Note 4 – Exceptional items
The Group has categorised the following items as exceptional items under UK GAAP because, by either their size, incidence or because they are specifically prescribed, they need to be separately disclosed for the accounts to show a true and fair view.
a) Operating
Certain exceptional items are shown below as ‘operating exceptional items’. The Directors believe these items require separate disclosure, as permitted by FRS 3, within operating profit to show a true and fair view. These items include: restructuring costs; costs arising from the recognition of employee and property costs arising as a direct result of the Merger; share of exceptional operating items of a joint venture; impairment of business; impairment of investments in joint ventures and associate; impairment of assets; and environmental provision which are all disclosed by virtue of their size.
| | 2005 £m |
2004 £m | 2003 (restated) £m |
|---|---|---|---|
| Continuing operations | |||
| Restructuring costs (i) | 210 | 249 | 203 |
| Environmental provision (ii) | 41 | 28 | – |
| Merger costs (iii) | – | – | 108 |
| 251 | 277 | 311 | |
| Discontinued operations | |||
| Restructuring costs (i) | – | – | 6 |
| Impairment of investments in joint ventures (iv) | – | – | (135) |
| Impairment of business (v) | – | – | 168 |
| – | – | 39 | |
| Total operating exceptional items | 251 | 277 | 350 |
| (i) | The 2005 restructuring costs consist of £62m (2004: £24m; 2003: £nil) of costs associated with the proposed disposal of UK-based distribution networks and other charges of £148m (2004: £225m; 2003: £209m). The other charges primarily related to costs incurred in reorganisations in the UK and US businesses, primarily due to cost reduction programmes. The post-tax restructuring costs amounted to £158m (2004: £170m; 2003: £165m). |
|---|---|
| (ii) | During the year ended 31 March 2005, a review of the environmental provision was undertaken to take into account the impact of recent changes to UK regulations on waste disposal. This review, together with related revisions to the expected expenditure profile, has resulted in a charge in 2005 of £41m (£26m after tax). The 2004 charge of £28m resulted from an adjustment to the carrying value of liabilities following the completion of UK site investigations in that year (£28m after tax). |
| (iii) | Represented employee and property costs associated with the Merger (£79m after tax). |
| (iv) | The 2003 credits related to Intelig and other telecoms joint ventures (£155m after tax). The exceptional credits arising in 2003 substantially represented the reversal of the Group’s share of retained losses incurred by these joint ventures during the period from 1 April 2002 to the date of disposal or the date that equity accounting ceased. £129m of the pre-tax exceptional credits were reflected in ‘Share of joint ventures’ operating profit/(loss) – discontinued operations’. |
| (v) | In 2003, following a review of the carrying value of certain of the Group’s telecoms assets, the Group incurred impairment charges that resulted in the write-down of those assets to their estimated recoverable amounts and the recognition of other related costs (2003: £143m after tax). |
b) Non-operating
Paragraph 20 of FRS 3 requires that certain items should be disclosed after operating profit and are shown below as ‘non-operating exceptional items’. These items comprise: a) costs associated with a fundamental reorganisation which in the case of the Group relate to the transaction costs relating to the Merger; b) profit on disposal of fixed assets (including the gain on assets held for exchange and other fixed asset investments); and c) profit or loss on the sale or termination of operations.
| |
2005 £m |
2004 £m | 2003 £m |
|---|---|---|---|
| Continuing operations | |||
| Profit on disposal of tangible fixed assets (vi) | (70) | (96) | (48) |
| Merger costs (vii) | – | – | 79 |
| (70) | (96) | 31 | |
| Discontinued operations | |||
| Gain on assets held for exchange (viii) | – | (226) | – |
| (Profit)/loss on sale or termination of operations (ix) | (13) | – | 68 |
| (13) | (226) | 68 | |
| Total non-operating exceptional items | (83) | (322) | 99 |
| (vi) | The after tax profit on disposal of tangible fixed assets was £69m (2004: £96m; 2003: £50m). |
|---|---|
| (vii) | The 2003 after tax transaction cost of the Merger was £71m. |
| (viii) | The gain on assets held for exchange related to the profit recognised on Energis shares delivered to Equity Plus Income Convertible Securities (EPICs) bondholders on 6 May 2003 in settlement of all EPICs outstanding at that date that had a carrying value of £243m. This transaction represented the culmination of a deferred sale arrangement entered into in February 1999. The after tax gain on assets held for exchange was £226m. |
| (ix) | The credit in 2005 reflects the before and after tax profit on sale of the joint venture investment in Compañia Inversora En Transmicion Electrica S.A. (Citelec) of £13m. The charges for 2003 related to losses on the sale of The Leasing Group of £45m and loss on closure of 186k Limited of £23m. The after tax loss relating to the 2003 sale and closure amounted to £68m. |
c) Financing costs
For 2003, the exceptional net interest cost of £31m (£31m after tax) related to the Group’s share of foreign exchange losses incurred on foreign currency borrowings by joint ventures (£98m), partially offset by the Group’s share of a gain on net monetary liabilities (£67m). The gain on the net monetary liabilities related to Citelec, a joint venture operating in Argentina which is now classified as a discontinued operation, and reflected the net gain that arose on net monetary liabilities that were financing the operation in a hyper-inflationary economy.
d) Taxation
The exceptional tax credit of £79m in 2005 includes a credit of £22m associated with the prior period disposal of Energis, a former associate company; a £3m credit associated with the prior period write-down of investments; and a £12m charge relating to the settlement of the liabilities arising from operating the Group’s Qualifying Employee Share Ownership Trust. The exceptional tax credit for 2004 of £89m included a net credit amounting to £10m relating to investments disposed of in prior periods.
e) Minority interests
The 2003 exceptional minority interest charge of £28m related to the Group’s share of the minority interest in the after taxation exceptional items of Citelec, a joint venture which is now classified as a discontinued operation, and primarily reflected the minority interest’s share of the gain on net monetary liabilities referred to in note 4(c).