Overview
All companies listed on a European Union stock exchange are required to adopt International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board and endorsed by the European Commission. We are required to adopt IFRS in our next consolidated financial statements, for the financial year commencing on 1 April 2005.
The Group commenced a programme of work in 2003, to enable a smooth transition to IFRS. This involved examining all implementation aspects, including changes to accounting policies, systems impacts, staff training, restatement of comparative periods, assessment of IFRS accounting developments and related business issues arising from the conversion to IFRS. This work is almost completed and remains on course to meet the requirements of the publication of full IFRS financial statements for 2005/06.
Unaudited impact of adopting IFRS
The adoption of IFRS will have a significant impact on the Group’s reported financial results, initially leading to higher reported operating profit, profit before tax, profit for the year and earnings per share together with higher reported net assets. The unaudited tables below show the impact that the adoption of IFRS would have, compared with the equivalent UK GAAP measures of operating profit, profit before tax, profit for the year and earnings per share for 2004/05, together with a reconciliation from UK GAAP to IFRS for net assets as at 31 March 2005. The impact on adjusted operating profit, adjusted profit before tax, adjusted profit for the year and adjusted earnings per share is also shown.
Unaudited reconciliation of operating profit from UK GAAP to IFRS
| For the year ended 31 March 2005 |
Adjusted operating profit £m |
Goodwill amortisation and exceptional items £m |
Operating profit £m |
|---|---|---|---|
| UK GAAP | 2,212 | (360) | 1,852 |
| IFRS adjustments: | |||
| Replacement expenditure | 336 | - | 336 |
| Regulatory assets | 269 | (60) | 209 |
| Pensions and other post-retirement benefits | 6 | 15 | 21 |
| Goodwill amortisation | - | 109 | 109 |
| Profits on disposal of properties | 62 | - | 62 |
| Reclassification of share of joint ventures | (7) | - | (7) |
| Other | (12) | - | (12) |
| IFRS | 2,866 | (296) | 2,570 |
Unaudited reconciliation of profit before tax from UK GAAP to IFRS
| For the year ended 31 March 2005 |
Adjusted profit before tax £m |
Goodwill amortisation and exceptional items £m |
Profit before tax £m |
|---|---|---|---|
| UK GAAP | 1,429 | (277) | 1,152 |
| IFRS adjustments: | |||
| Replacement expenditure | 336 | - | 336 |
| Regulatory assets | 306 | (60) | 246 |
| Pensions and other post-retirement benefits | 42 | 15 | 57 |
| Goodwill amortisation | - | 109 | 109 |
| Profits on disposal of properties | 62 | (62) | - |
| Reclassification of share of joint ventures | (2) | - | (2) |
| Other | (18) | - | (18) |
| IFRS | 2,155 | (275) | 1,880 |
Unaudited reconciliation of profit for the year from UK GAAP to IFRS
| For the year ended 31 March 2005 |
Adjusted profit for the year £m |
Goodwill amortisation and exceptional items £m |
Profit for the year £m |
|---|---|---|---|
| UK GAAP | 1,106 | (198) | 908 |
| IFRS adjustments: | |||
| Replacement expenditure | 236 | - | 236 |
| Regulatory assets | 187 | (36) | 151 |
| Pensions and other post-retirement benefits | 31 | 10 | 41 |
| Goodwill amortisation | - | 109 | 109 |
| Deferred taxation | (11) | - | (11) |
| Profits on disposal of properties | 62 | (62) | - |
| Other | (10) | - | (10) |
| IFRS (net income) | 1,601 | (177) | 1,424 |
Unaudited reconciliation of earnings per share from UK GAAP to IFRS
| For the year ended 31 March 2005 |
Adjusted earnings per share pence |
Goodwill amortisation and exceptional items pence |
Earnings per share pence |
|---|---|---|---|
| UK GAAP | 35.9 | (6.4) | 29.5 |
| IFRS adjustments: | |||
| Replacement expenditure | 7.7 | - | 7.7 |
| Regulatory assets | 6.0 | (1.1) | 4.9 |
| Pensions and other post-retirement benefits | 1.0 | 0.3 | 1.3 |
| Goodwill amortisation | - | 3.5 | 3.5 |
| Deferred taxation | (0.4) | - | (0.4) |
| Profits on disposal of properties | 2.0 | (2.0) | - |
| Other | (0.3) | - | (0.3) |
| IFRS | 51.9 | (5.7) | 46.2 |
Unaudited reconciliation of net assets from UK GAAP to IFRS
| As at 31 March 2005 |
Net assets £m |
|---|---|
| UK GAAP | 1,391 |
| IFRS adjustments: | |
| Replacement expenditure | 4,305 |
| Regulatory assets | (2,663) |
| Pensions and other post-retirement benefits | (1,741) |
| Intangible assets other than goodwill | 182 |
| Goodwill | 18 |
| Deferred taxation | 179 |
| Proposed final dividend | 469 |
| Non-equity minority interests | (22) |
| Other | (23) |
| IFRS | 2,095 |
The adjustments to net assets are measurement adjustments only. This reconciliation is not intended to represent adjustments relating to balance sheet reclassifications that do not affect net assets, but will arise as a result of conversion to IFRS.
Basis of preparation
IFRS is subject to interpretation by the International Financial Reporting Interpretations Committee. Further standards may be issued that need to be adopted for financial years beginning on or after 1 April 2005. Also, the number of new and revised standards within IFRS means that there is not yet a significant established practice from which to draw conclusions on the application and interpretation of IFRS.
In addition, at 31 March 2005, the planned sales of four of our gas distribution networks did not meet the criteria to be treated as discontinued operations under IFRS. As a consequence, the results of those networks are included within IFRS operating profit, profit before tax, profit for the year (net income) and earnings per share without being separately identified as discontinued.
When the Group’s results for the year ending 31 March 2006 are published, the comparatives (for the year ended 31 March 2005) will need to be re-presented on the basis that the operations of the networks that are to be sold will by then have become discontinued. As a consequence, the Group’s results and financial position as at 31 March 2005, reported next year, will differ from the unaudited IFRS results and financial position shown in the tables above.
The following notes explain the primary adjustments arising from the conversion to IFRS.
Replacement expenditure (repex)
This represents the cost of planned maintenance on gas mains and services assets, the vast majority of which relate to the Group's UK Gas Distribution business. Under UK GAAP, repex is written off to the profit and loss account as incurred. Under IFRS, it is capitalised and depreciated over its useful life.
Regulatory assets
These assets arise when a US-based public utility, authorised by its regulator, defers to its balance sheet certain costs or revenues which would otherwise be charged or credited to the income statement. These assets are currently recognised in the balance sheet under UK GAAP. Under IFRS, regulatory assets are not permitted to be recognised in the balance sheet. Instead, costs are charged to the income statement when incurred and recoveries from customers are recognised when receivable.
Pensions and other post-retirement benefits
Under UK GAAP, the Group's pensions and post-retirement benefits are accounted for under SSAP 24. Under IFRS, these benefits are accounted for under IAS 19. This results in the Group recognising all of its net pension and other post-retirement benefit obligations in the balance sheet at 1 April 2004 with a corresponding adjustment to opening reserves. There are also differences in the measurement of the annual pension expense under IAS 19 compared with SSAP 24.
Intangible assets other than goodwill
In a business combination IFRS requires fair values to be attributed to intangible assets that are not recognised under UK GAAP together with associated deferred tax balances. A corresponding reduction in goodwill arises as a consequence. The acquisition of the UK operations of Crown Castle International Corp. in 2004/05 resulted in the recognition under IFRS of certain intangibles, amounting to £188 million at the date of acquisition, which are being amortised on a straight-line basis on periods ranging from 10 to 25 years. In accordance with IFRS 1, the Group has not restated any business combinations that occurred prior to 31 March 2004.
Goodwill
The goodwill recorded in the accounts as at 31 March 2005 primarily arose from the acquisition of our US businesses and from the acquisition of the UK operations of Crown Castle International Corp. Under UK GAAP, goodwill is amortised over 20 years. Under IFRS, we are no longer required to amortise goodwill, however, it must be reviewed for impairment on an annual basis. This adjustment affects operating profit, profit before tax, profit for the year and earnings per share, but does not affect adjusted operating profit, adjusted profit before tax, adjusted profit for the year or adjusted earnings per share as goodwill amortisation is excluded from adjusted profit measures under UK GAAP.
Profit on disposal of properties
Under UK GAAP, certain items must be shown below operating profit within exceptional items on the face of the profit and loss account, in particular material gains and losses on the disposal of fixed assets. Gains and losses on disposal of properties held by SecondSite Property, our property management business, will be included within both adjusted operating profit and operating profit under IFRS, as these are considered to be part of the normal recurring operating activities of the Group.
Deferred taxation
Most of the IFRS adjustments give rise to temporary differences (differences between the tax base and the book value of assets and liabilities). Deferred taxation is provided in respect of these temporary differences in accordance with IAS 12. This is different to the timing differences method used under UK GAAP.
Proposed final dividend
Under UK GAAP, final ordinary dividends are recorded as a liability in the year in respect of which they are proposed by the Board of Directors for approval by the shareholders. Under IFRS, dividends are not provided until declared.
Non-equity minority interests
Under UK GAAP, non-equity minority interests are shown separately from shareholders' equity within capital and reserves. Under IFRS this amount is included within liabilities, resulting in lower net assets.
Financial instruments
The unaudited adjustments reconciling UK GAAP and IFRS as at 31 March 2005 shown above do not reflect the impact of IAS 39, which is being adopted by the Group with effect from 1 April 2005.