Invensys plc
Consolidated income statement
For the year ended 31 March 2005
UK GAAP Intangible Foreign
IFRS development exchange gains
format costs Goodwill /(losses) Leases
Notes £m £m £m £m £m
-------- -------- -------- -------- --------
Continuing operations
Revenue 1 2,923
Operating expenses (2,748) 8 2
-------- -------- -------- -------- --------
Operating profit before
exceptional items,
goodwill amortisation
and goodwill impairment 1 175 8 - - 2
Operating exceptional
items 3 (168)
Goodwill amortisation (28) 28
Goodwill impairment (27) (1)
-------- -------- -------- -------- --------
Total operating loss 2 (48) 8 27 - 2
Loss on sale of fixed
assets (3)
(Loss)/profit on
disposal of operations 4 (298) 331 (3)
-------- -------- -------- -------- --------
Loss before finance
costs and taxation (349) 8 358 (3) 2
Foreign exchange gains - 16
Finance costs (136) (1)
Finance income -
Other finance charges -
FRS 17/ IAS 19 (15)
-------- -------- -------- -------- --------
Loss before taxation (500) 8 358 13 1
Taxation 5 16
-------- -------- -------- -------- --------
Loss for the year from
continuing operations (484) 8 358 13 1
-------- ------- -------- -------- -------
Profit for the year from
discontinued operations 4 -
-------- -------- -------- -------- --------
Loss for the year (484) 8 358 13 1
-------- -------- -------- -------- --------
Attributable to:
Equity holders of the
parent (473) 8 358 13 1
Minority interests (11)
-------- -------- -------- -------- --------
(484) 8 358 13 1
-------- -------- -------- -------- --------
Earnings per share
Total Group
Loss per share (basic
and diluted) 6 (8.3) p
Earnings per share
(before exceptional
items, goodwill
amortisation,
goodwill impairment and
foreign exchange
gains/(losses)) 6 0.1 p
Continuing operations
Loss per share (basic
and diluted) 6 (2.9) p
Earnings per share
(before exceptional
items, goodwill
amortisation,
goodwill impairment and
foreign exchange
gains/(losses)) 6 0.2 p
Consolidated income statement continued
Reclassicifations Restated
Employee & discontinued under
benefits Taxation operations IFRS
Notes £m £m £m £m
-------- -------- --------- ------
Continuing operations
Revenue 1 (120) 2,803
Operating expenses (1) 123 (2,616)
Operating profit before
exceptional items
and goodwill impairment 1 (1) - 3 187
Operating exceptional items 3 (168)
Goodwill amortisation -
Goodwill impairment (28)
-------- -------- --------- -------
Total operating loss 2 (1) - 3 (9)
Loss on sale of fixed assets (3)
(Loss)/profit on disposal of
operations 4 (30) -
--------- -------- -------- -------
Loss before finance costs
and taxation (1) - (27) (12)
Foreign exchange gains 16
Finance costs (19) (156)
Finance income 19 19
Other finance charges
- FRS 17/IAS 19 (15)
--------- --------- -------- -------
Loss before taxation (1) - (27) (148)
Taxation 5 (1) 1 16
--------- -------- --------- -------
Loss for the year from
continuing operations (1) (1) (26) (132)
Profit for the year from
discontinued operations 4 26 26
-------- -------- --------- -------
Loss for the year (1) (1) - (106)
-------- -------- --------- -------
Attributable to:
Equity holders of the parent (1) (1) - (95)
Minority interests (11)
-------- -------- --------- -------
(1) (1) - (106)
-------- -------- --------- -------
Earnings per share
Total Group
Loss per share (basic and
diluted) 6 (1.7) p
Earnings per share (before
exceptional items, goodwill
amortisation, goodwill
impairment and foreign
exchange gains/(losses)) 6 0.3 p
Continuing operations
Loss per share (basic and
diluted) 6 (2.1) p
Earnings per share (before
exceptional items, goodwill
amortisation, goodwill
impairment and foreign
exchange gains/(losses)) 6 0.3 p
Consolidated balance sheet
At 31 March 2005
UK GAAP Intangible
IFRS development
format costs Goodwill Leases
Notes £m £m £m £m
-------- -------- -------- --------
ASSETS
Non-current assets
Property, plant and equipment 442 (16) 8
Intangible assets - goodwill 285 25
Intangible assets - other - 83
Investments in associates 1
Deferred income tax assets 8
Other financial assets 16
-------- -------- -------- --------
752 67 25 8
-------- -------- -------- --------
Current assets
Inventories 266
Amounts due from contract -
customers
Trade receivables 694
Cash and cash equivalents 7 638
Other current assets 223 (11) (4)
-------- -------- -------- --------
1,821 (11) - (4)
-------- -------- -------- --------
TOTAL ASSETS 2,573 56 25 4
-------- -------- -------- --------
LIABILITIES
Non-current liabilities
Borrowings (1,402) (8)
Provisions - (4)
Other liabilities (17)
Deferred income tax liabilities (3)
Pension liability (574)
-------- -------- -------- --------
(1,996) - - (12)
-------- -------- -------- --------
Current liabilities
Trade and other payables (771)
Amounts due to contract -
customers
Borrowings (28) (2)
Current tax payable (83)
Provisions (205)
-------- -------- -------- --------
(1,087) - - (2)
-------- -------- -------- --------
TOTAL LIABILITIES (3,083) - - (14)
-------- -------- -------- --------
NET LIABILITIES (510) 56 25 (10)
-------- -------- -------- --------
EQUITY
Equity attributable to equity
holders of the parent
Issued capital 57
Share premium 440
Capital redemption reserve 923
Capital reserve 2,855
Foreign exchange reserve -
Retained earnings (4,918) 56 25 (10)
-------- -------- -------- --------
Shareholders' deficit - equity (643) 56 25 (10)
Minority interests 133
-------- -------- -------- --------
TOTAL EQUITY (510) 56 25 (10)
-------- -------- -------- --------
Consolidated balance sheet continued
Restated
Employee under
benefits Taxation Reclassifications IFRS
Notes £m £m £m £m
-------- -------- -------- --------
ASSETS
Non-current assets
Property, plant and
equipment 434
Intangible assets -
goodwill 310
Intangible assets - other 83
Investments in associates 1
Deferred income tax assets 2 10
Other financial assets 16
-------- -------- -------- --------
- 2 - 854
-------- -------- -------- --------
Current assets
Inventories (9) 257
Amounts due from contract
customers 185 185
Trade receivables (167) 527
Cash and cash equivalents 7 638
Other current assets 208
-------- -------- -------- --------
- - 9 1,815
-------- -------- -------- --------
TOTAL ASSETS - 2 9 2,669
-------- -------- -------- --------
LIABILITIES
Non-current liabilities
Borrowings (1,410)
Provisions (2) (72) (78)
Other liabilities (3) 6 (14)
Deferred income tax
liabilities (18) (21)
Pension liability (574)
-------- -------- -------- --------
(5) (18) (66) (2,097)
-------- -------- -------- --------
Current liabilities
Trade and other payables (15) 120 (666)
Amounts due to contract
customers (138) (138)
Borrowings (30)
Current tax payable (83)
Provisions (1) 75 (131)
-------- -------- -------- --------
(16) - 57 (1,048)
-------- -------- -------- --------
TOTAL LIABILITIES (21) (18) (9) (3,145)
-------- -------- -------- --------
NET LIABILITIES (21) (16) - (476)
-------- -------- ------- --------
EQUITY
Equity attributable to
equity holders of the parent
Issued capital 57
Share premium 440
Capital redemption reserve 923
Capital reserve (346) 2,509
Foreign exchange reserve 1 1
Retained earnings (21) (16) 345 (4,539)
-------- -------- ------- --------
Shareholders' deficit -
equity (21) (16) - (609)
Minority interests 133
-------- -------- -------- --------
TOTAL EQUITY (21) (16) - (476)
-------- -------- -------- --------
Consolidated cash flow statement
For the year ended 31 March 2005
UK GAAP Intangible
IFRS development
format costs Goodwill
Notes £m £m £m
-------- -------- ---------
Operating activities
Total operating loss (48) 8 27
Depreciation of property, plant and equipment 73
Non-cash charge for share option schemes 2
Amortisation of goodwill 28 (28)
Amortisation of other intangibles - 8
Provision for impairment charged to operating
profit/loss 90 1
Decrease in working capital 30
Movement in pensions (83)
Income taxes paid (76)
Interest paid (130)
-------- -------- ---------
Cash flows from operating activities (114) 16 -
-------- -------- ---------
Investing activities
Interest received 18
Purchase of tangible fixed assets (60)
Expenditure on intangible fixed assets - (16)
Sale of tangible fixed assets 2
Purchase of subsidiary undertakings (1)
Sale of subsidiary undertakings 381
Net cash disposed of on sale of subsidiary
undertakings (18)
Purchase of minority interests (1)
Dividends paid to minority interests (14)
-------- -------- ---------
Cash flows from investing activities 307 (16) -
-------- -------- ---------
Financing activities
Repayment of short-term borrowings (52)
Increase in long-term borrowings 226
Repayment of long-term borrowings (284)
-------- -------- ---------
Capital element of finance lease repayments -
Cash flows from financing activities (110) - -
-------- -------- ---------
Net increase in cash equivalents 83 - -
Cash and cash equivalents at beginning of year 562
Net foreign exchange difference (7)
--------
Cash and cash equivalents at end of year 7 638
--------
Consolidated cash flow statement cont
Restated
Employee under
Leases benefits IFRS
Notes £m £m £m
-------- -------- ---------
Operating activities
Total operating loss 2 (1) (12)
Depreciation of property, plant and equipment 1 74
Non-cash charge for share option schemes 2
Amortisation of goodwill -
Amortisation of other intangibles 8
Provision for impairment charged to operating
profit/loss 91
Decrease in working capital (1) 1 30
Movement in pensions (83)
Income taxes paid (76)
Interest paid (1) (131)
-------- -------- ---------
Cash flows from operating activities 1 - (97)
-------- -------- ---------
Investing activities
Interest received 18
Purchase of tangible fixed assets (60)
Expenditure on intangible fixed assets (16)
Sale of tangible fixed assets 2
Purchase of subsidiary undertakings (1)
Sale of subsidiary undertakings 381
Net cash disposed of on sale of subsidiary
undertakings (18)
Purchase of minority interests (1)
Dividends paid to minority interests (14)
-------- -------- ---------
Cash flows from investing activities - - 291
-------- -------- ---------
Financing activities
Repayment of short-term borrowings (52)
Increase in long-term borrowings 226
Repayment of long-term borrowings (284)
Capital element of finance lease repayments (1) (1)
-------- -------- ---------
Cash flows from financing activities (1) - (111)
-------- -------- ---------
Net increase in cash equivalents - - 83
Cash and cash equivalents at beginning of year 562
Net foreign exchange difference (7)
---------
Cash and cash equivalents at end of year 7 638
---------
Consolidated statement of changes in equity
For the year ended 31 March 2005
Attributable to equity holders of the parent
--------------------------------------------
Foreign
Issued Share Retained exchange Other Total capital Minority Total
capital premium earnings reserve Reserves and reserves interests equity
£m £m £m £m £m £m £m £m
------- ------ ------- ------- ------- ------- ------- ---------
At 1 April
2004
Under UK 897 440 (4,398) 2,592 (469) 165 (304)
GAAP
Recognition of
intangible
assets 48 48 48
Recognition of
employee
benefits (20) (20) (20)
Capitalisation
of leases (10) (10) (10)
Deferred tax
adjustment (15) (15) (15)
------- ------ ------- ------- ------- ------- ------- ---------
Under IFRS 897 440 (4,395) 2,592 (466) 165 (301)
Loss for the
year (95) (95) (11) (106)
Actuarial loss
recognised on
pension
schemes (50) (50) (50)
Cancellation
of deferred
shares (840) 840
Share-based
payments 1 1 1
Dividends paid
to minority
interests - (14) (14)
Disposal of
minority
interests - (1) (1)
Foreign
exchange loss
transferred on
disposal of
operations 3 3 3
Exchange
adjustments (2) (2) (6) (8)
------- ------ ------- ------- -------- ------- -------- ---------
At 31 March
2005 57 440 (4,539) 1 3,432 (609) 133 (476)
------- ------ ------- ------- -------- ------- -------- ---------
Notes
For the year ended 31 March 2005
1 Segmental analysis
Intangible Foreign Restated
Under development exchange gains Employee under
UK GAAP costs Goodwill /(losses) Leases benefits IFRS
£m £m £m £m £m £m £m
------- ------ ------ -------- -------- -------- --------
Revenue
Business
Process
Systems 709 709
Eurotherm 122 122
APV 360 360
Rail 412 412
Systems
Controls 921 921
Businesses
for sale 279 279
------- ------ ------ -------- -------- -------- --------
Continuing
operations 2,803 - - - - - 2,803
Discontinued
operations 120 - - - - - 120
------- ------ ------ -------- -------- -------- --------
Total Group 2,923 - - - - - 2,923
------- ------ ------ -------- -------- -------- --------
Operating
profit
Business
Process
Systems 47 3 1 51
Eurotherm 17 17
APV 6 (1) 5
Rail 56 5 61
Systems
Controls 89 1 90
Businesses
for sale 9 9
Corporate
costs (46) (46)
------- ------ ------ -------- -------- -------- --------
Continuing
operations 178 8 - - 2 (1) 187
Discontinued
operations (3) (3)
------- ------ ------ -------- -------- -------- --------
Total Group 175 8 - - 2 (1) 184
------- ------ ------ -------- -------- -------- --------
2 Total operating loss
Intangible Foreign Restated
Under development exchange gains Employee under
UK GAAP costs Goodwill /(losses) Leases benefits IFRS
£m £m £m £m £m £m £m
-------- -------- -------- -------- ------- ------- ----------
Continuing
operations
Revenue 2,803 2,803
Cost of (2,058) 8 (2,050)
sales -------- -------- -------- -------- ------- ------- ----------
Gross profit 745 8 - - - - 753
Distribution
costs (18) - - (18)
Administrative
costs (549) 2 1 (548)
-------- -------- -------- -------- -------- -------- ---------
Operating
profit 178 8 - - 2 (1) 187
Operating
exceptional
items (168) (168)
Goodwill
amortisation (24) 24 -
Goodwill
impairment (27) (1) (28)
-------- -------- -------- -------- ------- ------- ----------
Total
operating loss (41) 8 23 - 2 (1) (9)
-------- -------- -------- -------- ------- ------- ----------
Discontinued
operations
Revenue 120 120
Cost of (98) (98)
sales -------- -------- -------- -------- ------- ------- ----------
Gross profit 22 - - - - - 22
Distribution
costs (2) - - (2)
Administrative
costs (23) (23)
-------- -------- -------- -------- ------- ------- ----------
Operating loss (3) - - - - - (3)
Operating
exceptional
items - -
Goodwill
amortisation (4) 4 -
Goodwill - -
impairment -------- -------- -------- -------- ------- ------- ----------
Total
operating loss (7) - 4 - - - (3)
(Loss)/profit
on disposal of
operations (298) 331 (3) 30
-------- -------- -------- -------- ------- ------- ----------
(Loss)/profit
before
taxation (305) - 335 (3) - - 27
Taxation (1) (1)
-------- -------- -------- -------- ------- ------- ----------
(Loss)/profit
for the year
from
discontinued
operations (306) - 335 (3) - - 26
-------- -------- -------- -------- ------- ------- ----------
3 Operating exceptional items
Impact of Restated
Under IFRS under
UK GAAP transition IFRS
£m £m £m
-------- -------- --------
Restructuring costs (58) - (58)
Transition costs* (17) - (17)
Refinancing costs - - -
Fixed asset impairment (63) - (63)
Product recall costs* (30) - (30)
-------- -------- --------
(168) - (168)
-------- -------- --------
Restructuring costs by business
Process Systems (7) - (7)
Eurotherm - - -
APV (14) - (14)
Rail Systems (2) - (2)
Controls (26) - (26)
Businesses for sale (6) - (6)
Corporate costs (3) - (3)
-------- -------- --------
Continuing operations (58) - (58)
Discontinued operations - - -
-------- -------- --------
(58) - (58)
-------- -------- --------
Fixed asset impairment
by business
Process Systems - - -
Eurotherm - - -
APV - - -
Rail Systems - - -
Controls (58) - (58)
Businesses for sale (2) - (2)
Corporate costs (3) - (3)
-------- -------- --------
Continuing operations (63) - (63)
Discontinued operations - - -
-------- -------- --------
(63) - (63)
-------- ------- --------
* Transition costs relate wholly to the corporate sector. Product recall costs
are attributable wholly to the Controls business.
4 (Loss)/profit for the year from discontinued operations
Impact Restated
Under of IFRS under
UK GAAP transition IFRS
£m £m £m
-------- -------- --------
The Group's (loss)/profit from discontinued operations
comprises the following:
Total operating loss, after taxation (8) 4 (4)
-------- -------- --------
Profit on assets divested 162 - 162
Charge of associated goodwill (468) 331 (137)
Settlements and curtailments credit - FRS 17/IAS 19 8 - 5
Foreign exchange loss transferred on disposal of operations - (3) (3)
-------- -------- --------
(Loss)/profit on disposal of operations (298) 328 30
-------- -------- --------
(Loss)/profit for the year from discontinued operations (306) 332 26
-------- -------- --------
5 Taxation
Impact of Restated
Under IFRS under
UK GAAP transition IFRS
£m £m £m
-------- -------- --------
Taxation on ordinary activities (25) - (25)
Adjustments in respect of prior years 41 - 41
Deferred taxation - 1 1
-------- -------- --------
16 1 17
-------- -------- --------
Continuing operations 15 1 16
Discontinued operations 1 - 1
-------- -------- --------
16 1 17
-------- -------- --------
6 (Loss)/earnings per share
Impact of Restated
Under IFRS under
UK GAAP transition IFRS
--------- --------- ----------
(Loss)/earnings
per share (pence)
Basic (8.3) 6.6 (1.7)
Total Group* 0.1 0.2 0.3
Diluted (8.3) 6.6 (1.7)
--------- --------- ----------
Average number of
shares (million)
Basic 5,687 5,687 5,687
--------- --------- ----------
(Loss)/earnings
(£m)
Basic (473) 378 (95)
Total Group
Operating profit* 175 9 184
Finance costs (136) (4) (140)
Finance income - 3 3
Other finance charges -
FRS 17/IAS 19 (15) - (15)
--------- --------- ----------
Operating profit less 24 8 32
finance costs
Taxation on operating
profit less finance
costs (28) - (28)
Minority interests 11 - 11
--------- --------- ----------
7 8 15
--------- --------- ----------
* Before exceptional items, goodwill amortisation, goodwill impairment and
foreign exchange gains/(losses).
The basic loss per share for the year under IFRS has been calculated using 5,687
million shares, being the weighted average number of shares in issue during the
year and the loss after taxation and minority interests of £95 million.
Earnings per share under IFRS is also calculated by reference to earnings for
the total Group, before exceptional items, goodwill impairment and foreign
exchange gains/(losses) with an underlying tax charge of £28 million, since the
directors consider that this gives a useful additional indication of underlying
performance.
The diluted loss per share under IFRS has been calculated in accordance with IAS
33 Earnings per Share without reference to adjustments in respect of certain
share options which are considered to be anti-dilutive.
7 Analysis of changes to net debt
At At At
1 April Impact 1 April 2004 31 March 2005
2004 of transition restated Cash Other Exchange estated
under UK GAAP to IFRS under IFRS flow movements movement under IFRS
£m £m £m £m £m £m £m
-------- -------- ------- ------- ---------- ---------- ----------
Cash at bank
and in hand 409 409 112 (8) 513
Overdrafts (4) (4) 3 - (1)
-------
115
Debt due
within one
year (53) (53) 52 (25) (1) (27)
Debt due after
one year (1,492) (1,492) 58 20 14 (1,400)
Finance leases (3) (11) (14) 1 - (13)
-------
111
Short-term
deposits 157 157 (32) 1 126
-------- -------- ------- ------- ---------- ---------- ----------
Total (986) (11) (997) 194 (5) 6 (802)
-------- -------- ------- ------- ---------- ---------- ----------
Cash at bank
and in hand 409 513
Overdrafts (4) (1)
Short-term
deposits 157 126
----------
Cash and cash
equivalents 562 638
-------- ----------
8 Financial statements
These unaudited financial statements were approved by a duly appointed and
authorised committee of the Board of directors on 18 May 2005. These statements
do not comprise the statutory accounts of the Group, as defined in section 240
of the Companies Act 1985.
ACCOUNTING POLICIES FOR INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
The significant accounting policies adopted by Invensys under IFRS are set out
below. Invensys has applied these policies in preparing:
• its opening IFRS balance sheet as at 1 April 2004, the date of
transition to IFRS; and
• its IFRS balance sheet as at 31 March 2005 and income statement,
statement of changes in equity and cash flow statement for the year then
ended, which will be presented as comparative information in Invensys's
first IFRS financial statements.
Statement of compliance
The financial information has been prepared in accordance with all International
Financial Reporting Standards, including International Accounting Standards
('IAS') and interpretations issued by the International Accounting StandardsBoard ('IASB') and its committees, published by 31 March 2005. These are subjectto ongoing review and amendment by the IASB and subsequent endorsement by the
European Commission and therefore may change. Further standards and
interpretations may also be issued that will become applicable for the Group's
financial year ending 31 March 2006. The IFRS in force at the time the Group
prepares its first IFRS financial statements may, therefore, require different
accounting policies from those stated here. The Group has adopted the recent
amendment to IAS 19, Employee Benefits. This amendment has still to be endorsed
by the European Commission.
In November 2004 the EU endorsed a reduced version of IAS 39, Financial
Instruments: Recognition and Measurement, as issued previously by the IASB. For
the year ending 31 March 2006, the Group will adopt IAS 39 in accordance with
the guidance issued by the IASB.
The Group has applied the rules for first-time adoption of IFRS as set out in
IFRS 1, First-time Adoption of International Reporting Standards. IFRS 1
requires use of the same accounting policies in the IFRS transition balance
sheet and for all periods presented thereafter. These policies must comply with
all IFRS effective at the reporting date for the first financial reporting under
IFRS.
In general, for the first-time adoption of IFRS, the standards are applied
retrospectively. However IFRS 1 permits a number of optional exemptions, as well
as prohibiting retrospective application of some aspects of other IFRS. The
Group has adopted the following optional exemptions under IFRS 1:
(a) Business combinations prior to 1 April 2004 have not been restated to comply
with IFRS 3, Business Combinations.
(b) All cumulative actuarial gains and losses with respect to employee benefits
have been recognised in shareholders' equity at 1 April 2004.
(c) Cumulative translation differences on foreign operations are deemed to be
zero at 1 April 2004. Any gains and losses recognised in the consolidated
income statement on subsequent disposals of foreign operations will
therefore exclude translation differences arising prior to the transition
date.
(d) IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39,
Financial Instruments: Recognition and Measurement, shall be applied for the
first time in the financial statements for the financial year ending 31
March 2006, with no restatement of comparative information. Financial
instruments recognised prior to 1 April 2005, the date of transition to
IAS 32 and IAS 39, were designated at the date of IAS 32 and IAS 39
transition, rather than at their inception.
(e) The requirements of IFRS 2, Share-based Payment, have not been applied to
equity instruments granted on or before 7 November 2002 and those vesting
before 1 April 2005.
The financial statements have been presented in accordance with IAS 1
Presentation of Financial Statements. Where IAS 1 does not provide definitive
guidance on presentation, for example in relation to aspects of the income
statement, the Group has adopted a format consistent with UK GAAP requirements.
Basis of preparation
The financial information for the year ended 31 March 2005 is prepared under the
historical cost convention. For the year ending 31 March 2006, for which IAS 32,
IAS 39 and IFRS 5, Non-current Assets Held for Sale, will be adopted, the
financial statements will be prepared under the historical cost convention as
modified by requirements to revalue available-for-sale financial assets and
financial assets and financial liabilities (including derivative instruments).
The principal effects of changing from previous GAAP (UK GAAP) to IFRS,
including reconciliations between the IFRS and UK GAAP financial information,
are set out in the notes to these financial statements.
The financial statements for the year ending 31 March 2006, including
comparative information for the previous year, will be the first annual
financial statements in which Invensys adopts IFRS, and will include an explicit
and unreserved statement of compliance with IFRS as required by IFRS 1.
Basis of consolidation
The consolidated financial statements comprise Invensys plc and its subsidiaries
together with the Group's share of the results of its associates for the
financial year to 31 March each year. The financial statements of subsidiaries
are prepared for the same reporting year as the parent company, using consistent
accounting policies.
All intercompany balances and transactions, including unrealised profits arising
from intra-group transactions, have been eliminated.
The results of subsidiaries sold or acquired during the year are consolidated up
to, or from, the date control passes.
The Group's investments in its associates are accounted for using the equity
method of accounting. An associate is an entity in which the Group has
significant influence and which is neither a subsidiary nor a joint venture. The
financial statements of the associate are used by the Group to apply the equity
method. The financial statements of associates are prepared as of the same date
as the Group's financial statements and use consistent accounting policies. The
investment in an associate is carried in the balance sheet at cost plus
post-acquisition changes in the Group's share of net assets of the associate,
less any impairment in value. The income statement reflects the share of the
results of operations of the associate. Where there has been a change recognised
directly in the associate's equity, the Group recognises its share of any
changes and discloses this, when applicable in the statement of changes in
equity.
All business combinations since 1 April 2004, the date of transition to IFRS,
are accounted for using the purchase method. The cost of the business
combination is measured as the fair value of the assets given, equity
instruments issued and liabilities incurred or assumed at the date of exchange,
plus costs directly attributable to the acquisition. Identifiable assets
acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest. The excess of the cost of
acquisition over the fair value of the Group's share of the identifiable net
assets acquired is recorded as goodwill.
Foreign currencies
The financial statements for each of the Group's subsidiaries and associates are
prepared using their functional currency. The functional currency is the
currency of the primary economic environment in which an entity operates. The
presentation currency of the Group and functional currency of Invensys plc is
sterling.
Transactions in foreign currencies are translated at the exchange rates ruling
at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are
retranslated at the exchange rates ruling at the balance sheet date. Exchange
differences arising are recognised in the consolidated income statement unless:
i) the monetary assets or liabilities to which they relate form the hedging
item in a hedging relationship that qualifies for hedge accounting; or
ii) the monetary assets or liabilities to which they relate form part of a net
investment in a foreign operation;
in which case they are recognised directly in reserves.
Non-monetary items that are measured in terms of historical cost in a foreign
currency are translated using the exchange rate as at the date of the initial
transaction.
Non-monetary assets and liabilities measured at fair value in a foreign currency
are translated at the rates prevailing when the fair value was determined. Gains
and losses arising on retranslation are included in the income statement for the
period, except for exchange differences arising on non-monetary assets and
liabilities where the changes in fair value are recognised directly in equity.
The trading results of overseas subsidiaries and associates are translated into
sterling at average rates of exchange ruling during the year. Assets and
liabilities of overseas subsidiaries, including goodwill, are translated into
sterling at closing rates of exchange ruling at the balance sheet date. All
resulting exchange differences arising after the date of transition to IFRS (1
April 2004) are recognised directly in a separate component of reserves. On
disposal of a foreign operation, any cumulative exchange differences held in
equity and arising after the date of transition to IFRS are transferred to the
consolidated income statement. as part of the profit or loss on sale.
Translation differences that arose before the date of transition to IFRS are
presented in equity but not as a separate component. When the foreign operation
is sold, these cumulative exchange differences are not recognised in the income
statement.
Revenue recognition
Revenue is recognised to the extent that it is probable that the economic
benefits will flow to the Group and the revenue can be reliably measured.
Sale of goods
Revenue from the sale of goods is recognised when the significant risks and
rewards of ownership of the goods have passed to the buyer and the amount of
revenue can be reliably measured.
Rendering of services
Revenue from the rendering of services is recognised by reference to the stage
of completion of the transaction. Revenue from services provided on a short-term
or one-off basis is recognised when the service is complete. The provision of a
service over a long-term period is treated as a construction contract, and the
revenue recognised as set out below.
Construction contracts
Revenue from construction contracts, including long-term service provision
contracts, is recognised by reference to the stage of completion of the
contract. Stage of completion is determined by the costs incurred on the
contract to date, to the extent that such costs represent progress made on the
project.
Revenue comprises the invoiced value of goods and services supplied by the Group
excluding inter-company transactions, sales by associated undertakings and sales
taxes. Revenue relating to construction contracts, including long-term service
provision contracts, represents the value of work performed during the year
determined by reference to the stage of completion of the contract.
Profit is recognised at the time of sale. In the case of construction and
long-term service provision contracts, a prudent level of profit attributable to
the contract activity is recognised if the final outcome of such contracts can
be reliably assessed. On all contracts, full provision is made for any losses in
the year in which they are first foreseen.
Research and development
All research expenditure is expensed as incurred. Development expenditure is
expensed as incurred unless it meets the criteria for recognition as an
intangible asset (see other intangible assets).
Pension costs and other post-retirement benefits
The service cost of providing retirement benefits to employees during the year
is charged to operating profit or loss in the year. The full cost of providing
amendments to benefits in respect of past service is also charged to operating
profit or loss in the year. The expected return on the assets of the schemes
during the year based on the market value of scheme assets at the start of the
financial year is included within other finance charges. This also includes a
charge representing the expected increase in liabilities of the schemes during
the year, arising from the liabilities of the scheme being one year closer to
payment. Differences between actual and expected returns on assets during the
year are recognised in the statement of recognised gains and losses in the year,
together with differences from changes in assumptions. The net deficit on
defined benefit pension schemes is reported on the balance sheet within the
pension liability. This is net of related deferred tax.
For defined contribution schemes the amount charged to the profit and loss
account in respect of pension costs is the contributions payable in the year.
Differences between contributions payable in the year and contributions actually
paid are shown either as accruals or prepayments in the balance sheet.
Goodwill
On a business combination, the fair value of net assets is assessed and
adjustments are made to bring the accounting policies of businesses acquired
into alignment with those of the Group. The difference between the price paid
for new interests and the fair value of identifiable net assets acquired is
included in intangible assets as goodwill. Any costs of integrating the acquired
business are taken to the profit and loss account.
Goodwill is tested for impairment annually, or more frequently if events or
changes in circumstances indicate that the carrying value may be impaired, and
it is subsequently carried at cost less accumulated impairment losses. Goodwill
is allocated to cash generating units for the purpose of impairment testing.
Goodwill arising on business combinations before the date of transition to IFRS
has been retained at the previous UK GAAP amounts subject to being tested for
impairment at that date. Goodwill written off to reserves under UK GAAP prior to
1998 has not been reinstated and is not included in determining any subsequent
profit or loss on disposal.
Gains and losses on the disposal of a business include the carrying amount of
goodwill relating to the business sold.
Internally generated goodwill is not recognised as an asset.
Other intangible assets
Other intangible assets are carried at cost less accumulated amortisation and
accumulated impairment losses. Amortisation begins when an asset is available
for use and is calculated on a straight line basis to allocate the cost of
assets over their estimated useful lives using the following annual rates:
Development costs 10 to 20%
Computer software systems 10 to 25%
Patents, trademarks and licenses Shorter of period of the agreement or 15 years
Useful lives are examined on an annual basis and adjustments, where applicable
are made on a prospective basis. No intangible assets other than goodwill are
considered to have indefinite useful lives.
The cost of intangible assets acquired in a business combination is the fair
value at acquisition date. The cost of separately acquired intangible assets,
including computer software, comprises the purchase price and any directly
attributable costs of preparing the asset for use.
Expenditure incurred on development projects is capitalised as an intangible
asset if it meets the recognition criteria set out in IAS 38, Intangible Assets.
These require that it is probable that the expenditure will generate future
economic benefits and can be measured reliably. To be able to meet these
criteria, it is necessary to be able to demonstrate, among other things, the
technical feasibility of completing the intangible asset so that it will be
available for use or sale.
Costs incurred in the preliminary stage of a development project are considered
to be research costs, and are recognised in the income statement as incurred.
These costs are incurred to determine the product concepts and alternatives,
evaluate the alternatives and related risks, assess the technical feasibility of
concepts, make the final selection from the possible alternatives and prepare
the high level design and project planning. The costs incurred in the following
development stage for substantially new or improved products are assessed
against the IAS 38 criteria and considered for recognition as an asset when they
meet those criteria. These costs are generally incurred in developing the
detailed product design, software configuration and software interfaces; the
coding of software, building of prototypes and integration of the software with
hardware; and testing and releasing the product to manufacture and pilot
production.
Development expenditure directed towards incremental improvements in existing
products does not qualify for recognition as an intangible asset.
In general the costs of developing software products that are sold in package
form and not integrated and sold with hardware are not recognised as intangible
assets. The uncertainties associated with the functionality of these products
mean that technical feasibility is achieved only prior to or after field trial
tests at customer sites. As a result minimal or no costs are considered to meet
the IAS 38 criteria for recognition.
Property, plant and equipment
Items of property, plant and equipment are carried at cost less accumulated
depreciation and accumulated impairment losses. The cost of property, plant and
equipment comprises purchase price and directly attributable costs.
Items of property, plant and equipment are depreciated to their residual values
on a straight-line basis over their estimated useful lives at the following
rates applied to original cost.
Freehold land Nil
Freehold buildings 2 to 2.5%
Leasehold properties Over the period of the lease
Plant and machinery 7 to 35%
Useful lives and residual values are examined on an annual basis and
adjustments, where applicable are made on a prospective basis.
Impairment
At each reporting date, the Group assesses whether there is any indication that
an asset may be impaired. If there is an indication of impairment, the Group
makes an estimate of the asset's recoverable amount. Where the carrying amount
of an asset exceeds its recoverable amount the asset is written down to its
recoverable amount and an impairment loss is recognised in the income statement.
Goodwill is impairment tested annually whether or not there is any indication of
impairment. Goodwill was also impairment tested at the date of transition to
IFRS.
An asset's recoverable amount is the higher of its fair value less costs to sell
and its value in use and is determined for an individual asset. If the asset
does not generate cash inflows that are largely independent of those from other
assets or groups of assets the recoverable amount of the cash generating unit to
which the asset belongs is determined.
The calculation of an asset's value in use uses a discount rate that reflects
the asset specific risks and the time value of money.
Leased assets
Assets held under finance leases are capitalised and included in property, plant
and equipment at fair value. Each asset is depreciated over the shorter of the
lease term or its useful life. Obligations related to finance leases, net of
finance charges in respect of future periods, are included as appropriate within
creditors. The interest element of the rental obligation is allocated to
accounting periods during the lease term to reflect a constant rate of interest
on the remaining balance of the obligation for each accounting period.
Lease payments, including any premium paid at the outset of the lease, made
under operating leases are recognised as an expense over the lease term on a
straight-line basis.
Inventories
Inventories are valued at the lower of cost and estimated net realisable value.
Cost comprises the cost of raw materials, determined on a FIFO cost basis, and
an appropriate proportion of labour and overheads. Provision is made for
obsolete and slow moving items and for unrealised profits on items of
inter-company manufacture.
Cash and Cash Equivalents
Cash and cash equivalents includes cash in hand, call deposits and other
short-term liquid investments with original maturities of three months or less.
Cash and short-term deposits at the balance sheet date are deducted from bank
loans and overdrafts where formal rights of set-off exist.
Borrowing Costs
Borrowing costs are not capitalised.
Taxation
Deferred income tax is provided, using the liability method, on all temporary
differences at the balance sheet date between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable temporary
differences:
• except where the deferred income tax liability arises from goodwill
amortisation or the initial recognition of an asset or liability in a
transaction that is not a business combination and, at the time of the
transaction, affects neither the accounting profit nor taxable profit or
loss; and
• in respect of taxable temporary differences associated with investments
in subsidiaries, associates and interests in joint ventures, except where
the timing of the reversal of the temporary differences can be controlled
and it is probable that the temporary differences will not reverse in the
foreseeable future.
Deferred income tax assets are recognised for all deductible temporary
differences, carry-forward of unused tax assets and unused tax losses, to the
extent that it is probable that taxable profit will be available against which
the deductible temporary differences, and the carry-forward of unused tax assets
and unused tax losses can be utilised:
• except where the deferred income tax asset relating to the deductible
temporary difference arises from the initial recognition of an asset or
liability in a transaction that is not a business combination and, at the
time of the transaction, affects neither the accounting profit nor taxable
profit or loss; and
• in respect of deductible temporary differences associated with
investments in subsidiaries, associates and interests in joint ventures,
deferred tax assets are only recognised to the extent that it is probable
that the temporary differences will reverse in the foreseeable future and
taxable profit will be available against which the temporary differences
can be utilised.
Deferred tax is measured at the tax rates that are expected to apply in the
periods in which timing differences reverse, based on tax rates and laws enacted
or substantively enacted at the balance sheet date.
Income tax on the profit or loss for the year comprises current and deferred
tax. Income tax is recognised in the income statement except to the extent that
it relates to items recognised directly to equity, in which case it is
recognised in equity.
Financial instruments - Policy applicable for the year to 31 March 2005
IAS32, Financial Instruments: Disclosure and Presentation, and IAS39, Financial
Instruments: Recognition and Measurement, shall be applied for the first time in
the financial statements for the financial year ending 31 March 2006. Therefore
the information prepared under IFRS for the year ended 31 March 2005 applies UK
GAAP to the treatment of derivative instruments, as set out below.
The Group primarily uses forward foreign currency contracts and interest rate
swaps to manage its exposures to fluctuations in interest and foreign exchange
rates. These instruments are accounted for as hedges when designated as hedges
at the inception of the contract. The Group does not hold or issue derivative
financial instruments for financial trading purposes.
Interest rate swaps
Interest rate swaps are revalued to fair value for disclosure only. They are not
shown on the consolidated balance sheet. Interest payments and receipts are
accrued and included in net interest payable as an adjustment of the interest
expense of the designated liability.
Foreign exchange swaps and forwards
Where foreign exchange swaps and forwards are used to adjust the currency
profile of net borrowings which are matched to net assets of subsidiaries,
realised and unrealised gains and losses are taken directly to reserves. Where
foreign exchange forwards are used to hedge foreign currency trade debtors and
creditors, realised and unrealised gains and losses are recognised in the income
statement. Where the instrument is used to hedge against future transactions,
gains and losses are not recognised until the transaction occurs.
Debt instruments
New borrowings are stated at net proceeds received after deduction of issue
costs. The issue costs of debt instruments are amortised at a constant rate on
the carrying amount of the related debt, over the life of the instrument.
Financial instruments - Policy applicable for the year to 31 March 2006
Derivative financial instruments
The Group primarily uses forward foreign currency contracts and interest rate
swaps to manage its exposures to fluctuations in interest and foreign exchange
rates. These instruments are accounted for as hedges when designated as hedges
at the inception of the contract (or at the date of transition to IFRS, as
permitted by IFRS 1). The Group does not hold or issue derivative financial
instruments for financial trading purposes.
All derivative financial instruments are recognised at fair value in the balance
sheet. The fair value of forward foreign exchange contracts and interest rate
swaps are calculated by reference to current forward exchange rates for
contracts with similar maturity profiles.
The designation of derivative financial instruments as hedges is carried out
according to the Group's risk management policies. Hedges fall into three
categories:
(a) Fair value hedges, which hedge the exposure to changes in the fair value of
a recognised asset or liability.
(b) Cash flow hedges, which hedge exposure to variability in cash flows that is
attributable to either a particular risk associated with a recognised asset
or liability or a committed or highly probable forecast transaction.
(c) Net investment hedges, which hedge exposure to changes in he value of the
Group's net investment in foreign operations.
The accounting treatment for these categories is outlined below:
Fair value hedges
When the hedging instrument is remeasured at fair value, any resulting gain or
loss is recognised in the income statement. Any gain or loss on the hedged item
that is attributable to the hedged risk is adjusted against the carrying amount
of the hedged item and similarly recognised in the income statement.
Cash flow and net investment hedges
The portion of the gain or loss on the hedging instrument that is determined to
be an effective hedge is recognised in equity. Any ineffective portion of the
gain or loss is recognised in the income statement. When a hedged cash flow
related to a hedged item results in the recognition of a non financial asset or
liability, the associated gains or losses previously recognised in equity are
included in the initial measurement of the asset or liability. For all other
cash flow hedges, the gains or losses that are recognised in equity are
transferred to the income statement in the same period in which the hedged cash
flow related to a hedged item affects the income statement.
Any gains or losses arising from changes in fair value of derivative financial
instruments not designated as hedges are recognised in the income statement.
Derivative instruments held by the Group's pension and post-retirement benefit
schemes are accounted for within the schemes themselves and are reflected in the
Group's financial statements within the amounts reported for those schemes.
Borrowings are measured at amortised cost except where they are hedged by an
effective fair value hedge, in which case the carrying value is adjusted to
reflect the fair value movements associated with the hedged risk. Where
borrowings are used to hedge the Group's net investment in foreign operations,
the portion of the gain or loss on the borrowings that are determined to be an
effective hedge is recognised in equity.
Other financial assets
Other financial assets are measured as follows:
(a) At fair value for available for sale financial assets. Gains and losses are
recognised in equity except for impairment losses, interest and dividends
arising from these assets which are recognised in the income statement.
(b) At amortised cost for held to maturity financial assets.
Trade and other receivables are measured at amortised cost less any provision
for impairment. Trade and other receivables are discounted when the time value
of money is considered material.
Derecognition of financial instruments
A financial instrument is derecognised when the Group no longer controls the
contractual rights that comprise the financial instrument. This is normally the
case when the instrument is sold, or all the cash flows attributable to the
instrument are passed through to an independent third party.
Share-based payments
The Group operates various equity settled and cash settled share schemes. For
equity settled share options, the services received from employees are measured
by reference to the fair value of the share options. The fair value is
calculated at grant date using the Black-Scholes option pricing model and
recognised in the consolidated income statement, together with a corresponding
increase in shareholders' equity, on a straight line basis over the vesting
period, based on an estimate of the number of options that will eventually vest.
Vesting conditions, other than market conditions, are not taken into account
when estimating the fair value.
For equity settled share award schemes, the fair value is calculated based on
the share price at the grant date and expensed over the vesting period based on
the number of shares expected to vest.
For cash settled share awards, the services received from employees are measured
at the fair value of the liability and recognised in the consolidated income
statement on a straight line basis over the vesting period. The fair value of
the liability is remeasured at each reporting date and at the date of settlement
with changes in fair value recognised in the consolidated income statement.
IFRS2 has been applied, in accordance with IFRS1, to equity settled share
options granted after 7 November 2002 and those vesting after 1 April 2005, and
to all cash settled share options.