Kingfisher was the latest company to feel the IFRS bite this week. Announcing its final results for 2004/05, the DIY specialist retailer said that the impact of international financial reporting standards would mean a dent in its profitability.
The most unpleasant figure for shareholders was that underlying profits after tax would be reduced by 5% as a result of the changes. In addition, the company’s balance sheet appeared less healthy than it had under UK GAAP, down by 11% as at 29 January 2005.
But there were a host of other numbers giving less cause for worry: headline profits after tax were only down by 3%, and retail profits reduced by less than 1%.
The difference between the figures is accounted for by an inter-company loan. A currency exchange of £12m by Kingfisher, which operates across Europe, meant underlying and retail profits were accounted for differently under the new rules.
With overall annual pre-tax profits up by 17.5%, investors seemed unconcerned, as the home improvement retailer’s shares ticked up 10p to 296p by the end of the day.
So what caused the group to downgrade profits in line with the new rules?
The main difference to the profit and loss account before tax was a deferred tax charge of £12m, essentially in financing the deficit on deferred tax, which has now come onto the balance sheet.
Kingfisher also had to change the way it accounts for lease incentives, amortising them over the life of the lease, typically 20 years, rather than over five years, as it had done previously. That meant a hit of £3m. A functional currency adjustment offset those changes by around £8m.
The company’s balance sheet was also affected by the new rules. The company’s net assets as at 1 February 2004 would have been reduced by 7%, and by 11% as at 29 January 2005.
The main difference to the balance sheet was deferred tax balances. Changes to the way in which deferred tax balances are accounted for meant a reduction of £280m.
The company has also had to bring its pension deficit onto the accounts, meaning a further hit of £214m.
These were offset by changes to the way dividends are interpreted under the new rules. Since the dividends have not as yet been approved, they cannot go on the balance sheet under IFRS, unlike under UK GAAP. That meant a credit of £160m.
The way in which property is valued by the company has also changed. Instead of updating property valuations regularly, the international standards mean that the company will now value them as at 1 February 2004.
Employee share awards reduce tax for Admiral, but a charge to the P&L account for Johnston Press.
Cooker and refrigeration manafacturer AGA Foodservice Group, which supports a large pension fund in relation to its size, is expecting IAS19 to create a deficit of about £4.6m in the company’s pension scheme. AGA reported a pre-tax profit of £30.6m for 2004, up from £27.9m in 2003.
Profits at Johnston Press would have been around £7m lower under IFRS. The media group said its requirement to present pension liabilities under the new rules would have meant a charge to the P&L account of £5.9m. Further charges in respect of employee share awards and benefits based on their fair value would have meant a charge of £1.1m. The group announced pre-tax profits of £150m for 2004.
Reporting profits before taxation and exceptional items of £36.2m for 2004, property company Capital & Regional said it would only begin reporting under IFRS from the start of 2006. The group said the delay was ‘in the economic interests of shareholders’, because there was certainty under UK GAAP about the accounting treatment of the repurchase of convertible unsecured loan stock valued at £20.4m.
Car insurer Admiral has reduced its tax charge for 2004 to £14.4m, compared with the £18m reported in 2003. The group reported a substantial increase in pre-tax profits, which soared from £57.2m in 2003 to £101m, but still saw its tax charge drop due to the impact of employee share ownership trust share awards. These awards to its employees attracted a significant deduction for corporation tax purposes.
Gaming group Wembley is set to benefit from its simple structure when it makes the transition to IFRS. The group has a relatively basic corporate set-up and simple financing arrangements, so will not require significant changes to the information systems or operations. Wembley reported a pre-tax profit of £20.2m for 2004.
Professional education provider BPP Holdings’ fixed assets and shareholders’ funds have both dipped by £5.2m because of the group’s adoption of UITF38 for its employee stock option plans. The standard changes the way the company reflects its own shares held in an ESOP trust. Shares used to be held as assets and will now be deducted to calculate shareholders’ funds. The company now has fixed assets valued at £94m. Shareholders’ funds total £40.3m. It announced pre-tax profits of £8.2m for 2004.
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