over the vesting period of the options, with a correspondingamount recorded in the 'Reserve for share-based payments'.10. Under UK GAAP, dividends are recorded in the year to which they relate. IAS10 requires that dividends are recorded in the year that they are declared. Taxation11. The net impact on taxation of the above adjustments SECTION 3 Pro-forma Income Statement under IFRS for the year to 31 January 2005 This section contains a pro-forma income statement for the year to 31 January2005 as if IFRS, including both IAS 32 and IAS 39, had been in force throughoutthe period. This has been prepared to provide a more meaningful comparison ofthe full effects of IFRS, compared to the statutory results for the full year2005. The impact of any volatility arising from derivatives, other thanwarrants, being recorded at fair value has not been shown in the incomestatement for the year ended 31 January 2005. Pro-forma Income Statement for the year to 31 January 2005 under IFRS Notes UK GAAP Effective Impairment Other IFRS Year Interest £m £m Year ended rate ended 31 January £m 31 January 2005 2005 (Audited) (Unaudited) £m £m Interest anddividend 1, 2 101.6 13.7 - - 115.3incomeRealisedcapitalgains and 7 62.9 - - 10.5 73.4changes inwarrantvaluationsFee and otheroperating 3 27.4 (3.6) - - 23.8income 191.9 10.1 - 10.5 212.5Interestpayable and 4 (26.5) (0.3) - - (26.8)similarchargesImpairment ofloans 5 (28.2) - (3.5) - (31.7)andinvestmentsAdministrativeexpenses 6, 8 (41.7) (2.7) - (2.6) (47.0)Profit onordinaryactivities 95.5 7.1 (3.5) 7.9 107.0beforetaxationTax on profiton 9 (33.5) (2.8) 1.0 (3.2) (38.5)ordinaryactivitiesProfit onordinaryactivities 62.0 4.3 (2.5) 4.7 68.5aftertaxation Earnings per 89.4p - - - 98.7pshareDilutedearnings per 88.7p - - - 98.0pshare Notes EIR calculation1 The application of EIR calculations has increased mezzanine loan relatedincome and investment income on loan stock.2 Write back of prior year provision against interest has increased interestincome as this is now included as part of the impairment calculations.3 Write back of underwriting fee income in the year, which is now included inEIR calculations.4 Increase in interest expense due to EIR calculation of private placements andsecuritisation notes. Impairment of assets5 Increase in provisions owing to inclusion of interest in impairmentcalculation, formerly netted within interest income. Valuation of investments6 Impact on MTIS of applying new IFRS policies.7 Increase in fair value of warrants where the value can be reliably measured. Non IAS 32/IAS 39 adjustments8 Increase in administrative expenses relating to the fair valuing of shareoption awards using the Black Scholes model. Taxation9 Increase in tax charge for IFRS adjustments. Dividends10 Difference between the May 2004 declared dividend and May 2005 declareddividend Reconciliation of Pro-Forma Income Statement for the year ended 31 January 2005 CORE INCOME Year ended 31.01.05 UK GAAP Effective Impairment Other IFRS (Note) interest Proforma rate £m £m £m £m £mInterest and dividend 101.6 12.5 (5.2) 1.2 110.1incomeFee and other operatingincome 27.4 (3.6) - - 23.8 129.0 8.9 (5.2) 1.2 133.9Less:related expensesInterest payable andsimilar (26.5) (0.3) - - (26.8)chargesAdministrativeexpenses-salaries andbenefits (12.8) - - (0.5) (13.3)Operating expenses (8.3) - - - (8.3)Medium Term Incentive (6.3) (2.7) - - (9.0)Scheme Core Income 75.1 5.9 (5.2) 0.7 76.5 Core Income is the key component of ICG's profitability and consists of netinterest income plusfees less related administrative expenses. CAPITAL RELATED ITEMS The other component of ICG's profitability consists of items of a capital naturewhich are shown below:- Year ended 31.01.05 UK GAAP Effective Impairment Other IFRS (Note) interest Proforma rate £m £m £m £m £m Realised capital gains andchanges in warrantvaluations 62.9 - - 10.5 73.4Medium Term Incentive (14.3) - - (2.1) (16.4)Scheme Net capital gains 48.6 - - 8.4 57.0Provisions for impairmentof (28.2) - 1.7 - (26.5)assets Net capital profits 20.4 - 1.7 8.4 30.5 Profit before tax 95.5 5.9 (3.5) 9.1 107.0 SECTION 4 Key differences for ICG between UK GAAP and IFRS This section includes additional information on the key impacts of IFRS on us asdetailed previously in Sections 1, 2 and 3 and provides a comparison to thecurrent accounting treatment under UK GAAP. This information has not beenaudited and is provided for information purposes only. 1) Share Based Payments Under UK GAAP no charge has been made to profit for the cost of share options,as ICG grants all such options at the then ruling market price. Under IFRS, IFRS 2 has been applied to all grants of options after 7 November2002 that had not vested by 31 January 2005. The options have been valued usingthe Black Scholes pricing model. The fair value of the options expected to vestis expensed on a straight line basis over the vesting period. 2) Loans and Investments There are a number of different elements of mezzanine finance and to the incomethat it produces. At the commencement of a transaction, a fee is normally charged which is, inpart, an arranging fee (if we arrange the transaction) and, in part, anunderwriting/participation fee. Where ICG is the mezzanine agent, it also isentitled to receive an annual agency fee. The mezzanine loan normally has a cash interest element and a rolled-up interestelement (which is not payable until the repayment of the loan), although not allloans have both features. As part of the mezzanine transaction, ICG usuallyreceives an equity interest in the borrower which may be in the form ofwarrants, shares and / or (convertible) loan stock. Virtually all of thecompanies to which ICG lends are private companies. The main differences between UK GAAP and IFRS as they relate to the lendingactivities are set out below:- (i) Mezzanine loans and loan stock recognition of interest income UK GAAP Mezzanine Loans Loans are held in the balance sheet at cost, plus capitalised interest accruedto date, less provisions. All interest is accounted for on the accruals basis. Where it is consideredunlikely that interest will be received on the due date, a reserve is madeagainst such interest. Loan Stock and Convertible Loan Stock Loan stock and convertible loan stock are considered to be quasi-equity andtherefore interest is generally reserved against and not recognised until suchtime as the cash is received. IFRS Mezzanine loans and (convertible) loan stock are measured on the amortised costbasis. Under amortised cost accounting, interest is not accrued for separately from theloan. Expected cash flows on the loan, including all costs and fees integral tothe loan, are recognised on an effective yield basis with the carrying value ofthe loan being the present value of these cash flows discounted at thiseffective yield. (ii) Mezzanine loans and loan stock - Provisions and Impairment UK GAAP Under UK GAAP, a provision is made in whole or in part against the principal ofa loan if, in the opinion of the directors, the value of that loan is impairedand ICG will not receive back its original investment in full. IFRS Under IFRS, a provision for impairment may only be made following theidentification of objective evidence of an event which causes a decrease in theexpected cash flows on an asset. Once an impairment event has occurred, therevised future expected cash flows, and an amended fair value is calculatedusing the EIR model and the same discount rate as the original model. The reduction in the fair value of the asset as a result of its impairment istaken through the income statement under the heading of impairment with nodifferentiation between principal and interest. (iii) Mezzanine loans and loan stock - fee income UK GAAP Arranging and underwriting fees, which are received at the commencement of thetransaction, are taken to profit when received. Agency fees are accounted for onthe accruals basis. IFRS The arranging portion of the fee is taken to profit at the commencement of thetransaction. The underwriting fee and the agency fee are included in theEffective Interest Rate ("EIR") calculation and are taken to profit over theexpected life of the loan. (iv) Valuation of shares and warrants and Capital Gains ICG holds a portfolio of unquoted shares and warrants as an integral part of itsbusiness, from which is derived the capital profit on each transaction. Suchshares or warrants are usually granted as part of the overall mezzanine loantransaction and, although some of these instruments could technically be traded,ICG has never traded them. UK GAAP Capital Gains Capital gains upon the sale of investment are accounted for when received. Shares in listed companies Unsold shares acquired as the result of a flotation of an investee company areheld in the balance sheet at cost less provisions for impairment. Profits andlosses are only taken when the shares have been sold. Unquoted shares and warrants Unquoted shares and warrants are held in the balance sheet at cost which in mostcases, is nominal, less provisions for impairment. A directors' valuationutilising the guidelines from the BVCA is carried out on a semi-annual basis andthis is shown as a note to the annual accounts. Capital gains are only taken tothe profit and loss account as and when the shares and/or warrants are realisedand cash has been received. IFRS Under IFRS, shares and warrants are valued, where a reliable valuation ispossible, at fair value, with the movements being accounted for as follows:- Shares in listed companies These are marked to market, with the movement going through reserves. Once theshares are sold, or there is objective evidence of impairment, the profit orloss is recycled through the income statement. Shares in unquoted companies These are valued at their fair value where it is considered possible toreasonably measure this value, otherwise these are held at cost. As with listedshares, movements in fair value are taken to reserves, with any profit or losson realisation, or where there is objective evidence of impairment, beingrecycled through the income statement. Warrants in unquoted companies Warrants are shown at their fair value although, in common with shares inunquoted companies, such value can be difficult to establish and where thesecannot be reliably measured they are held at cost. All movements in fair valueare taken through the income statement. 3) Derivatives As part of the funding of its mezzanine activities, the company enters intovarious financial derivatives, primarily interest rate swaps and forward foreignexchange contracts, to ensure that it is not exposed to interest rate orcurrency movements on its asset or liability base. UK GAAP Under UK GAAP, interest on interest rate swaps and the premium/discount onforward foreign exchange contracts are accounted for on the accruals basis inline with the underlying hedged item. All forward foreign exchange contracts are revalued into Sterling at the end ofeach month, with any resulting profit or loss being taken to the profit and lossaccount. This will be equal and opposite to the profit or loss on therevaluation of the hedged asset or liability. IFRS Although ICG is hedged economically, we are unable to obtain hedge accountingunder IFRS on the majority of derivatives. This is because these hedges aredenominated in US Dollars and swapped into Euros, neither of which are sterling,our functional currency, and therefore hedge accounting is not permitted. The impact of any volatility arising from certain financial liabilities beingrecorded at amortised cost with the associated derivatives being recorded atfair value has not been shown in the proforma income statement for the yearended 31 January 2005. 4) Debt funding - recognition of interest expense UK GAAP Interest expense has been accounted for on the accruals basis. Upfront fees onthe arrangement of such debt are amortised over the expected maturity period ofthe debt. IFRS All interest expense, including upfront fees, is accounted for using the EIRmethod. 5) Consolidation This transitional statement covers ICG and its subsidiary companies. It does notinclude third party funds managed by the group as ICG does not have the power tocontrol such funds with a view to obtaining benefits from their activities. 6) Taxation A provisional tax calculation has been made of the effect of all the adjustmentsto reserves of IFRS. APPENDIX 1PRINCIPAL IFRS ACCOUNTING POLICIES Basis of preparation The preliminary consolidated comparative financial information has been preparedin accordance with International Financial Reporting Standards (IFRS) for thefirst time. The accounting policies and disclosures adopted reflect our currentview of best practice, and the accounting standards that will be in force andendorsed by the EU for the period commencing 1 February 2005. They are thereforesubject to change. The date of transition to IFRS and the date of the opening IFRS balance sheetwas 1 February 2004. On initial adoption of IFRS, the following exemptions wereapplied from the requirements of IFRS and from their retrospective applicationas permitted by IFRS 1 'First-time Adoption of International Financial ReportingStandards' (IFRS 1): Implementation of IAS 32, IAS 39 and IFRS 4 - as allowed by IFRS 1, our 2004consolidated income statement and balance sheet has not been restated to complywith IAS 32 and IAS 39.Derecognition -the derecognition requirements of IAS 39 to transactionsoccurring on or after 1 February 2005 has been applied.Share based payments - IFRS 2 'Share-based Payment' has been applied to equityinstrumentsgranted after 7 November 2002. Accounting conventionThe Group prepares its accounts under the historical cost convention, except forthe revaluation of loans and investments, available-for-sale financial assets,financial assets at fair value through profit or loss and all derivativecontracts. Basis of consolidationThe group financial statements incorporate the financial statements of thecompany and its subsidiaries. Interest income and expensesInterest income and expense on financial assets and liabilities held atamortised cost are measured using the effective interest rate ("EIR") method,which allocates the interest income or interest expense over the relevantperiod. The EIR is the rate that discounts estimated future cash payments orreceipts through the expected life of the financial instrument. Fee and commission incomeArrangement fees are generally recognised at the time they are received.Underwriting and agency fees form part of the EIR calculation. Fees from fund management are recognised on an accruals basis. Fees payable Arrangement fees on Balance Sheet funding are recognised in interest expense aspart of the EIR calculation.Other fees are expensed as incurred. Share-based paymentsThe group issues equity-settled share options to certain employees. These aremeasured at fair value at date of grant using a Black Scholes option pricingmodel. The fair value is expensed on a straight line basis over the vestingperiod, based on an estimate of the number of shares that will ultimately vest. DividendsDividend income from investments is recognised when the shareholders' rights toreceive payment have been established. Pension costsPension liabilities are provided by payments to insurance companies or toindividuals for employees' private pension plans. The amount charged to theprofit and loss account represents a percentage of the current payroll cost paidto defined contribution schemes. Value added taxIrrecoverable VAT is written off on items of expenditure relating to the profitand loss account. VAT on tangible fixed assets is capitalised and written offover a similar period to the asset to which it relates. Foreign currenciesForeign currency monetary transactions are translated into sterling using theexchange rates prevailing at the dates of the transactions. Monetary assets andliabilities are re-translated at year end exchange rates. Foreign exchange gainsand losses are recognised in the income statement. Taxation Provision is made for taxation at the current enacted rates on taxable profits,arising in income or in equity, taking into account relief for overseas taxationwhere appropriate. Deferred taxation is accounted for in full for all temporarydifferences between the carrying amount of an asset or liability for accountingpurposes and its carrying amount for tax purposes. Deferred tax assets are onlyrecognised to the extent that it is probable that they will be recovered. Property, plant and equipment and depreciationDepreciation is provided at rates calculated to write off the cost, lessestimated residual value, of each asset on a straight line basis over itsexpected useful live as follows:Furniture and Equipment - 20% - 33% per annumLeasehold Premises - Over the term of the lease Financial assetsFinancial assets are classified into the following categories, as determined atinitial recognition:(a) Financial assets at fair value through profit or lossDerivative assets are categorised as 'at fair value through profit or loss'unless they are designated as hedges. We have no other assets classified as fairvalue through profit or loss. (b) Loans and receivablesLoans and receivables are non-derivative financial assets with fixed ordeterminable payments that are not quoted in an active market. (c) Available-for-saleAvailable-for-sale assets are financial assets not classified in (a)-(b) above. Available-for-sale financial assets and financial assets at fair value throughprofit or loss are carried at fair value. Loans and receivables andheld-to-maturity investments are carried at amortised cost using the effectiveinterest rate ("EIR") method. The fair values of quoted investments in active markets are based on current bidprices. If there is no active market then fair value is determined, wherepossible, using valuation techniques. Impairment of financial assets A financial asset is impaired and impairment losses are incurred if, and onlyif, there is objective evidence of a fall in value of that asset as a result ofevents that occurred after the initial recognition of the asset and that lossevent has an impact on the estimated future cash flows. If there is objective evidence that an impairment loss on loans and receivablesor held-to-maturity investments carried at amortised cost has occurred, theamount of the loss is measured as the difference between the asset's carryingamount and the present value of estimated future cash flows discounted at thefinancial asset's effective interest rate. Shares and WarrantsWhere management can reliably measure the value, shares and warrants are valuedat their fair value. If the fair value cannot be reliably measured, the assetsare held at cost.Gains and losses arising from changes in the fair value of warrants arerecognised in the income statement. Gains and losses arising from changes in thefair value of shares are recognised directly in equity, until the shares arede-recognised or impaired, at which time the cumulative gain or loss previouslyrecognised in equity is recognised in the income statement. Assets held for the Short Term Investments which are held for sale in the short term as current assets aremeasured at fair value i.e. cost plus accrued interest. Financial liabilitiesAll Balance Sheet funding liabilities are held at amortised cost. Derivativeliabilities are categorised as at fair value through profit or loss unless theyare designated as hedges. Derivative financial instruments and hedge accountingDerivatives, including embedded derivatives which are not considered to beclosely related to the host contract, are initially recognised at fair value onthe date on which a derivative contract is entered into, and are subsequentlyremeasured at their fair value. Derivatives can be designated as either cash flow or fair value hedges. Cash flow hedgesA cash flow hedge is used to hedge exposures to variability in cash flows, suchas variable rate financial assets and liabilities. The effective portion ofchanges in the derivative fair value is recognised in equity, and recycled tothe income statement in the periods when the hedged item will affect profit orloss. The fair value gain or loss relating to the ineffective portion isrecognised immediately in the income statement. Fair value hedgesA fair value hedge is used to hedge exposures to variability in the fair valueof financial assets and liabilities, such as fixed rate loans. Changes in thefair value of derivatives that are designated and qualify as fair value hedgesare recorded in the income statement, together with any changes in the fairvalue of the hedged asset or liability that are attributable to the hedged risk.If the hedge no longer meets the criteria for hedge accounting, the adjustmentto the carrying amount of the hedged item is amortised to the income statementover the period to maturity. If derivatives are not designated as hedges then changes in fair values arerecognised immediately in the income statement. Offsetting financial instrumentsFinancial assets and liabilities are offset and the net amount reported in thebalance sheet when there is a legally enforceable right to offset the recognisedamounts and there is an intention to settle on a net basis, or realise the assetand settle the liability simultaneously. APPENDIX 2REPORTS OF THE INDEPENDENT AUDITORS INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF INTERMEDIATE CAPITALGROUP PLC ON THE PRELIMINARY FULL YEAR COMPARATIVE IFRS FINANCIAL INFORMATION We have audited the preliminary full year comparative International FinancialReporting Standards (IFRS) consolidated financial information of IntermediateCapital Group PLC ("the Company") and its subsidiaries (together, "the Group");which comprises: the Statutory consolidated balance sheets as at 1 February2004, 31 January 2005 and 1 February 2005 (as set out on pages 5, 6 and 7) andthe Statutory consolidated income statement for the year ended 31 January 2005(as set out on page 8); and the Principal IFRS accounting policies set out onpages 20 to 22 (together "the full year comparative IFRS financialinformation"). This report is made solely to the Board of Directors, in accordance with ourengagement letter dated 4 April 2005 and solely for the purpose of assistingwith the transition to IFRS. Our audit work has been undertaken so that we mightstate to the Company's board of directors those matters we are required to stateto them in an auditors' report and for no other purpose. To the fullest extentpermitted by law, we will not accept or assume responsibility to anyone otherthan the Company for our audit work, for our report, or for the opinions we haveformed. Respective responsibilities of directors and auditorsThe Company's directors are responsible for ensuring that the Company and theGroup maintains proper accounting records and for the preparation of thepreliminary full year comparative IFRS financial information on the basis setout in the Principal IFRS accounting policies, which describe how IFRS will beapplied under IFRS 1, including the assumptions the directors have made aboutthe standards and interpretations expected to be effective, and the policiesexpected to be adopted, when the Group prepares its first complete set of IFRSfinancial statements as at 31 January 2006. Our responsibility is to audit thepreliminary full-year comparative IFRS financial information in accordance withrelevant United Kingdom legal and regulatory requirements and auditing standardsand report to you our opinion as to whether the preliminary full yearcomparative IFRS financial information is prepared, in all material respects, onthe basis set out in the Principal IFRS accounting policies. We read the other information contained in the preliminary full year comparativeIFRS financial information for the above year and consider the implications forour report if we become aware of any apparent misstatements or materialinconsistencies with the preliminary full year comparative IFRS financialinformation. Basis of audit opinionWe conducted our audit in accordance with United Kingdom auditing standardsissued by the Auditing Practices Board. An audit includes examination, on a testbasis, of evidence relevant to the amounts and disclosures in the preliminaryfull year comparative IFRS financial information. It also includes an assessmentof the significant estimates and judgements made by the directors in thepreparation of the preliminary full year comparative IFRS financial informationand of whether the accounting policies are appropriate to the circumstances ofthe Group, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the preliminary full yearcomparative IFRS financial information is free from material misstatement,whether caused by fraud or other irregularity or error. In forming our opinion,we also evaluated the overall adequacy of the presentation of information in thepreliminary full year comparative IFRS financial information. Emphasis of matter Without qualifying our opinion, we draw attention to the fact that the PrincipalIFRS accounting policies explain that there is a possibility that theaccompanying preliminary full year comparative IFRS financial information mayrequire adjustment before constituting the final full year comparative IFRSfinancial information. Moreover, we draw attention to the fact that, underIFRSs, only a complete set of financial statements comprising a balance sheet,income statement, statement of changes in equity, cash flow statement, togetherwith comparative financial information and explanatory notes, can provide a fairpresentation of the Group's financial position, results of operations and cashflows in accordance with IFRSs. OpinionIn our opinion the preliminary full year comparative IFRS financial informationhas been prepared, in all material respects, on the basis set out in thePrincipal IFRS accounting policies which describe how IFRS will be applied underIFRS 1, including the assumptions the directors have made about the standardsand interpretations expected to be effective, and the policies expected to beadopted, when the Group prepares its first complete set of IFRS financialstatements as at 31 January 2006. Deloitte & Touche LLPChartered AccountantsLondon15 September 2005 INDEPENDENT REVIEW REPORT TO THE BOARD OF DIRECTORS OF INTERMEDIATE CAPITALGROUP PLC ON THE PRELIMINARY INTERIM COMPARATIVE IFRS FINANCIAL INFORMATION FORTHE SIX MONTHS ENDED 31 JULY 2004 We have reviewed the preliminary interim comparative International FinancialReporting Standards (IFRS) consolidated financial information of IntermediateCapital Group PLC ("the Company") and its subsidiaries (together "the Group")for the six months ended 31 July 2004 which comprises: the Statutoryconsolidated balance sheet as at 31 July 2004 ( as set out on page 6) and theStatutory consolidated income statement for the six months ended 31 July 2004(as set out on page 8); and the Principal IFRS accounting policies set out onpages 20 to 22 (together "the interim comparative IFRS financial information"). This preliminary interim comparative IFRS financial information is theresponsibility of the Company's directors. It has been prepared as part of theGroup's conversion to IFRS in accordance with the basis set out in the PrincipalIFRS accounting policies which describe how IFRSs have been applied under IFRS1, including the assumptions the directors have made about the standards andinterpretations expected to be effective, and the policies expected to beadopted, when the Group prepares its first complete set of IFRS financialstatements as at 31 January 2006. Our responsibility is to express an opinion onthis preliminary interim comparative IFRS financial information based on ourreview. Our review report is made solely to the Board of directors in accordance withBulletin 1999/4 issued by the Auditing Practices Board. Our work has beenundertaken so that we might state to the Company those matters we are requiredto state to them in an independent review report and for no other purpose. Tothe fullest extent permitted by law, we do not accept or assume responsibilityto anyone other than the Company, for our review work, for this report, or forthe conclusions we have formed. Review work performedWe conducted our review in accordance with Bulletin 1999/4 issued by theAuditing Practices Board. A review consists principally of making enquiries ofmanagement and applying analytical procedures to the preliminary interimcomparative IFRS financial information and underlying financial data and,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review excludes auditprocedures such as tests of control and verification of assets, liabilities andtransactions. It is substantially less in scope than an audit performed inaccordance with United Kingdom auditing standards and therefore provides a lowerlevel of assurance than an audit. Accordingly, we do not express an auditopinion on the preliminary interim comparative IFRS financial information. Emphasis of matter Without modifying our review conclusion, we draw attention to the fact that thePrincipal IFRS accounting policies explain that there is a possibility that theaccompanying preliminary interim comparative IFRS financial information mayrequire adjustment before constituting the final interim comparative IFRSfinancial information for the six months ended 31 July 2004. Moreover, we drawattention to the fact that, under IFRSs, only a complete set of financialstatements comprising an income statement, balance sheet, statement of changesin equity, cash flow statement, together with comparative financial informationand explanatory notes, can provide a fair presentation of the Group's financialposition, results of operations and cash flows in accordance with IFRSs. Review conclusionOn the basis of our review we are not aware of any material modifications thatshould be made to the preliminary interim comparative IFRS financial informationfor the six months ended 31 July 2004 which has been prepared in accordance withthe basis set out in the note on Principal IFRS accounting policies. Deloitte & Touche LLPChartered AccountantsLondon15 September 2005 This information is provided by RNS The company news service from the London Stock Exchange