Mpac Group Plc Regulatory News (MPAC)

30 Jun 2005 07:01

Molins PLC30 June 2005 30 JUNE 2005 FOR RELEASE AT 07.00 MOLINS PLC PREPARATIONS FINALISED FOR ADOPTION OF IFRS Molins PLC, the international specialist engineering company, has finalised itspreparations to adopt International Financial Reporting Standards (IFRS) andannounces the impact of IFRS on the reported results of the Group. To date Molins has prepared its financial statements in compliance with UKGenerally Accepted Accounting Practice (UK GAAP). European Union (EU)regulations require the Group to adopt IFRS (which include InternationalAccounting Standards (IAS)) in its financial statements from 2005, the first setof such accounts being for the year ended 31 December 2005. Such adoptionrequires the results for the year to 31 December 2004 to be restated so as toprovide an appropriate comparative set of results. A summarised analysis of the main aspects of IFRS that impact on the financialstatements of the Group is set out on pages 2 to 6. In addition a set ofrestated 2004 financial statements, excluding detailed notes, are set out onpages 7 to 10 of this release, together with a restatement of the Group'saccounting policies under IFRS in Appendix 1*. Reconciliations between UK GAAPand IFRS balance sheets and income statements for the periods ended 31 December2004, 30 June 2004 and 1 January 2004 are provided in Appendix 2*. The restatements of the Group's 2004 results are unaudited, but the Group'sauditors, KPMG Audit Plc, have agreed the principles that have been adopted bythe Group. Key points • Shareholders' funds at 31 December 2004 decreased to £29.2m, from £51.5m as previously reported. This has arisen substantially from the new requirements for accounting for pensions which were referred to in note 8 to the 2004 published accounts. • 2004 underlying earnings per share (excluding net pension credit and reorganisation costs) increased by 0.8p, from 1.1p reported under UK GAAP, to 1.9p under IFRS. • Volatility in the level of distributable profits increases, mainly from the changes in accounting for pensions. • No effect on the Group's trading cash flows. • No effect on the Group's management of its businesses. Enquiries: Molins PLC David Cowen , Group Finance Director Tel: 01908 219000 * Appendices 1 & 2 can be found on the Group's website at www.molins.com/ corporate.html as part of the full announcement. Principal areas that affect the financial statements of the Group 1. Pensions and other post-retirement benefits UK GAAP: Pension costs were accounted for under SSAP 24 Accounting for pensioncosts, whereby the costs of providing pensions were charged to the profit andloss account based on a percentage of employees pay, with any variations inregular costs, interest and changes to actuarial gains and losses amortised overthe expected average remaining service lives of current employees. Anydifferences between the amounts charged to the profit and loss account and cashpayments made to the pension schemes were recognised in the balance sheet. IFRS (as required by IAS 19 revised, but closely in line with the disclosuresalready made in the notes to the accounts under FRS 17): Current and pastservice costs of the Group's pension schemes, the expected return on thescheme's assets and any interest costs relating to the present value of thescheme's liabilities are charged to the income statement, with any actuarialgains and losses being recognised through the statement of recognised income andexpense (SORIE). Any surplus in the fair value of the pension scheme's assetsover the present value of the liabilities is recorded as an asset in the balancesheet, and any deficit as a liability. The change in the accounting treatment of the Group's pension arrangements willhave no impact on their funding. The EU has not yet endorsed the revisions toIAS 19 which allows actuarial gains or losses to be recognised through theSORIE. However this is expected to occur before the year end. Accounting impact in 2004: • Income statement: A decrease to reported pre tax profits of £1.3m,mainly arising as a result of £1.4m of pension augmentation costs onredundancies. These are past service costs and are recognised immediately underIFRS. • Balance sheet: A decrease to shareholders' funds of £29.8m afterdeferred tax, being the elimination of the net pension prepayment under SSAP 24of £16.8m and the creation of a net pension liability, after deferred tax, of£13.0m. 2. Research and development costs UK GAAP (as applied by Molins): Research and development costs were chargedagainst profits as incurred, unless specifically chargeable to and recoverablefrom customers under agreed contract terms. IFRS (as required by IAS 38): A portion of development costs, as defined byspecific criteria, must be capitalised as intangible assets. Broadly, thesecriteria will apply where the relevant spending can be reliably identified withdevelopment rather than research and is likely to generate earnings - conditionsthat will generally be met on most product development programmes where theintellectual property rights are retained by the Group. The resulting assetwill be amortised on a straight-line basis over its economic life (which will beup to a maximum of five years); it will also be re-assessed each year (in an 'impairment test') to ensure that the recorded value is supported by theestimated value of related future earnings. Accounting impact in 2004: • Income statement: An increase to reported pre tax profits of £0.4m, asthe cost of amortising capitalised research and development costs was less thanthe amount previously expensed. • Balance sheet: An increase to shareholders' funds of £2.2m afterdeferred tax, classified as Intangible assets. 3. Amortisation of purchased goodwill UK GAAP: Goodwill was amortised over a period of 20 years and was subject totesting for impairment when circumstances indicated that the carrying value maynot be recoverable. IFRS (as required by IFRS 3 and also by concession under IFRS 1): Goodwill isnot amortised but is tested annually for impairment. This applies to allgoodwill arising on acquisitions after 1 January 2004. IFRS 1 First timeadoption of IFRS, permits goodwill on acquisitions made before this date to bebrought on to the balance sheet at 1 January 2004 at its carrying value under UKGAAP. Accounting impact in 2004: • Income statement: Profit before tax increased by £0.9m in 2004,being the amount amortised in 2004 under UK GAAP. • Balance sheet: An increase to shareholders' funds of £0.9m, aspurchased goodwill remains at its 1 January 2004 carrying value. 4. Property valuation UK GAAP: Properties were recorded at their historical cost, except whererevalued on a regular basis, in which case they may have been held in thebalance sheet at their revalued amount on an existing use basis. When FRS 15Tangible fixed assets, was introduced in 2000, Molins applied the option tofreeze its previously revalued properties at their 'modified historical cost'. IFRS (as required by IAS 16 and also by concession under IFRS 1): Properties arerecorded at cost. IFRS 1 requires all assets and liabilities to be brought ontothe balance sheet at their deemed cost at the date of transition or, byconcession in the first year of implementation, at their 'fair value', wherefair value is market value (including existing planning consents). The Grouphas taken advantage of this concession to include certain properties at theiropen market value. Accounting impact in 2004: • Income statement: There is no impact as most of the 'revaluation' relates to land values, which are not subject to depreciation. • Balance sheet: An increase to shareholders' funds of £4.6m,after deferred tax. 5. Share-based payments UK GAAP: The charge to the profit and loss account of the Group's Long-termincentive plan (LTIP) was based on the market value of the shares at the date ofgrant. The charge was recognised over the life of the award and was adjustedwhere achievement of the performance criteria varied from the plan. IFRS (as required by IFRS 2): An expense is recognised in the income statementon all share-based payment schemes granted after 7 November 2002. Awards madebefore this date are not accounted for under IFRS 2, as permitted under thetransitional rules of IFRS 1. For awards made after 7 November 2002 the chargeis based on the fair value to the employee of the option granted, calculatedusing an option pricing model. In addition, performance criteria based on 'market conditions', such as a total shareholder return measure, are not adjustedfor when performance outcomes differ from the plan; this is factored into theoption model in determining the fair value of the shares at the date of grant. Accounting impact in 2004: • Income statement: A decrease to reported profit before tax of£0.3m, as under UK GAAP the 2004 profit and loss account was credited with awrite-back of previously written off costs relating to pre 7 November 2002non-performing LTIP awards. • Balance sheet: The balance sheet treatment of the ordinaryshares held by the employee trust is unchanged. 6. Preference shares UK GAAP: Preference shares were treated as capital and associated servicingcharges were treated as dividends. IFRS (as required by IAS 32): Preference shares with an obligation to transfereconomic benefit are treated as financial liabilities (debt) and not as capital.The costs of servicing preference shares are disclosed as interest. Accounting impact in 2004: • Income statement: A decrease to reported profit before tax of£0.1m. At a retained profit level, there is no change. • Balance sheet: Net assets and equity decrease by £0.9m, and netdebt increases by the same amount. 7. Deferred tax UK GAAP: Deferred tax was provided on timing differences between accounting andtax profits. No provision for the tax effect on the potential disposal ofrevalued properties was accounted for. IFRS (as required by IAS 12): Deferred tax is provided on all temporarydifferences between accounting and tax book values, including the requirement toaccount for the tax effect of any future property disposals. In addition therehave been deferred tax adjustments to account for the tax effect of other IFRSchanges, including product development, pensions and share-based payments. Accounting impact in 2004: • Income statement: An increase to reported profit after tax of£0.4m, mainly attributable to the expected tax relief on the pensionaugmentation costs of redundancies. On an underlying basis, the main impact isin respect of the capitalisation of product development. • Balance sheet: Net assets and equity increase by £9.4m, which ismainly attributable to the elimination of a deferred tax liability on the SSAP24 pension prepayment and creation of a deferred tax asset on the IAS 19 pensionliability, offset by the deferred tax effect in respect of product developmentand properties. 8. Other adjustments Smaller adjustments have also been made to reflect IFRS reclassifications andprofit and loss adjustments relating to certain other employee benefits, leasepremiums, exchange on foreign denominated goodwill and the treatment of proposeddividends at 1 January 2004. Summarised reconciliations from UK GAAP to IFRS 1. 2004 income statement (before pension costs, reorganisation costs & tax) Underlying profit before tax under UK GAAP £0.9mDevelopment costs £0.4mShare-based payments £(0.3)mOther employee benefits £0.1mInterest on preference shares £(0.1)mUnderlying profit before tax under IFRS £1.0m 2. 2004 income statement (after pension costs, reorganisation costs & tax) Loss after tax under UK GAAP £(11.2)mDevelopment costs £0.3mShare-based payments £(0.3)mOther employee benefits £0.1mPensions and post-retirement benefits £(0.9)mDeferred tax £0.1mGoodwill - amortisation £0.9mLoss after tax under IFRS £(11.0)m 3. 2004 net assets Net assets under UK GAAP £51.5mDevelopment costs (net of deferred tax) £2.2mDeferred tax £0.2mOther employee benefits £0.3mProperty valuation (net of deferred tax) £4.6mPensions and post-retirement benefits (net of deferred tax) £(29.8)mGoodwill - amortisation £0.9mGoodwill - foreign exchange £0.2mPreference shares £(0.9)mNet assets under IFRS £29.2m 4. 2003 net assets (at 1 January 2004) Net assets under UK GAAP £64.0mDevelopment costs (net of deferred tax) £1.9mDeferred tax £0.1mOther employee benefits £0.3mProperty valuation (net of deferred tax) £4.4mPensions and post-retirement benefits (net of deferred tax) £(31.4)mGoodwill - foreign exchange £0.1mProposed dividend £1.4mPreference shares £(0.9)mNet assets under IFRS £39.9m Detailed reconciliations are included in Appendix 2*. Basis of preparation The financial information has been prepared in accordance with the IFRSstandards expected to be adopted by the EU at 31 December 2005. These standardsare still subject to change. The accounting policies applied are set out inAppendix 1*. Transitional arrangements The rules for first time adoption of IFRS are set out in IFRS 1. In general acompany is required to determine its IFRS accounting policies and apply theseretrospectively to determine its opening balance sheet under IFRS. IFRS 1allows a number of exceptions to this general requirement. The accounting forgoodwill, share-based payments and property at market value has already beennoted above. In addition, the Group has adopted the exemption that IAS 32 andIAS 39, both relating to financial instruments, need not be applied to thecomparative periods. Under IAS 21 The effects of changes in foreign exchangerates, cumulative translation differences arising on consolidation ofsubsidiaries should be held in a separate reserve, rather than included in theprofit and loss reserve; the Group has applied the exemption not to adopt thisretrospectively and the reserve has been deemed to be £nil on 1 January 2004. Presentation of financial statements The Group's financial statements have been presented in accordance with IAS 1Presentation of financial statements. Except for the reclassification ofpreference dividends as interest, there is no impact on reported profit beforetax as a consequence of IAS 1. Where IAS 1 does not provide definitive guidanceon presentation, for example in relation to aspects of the income statement, theGroup has adopted a format consistent with UK GAAP requirements. This assistswith comparing results with prior years. The format of the balance sheet hasbeen amended to include items required by IAS 1 to be presented on the face ofthe balance sheet, including the requirement to analyse all assets andliabilities, including provisions, between current and non-current, and presentdeferred tax assets separately from deferred tax liabilities, rather than as asingle net amount. Appendix 2* includes reconciliations from UK GAAP formats to IFRS format. TheIFRS adjustments referred to above are then applied to these revised formats. Distributable profits The Company may only make distributions to its shareholders out of profits thatare available for that purpose (s 263 Companies Act 1985) at the time suchdistribution is to be made. In summary, such profits are the Company'saccumulated realised profits less its accumulated realised losses. Whilst theconcept of distributable profits is derived from company law and not accountingstandards, the adoption of IFRS has led to a major change in the amounts of suchprofits and losses and in particular, in Molins case, from the change inaccounting for pensions. At 31 December 2004 the Company had distributable profits under IFRS of £0.6m,significantly reduced from the £27.4m it had under UK GAAP. As the value of the Company's pension scheme assets changes on a daily basis, asdoes the valuation of its liabilities (as a consequence of changes to marketyields for high quality fixed rate corporate bonds), and with a low level ofdistributable profits at 31 December 2004, there is a possibility thatdistributable profits could be less than £nil at a particular point in time, andtherefore the Company might not legally be in a position to pay dividends to itsordinary and preference shareholders. The Company is assessing options to giveit more certainty as to its ability to pay dividends in the future. Interim results Molins will report its interim results for the six months to 30 June 2005 underIFRS in September 2005. Consolidated income statement 12 months to 31 December 2004 6 months to 30 June 2004 Before Before reorganisation Reorganisation reorganisation Reorganisation costs costs Total costs costs Total £m £m £m £m £m £mRevenue 122.9 - 122.9 57.7 - 57.7Cost of sales (92.5) (7.2) (99.7) (42.7) (3.6) (46.3) Gross profit 30.4 (7.2) 23.2 15.0 (3.6) 11.4Other operating income 0.1 - 0.1 - - -Distribution expenses (8.4) (0.3) (8.7) (4.9) (0.1) (5.0)Administrative (18.2) (2.4) (20.6) (10.0) (0.3) (10.3)expensesOther operating (1.6) (1.4) (3.0) (0.2) (0.1) (0.3)expenses Operating (loss)/ 2.3 (11.3) (9.0) (0.1) (4.1) (4.2)profitLoss on closure of - (1.6) (1.6) - (1.8) (1.8)associate (Loss)/profit beforefinancing costs 2.3 (12.9) (10.6) (0.1) (5.9) (6.0)Financial income 0.3 - 0.3 0.1 - 0.1Financial expenses (1.5) - (1.5) (0.6) - (0.6) Net financing costs (1.2) - (1.2) (0.5) - (0.5) (Loss)/profit before 1.1 (12.9) (11.8) (0.6) (5.9) (6.5)taxIncome tax credit/ (0.7) 1.5 0.8 (0.2) 0.3 0.1(expense) (Loss)/profit for the 0.4 (11.4) (11.0) (0.8) (5.6) (6.4)period Basic (loss)/earningsper ordinary share 2.3p (63.4)p (61.1)p (4.7)p (30.7)p (35.4)pDiluted (loss)/earnings per ordinary 2.3p (63.4)p (61.1)p (4.7)p (30.7)p (35.4)pshare Consolidated balance sheet 31 Dec 30 June 31 Dec 2004 2004 2003 £m £m £mNon-current assetsIntangible assets 19.6 19.1 17.6Property, plant and equipment 29.7 30.0 29.3Investment in associate - - 1.8Trade and other receivables 1.0 1.7 4.2Employee benefits 1.4 2.8 2.8Deferred tax assets 6.8 7.5 8.0 58.5 61.1 63.7 Current assetsInventories 35.2 40.0 40.3Income tax receivable 1.9 0.4 0.3Trade and other receivables 25.5 28.1 36.7Cash and cash equivalents 5.1 5.4 7.0 67.7 73.9 84.3Current liabilitiesBank overdraft (0.9) (1.0) (2.1)Interest-bearing loans and borrowings (0.8) (2.0) (1.9)Trade and other payables (32.4) (37.5) (44.9)Income tax payable (0.9) (0.6) (1.1)Provisions (5.4) (2.0) (1.7) (40.4) (43.1) (51.7) Net current assets 27.3 30.8 32.6 Total assets less current liabilities 85.8 91.9 96.3 Non-current liabilitiesInterest-bearing loans and borrowings (29.4) (30.1) (25.4)Employee benefits (22.6) (24.6) (26.3)Deferred tax liabilities (4.6) (4.7) (4.7) (56.6) (59.4) (56.4) Net assets 29.2 32.5 39.9 Capital and reservesIssued capital 5.0 5.0 5.0Share premium 25.9 25.9 25.9Reserves (0.1) 0.1 0.8Retained earnings (1.6) 1.5 8.2 Shareholders' funds 29.2 32.5 39.9 Consolidated statement of recognised income and expense 12 months 6 months to 31 Dec to 30 June 2004 2004 £m £mCurrency translation movements arising on foreigncurrency net investments (1.0) (0.8)Actuarial gains and losses 2.5 1.0 Net income recognised directly in equity 1.5 0.2Loss for the period (11.0) (6.4) Total recognised income and expense for the period (9.5) (6.2) Consolidated statement of cash flows 12 months 6 months to 31 Dec to 30 June 2004 2004 £m £mCash flows from operating activities Loss for the period (11.0) (6.4)Amortisation 0.8 0.4Depreciation 2.9 1.4Investment income (0.3) (0.1)Interest expense 1.5 0.6Write-down of non-current assets 0.2 0.4Equity-settled share-based payments 0.1 0.1Income tax credit (0.8) (0.1)Other movements (0.1) -Working capital movements - Decrease/(Increase) in inventories 4.8 (0.8) - Decrease in trade and other receivables 13.8 10.2 - Decrease in trade and other payables (12.3) (6.7) - Increase in provisions and employee benefits 4.6 0.5 Cash generated from operations 4.2 (0.5) Income taxes paid (0.8) (0.6) Net cash from operating activities 3.4 (1.1) Cash flows from investing activities Proceeds from sale of plant and equipment 0.4 0.2Net proceeds from closure of associate 0.2 -Interest paid (1.6) (0.7)Interest received 0.4 0.2Acquisition of property, plant and equipment (3.8) (2.5)Development expenditure (1.2) (0.5) Net cash from investing activities (5.6) (3.3) Cash flows from financing activities Increase in borrowings 2.9 5.5Dividends paid (1.4) (1.4) Net cash from financing activities 1.5 4.1 Net increase in cash and cash equivalents (0.7) (0.3)Cash and cash equivalents at 1 January 4.9 4.9Effect of exchange rate fluctuations on cash held - (0.2) Cash and cash equivalents at period end 4.2 4.4 This information is provided by RNS The company news service from the London Stock Exchange