QRT.L Regulatory News (QRT)

2 Sep 2005 07:00

Quarto Group Inc02 September 2005 THE QUARTO GROUP, INC. ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) The Quarto Group, Inc's (Quarto's) transition date for IFRS reporting is 1January 2004, and the first full year reporting under IFRS will be for the yearending 31 December 2005. The primary changes to Quarto's reported 2004 financial information followingthe adoption of IFRS are as a result of: • Changes in presentation and disclosure; • Ceasing to amortize goodwill. Capitalised goodwill will, in future, be subject to an annual impairment review; • Ceasing to accrue for dividends declared after the period end; • Recognising certain intangible assets, which will be amortized; • Carrying goodwill and intangibles in the currency of the company acquired; • Recognising liabilities in respect of unutilised holiday pay; • Accounting for cumulative redeemable preference shares, convertible loan notes and interest rate swaps in accordance with IAS 32 and IAS 39; and • Recognising deferred tax assets and liabilities on a different basis. The effect of the adoption of IFRS in respect of the group's 2004 financialstatements is set out in detail in the attached report. In summary: UK GAAP IFRS Change £000 £000 £000Revenue 79,835 79,750 (85) Operating profit 7,194 7,007 (187)Adjusted operating profit* 7,604 7,516 (88) Profit before tax 6,025 5,392 (633)Adjusted profit before tax* 6,435 5,901 (534) Earnings per share 21.5p 20.8p (0.7)pAdjusted earnings per share* 23.8p 22.7p (1.1)pDiluted earnings per share 20.1p 19.6p (0.5)pAdjusted diluted earnings per share 22.0p 21.2p (0.8)p £000 £000 £000Net assets at 31 December 2004 11,167 6,304 (4,863) *Adjusted operating profits and earnings per share are after adding backintangible asset amortization. • Adjusted operating profits for the year to 31 December 2004 are reduced by £88k from £7,604k to £7,516k due primarily to holiday pay expense of £50k and share-based payment expenses of £4k; unadjusted operating profits are reduced by £187k from £7,194k to £7,007k, which, in addition to the holiday pay and share-based payment expenses, is primarily caused by changes to the accounting for goodwill and intangible assets; • Adjusted and unadjusted profits before tax for the year to 31 December 2004 are reduced for the same reasons by £88k and £187k respectively and additionally by £446k in respect of preference share dividends now treated as finance costs, a total reduction of £534k (from £6,435k to £5,901k) and £633k (from £6,025k to £5,392k), respectively. • Adjusted and unadjusted share are consequently reduced by 1.1 pence per share and 0.7 pence per share respectively. Adjusted and unadjusted dilutive earnings per share are consequently reduced by 0.8 pence and 0.5 pence per share respectively; • Net assets as at 31 December 2004 are decreased by £4,863k from £11,167k to £6,304k, primarily due to the treatment of preference shares under IAS 32 as debt (£4,855k) and £374k with respect to carrying goodwill and intangibles in the currency of the company acquired, offset by changes to the timing of recognition of dividend payments totalling £629k; To date, Quarto has prepared its accounts in compliance with UK GenerallyAccepted Accounting Principles (UK GAAP). EU regulations require Quarto to adoptIFRS in its financial statements from 2005. The group has reviewed those changesnecessary to move from UK GAAP to IFRS. Restatements of our 2004 financialstatements are unaudited. DisclaimerStandards currently in issue and adopted by the EU are subject to interpretationissued from time to time by the International Financial ReportingInterpretations Committee (IFRIC). Further standards may be issued by the IASBthat will be adopted for financial years beginning on or after 1 January 2005.Additionally, IFRS is currently being applied in the United Kingdom and in alarge number of countries simultaneously for the first time. Furthermore, due toa number of new and revised Standards included within the body of Standards thatcomprise IFRS, there is not yet significant established practice on which todraw in forming decisions regarding the interpretation and application.Accordingly, practice is continuing to evolve. At this preliminary stage,therefore, the full financial effect of reporting under IFRS as it will beapplied and reported on in the Company's first IFRS financial statements for theyear ended 31 December 2005 may be subject to change. ADOPTION OF IFRS Contents 1. Introduction 2. Basis of Preparation 3. Overview of Impact 4. Key Impact Analysis 5. Performance Measurement 6. Restated Consolidated Primary Statements APPENDICES 1. Summarised Restatement of Accounting Policies 2. Reconciliations of reported UK GAAP financial statements to IFRS 2.1-2.6: Year to 31 December 2004 - IAS 1 format changes and Other IFRS adjustments 2.7-2.12: Six months to 30 June 2004 - IAS 1 format changes and Other IFRS adjustments 2.13-2.14: Transition Balance Sheet as at 1 January 2004 - IAS 1 format changes and Other IFRS adjustments 1. INTRODUCTION In accordance with European Union regulations, Quarto is required to adoptInternational Financial Reporting Standards (IFRS)(1) in its consolidatedaccounts for accounting periods commencing on or after 1 January 2005.Consequently, the first full year reporting under IFRS will be for the year to31 December 2005. These financial statements will include comparativeinformation for 2004. This press release explains how the group's previously reported UK GAAPfinancial performance and position are reported under IFRS. It includes on anIFRS basis: • the consolidated income statement for the period ended 30 June 2004 and for the year ended 31 December 2004; • the consolidated balance sheet at 30 June 2004 and 31 December 2004; and • the consolidated cash flow statement for the period ended 30 June 2004 and year ended 31 December 2004. A summary of the impact on the group's operating profit, profit before tax,earnings per share, and net assets from the adoption of IFRS is provided insection 3, 'Overview of Impact'. Reconciliations to assist the reader in understanding the nature and quantum ofdifferences between UK GAAP and IFRS for the financial information above areincluded in the appendices. The financial information set out in this press release is unaudited. 2. BASIS OF PREPARATION Standards currently in issue and adopted by the EU are subject to interpretationissued from time to time by the International Financial ReportingInterpretations Committee (IFRIC). Further standards may be issued by the IASBthat will be adopted for financial years beginning on or after 1 January 2005.Additionally, IFRS is currently being applied in the United Kingdom and in alarge number of countries simultaneously for the first time. Furthermore, due toa number of new and revised Standards included within the body of Standards thatcomprise IFRS, there is not yet significant established practice on which todraw in forming decisions regarding the interpretation and application.Accordingly, practice is continuing to evolve. At this preliminary stage,therefore, the full financial effect of reporting under IFRS as it will beapplied and reported on in the Company's first IFRS financial statements for theyear ended 31 December 2005 may be subject to change. (1) References to IFRS throughout this document refer to the application ofInternational FinancialReporting Standards ('IFRS'), including International Accounting Standards('IAS') and interpretations issued by the International Accounting Standards Board ('IASB') and its committees that have been adopted for use in the EU ('adopted IFRS'). 2.1. IFRS 1 exemptions IFRS 1, "First-time Adoption of International Financial Reporting Standards"sets out the procedures that the Group must follow when it adopts IFRS for thefirst time as the basis for preparing its consolidated financial statements. Thegroup is required to establish its IFRS accounting policies as at 31 December2005 and, in general, apply these retrospectively to determine the IFRS openingbalance sheet at its date of transition, 1 January 2004. This standard provides a number of exceptions, some of which are optional, tothis general principle. The most significant of these so far as they have beenadopted by the group are set out in Appendix 1.18 "IFRS TransitionalArrangements". 2.2. Presentation of financial information The primary statements within the financial information contained in thisdocument have been presented in accordance with IAS 1, 'Presentation ofFinancial Statements'. However, this format and presentation may requiremodification in the event that further guidance is issued and as practicedevelops. 3. OVERVIEW OF IMPACT The following summary tables show the impact of IFRS adjustments on the group'soperating profit and profit before tax, earnings per share, and net assets. 3.1. Operating profit and profit before tax Six months ended 30 June 2004 Year ended 31 December 2004 Unadjusted Adjusted Unadjusted Adjusted £000 £000 £000 £000Operating profitper UK GAAP 1,996 2,101 7,194 7,604 Share basedpayments(section 4.2) (2) (2) (4) (4)Short termemployee benefit(section 4.4) (133) (133) (50) (50)Reversal ofgoodwillamortization(section 4.3) 88 - 376 -Amortization ofintangibles(section 4.3) - - (475) -Other (section4.8) 5 5 (34) (34)Operating profitper IFRS 1,954 1,971 7,007 7,516 Net financingcosts per UKGAAP (417) (417) (1,169) (1,169)Preferenceshares (section4.7) (223) (223) (446) (446)Net financingcosts per IFRS (640) (640) (1,615) (1,615)*Profit beforetax per IFRS 1,314 1,331 5,392 5,901 \* There are no reconciling items between profit before tax under UK GAAP andunder IFRS, save for those identified above. 3.2 Profit after tax Six months ended 30 June 2004 Year ended 31 December 2004 Unadjusted Adjusted Unadjusted Adjusted £000 £000 £000 £000Profit after taxper UK GAAP 1,225 1,330 4,688 5,098 Adjustments tooperating profit (42) (130) (187) (88)Adjustments tofinancing costs (223) (223) (446) (446)Tax on non-taxIFRS adjustments 33 33 119 10Deferred tax onrevalued assets(section 4.6) 1 1 3 3Tax adjustmentrelating to USgoodwill(section 4.6) (20) (20) (40) (40)Profit after taxper IFRS 974 991 4,137 4,537 Earnings pershareEarnings pershare per UKGAAP 4.7p 5.3p 21.5p 23.8pEarnings pershare per IFRS 4.5p 4.6p 20.8p 22.7p 3.3 Net assets 30 June 2004 31 December 2004 £000 £000Net assets per UK GAAP 8,137 11,167Reversal of 2004 goodwill amortization(section 4.3) 88 376Amortization of intangibles (section 4.3) - (371)Goodwill / Intangibles translation (section4.3) - (374)Short term employee benefits (section 4.4) (215) (174)Deferred tax on US goodwill (section 4.6) 156 128Deferred tax on revalued assets (section4.6) (292) (290)Dividends (section 4.5) 494 629Interest rate swap (section 4.7) - 130Preference shares and convertible loan note(section 4.7) (4,845) (4,850)Other (section 4.8) (40) (67) Net assets under IFRS 3,483 6,304 4. KEY IMPACT ANALYSIS The analysis below sets out the most significant adjustments arising from thetransition to IFRS. Adjustments effective from 1 January 2004 4.1 Presentation of Financial Statements The format of the group's primary financial statements has been presented inaccordance with IAS 1, "Presentation of Financial Statements". The changes areset out in appendices 2.1, 2.3, 2.5, 2.7, 2.9, 2.11 and 2.13. 4.2 Share Based Payments IFRS 2, "Share-based Payment" requires that an expense for share options grantedbe recognised in the financial statements based on their fair value at the dateof grant. This expense is recognised over the vesting period of the options. The group has measured this expense for options granted after 7 November 2002,that had not vested at 1 January 2005, in accordance with the exemptionpermitted under IFRS 1. Quarto has used a binomial model for the purposes ofcomputing fair value. The charge to the income statement for the year to 31 December 2004 was £4k (sixmonths ended 30 June 2004 - £2k), see appendices 2.2 and 2.8. As this transaction is settled in equity, rather than cash, the charge to theincome statement is matched by a corresponding increase in equity and there istherefore a net nil effect on the balance sheet. 4.3 Goodwill and acquired intangible assets IAS 38, "Intangible Assets" requires that goodwill is not amortized. Instead itis subject to an annual impairment review. As permitted, the group has electednot to apply IFRS 3 retrospectively to business combinations prior to theopening balance sheet date under IFRS. Consequently, the UK GAAP goodwill hasbeen included in the opening IFRS consolidated balance sheet at the carryingvalue as at 31 December 2003 (£3,071k) and is no longer amortized. £266k ofseparately acquired backlists, previously included within goodwill, have beenpresented as separate intangible assets and will continue to be amortized overtheir useful economic life. The goodwill amortization in the year to 31 December 2004 of £376k (30 June 2004- £88k) under UK GAAP has been reversed; see appendices 2.2 and 2.8. Theamortization of intangibles under UK GAAP in the year to 31 December 2004 of£34k (30 June 2004 - £17k) remains in the financial statements under IFRS. The group made three acquisitions of businesses during 2004. These acquisitionsincluded the purchase of finite-lived intangible assets not previouslyrecognised under UK GAAP. Under IFRS, these intangible assets are reclassifiedfrom goodwill, and amortized over their useful economic lives. The reclassified intangible assets are being amortized over various periods notexceeding five years, depending on their nature; the corresponding amortizationcharge for the reclassified intangible assets for the year to 31 December 2004was £475k (30 June 2004 - £nil); see appendices 2.2 and 2.8. The balance sheet reclassification of goodwill to intangibles arising from 2004acquisitions as at 31 December 2004 was £5,810k (30 June 2004 - £nil), seeappendices 2.4 and 2.10. Under IAS 21, goodwill and intangibles are carried in the currency of theacquired company. The balance sheet value of goodwill at 31 December 2004 hasbeen reduced by £141k and the balance sheet value of intangibles at 31 December2004 has been reduced by £233k (30 June 2004 for both categories £nil). 4.4 Employee Benefits IAS 19 requires short term accumulating benefits such as holiday pay entitlementand sick pay to be accrued over the period in which the entitlement is earned. The additional liability in the balance sheet at 31 December 2004 is £205k (30June 2004 - £280k), see appendices 2.4 and 2.10. The impact on profit before tax for the year to 31 December 2004 is a charge of£50k (30 June 2004 - charge of £133k), see appendices 2.2 and 2.8. 4.5 Dividends IAS 10, "Events after the Balance Sheet Date" requires that dividends declaredafter the balance sheet date should not be recognised as a liability at thatbalance sheet date as they do not represent a present obligation as defined byIAS 37 "Provisions, Contingent Liabilities and Contingent Assets". Under IFRS, dividends are shown as a deduction from reserves; therefore theincome statement no longer shows the deduction of dividends. The final dividend in the 2004 UK GAAP financial statements in relation to thefinancial year ended 31 December 2004 of £629k has been reversed in the balancesheet at 31 December 2004 (30 June 2004 - reversal of interim dividend of£494k), see appendices 2.4 and 2.10. 4.6 Deferred and Current Taxes IAS 12, "Income Taxes" requires that deferred tax assets and liabilities arecalculated by reference to temporary differences, the difference between thecarrying amount of an asset and its tax base. Deferred tax on US Goodwill Goodwill from the acquisition of US businesses previously written off toreserves under UK GAAP is deductible for US tax purposes; the tax balancecarried forward under IAS 12 gives rise to a deferred tax asset.At 31 December 2004 a deferred tax asset of £128k has been recognised under IFRS(30 June 2004 - deferred tax asset of £156k) which partially offsets US deferredtax liabilities, see appendices 2.4 and 2.10. The impact on the income statement for the year to 31 December 2004 is toincrease the tax expense by £40k (30 June 2004 - £20k), see appendices 2.2 and2.8. Deferred tax on revalued asset A deferred tax liability has been established with regard to the propertyrevaluation. At 31 December 2004, this amounted to £290k (30 June 2004 - £292k). The impact on the income statement for the year to 31 December 2004 is to reducethe tax expense by £3k (30 June 2004 - £1k), see appendices 2.2 and 2.8 Other tax adjustments The non-tax IFRS adjustments outlined elsewhere within this document have beentax effected as at 30 June 2004 and 31 December 2004. 4.7 Financial Instruments IAS 32, "Financial Instruments: Disclosure and Presentation" and IAS 39"Financial Instruments: Recognition and Measurement" address the accounting for,and reporting of, financial instruments. IAS 39 sets out detailed accountingrequirements in relation to financial assets and liabilities. All derivative financial instruments are accounted for at fair value whilstother financial instruments are accounted for either at amortized cost or atfair value depending on their classification. Subject to stringent criteria,financial assets and financial liabilities may be designated as forming hedgerelationships as a result of which fair value changes are offset in the incomestatement or charged/credited to equity depending on the nature of the hedgerelationship. Quarto has three types of financial instrument that are impacted by IAS 32 andIAS 39, as follows: Interest rate swap In order to provide a hedge against changes in interest rates, the group hastaken out an interest rate swap to swap variable to fixed rates on US$ 30million of borrowings. Under IAS 39, the group has designated the interest rate swap as a cash flowhedge of its interest cost on the borrowings concerned, and the directors havedetermined that the hedge was effective in the year ended 31 December 2004. The impact of recognising this instrument at fair value on the balance sheet asat 31 December 2004 is an increase in net assets of £130k, with a correspondingadjustment in the hedging reserves. Financial Instruments Preference shares / Convertible loan note These two financial instruments have been recognised / presented in thefinancial statements under IAS 32. The impact of IAS 32 is to recognise asignificant portion of the preference share investment as a liability and torecognise an element of the convertible loan note as equity, in accordance withthe rights attaching to those instruments. The impact of recognising these instruments, in accordance with IAS 32, on thebalance sheet is to increase short term borrowings by £4,850k (30 June 2004 -increase medium and long term borrowing by £4,845k), to reduce share capital by£278k (30 June 2004 - £278k), to reduce the share premium account by £4,704k (30June 2004 - £4,709k) and to increase retained earnings by £132k (30 June 2004 -£142k), see appendices 2.4 and 2.10. The impact on the income statement for the year to 31 December 2004 is toincrease the interest charge by £446k (30 June 2004 - £223k), see appendices 2.2and 2.8. 4.8 Other The impact of other IFRS requirements, primarily the calculation of deferred taxon eliminated inter company profit, has been minimal. In the income statement at 31 December 2004, other IFRS requirements led to areduction in profit before tax of £34k (30 June 2004 increase of £5k) and £24kin profit after tax (30 June 2004 increase of £4k), see appendices 2.2 and 2.8. In the balance sheet at 31 December 2004, net assets were reduced by £67k (30June 2004 - £40k), see appendices 2.4 and 2.10. 5. PERFORMANCE MEASUREMENT Under UK GAAP, the group has presented adjusted profit and earnings per sharemeasures of its underlying performance that excluded goodwill amortization andexceptional items. In implementing IFRS, it is necessary to revise the definition of underlyingprofits and earnings per share, whilst seeking to continue to present a measureof underlying performance. It is therefore intended that Quarto reports an adjusted measure of profits andearnings per share that eliminates the following items: • Intangible asset amortization charges; • Asset impairment charges; • Gains or losses on the disposal of businesses; • Significant restructuring costs • Significant non-recurring items • The tax effect of the items referred to above. 6. RESTATED CONSOLIDATED PRIMARY STATEMENTS Condensed Consolidated Income Statement 6.1 For the period ended 30 June 2004 UK GAAP IFRS IFRS IFRS format adjustments £000 £000 £000Revenue 31,039 10 31,049Operating profit 1,996 (42) 1,954Financing costs (448) (223) (671)Financial income 31 - 31Profit before taxation 1,579 (265) 1,314Taxation (354) 14 (340)Profit for the period 1,225 (251) 974Profit for the period attributable to:Minority interests 160 (1) 159Shareholders of the parentcompany 1,065 (250) 815 1,225 (251) 974Earnings per share 4.7p (0.2)p 4.5p The above results are wholly from continuing operations. Condensed Consolidated Income Statement 6.2 For the year ended 31 December 2004 UK GAAP IFRS IFRS IFRS format adjustments £000 £000 £000Revenue 79,835 (85) 79,750Cost of sales (50,931) 51 (50,880)Gross profit 28,904 (34) 28,870Operating costs (21,710) (153) (21,863)Operating profit 7,194 (187) 7,007Financing costs (1,234) (446) (1,680)Financial income 65 - 65Profit before taxation 6,025 (633) 5,392Taxation (1,337) 82 (1,255)Profit for the period 4,688 (551) 4,137Profit for the period attributable to:Minority interests 403 - 403Shareholders of the parentcompany 4,285 (551) 3,734 4,688 (551) 4,137Earnings per share 21.5p (0.7)p 20.8p The above results are wholly from continuing operations. Consolidated Balance Sheet 6.3 As at 30 June 2004 UK GAAP IFRS IFRS IFRS format adjustments £000 £000 £000Non current assetsProperty, plant & equipment 8,959 - 8,959Goodwill 3,232 (161) 3,071Other intangible assets - 249 249 12,191 88 12,279Current assetsInventories 19,148 30 19,178Taxation recoverable 94 - 94Trade and other receivables 17,195 (93) 17,102Cash and cash equivalents 6,287 - 6,287 42,724 (63) 42,661Total assets 54,915 25 54,960Current liabilitiesShort term borrowings (356) - (356)Trade and other payables (15,995) 221 (15,774)Corporation tax liabilities (462) - (462) (16,813) 221 (16,592)Net current assets 25,911 158 26,069 Non-current liabilitiesMedium and long termborrowings (28,853) (4,845) (33,698)Other payables (243) - (243)Deferred tax liabilities (869) (55) (924) (29,965) (4,900) (34,865)Total liabilities (46,778) (4,679) (51,457)Net assets 8,137 (4,654) 3,483 EquityIssued capital 1,341 (278) 1,063Share premium account 23,903 (4,709) 19,194Retained earnings and otherreserves (19,564) 334 (19,230)Equity attributable toshareholders of the parentcompany 5,680 (4,653) 1,027Minority Interests 2,457 (1) 2,456 8,137 (4,654) 3,483Total equity and liabilities (54,915) (25) (54,940) Consolidated Balance Sheet 6.4 As at 31 December 2004 UK GAAP IFRS IFRS IFRS format adjustments £000 £000 £000Non current assetsProperty, plant & equipment 8,982 - 8,982Goodwill 12,773 (5,529) 7,244Other intangible assets 232 5,102 5,334Deferred tax 4 - 4 21,991 (427) 21,564Current assetsInventories 20,727 136 20,863Taxation recoverable 154 - 154Trade and other receivables 24,066 (190) 23,876Cash and cash equivalents 10,611 - 10,611 55,558 (54) 55,504Total assets 77,549 (481) 77,068Current liabilitiesShort term borrowings (433) (4,850) (5,283)Trade and other payables (25,377) 448 (24,929)Corporation tax liabilities (1,304) - (1,304) (27,114) (4,402) (31,516)Net current assets 28,444 (4,456) 23,988 Non-current liabilitiesMedium and long termborrowings (38,408) - (38,408)Other payables (210) - (210)Deferred tax liabilities (650) 20 (630) (39,268) 20 (39,248)Total liabilities (66,382) (4,382) (70,764)Net assets 11,167 (4,863) 6,304 EquityIssued capital 1,341 (278) 1,063Share premium account 23,903 (4,704) 19,199Retained earnings and otherreserves (16,797) 119 (16,678)Equity attributable toshareholders of the parentcompany 8,447 (4,863) 3,584Minority Interests 2,720 - 2,720 11,167 (4,863) 6,304Total equity and liabilities (77,549) 481 (77,068) Condensed Consolidated cash flow statement 6.5 For the period to 30 June 2004 UK GAAP IFRS IFRS IFRS format adjustments £000 £000 £000Cash flows from operating activitiesProfit for the period 1,225 (251) 974Tax expense 354 (14) 340Net finance costs 417 223 640Depreciation 537 - 537Amortization 105 (88) 17Equity settled share-basedpayment expense - 2 2Operating profit beforechanges in working capital andprovisions 2,638 (128) 2,510Movement in current operatingassets and liabilities (5,601) 128 (5,473)Corporation tax paid (743) - (743)Net cash flow from operatingactivities (3,706) - (3,706) Cash flows from investing activitiesPurchase of tangible fixedassets (613) - (613)Purchase of subsidiaryundertakings (183) - (183)Interest received 31 - 31Net cash flow from investingactivities (765) - (765) Cash flows from financing activitiesInterest paid (448) (213) (661)Proceeds from the issue ofshare capital 26 - 26Preference dividends paid (213) 213 -Dividend paid to minorityshareholder (103) - (103)Loans repaid (197) - (197)Ordinary dividends paid (583) - (583)Net cash flows from financingactivities (1,518) - (1,518)Net decrease in cash and cashequivalents (5,989) - (5,989) Consolidated cash flow statement 6.6 For the year to 31 December 2004 UK GAAP IFRS IFRS IFRS format adjustments £000 £000 £000Cash flows from operating activitiesProfit for the period 4,688 (551) 4,137Tax expense 1,337 (82) 1,255Net finance costs 1,169 446 1,615Depreciation 1,073 - 1,073Amortization 410 99 509Profit on sale of tangiblefixed assets (1) - (1)Equity settled share-basedpayment expense - 4 4Operating profit beforechanges in working capital andprovisions 8,676 (84) 8,592Decrease in trade and otherreceivables 215 86 301Increase in inventories (675) (47) (722)Decrease in trade and otherpayables (1,713) 45 (1,668)Corporation tax paid (1,062) - (1,062)Net cash flow from operatingactivities 5,441 - 5,441 Cash flows from investing activitiesPurchase of tangible fixedassets (1,020) - (1,020)Proceeds from sale of tangiblefixed assets 38 - 38Purchase of subsidiaryundertakings (13,700) - (13,700)Interest received 51 - 51Net cash flow from investingactivities (14,631) - (14,631) Cash flows from financing activitiesInterest paid (1,327) (426) (1,753)Proceeds from the issue ofshare capital 26 - 26Preference dividends paid (426) 426 -Dividend paid to minorityshareholder (103) - (103)New loans 10,967 - 10,967Ordinary dividends paid (1,077) - (1,077)Net cash flows from financingactivities 8,060 - 8,060Net decrease in cash and cashequivalents (1,130) - (1,130) Appendix 1 - Summarised restatement of accounting policies This appendix provides a summary of Quarto's key group accounting policies underIFRS. 1.1 Basis of accounting under IFRS The restated financial information for the transition to IFRS at 1 January 2004,the interim period ended 30 June 2004, and the year ended 31 December 2004 hasbeen prepared in accordance with International Financial Reporting Standardsissued by the International Accounting Standards Board and expected to beendorsed by the EU and effective at 31 December 2005. Certain optional exemptions are allowed by IFRS1 on first-time adoption of IFRS.The exemptions adoptedby the group are summarised in section 1.18, "IFRS transitional arrangements",below. 1.2 Basis of preparation The financial statements are prepared on the historical cost basis, except thatthe derivative financial instruments are stated at fair value and non-currentassets, as modified by the revaluation of freehold property, are stated at thelower of carrying amount and fair value less costs to sell. The preparation of financial statements in conformity with IFRS's requiresmanagement to make judgments, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period or in the period ofthe revision and future periods if the revision affects both current and futureperiods. The accounting policies set out below have been applied to all periodspresented. 1.3 Basis of consolidation The group financial statements include the results of the company and all of itssubsidiary undertakings. A subsidiary is an entity controlled, directly orindirectly, by the group. Control is the power to govern the financial andoperating policies of the entity so as to obtain benefits from its activities.The financial statements of subsidiaries are included in the consolidatedfinancial statements from the date that control commences until the date thatcontrol ceases. Intragroup balances and any unrealised gains and losses or income and expensesarising from intragroup transactions are eliminated in preparing theconsolidated financial statements. The assets and liabilities of foreign operations, including goodwill and fairvalue adjustments arising on consolidation, are translated into sterling atexchange rates ruling at the balance sheet date. The revenues and expenses offoreign operations are translated into sterling at average annual exchangerates. Foreign exchange differences arising on retranslation are recogniseddirectly in a separate translation reserve within equity. 1.4 Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rateruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies at the balance sheet date are translated atthe exchange rate ruling at that date with any exchange differences arising onretranslation being recognised in the income statement. 1.5 Derivative financial instruments and hedge accounting The group uses derivative financial instruments to hedge its exposure tointerest rate risks arising from financing activities. The group has an interestrate swap on US$30 million of its borrowings. The instrument meets IAS 39'shedge accounting criteria and the instrument is carried at fair value at eachreporting date, with any gain or loss being recognised in equity. Preference share capital is classified as a liability if it is redeemable as aspecific date or at the option of shareholders or if dividend payments are notdiscretionary. Dividends thereon are included in the income statement withinfinancial costs. Convertible notes that can be converted to share capital at the option of theholder, where the number of shares issued does not vary with changes in theirfair value, are accounted for as compound financial instruments. Transactioncosts that relate to the issue of a compound financial instrument are allocatedto the liability and equity components in proportion to the allocation ofproceeds. The equity component of the convertible notes is calculated as theexcess of the issue proceeds over the present value of the future interest andprincipal payments, discounted at the market rate of interest applicable tosimilar liabilities that do not have a conversion option. The interest expenserecognised in the income statement is calculated using the effective interestrate method. 1.6 Financing income and costs 1.6.1 Financing costs Financing costs comprise interest payable on borrowings calculated using theeffective interest methods. 1.6.2 Financing income Financing income comprises interest receivable, which is recognised in theincome statement as it accrues using the effective interest method, and dividendincome, which is recognised in the income statement when the right to receivepayment is established. 1.7 Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalentscomprises cash balances, call deposits and bank overdrafts that form an integralpart of the group's cash management processes. 1.8 Business combinations and goodwill All business combinations are accounted for by applying the purchase method.Goodwill represents the excess of the cost of the acquisition over the fairvalue to the group of the net assets and any contingent liabilities acquired. Inrespect of acquisitions prior to 1 January 2004, goodwill is included on thebasis of its deemed cost which represents the amount recorded previously underUK GAAP. Goodwill arising on acquisitions is stated at cost less any accumulatedimpairment losses. From 1 January 2004, goodwill is allocated to cash-generatingunits and is no longer amortized but is tested annually for impairment. Prior to1 January 1998, goodwill was written off to reserves in the year of acquisition. 1.9 Intangible assets Other intangible assets, such as backlists, that are acquired by the group arestated at cost less accumulated amortization and impairment losses. Subsequentexpenditure on capitalised intangible assets is expensed as incurred. Amortization of intangible assets is charged to the income statement on astraight-line basis over the estimated useful lives of intangible assets. Theestimated useful lives are 5 to 10 years. 1.10 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciationand any provision for impairments in value. The group recognises in the carryingamount of property, plant and equipment the subsequent costs of replacing partof such items when there are future economic benefits. All other costs arerecognised in the income statement as an expense as they are incurred. Depreciation is provided on a straight-line basis to write off the cost, lessthe estimated residual value, of property, plant and equipment over theirestimated useful lives. Where parts of an item of plant and equipment haveseparate lives, they are accounted for and depreciated as separate items. Landis not depreciated. Estimated useful lives are as follows:Freehold and long leasehold property - 50 yearsShort leasehold property - over the period of the leasePlant, equipment and motor vehicles - 4 to 10 yearsFixtures and fittings - 5 to 7 years Certain items of property, plant and equipment, that had been revalued to fairvalue on or before 1 January 2004, the date of transition to IFRS's, aremeasured on the basis of deemed cost, being the revalued amount at the date ofthat revaluation. 1.11 Impairment The carrying amount of the group's assets is reviewed at each balance sheet dateto determine whether there is any indication of impairment. If any suchindication exists, the asset's recoverable amount is estimated. For goodwill,the recoverable amount is estimated at each balance sheet date. An impairmentloss is recognised whenever the carrying amount of an asset or itscash-generating unit exceeds its recoverable amount. Impairment losses arerecognised in the income statement. 1.12 Revenues Revenue represents invoiced value of sales less anticipated returns, excludingcustomer sales taxes and inter group sales. Revenues are recognised on despatchof goods. 1.13 Inventory Inventory is valued at the lower of cost, including an appropriate portion ofoverheads, and net realisable value. Net realisable value is the estimatedselling price in the ordinary course of business, less estimated costs ofcompletion and selling expenses. Production costs (excluding unit print costs),including an appropriate proportion of overheads, in respect of a book arecharged to income statement on the first printing of a book. 1.14 Leases and hire purchase contracts Where assets are acquired under finance leases (including hire purchasecontracts), which confer rights and obligations similar to those attached toowned assets, the amount representing the outright purchase price of such assetsis included in tangible fixed assets. Depreciation is provided in accordancewith the accounting policy above. The capital element of future finance leasepayments is included in creditors and the interest element is charged to theincome statement over the period of the lease in proportion to the capitalelement outstanding. Expenditure on operating leases is charged to the incomestatement on a straight line basis. 1.15 Post-retirement benefits Substantially all of the group's pension costs relate to individual pensionplans and are charged to the income statement as they fall due. The QuartoPublishing plc pension scheme is a personal defined contribution pension scheme. 1.16 Share-based payments The fair value of employee share option grants is calculated using a binomialmodel. The resulting cost is charged to the income statement over the vestingperiod of the plans. The value of the charge is adjusted to reflect expected andactual levels of options vesting. 1.17 Taxation Tax on the profit or loss for the year comprises both current and deferred tax. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantially enacted at the balance sheet date, andany adjustments to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differencesbetween the carrying amounts of assets and liabilities for financial reportingpurposes and the amounts usedfor taxation purposes. A deferred tax asset is recognised only to the extentthat it is probable that futuretaxable profits will be available against which the asset can be utilised. 1.18 IFRS transitional arrangements When preparing the group's IFRS balance sheet at 1 January 2004, the date oftransition, the following optional exemptions, provided by IFRS 1 First-timeAdoption of International Financial Reporting Standards from full retrospectiveapplication of IFRS accounting policies, have been adopted: • Business combinations - the provisions of IFRS 3 have been applied from 1 January 2004. The net carrying value of goodwill at 31 December 2003 under the previous accounting policies has been deemed to be the cost at 1 January 2004; • Cumulative translation differences arising on consolidation of subsidiaries - IAS 21 requires such differences to be held in a separate reserve, rather than included in the profit and loss reserve under UK GAAP. This reserve has been deemed to be nil on January 1 2004; Share-based payments - IFRS2 has not been applied to share options granted priorto 7 November 2002. CONTINUED IN ADOPTION OF IFRS ANNOUNCEMENT - PART 2 This information is provided by RNS The company news service from the London Stock Exchange