Renold Regulatory News (RNO)

10 Aug 2005 07:00

Renold PLC10 August 2005 Renold plc - IFRS update Introduction The Renold plc Group has to date prepared its consolidated financial statementsin accordance with UK Generally Accepted Accounting Practice ("UK GAAP"). Forthe year to 31 March 2006 the Group is required to prepare its consolidatedfinancial statements in accordance with International Financial ReportingStandards ("IFRS"). The first published statements prepared under IFRS will bethe Group's interim results for the six months ending 30 September 2005 whichare intended to be issued in the first half of December 2005. In advance ofissuing the interim results a statement will be published showing the restatedfinancial information for prior periods, as it will appear in the interimstatement. The purpose of this statement is to provide narrative information on the moresignificant matters that will be impacted in the financial statements followingthe adoption of IFRS. Detailed financial information has not been provided asthis is in the course of preparation and remains subject to review by theGroup's auditors. Transition to IFRS Guidance on the transition to IFRS is specifically provided in IFRS 1 - "FirstTime Adoption of International Financial Reporting Standards". The Group'stransition date to IFRS is 4 April 2004 (the previous financial year havingended on 3 April 2004). There are certain exemptions granted under IFRS 1 thatapply to the transition period. Those which are most significant to the Groupare briefly outlined below: Business combinations - As allowed under IFRS 1, business combinations thatoccurred prior to the transition date will not be restated. Financial instruments - Advantage will be taken of the option not to restatecomparative information under IAS 32 and IAS 39, the standards on FinancialInstruments. Therefore, UK GAAP will continue to apply in respect of FinancialInstruments, until these standards are adopted with effect from 1 April 2005. Cumulative translation differences - IAS 21 (The effects of changes in foreignexchange rates) requires that on disposal of an operation the cumulative amountof exchange differences previously recognised directly in equity for thatforeign operation should be transferred to the income statement as part of theprofit or loss on disposal. The Group will adopt the exemption allowing thesecumulative translation differences to be reset to zero at the transition date. Impact on financial statement disclosuresThe primary statements drawn up in accordance with IFRS will require thereclassification of certain existing balances under UK GAAP into differentcaptions under IFRS (e.g. Deferred tax assets transferred from "current assets"to "deferred tax - non-current assets"). Such reclassifications are notspecifically considered for the purposes of this statement but attention israther focused on matters that will change the actual amounts disclosed in priorperiods. In summary, in this context, it is anticipated that the followingmatters will have the most significant impact on the financial statements; IFRS 1 - First time adoption of IFRS - In accordance with the options availableunder IFRS 1, at the date of transition the Group will measure its freeholdproperties on a fair value basis and use this valuation as deemed cost goingforward. This will result in a material increase in the value of property in theGroup's balance sheet. The basis on which freehold properties are depreciatedwill be revised from a reducing balance basis to a straight line basis which isconsidered to be a basis more in line with general practice. The impact of theserevisions is not anticipated to have a material change on earnings. IAS 19 - Employee benefits - Under UK GAAP the Group had adopted FinancialReporting Standard 17 ("FRS 17"). Following the revision made to IAS 19 inDecember 2004, FRS 17 has many similarities with IAS 19. Therefore, the impacton the Group's net pension scheme liability following the adoption of IAS 19 islimited. There will however be classification changes in the balance sheet,including the treatment of associated deferred tax balances and also there arealternative classifications available for costs within the income statement. IFRS 3 - Business combinations - Under this standard goodwill is carried at costand subject to an annual impairment review. Under UK GAAP the income statementsuffered a straight line amortisation charge, which will no longer be made. Acharge to income will only be required if an impairment is identified. It is important to note one particular matter that will materially influence therestated result for the year to 31 March 2005. In the final month of that yearthe Group made an acquisition that gave rise to negative goodwill. Theacquisition accounting has been reassessed under IFRS but there will remain asignificant level of negative goodwill. IFRS 3 requires the immediaterecognition of negative goodwill as a credit to the income statement. Under UKGAAP the credit to profit was restricted and this change in applicable GAAP willresult in a material improvement to the 2005 result. IFRS 2 - Share based payments - The Group is required for the first time torecognise a charge against operating profit in respect of the estimated fairvalue of share options granted to employees. IFRS 1 provides an exemption toapply IFRS 2 only to awards made after 7 November 2002 and which will vest after1 January 2005; this exemption will be adopted by the Group. Whilst a chargeagainst profit will result, following the adoption of this Standard, the amountinvolved is not considered to be material to the Group's results. IAS 10 - Events after the balance sheet date - This standard specificallyprevents the recognition of a liability in the balance sheet for a dividenddeclared after the period end. Therefore, the UK practice of recognisingproposed interim and final dividends as liabilities in the respective balancesheets will no longer apply. This is because they do not meet the criteria of apresent obligation as defined by IAS 37, the Standard on provisions. IAS 32 - Financial instruments: Disclosure and presentation and IAS 39 -Financial instruments: Recognition and measurement - As noted above thesestandards will have no impact on the financial statements of the Group aspublished prior to 31 March 2005, following the adoption of the exemptionprovided in IFRS 1. However, from 1 April 2005 the impact of these standardswill include a revised treatment in relation to derivative financialinstruments. Under UK GAAP the derivative financial instruments used by theGroup to manage its currency and interest rate exposures (forward foreignexchange contracts and interest rate swaps) are not recognised in the financialstatements until the hedged transaction has itself been recognised. Under IFRSsuch instruments must be recognised and stated at their fair values. The Groupwill not adopt hedge accounting for routine hedged transactions under theconditions set out by IAS 39 and therefore changes in the fair values of theseinstruments will be recognised in the income statement. IAS 12 - Income taxes - There will be changes to the deferred tax positionresulting both from the impact of adopting the IAS 12 and also as a result ofthe deferred tax consequences of adopting other International Standards as setout above. Enquiries: Tony Brown, Finance Director - Telephone 0161 498 4500 This information is provided by RNS The company news service from the London Stock Exchange