IFRS poses borrowing rethink for BAE Systems

BAE Systems is to hold an EGM next week Friday, at which it will ask shareholders to amend its borrowing rules because of IFRS.

Link: BAE Systems holds off on full IFRS restatement

BAE is preparing to put in a £2.1bn bid for US competitor United Defence Industries, and in order to fund the acquisition it will have to revise its articles of association borrowing rules, as they do not accommodate the changes to its balance sheet figures under IFRS.

Under the new standards BAE’s shareholder funds fall from £4.7bn under UK GAAP to £3.07bn. The swing in the figures is a result of an accounting technicality, but the company will nevertheless have to amend its articles of association to adjust to the new reporting regimen.

‘It should be noted… that the effect of these new standards on BAE Systems’ balance sheet is of a technical accounting nature rather than one affecting the underlying economics of BAE Systems’ business or its ability to raise finance,’ the company said in a statement.

At the EGM BAE will ask for the impacts of IAS19, IAS32 and IAS39 (the new standards for employee benefits and financial instruments) to be stripped out when determining whether the company’s borrowing has exceeded the threshold set in article 104 of the articles of association.

The developer of the Eurofighter and Airbus aircraft has set up a $3bn (£1.5bn) credit facility with Goldman Sachs and Dresdner Kleinwort Wasserstein. A further $689m (£360m) was raised from a share placing in March.

The finance plans for the UDI transaction could take BAE Systems over the borrowing limit specified by article 104 unless shareholders agree to leave out the three new accounting standards.

One analyst said the amendments to the articles of association amounted to nothing more than ‘sensible legal housekeeping’.

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