Renold Regulatory News (RNO)

23 Nov 2005 07:00

Renold PLC23 November 2005 23 November 2005 RENOLD plc RESTATEMENT OF COMPARATIVE FINANCIAL INFORMATION FOLLOWING THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS") Renold plc today announces the publication of its second statement ("theStatement") on the transition to IFRS. The Statement provides a quantitativefollow-up assessment of the impact of IFRS adoption on the Group's historicfinancial statements. Provided below is the narrative extract from the Statement, which can be read infull, together with detailed appendices, on the Group's website, www.renold.com.Alternatively, copies can be obtained from the Company Secretaryat Renold House, Styal Road, Wythenshawe, Manchester M22 5WL. INTRODUCTION On 10 August 2005 the Group issued a statement entitled "Update on IFRS". Thisprovided a narrative explanation as to how the more significant matters arisingfrom the adoption of IFRS were expected to impact the historic financialstatements of the Renold plc Group. It also set out how the Group will treat thevarious options and exemptions available when first adopting IFRS. The purposeof this second statement on IFRS is to provide the quantitative follow-upassessment of the impact of IFRS, and should be read in conjunction with theinterpretations provided within the first update on IFRS. Basis for information presented As set out in the Group's first IFRS statement the historic financial data ofthe Renold Group has been presented in accordance with UK Generally AcceptedAccounting Practice ("UK GAAP"). European law requires that Renold's next annualfinancial statements, being those to 31 March 2006, are prepared under IFRS, asendorsed by the European Union (EU). At this preliminary stage it should beappreciated that the International Standards currently in issue and adopted bythe EU are subject to interpretation issued from time to time by theInternational Financial Reporting Interpretations Committee (IFRIC). Furtherstandards may be issued by the International Accounting Standards Board thatwill be adopted for financial years ending on or after 31 March 2006.Additionally, IFRS is currently being applied in the United Kingdom and in alarge number of countries simultaneously for the first time. In an environmentof new and revised Standards, included within the body of the Standards thatcomprise IFRS, there is not yet a significant body of established practice onwhich to draw in forming options regarding interpretation and application.Accordingly, practice is continuing to evolve. At this stage, therefore, thefull financial effect of reporting under IFRS, as it will be applied andreported on in the Group's first IFRS Financial Statements for the year ended 31March 2006, may be subject to change. In general, the information provided in this document is designed to provide abridge between the Renold financial statements that have been publishedpreviously under UK GAAP, and the same statements as they appear following theapplication of IFRS. This "reconciliation bridge" between the UK GAAP basis andthe IFRS basis is provided for each of the following balance sheets or incomestatements: (a) the Group's balance sheet as at the date of transition to IFRS, being 4April 2004 (the final period under UK GAAP having ended on 3 April 2004); (b) the Group's balance sheet as at the end of the first half year (30 September2004) following the adoption of IFRS; (c) the Group's balance sheet as at the end of the first full financial year (31March 2005) following the adoption of IFRS; (d) the Group's income statement for the six month period ended 30 September2004; (e) the Group's income statement for the year to 31 March 2005. OVERVIEW OF THE IMPACT OF ADOPTING IFRS ON THE RESULTS PUBLISHED IN RESPECT OFTHE YEAR ENDED 31 MARCH 2005 Within the body of this document a more detailed explanation is provided of howthe implementation of IFRS has resulted in a change to the UK GAAP financialstatements. However, set out below is a high level summary of the impact of IFRSadoption on the last Group accounts published under UK GAAP;+----------------------------+-------------------------------------------------+ | |Year end 31 March 2005|| | || +---------------+--------------------+------------+| |UK GAAP basis |Change due to IFRS |IFRS basis || +---------------+--------------------+------------+| | £m | £m | £m |+----------------------------+---------------+--------------------+------------+|Revenue | 197.0 | - | 197.0 |+----------------------------+---------------+--------------------+------------+|Operating profit before | | | ||goodwill and | 3.7 | (0.3) | 3.4 ||exceptional items | | | |+----------------------------+---------------+--------------------+------------+|Operating (loss)/profit | | | ||after goodwill and | (4.2) | 5.2 | 1.0 ||exceptional items | | | |+----------------------------+---------------+--------------------+------------+|Loss before tax | (6.8) | 5.2 | (1.6) |+----------------------------+---------------+--------------------+------------+|Basic EPS(p) | (7.5)p| - | (0.2)p|+----------------------------+---------------+--------------------+------------+|Net assets | 40.3 | 15.8 | 56.1 |+----------------------------+---------------+--------------------+------------+ £m £mUK GAAP operating profit before goodwill and exceptional items - 3.7 Additional depreciation on freehold properties (0.1) - Employee benefits (0.1) - Cost associated with share-based payments (0.1) - ------- - (0.3) -----IFRS operating profit before goodwill and exceptional items - 3.4 ===== UK GAAP operating loss after goodwill and exceptional items - (4.2) Operating profit adjustments shown above (0.3) - Elimination of goodwill amortisation charges made under UK GAAP 1.2 - Additional goodwill impairment charge (arising from the reversalof related amortisation charges made in the year under UK GAAP) (0.2) -Release of negative goodwill 4.5 - ----- - 5.2 -----IFRS operating profit after goodwill and exceptional items - 1.0 ===== The primary increase in net assets arises from the revaluation of the Group'sfreehold properties (being £11.5 million, net of associated deferred taxprovisions). The changes in the goodwill held by the Group, as set out above,have contributed a £5.5m increase in net assets, which is offset by therecognition of additional employee benefit liabilities. A detailedreconciliation of the Group's balance sheet is set out in Appendix VI. SUMMARY OF KEY DIFFERENCES BETWEEN UK GAAP AND IFRS THAT IMPACT THE RENOLD GROUPACCOUNTS Appendix I includes a statement of the Group accounting policies under IFRS.Provided below is a summary of how the application of those policies hasimpacted the restatement of the Group's UK GAAP financial statements. (a) Freehold Property - Fair value as deemed cost Under the options available within IFRS 1 ("First-time Adoption of InternationalFinancial Reporting Standards") the Group has chosen to measure its freeholdproperties on a fair value basis and adopt this valuation as deemed cost as atthe date of transition, 4 April 2004. The valuation was undertaken by ColliersCRE, Chartered Surveyors. Under UK GAAP the Group's freehold properties, at 4 April 2004, had a carryingvalue of £7.6 million. Following the revaluation, the deemed cost of freeholdproperties at this date is £22.8 million, an increase of £15.2 million. Inaccordance with IAS12 ("Income taxes") a deferred tax liability of £3.7 millionhas been recognised as a result of the increase in the value of freeholdproperty. This treatment of freehold properties is a one-off optional change atthe date of transition. In view of the fact that freehold land is not depreciated, the change in theannual depreciation charge for freehold properties is less significant thanwould otherwise be expected and the impact on the full year to 31 March 2005 isto increase the depreciation change by £0.1 million. (b) Goodwill Under UK GAAP capitalised goodwill was amortised over its estimated economiclife. Under IFRS goodwill is no longer subject to amortisation but it is testedannually for impairment. In the first half of 2004 the reversal of goodwill amortisation has resulted ina credit of £0.6 million and a credit of £1.2 million for the full year. For theyear to 2005 an impairment charge of £2.4 million was booked under UK GAAP. Thishas increased to £2.6 million under IFRS as a result of the change in thepractice of goodwill amortisation, which reverses the amortisation charged inthe 2005 financial year up to the point at which the impairment was recognised. The acquisition of Sachs Automotive France SAS in the final month of the 2005financial year resulted in a surplus of fair value of assets acquired over theconsideration paid ("negative goodwill"). Following a review of the acquisitionaccounting for the purposes of IFRS adoption it has been concluded that thenegative goodwill recognised in the Group's balance sheet under UK GAAP is alsoappropriate under IFRS. However, IFRS requires immediate recognition in theincome statement of the entire amount of negative goodwill arising on theacquisition. Therefore, the amount previously retained in the UK GAAP balancesheet at 31 March 2005 has been released to income, being an additional creditof £4.5 million for the year. (c) Employee benefits (i) Pensions Under UK GAAP, in the annual financial statements for 2005 Renold accounted forpensions in accordance with FRS 17 ("Retirement Benefits"), having adopted thatstandard in advance of mandatory requirements. Under FRS 17 the assets andliabilities of defined benefit pension schemes were recognised at fair value inthe balance sheet; operating and financing costs were recognised in the incomestatement, and actuarial variations were recognised in the Statement of TotalRecognised Gains and Losses ("STRGL"). Under IFRS, applying the option under therespective standard (IAS 19 - "Employee Benefits") to take actuarial gains andlosses through a Statement of Recognised Income and Expense ("SORIE"), theaccounting requirements are similar to those of FRS 17. There are, however, anumber of technical differences under IAS 19 that give rise to variations in thefigures previously reported under FRS 17. This includes using a government bondrate as the discount rate for calculating pension liabilities in territorieswhere no suitable AA corporate bond rate exists and the requirement to use a bidvalue to measure plan assets rather than the mid-market value applied under FRS17. (ii) Other employment benefits In addition to specifying the accounting treatment of pension schemes IAS 19introduces more prescriptive guidance on the treatment of other employeebenefits. The adoption of IAS 19 has resulted in the recognition of certainJubilee and other potential service awards. (d) Share based payments Under UK GAAP no cost was required to be recognised in the income statement foroptions granted under the respective share option schemes operated by the Groupas options were granted at a market price at the date of grant. Under IFRS thecost of employee share schemes is based on the fair value of share optionsgranted to employees. Adopting the option available under IFRS 1, IFRS 2("Share-Based Payments") only applies to awards made after 7 November 2002 andwhich vest after 1 January 2005. The implementation of IFRS 2 has resulted in acharge to the income statement of £0.1 million for the year ended 31 March 2005. (e) Cumulative foreign currency translation differences Under both UK GAAP and IFRS the foreign currency translation differences arisingon the retranslation into Sterling of the Group's net investment in foreignentities are taken to reserves. However, IAS 21 ("The Effects of Changes inForeign Exchange Rates") requires that such differences are recognised in aseparate component of equity and brought into account when calculating theprofit or loss on disposal of a foreign entity. A separate reserve has thereforebeen created and the necessary reclassification made. (f) Proposed dividends It was established practice under UK GAAP to recognise proposed dividends as aliability in the period to which they related. In accordance with IAS 10("Events After the Balance Sheet Date") a dividend can only be recognised as aliability in the period it is declared. In practice, this translates to interimdividends being recognised in the financial statements when they are paid andfinal dividends recognised when they are approved at the Annual General Meeting.Therefore, the accrued final dividend for 2004, in the UK GAAP balance sheet hasbeen reversed, increasing net assets at that date by £2.1 million. The interimdividend accrued at 30 September 2004 (£1.1 million) has been reversed for thesame reasons. No final dividend was proposed at 31 March 2005 and thereforethere is no cumulative difference in net assets as at 31 March 2005 as a resultof the change in the recognition of dividends. (g) Software Under UK GAAP purchased software was generally capitalised within tangible fixedassets. Under IFRS software that is not an integral part of the related hardwareshould be treated as an intangible asset. This requirement has resulted in the reclassification of software from property,plant and equipment to intangible assets amounting to £0.4 million in theopening IFRS balance sheet. The reclassification at 31 March 2005 was £0.3million. There is no change to the depreciation charge made under UK GAAP. (h) Cash flow statements The adoption of IFRS has no impact on the actual cash flows of the underlyingbusinesses. However, IAS 7 "Cash Flow Statements" does introduce some changeddefinitions and therefore revised presentation from a UK GAAP statement. TheGroup's cash flow statements for the six months to 30 September 2004 and for theyear to 31 March 2005 have been restated into an IFRS format and are presentedin Appendix VIII and Appendix IX respectively. The movements that result fromother IFRS adoption adjustments are shown in the reconciliation of the "profit/loss before taxation to the cash generated from operations", which as statedabove, in net terms remains unchanged from that reported under UK GAAP. PROSPECTIVE ADOPTION OF IAS 32 AND IAS 39 As permitted under IFRS 1 the Group has adopted IAS 32 ("Financial Instruments:Disclosure and Presentation") and IAS 39 ("Financial Instruments: Recognitionand Measurement") prospectively from 1 April 2005. Therefore, in respect of thematters dealt with under these two standards, the comparative information forperiods up to and including 31 March 2005 remains accounted for on a UK GAAPbasis. The accounting policy of the Group in respect of financial instrumentsfrom 1 April 2005 is included in Appendix 1. There are three principal areas impacted by the adoption of IAS 32 and 39:- Derivative financial instruments It has been the practice of the Group to manage its exposures to movements incurrency exchange rates and interest rates by use of derivative contracts,namely forward currency contracts and interest rate swaps. Under IFRS suchcontracts must be recognised as assets and liabilities on the balance sheetmeasured at fair value, which is in contrast to UK GAAP accounting. Theresultant adjustment to opening net assets is shown in Appendix X and relatesprimarily to the effect of the interest rate swap taken out by the Group inrelation to its US dollar borrowing costs. Trade receivable provisions IAS 39 provides guidance on the impairment of financial assets (which includetrade receivables), specifying the need for objective evidence of impairment,arising from past events, to support the booking of an impairment provision.Under UK GAAP the Group practice was to calculate a provision from a formulaicassessment of the aged profile of trade receivable balances. Through thismechanism a provision was established on a consistent basis that, when viewed ata single point in time, contained an element that was general rather thanspecific in nature. Accordingly, trade receivable impairment provisions havebeen reassessed on a basis that is consistent with the new criteria establishedby IAS 39. Preference shares In accordance with UK GAAP the preference shares of the Group have been includedas a non-equity component of shareholders' funds. Under IAS 32 the preferenceshares are required to be re-classified as liabilities in the balance sheet.Dividends payable on the preference shares (which amount to £35,000 per annum)will in future be treated as interest costs. The financial impact of each of the above components on the opening balancesheet at 1 April 2005 is illustrated in Appendix X. It is noted that thereclassification of preference shares increases the Group's net debt from £17.0million at 31 March 2005 to £17.6 million at 1 April 2005. This information is provided by RNS The company news service from the London Stock Exchange