Costain Regulatory News (COST)

17 Aug 2005 07:00

Costain Group PLC17 August 2005 Costain Group PLC("Costain", the "Company" or the "Group") Transition to IFRS Costain, in line with all publicly listed companies in the European Union, willbe reporting its financial results in accordance with International FinancialReporting Standards ("IFRS") with effect from 1 January 2005. The Company'sfirst report under the new standards will be the announcement of its half yearresults for the period ended 30 June 2005. Ahead of these results, Costain is today presenting the impact of the transitionto IFRS. This report contains the restatement of the Group's results for theyear to 31 December 2004 and the half-year to 30 June 2004. Having reviewed the impact of IFRS across the Group, the majority of changes areof a presentational nature only, and the Group's core contracting businesses andunderlying cash flows are unaffected. The principal impact on the Group'sincome statement is from its joint venture property development in SouthernSpain, Alcaidesa, and the timing of both revenue and profit recognition withinthat operation. Under IFRS, there is a change in the revenue recognition policy at Alcaidesa.Revenue was previously recognised after exchange of contract and when anyoutstanding conditions, principally the completion of infrastructure, were underits control. However, IFRS is more specific about recognising revenue when thereremain any significant outstanding acts. This means that under IFRS, revenuewill be recognised when risk associated with ownership of the land istransferred and all significant acts are complete. The impact of this change is to defer sales recognised by the joint venture in2004 until the associated infrastructure is complete. This has reduced theGroup's earnings for the year ended 31 December 2004 by £6.4m and for the sixmonths ended 30 June 2004 by £1.9m. However, it is anticipated that themajority of these infrastructure works will be completed in 2005 and thecorresponding profit recognised accordingly. The business strategy of Alcaidesa, which is to purchase land and then securethe necessary planning consent before selling parcels of the land fordevelopment, will not be affected by this change. However, the future financialresults are likely to be more volatile as future infrastructure works on landinterests may extend over a twelve month period, thereby deferring sales to thefollowing year. Alcaidesa is the only part of the Group affected by thischange. The potential financial impact on the Group accounts and all presentationalchanges are set out in full in this report. Costain management will be presenting the key aspects of adopting IFRS on atelephone conference call for analysts and investors at 08:00 today. Toparticipate in this call, please dial (020) 7784 1015. The presentation slidesare available on the Company's website, www.costain.com. A replay of this conference call will also be available until Friday 19thAugust. The number to dial for the replay facility is (020) 7784 1024, quotingpasscode 7490480#. 17 August 2005 ENQUIRIES: Costain Group PLC Tel: 01628 842 444Charles McCole, Finance Director College Hill Tel: 020 7457 2020Matthew Gregorowski CONTENTS Section Content Page 1 Introduction and overview of impact 4 2 IFRS accounting policies 6 - 11 3 Consolidated income statement reconciliations - UK GAAP to IFRS As at 30 June 2004 12 As at 31 December 2004 13 Changes in accounting policies - income statement 14 4 Consolidated statement of recognised income and expense reconciliations - 15 UK GAAP to IFRS 5 Consolidated balance sheet reconciliations - UK GAAP to IFRS As at 1 January 2004 16 As at 30 June 2004 17 As at 31 December 2004 18 Changes in accounting policies - balance sheet 19 - 20 6 Consolidated cash flow statement for the year to 31 December 2004 21 7 Financial Instruments - IAS 32 & IAS 39 22 SECTION 1 INTRODUCTION In July 2002 the European Union (EU) approved a regulation (IAS Regulation EC1606/2002) requiring all EU listed companies to prepare consolidated financialstatements in accordance with International Financial Reporting Standards(IFRS), adopted for use in the EU (adopted IFRSs). The regulation applies toaccounting periods beginning on or after 1 January 2005. Costain Group PLC willpublish its 2005 Interim Report and 2005 Annual Report and Accounts inaccordance with recognition and measurement requirements of IFRSs in issue thatare either endorsed by the EU and effective (or available for early adoption) at31 December 2005 or are expected to be endorsed and effective (or available forearly adoption) at 31 December 2005. This report has been prepared in order to provide financial information showingthe impact of Costain Group PLC's transition from a UK Generally AcceptedAccounting Principles (UK GAAP) basis to an IFRS basis, in advance of thepublication of its first financial reporting under IFRS. The adoption of IFRSwill have no impact upon the underlying cash flows or trading activities of theGroup. OVERVIEW OF IMPACT The impact of applying IFRS on the headline 2004 financial information issummarised below: £million Half-year to 30 June 2004 Year to 31 Dec 2004 UK GAAP IFRS UK GAAP IFRSRevenue 324.2 324.2 673.2 673.2 Profit of operations 7.9 4.7 18.9 9.3Profit before tax 8.1 5.4 19.5 10.5Profit for the period 6.4 4.5 15.2 8.8 Basic earnings per share (p) 1.8p 1.3p 4.3p 2.5p Net assets (excl net pension liability) 23.6 20.9 32.5 25.1Net liabilities (30.5) (33.6) (36.7) (44.5) Areas affected by IFRS Financial impact to 31 December 2004 • IAS 18 - Revenue: profit of joint ventures in year to 31 December 2004 reduced by £6.4m • IFRS 2 - Share based payment: adjustment immaterial in 2004 • IAS 19 - Employee benefits: financial assets to be valued at bid price, not mid-market price - pension liability (net) increased by £0.4m Potential financial impact from 1 January 2005 • IAS 32 & IAS 39 - Financial Instruments (from 1 January 2005): discussed in Section 6 Presentation/classification impact • IAS 38 - Intangible assets: reclassification of capitalised software costs from tangible assets • IAS 1 - Presentation of financial statements: current/non-current asset and liability reclassification on balance sheet and equity accounted investments' return shown net of interest and tax below operating profit • IAS 12 - Income taxes: pension deferred tax asset shown separately from pension liability • IAS 21 - The effects of changes in foreign exchange rates: currency translation differences held within separate reserve from 1 January 2004 • IAS 19 - Employee benefits: finance income and expense shown separately on face of income statement Section 2 contains Costain Group PLC's IFRS accounting policies and Sections 3to 5 contain detailed reconciliations from UK GAAP to IFRS. SECTION 2 IFRS ACCOUNTING POLICIES Based on the adopted and unadopted IFRSs currently in issue, the directors havemade assumptions about the accounting policies expected to be applied, when thefirst annual IFRS financial statements are prepared for the year ending 31December 2005. In particular, the directors have assumed that IAS 19 (revised)will be adopted in sufficient time that it will be available for use in theannual IFRS financial statements for the year ending 31 December 2005. Thesepolicies have been consistently applied to the years presented. In addition, the adopted IFRSs that will be effective (or available for earlyadoption) in the annual financial statements for the year ending 31 December2005 are still subject to change and to additional interpretations and thereforecannot be determined with certainty. Accordingly, the accounting policies forthat annual period will be determined finally only when the annual financialstatements are prepared for the year ending 31 December 2005. The preparation of financial statements in conformity with IFRS requires theDirectors to make judgments and assumptions that affect the reported amounts ofassets and liabilities and income and expense during the reported periods.Although these judgments and assumptions are based on the Directors' bestknowledge of the amount, events or actions, actual results may differ from theseestimates. First time adoption IFRS 1 permits companies adopting International Financial Reporting Standardsfor the first time to take exemptions from the full requirements of IFRS in thetransition period. This financial information has been prepared on the basis oftaking the following exemptions. • Business combinations prior to 1 January 2004 have not been restated to comply with IFRS 3 'Business Combinations'. • All cumulative actuarial gains and losses with respect to employee benefits have been recognised in shareholders' equity at 1 January 2004. • Cumulative translation differences on foreign operations are deemed to be zero at 1 January 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. • The Group has elected to apply IFRS 2 only to all relevant share-based payment transactions granted after 7 November 2002 and not vested at 1 January 2005. • IAS 32 and IAS 39 have been adopted from 1 January 2005, with no restatement of comparative information. • In March 2005, the International Financial Reporting Interpretations Committee (IFRIC) issued draft guidance on accounting for service concession arrangements (IFRICs D12-D14). The Group has not applied the draft interpretations, as they may change before being finalised. The accounting policies set out below have been used to prepare the financialinformation. These include the accounting policies for financial instrumentsboth before and after the adoption of IAS 32 and IAS 39 on 1 January 2005. Basis of accounting The financial statements are prepared in accordance with adopted InternationalFinancial Reporting Standards. The following principal accounting policies havebeen applied consistently in dealing with items that are considered material inrelation to the Group's financial statements. Basis of consolidation a) The Group financial statements include the accounts of Costain Group PLCand subsidiaries controlled by the Group. Control exists where the Company hasthe power, directly or indirectly, to govern the financial and operatingpolicies of an entity so as to obtain benefits from its activities. Inassessing control, potential voting rights that presently are exercisable aretaken into account. The financial statements of subsidiaries are included inthe consolidated financial statements from the date that control commences untilthe date that control ceases. b) Associates are operations over which the Group has the power to exercisesignificant influence but not control, generally accompanied by a share ofbetween 20% and 50% of the voting rights. Associates are accounted for usingthe equity method. If the Group's share of losses in an associate equals itsinvestment, the Group does not recognise further losses, unless it has incurredobligations or made payments on behalf of the associate. c) Jointly controlled entities are those entities over whose activitiesthe Group has joint control, established by contractual agreement. Jointlycontrolled entities are accounted for using the equity method from the date thatthe jointly controlled entity commences until the date that joint control of theentity ceases. d) Jointly controlled operations are those joint ventures over which theGroup has joint control, established by contractual agreement, which are notentities. The consolidated financial statements include the Group'sproportionate share of the jointly controlled operation's assets, liabilities,revenue and expenses with items of a similar nature on a line-by-line basis fromthe date that the jointly controlled operation commences until the date thatjointly controlled operation ceases. e) Intragroup balances and transactions together with any unrealised gainsarising from intragroup transactions are eliminated in preparing theconsolidated financial statements. Unrealised gains arising from transactionswith jointly controlled entities and jointly controlled operations areeliminated to the extent of the Group's interest in the entity. The Group'sshare of unrealised gains arising from transactions with associates iseliminated against the investment in the associate. The Group's share ofunrealised losses is eliminated in the same way as unrealised gains, but only tothe extent that there is no evidence of impairment. Goodwill Goodwill arising on consolidation represents the excess of the fair value of thecost of acquisition over the Group's interest in the fair value of theidentifiable assets and liabilities of a subsidiary, jointly controlled entityor associate at the date of acquisition. The classification and accounting treatment of business combinations thatoccurred prior to 1 January 2004 have not been reconsidered in preparing theGroup's opening IFRS balance sheet at 1 January 2004. Positive goodwill is stated at cost less any accumulated impairment losses andis reviewed for impairment at least annually. Any impairment is recognisedimmediately in the income statement. In respect of associates, the carryingamount of goodwill is included in the carrying amount of the investment in theassociate. Negative goodwill arising on an acquisition is recognised directlyin income statement. Other intangible assets Other intangible assets are carried at cost less accumulated amortisation andimpairment losses. Amortisation begins when an asset is available for use andis calculated on a straight-line basis to allocate the cost of assets over theirestimated useful lives. Subsequent expenditure on capitalised intangible assetsis capitalised only when it increases the future economic benefits embodied inthe specific asset to which it relates. All other expenditure is expensed asincurred. Revenue recognition Revenue is measured at the fair value of the consideration received orreceivable, net of value added tax. Revenue from the sale of goods isrecognised when the Group has transferred the significant risks and rewards ofownership of the goods to the buyer, the amount of revenue can be measuredreliably and it is probable that the economic benefits associated with thetransaction will flow to the Group. Revenue includes the Group's share ofrevenue of jointly controlled operations. Revenue from construction contracts is recognised in accordance with the Group'saccounting policy on construction contracts. Rental income is recognised in theincome statement on a straight-line basis over the term of the lease. Leaseincentives are recognised as an integral part of the total rental income. Construction contracts Where the outcome of a construction contract can be estimated reliably and it isprobable that the contract will be profitable, revenue and costs are recognisedby reference to the stage of completion of the contract activity at the balancesheet date, as measured by the proportion that contract costs incurred for workperformed to date bear to the estimated total contract costs. When it is probable that total contract costs will exceed total contractrevenue, the expected loss is recognised as an expense immediately. Where the outcome of a construction contract cannot be estimated reliably,contract revenue is recognised to the extent of contract costs incurred that itis probable will be recoverable. Construction work in progress is stated at cost plus profit recognised to dateless a provision for foreseeable losses and less progress billings. Costincludes all expenditure related directly to specific projects and an allocationof fixed and variable overheads incurred in the Group's contract activitiesbased on normal operating capacity. Currency translation Transactions in foreign currencies are translated at the foreign exchange rateruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies at the balance sheet date are translated topounds sterling at the foreign exchange rate ruling at that date. Foreignexchange differences arising on translation are recognised in the incomestatement. Exchange differences arising from the translation of the net investment inforeign operations and of related hedges, that have arisen since 1 January 2004,the date of transition to IFRS, are presented as a separate component of equity.They are released into the income statement upon disposal. Translationdifferences that arose before the date of transition to IFRS in respect of allforeign entities are not presented as a separate component. Property, plant and equipment Property, plant and equipment are carried at cost less accumulated depreciationand impairment losses. Where parts of an item of property, plant and equipmenthave different useful lives, they are accounted for as separate items. Costcomprises purchase price and directly attributable costs. Freehold land is notdepreciated. For all other property, plant and equipment, depreciation iscalculated on a straight-line basis to allocate cost less residual values of theassets over their estimated useful lives as follows: Freehold buildings 50 yearsLeasehold buildings Shorter of 50 years or lease termPlant and equipment Remaining useful life (generally 3 - 121/2 years) Taxation The tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on the taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates and laws thathave been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. The carrying amount of deferred tax assets is reviewed at eachbalance sheet date. Such assets and liabilities are not recognised if thetemporary difference arises from the initial recognition of goodwill or otherassets and liabilities (other than in a business combination) in a transactionthat affects neither the taxable profit not the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates and interest in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Leases Leases are classified as finance leases where substantially all the risks andrewards of ownership are transferred to the Group. Finance leases arecapitalised at the inception of the lease at the lower of the fair value of theleased asset and the present value of the minimum lease payments. Leasepayments are apportioned between the liability and finance charge to produce aconstant rate of interest on the finance lease balance outstanding. Assetscapitalised under finance leases are depreciated over the shorter of the usefullife of the asset or the lease term and adjusted for impairment losses. Theinterest expense component of finance lease payments is recognised in the incomestatement using the effective tax rate method. Leases other than finance leases are classified as operating leases. Paymentsmade under operating leases are recognised as an expense in the consolidatedincome statement on a straight-line basis over the lease term. Any incentivesto enter into operating leases are recognised as a reduction of rental expenseover the lease term on a straight-line basis. Operating lease income iscredited to the income statement as it is earned. Inventories Inventories, including land held for and in the course of development, arestated at the lower of cost and net realisable value. Net realisable value isthe estimated selling price in the ordinary course of business, less theestimated costs of completion and selling expenses. Trade and other receivables Trade and other receivables are stated at their cost less impairment loss. Retirement benefit obligations The Group operates a pension scheme providing benefits based on finalpensionable salary. The assets of the scheme are held separately from those ofthe Group. Pension scheme assets are measured using market values. Pension schemeliabilities are measured using a projected unit method and discounted at thecurrent rate of return on a high quality corporate bond of equivalent term andcurrency to the liability. The liability recognised in the balance sheet inrespect of defined benefit pension plans is the present value of the definedbenefit obligation less the fair value of scheme assets at the balance sheetdate. The increase in the present value of the liabilities of the Group's definedbenefit pension scheme expected to arise from employee service in the period ischarged to the profit from operations. The expected return on the scheme'sassets and the increase during the period in the present value of the scheme'sliabilities arising from the passage of time are included in finance income orfinance costs respectively. Actuarial gains and losses are recognised in theconsolidated statement of recognised income and expense. Share based payments The Group operates various equity share option schemes. For equity settledshare options, the services received from employees are measured by reference tothe fair value of the share options. The fair value is calculated at grant dateand recognised in the consolidated income statement, together with acorresponding increase in shareholders' equity, on a straight line basis overthe vesting period, based on an estimate of the number of options that willeventually vest. Vesting conditions, other than market conditions, are nottaken into account when estimating the fair value. IFRS 2 has been applied, in accordance with IFRS 1, to equity settled shareoptions granted after 7 November 2002 and not vested at 1 January 2005. Provisions A provision is recognised in the balance sheet when the Group has a legal orconstructive obligation as a result of a past event and it is probable that anoutflow of economic benefits will be required to settle the obligation. If theeffect is material, provisions are determined by discounting the expected futurecash flows at a pre-tax rate that reflects current market assessments of thetime value of money and, where appropriate, the risks specific to the liability. A provision for onerous contracts is recognised when the expected benefits to bederived by the Group from a contract are lower than the unavoidable cost ofmeeting its obligations under the contract. Financial instruments (accounting policy applicable for periods prior to 1January 2005) The Group protects the sterling value of overseas income and payments, whereappropriate, by means of forward sales and purchase contracts. Profits orlosses arising from these arrangements are accounted for in the period in whichthe contracts are due to mature. Accordingly, no account is taken of unrealisedprofits or losses arising on such forward contracts. Financial instruments (accounting policy applicable from 1 January 2005) Derivative financial instruments are measured at fair value and those utilisedby the Group's treasury operations and its associated investments includeinterest rate and Retail Price Index swaps and forward foreign exchangecontracts. Certain derivative financial instruments are designated as hedges inline with the Group's risk management policies. Hedges are classified asfollows: (a) Fair value hedges that hedge the exposure to changes in the fair value of arecognised asset or liability. (b) Cash flow hedges that hedge exposure to variability in cash flows that iseither attributable to a particular risk associated with a recognised asset orliability or a forecast transaction. (c) Net investment hedges that hedge exposure to changes in the value of theGroup's interests in the net assets of foreign operations. For fair value hedges, any gain or loss from re-measuring the hedging instrumentat fair value is recognised in the consolidated income statement and any gain orloss on the hedged item is adjusted against the carrying amount of the hedgeditem and similarly recognised in the consolidated income statement. For cash flow hedges and net investment hedges, the portion of the gain or losson the hedging instrument that is determined to be an effective hedge isrecognised in shareholders' equity, with any ineffective portion recognised inthe consolidated income statement. When hedged cash flows result in therecognition of a non-financial asset or liability, the associated gains orlosses previously recognised in shareholders' equity are included in the initialmeasurement of the asset or liability. For all other cash flow hedges, thegains or losses that are recognised in shareholders' equity are transferred tothe consolidated income statement in the same period in which the hedged cashflows affect the consolidated income statement. Any gains or losses arising from changes in fair value of derivative financialinstruments not designated as hedges are recognised in the consolidated incomestatement. Borrowings are measured at amortised cost except where they are partof an effective fair value hedge relationship, in which case the carrying valueis adjusted to reflect the fair value movements associated with the hedged risk.Where borrowings are used to hedge the foreign currency risk of the Group'sinterests in the net assets of foreign operations, the portion of the foreigncurrency gain or loss on the borrowings that is determined to be an effectivehedge is recognised in shareholders' equity. Other financial assets are measured as follows: (a) At fair value for available for sale financial assets. Gains and losses arerecognised as a separate component of shareholders' equity except for impairmentlosses, interest and dividends arising from these assets, which are recognisedin the consolidated income statement. (b) At amortised cost for held to maturity financial assets. Trade and otherreceivables are measured at amortised cost less any provision for impairment.Trade and other receivables are discounted when the time value of money isconsidered material. SECTION 3 As set out in section 2 above, the adopted IFRSs that will be effective (oravailable for early adoption) in the annual financial statements for the yearending 31 December 2005 are still subject to change and to additionalinterpretations and therefore cannot be determined with certainty. Accordingly,the accounting policies for that annual period will be determined finally onlywhen the annual financial statements are prepared for the year ending 31December 2005. The primary statements within the financial information contained in thisdocument have been presented substantially in accordance with IAS1 'Presentationof Financial Statements'. However, the format and presentation may requiremodification in the event that further guidance is issued and as practicedevelops. Reconciliations - UK GAAP to IFRS CONSOLIDATED INCOME STATEMENTHalf year ended 30 June 2004 Impact of transition to IFRS Under UK Alcaidesa Joint Ventures/ Financing Under GAAP Associates IFRSNotes (page 11) A B C £m £m £m £m £mRevenue 324.2 324.2 Cost of sales (309.8) (309.8) Gross profit 14.4 14.4 Administrative expenses (9.9) (9.9) Group operating profit 4.5 4.5 Group share of joint ventures 3.4 (2.4) (1.0)operating results Share of profit of joint ventures 0.2 0.2and associates Profit of operations 7.9 (2.4) (0.8) 4.7 Other finance charges (0.5) 0.5Net interest 0.7 0.5 (1.2) Finance income 11.9 11.9Finance costs (11.2) (11.2) Profit before tax 8.1 (2.4) (0.3) - 5.4 Taxation (1.7) 0.5 0.3 - (0.9) Profit for the period 6.4 (1.9) - - 4.5 Attributable to:Equity holders of the parent 6.4 (1.9) - - 4.5Minority interests - - - - - Earnings per share - basic 1.8p (0.5p) - - 1.3pEarnings per share - diluted 1.8p (0.5p) - - 1.3p CONSOLIDATED INCOME STATEMENTYear ended 31 December 2004 Impact of transition to IFRS Under UK GAAP Alcaidesa Joint Financing Under IFRS Ventures/ AssociatesNotes (page 11) A B C £m £m £m £m £mRevenue 673.2 673.2 Cost of sales (645.0) (645.0) Gross profit 28.2 28.2 Administrative expenses (18.0) (18.0) Group operating profit 10.2 10.2 Group share of joint ventures 8.9 (9.2) 0.3operating results Group share of associates (0.2) 0.2operating results Share of profit of joint (0.9) (0.9)ventures and associates Profit from operations 18.9 (9.2) (0.4) 9.3 Other finance charges (1.1) 1.1Net interest 1.7 0.6 (2.3) Finance income 22.9 22.9Finance costs (21.7) (21.7) Profit before tax 19.5 (9.2) 0.2 - 10.5 Taxation (4.3) 2.8 (0.2) - (1.7) Profit for the period 15.2 (6.4) - - 8.8 Attributable to:Equity holders of the parent 15.2 (6.4) - - 8.8Minority interests - - - - - Earnings per share - basic 4.3p (1.8p) - - 2.5pEarnings per share - diluted 4.3p (1.8p) - - 2.5p Changes in Accounting Policies - Income Statement Explanatory notes on the impact of IFRS adjustments to the consolidated incomestatement A IAS 18 Revenue Recognition Alcaidesa, the Group's Spanish property development interest, has sold parcelsof land that were subject to the completion of certain infrastructure. Salesand profits in respect of such developments were recognised on exchange ofcontract with costs to complete on the infrastructure element recognisedaccordingly. Under IFRS, these developments fall within the scope of IAS 18, where referenceis specifically made to situations where the seller is obliged to performsubstantial acts to complete under the contract. Revenue and thus profit inrespect of such acts should be recognised only when the act is performed. Given the specific circumstances existing within these developments we considerthat the appropriate treatment under IFRS is to view these arrangements, whereseparable, as two transactions, firstly the sale of the land and secondly theprovision of the infrastructure. In such circumstances, revenue and profit arerecognised on the land sale element of each transaction on exchange of legaltitle and when all conditions for revenue recognition under IAS 18 are met. Inrespect of the infrastructure, the proportion of revenue and profit related tothe provision of these facilities is deferred until such works are complete. The impact of IAS 18 has been to defer the amount of profit shown within theGroup's share of profits from joint ventures and associates. Profit after taxfor the six months to 30 June 2004 and 12 months to 31 December 2004 has reducedby £1.9m and £6.4m respectively. B IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures Under UK GAAP, the group share of operating profits of associates was presentedon the face of the income statement after group operating profit. The groupshare of interest and tax of associates was included within the relevant Grouptotals. Under IFRS, the Group share of profit after tax of associates ispresented on the face of the income statement after Group operating profit. C IAS 1 Income Statement Reclassifications and IAS 19 Retirement Benefit Obligations There are a number of reclassifications between income statement and balancesheet captions that arise from the application of various IFRS. Under IFRS theexpected return on assets of the pension scheme and interest income are shown asfinance income and the interest on pension scheme liabilities and interest andfinance charges payable are shown as finance costs. SECTION 4 CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSEHalf year ended 30 June 2004 Under UK GAAP Alcaidesa Under IFRSNotes (page 11) A £m £m £mExchange differences on (1.2) (1.2)translation of foreign operationsActuarial losses on defined - -benefit pension schemes (net oftax)Net expense recognised directly in (1.2) (1.2)equity Profit for the period 6.4 (1.9) 4.5 Total recognised income and 5.2 (1.9) 3.3expense in the period Attributable to:Equity holders of the company 5.2 (1.9) 3.3Equity minority interests - - - CONSOLIDATED STATEMENTS OF RECOGNISED INCOME AND EXPENSEYear ended 31 December 2004 Under UK GAAP Alcaidesa Under IFRSNotes (page 11) A £m £m £mExchange differences on (0.2) (0.2) (0.4)translation of foreignoperationsActuarial losses on defined (16.0) (16.0)benefit pension schemes (net oftax)Net expense recognised directly (16.2) (0.2) (16.4)in equity Profit for the period 15.2 (6.4) 8.8 Total recognised income and (1.0) (6.6) (7.6)expense in the period Attributable to:Equity holders of the company (1.0) (6.6) (7.6)Equity minority interests - - - SECTION 5 CONSOLIDATED BALANCE SHEETAs at 1 January 2004 (Transition) Impact of transition to IFRS Under UK Reclassified Pension Translation Intangible P&L Under GAAP Reserve Assets Reserves IFRSNotes (pages 16-17) A B/C D E F £m £m £m £m £m £m £mASSETSNon-current assetsProperty, plant & equipment 4.9 (0.2) 4.7Intangible assets 0.2 0.2Other debtors 3.2 3.2Deferred tax assets 2.6 23.5 26.1Investments in associatesInvestments in jointly 17.6 (0.8) 16.8controlled entitiesLoans to jointly controlled 2.5 2.5entitiesLoans to associatesOther investments 1.0 1.0Total non-current assets 26.0 5.8 23.5 - - (0.8) 54.5 Current assetsInventories 1.6 1.6Trade and other receivables 122.4 (5.8) 116.6Cash & short term deposits 72.0 72.0Total current assets 196.0 (5.8) - - - - 190.2Total assets 222.0 - 23.5 - - (0.8) 244.7 EQUITYShare capital 34.5 34.5Share premium 119.4 119.4Cum. translation reserveRetained earnings (190.6) (0.4) (0.8) (191.8)Minority interest 0.1 0.1Total equity (36.6) - (0.4) - - (0.8) (37.8) LIABILITIESNon-current liabilitiesInterest bearing loans and 0.9 0.9borrowingsRetirement benefit 54.5 23.9 78.4obligationsOther payables 1.7 1.7Non current tax liabilitiesLong term provisions 3.8 3.8Total non-current 57.1 3.8 23.9 - - 84.8liabilities Current liabilitiesTrade and other payables 193.9 193.9Interest bearing loans and 0.5 0.5borrowingsProvisions and other 7.1 (3.8) 3.3liabilitiesTotal current liabilities 201.5 (3.8) - - - - 197.7Total liabilities 258.6 - 23.9 - - - 282.5Total equity and liabilities 222.0 - 23.5 - - (0.8) 244.7 CONSOLIDATED BALANCE SHEETAs at 30 June 2004 Impact of transition to IFRS Under UK Reclassified Pension Translation Intangible P&L Under GAAP Reserve Assets Reserves IFRSNotes (pages 16-17) A B/C D E F £m £m £m £m £m £m £mASSETSNon-current assetsProperty, plant & equipment 4.5 (0.2) 4.3Intangible assets 0.2 0.2Other debtors 5.9 5.9Deferred tax assets 2.0 23.5 25.5Investments in associatesInvestments in jointly 19.1 (2.7) 16.4controlled entitiesLoans to jointly controlled 2.5 2.5entitiesLoans to associatesOther investments 1.0 1.0Total non-current assets 27.1 7.9 23.5 - - (2.7) 55.8 Current assetsInventories - -Trade and other receivables 150.4 (7.9) 142.5Cash and short term deposits 66.8 66.8Total current assets 217.2 (7.9) - - - - 209.3Total assets 244.3 - 23.5 - - (2.7) 265.1 EQUITYShare capital 35.3 35.3Share premium 119.5 119.5Cum. translation reserve (1.2) (1.2)Retained earnings (185.4) (0.4) 1.2 (2.7) (187.3)Minority interest 0.1 0.1Total equity (30.5) - (0.4) - - (2.7) (33.6) LIABILITIESNon-current liabilitiesInterest bearing loans and 0.7 0.7borrowingsRetirement benefit 54.1 23.9 78.0obligationsOther payablesNon current tax liabilitiesLong term provisions 4.2 4.2Total non-current 54.8 4.2 23.9 - - - 82.9liabilities Current liabilitiesTrade and other payables 211.8 211.8Interest bearing loans and 0.4 0.4borrowingsProvisions and other 7.8 (4.2) 3.6liabilitiesTotal current liabilities 220.0 (4.2) - - - 215.8Total liabilities 274.8 - 23.9 - - 298.7Total equity and liabilities 244.3 - 23.5 - (2.7) 265.1 CONSOLIDATED BALANCE SHEETAs at 31 December 2004 Impact of transition to IFRS Under UK Reclassified Pension Translation Intangible P&L Under IFRS GAAP Reserve Assets ReservesNotes (pages 16-17) A B/C D E F £m £m £m £m £m £m £m ASSETS Non-current assets Property, plant & equipment 5.4 (0.5) 4.9 Intangible assets 0.5 0.5 Other debtors 5.7 5.7 Deferred tax assets 1.7 29.9 31.6 Investments in associates Investments in jointly 19.0 (7.4) 11.6 controlled entities Loans to jointly controlled 2.6 2.6 entities Loans to associates 2.7 2.7 Other investments 1.0 1.0 Total non-current assets 30.7 7.4 29.9 - - (7.4) 60.6 Current assets Inventories 1.0 1.0 Trade and other receivables 159.7 (7.4) 152.3Cash and short term deposits 64.1 64.1 Total current assets 224.8 (7.4) - - - - 217.4 Total assets 255.5 - 29.9 - - (7.4) 278.0 EQUITY Share capital 35.3 35.3 Share premium 119.5 119.5 Cum. translation reserve (0.2) (0.2) (0.4) Retained earnings (191.6) (0.4) 0.2 (7.2) (199.0) Minority interest 0.1 0.1 Total equity (36.7) - (0.4) - - (7.4) (44.5) LIABILITIES Non-current liabilities Interest bearing loans and 0.5 0.5 borrowings Retirement benefit 69.2 30.3 99.5 obligations Other payables 3.0 3.0 Non current tax liabilities Long term provisions 3.1 3.1 Total non-current 72.7 3.1 30.3 - - - 106.1 liabilities Current liabilities Trade and other payables 214.3 214.3 Interest bearing loans and 1.0 1.0 borrowings Provisions and other 4.2 (3.1) 1.1 liabilities Total current liabilities 219.5 (3.1) - - - - 216.4 Total liabilities 292.2 - 30.3 - - - 322.5Total equity and liabilities 255.5 - 29.9 - - (7.4) 278.0 Changes in Accounting Policies - Balance Sheet Explanatory notes on the impact of IFRS adjustments to the consolidated balancesheet at 31 December 2004 A IAS 1 Current/non current assets and liabilities An entity must present current and non-current assets and current andnon-current liabilities as separate classifications on the face of the balancesheet in accordance with IAS 1. Non-current receivables have been reclassified on the face of the balance sheetas non-current assets and provisions have been reallocated to non-currentliabilities. A distinction between current and non-current assets and liabilities arisingfrom post-employment benefits is not required. In practice assets andliabilities relating to defined benefit plans generally are classified asnon-current (IAS 19). Assets and liabilities relating to definedcontribution plans normally are current and are classified as such. B IAS 19 Employee benefits Costain Group PLC adopted early the amendments to FRS 17 for UK GAAP reportingand has recognised the defined benefit pension plan liability (based on theprojected unit credit method) in full as at 31 December 2003. The Group hasnominated to recognise any actuarial gains or losses in the statement ofrecognised income and expense. There are no significant accounting differencesbetween FRS 17 and IAS 19 in relation to accounting for defined benefit pensionliabilities where the company has nominated to recognise actuarial lossesdirectly in equity. However, the finance cost on the pension plan liabilitieswill be shown separately as a finance cost and the expected return on planassets will be shown as finance income. The Group intends to have actuarial updates at each half-year for the definedbenefit pension plan and a full actuarial review at least every 2 years asrequired by the trust deed. IAS 19 requires employee benefit schemes' financial assets to be valued at fairvalue. For relevant financial assets this means the bid price whereas FRS 17specifies using mid market price. This has the effect of reducing asset valuesand thereby increasing the deficit by £0.6m. C IAS 12 Income taxes Costain Group has a significant defined benefit pension scheme liability. UnderUK GAAP this has given rise to a deferred tax asset based on the company's UKcorporation tax rate, which has been netted against the defined benefit pensionscheme liability. IAS 12 requires that the deferred tax asset be grouped withother deferred tax assets. Deferred tax assets relating to retirement benefit obligations have beenreclassified from non-current liabilities to non-current assets. D IAS 21 The effects of changes in foreign exchange rates UK GAAP requires exchange differences on a monetary item forming part of areporting entity's net investment in a foreign operation to be taken to theSTRGL. Under IFRS, IAS 21 requires such exchange differences to be recognised ina separate component of equity in the reporting entity's consolidated financialstatements. Cumulative translation differences on foreign operations are deemed to be zeroat 1 January 2004 (as per transitional options of IFRS 1 detailed in Section 2).A £0.2m exchange difference relating to 2004 has been moved from retainedreserves to a cumulative translation reserve. E IAS 38 Intangible assets Under UK GAAP, computer software costs attributable to major business systemsimplementations and material software licenses were capitalised as property,plant and equipment. Under IFRS, software development, purchased software andsoftware licences should be classified as an intangible asset. At 31 December 2004, under IFRS, computer software of £0.5m has beenreclassified from property, plant and equipment to intangible assets. F IAS 18 Reserve Movement The income statement IFRS adjustment required for Alcaidesa revenue recognition(as explained in Section 3A) causes a reduction in the carrying value of jointventure net assets of £0.8m at 1 January 2004, £2.7m at 30 June 2004 and £7.4mat 31 December 2004. Others - no financial impact in comparative periods IFRS 2 Share based payments Under UK GAAP, a provision was recognised for cash settled options based onintrinsic value at the balance sheet date. Costain Group has long-term incentive plans for several directors and keyemployees under which share options have been issued and, subject to certainperformance conditions, will vest to the relevant option holders over a periodof 3 years. The Group also has Save-As-You-Earn schemes under which optionswere granted to UK employees. In accordance with IFRS 2, the Group is requiredto recognise an expense for options granted after 7 November 2002 that have notvested as at 1 January 2005. The options have been valued at the date of grant and an expense recognised overthe period that the service benefit is to be provided by the employees under theterms of the schemes. At 31 December 2004, under IFRS, the charge for equity settled options isimmaterial and charges will commence in 2005. SECTION 6 CONSOLIDATED CASH FLOW STATEMENTFor the year to 31 December 2004 Impact of transition to IFRS Under UK GAAP Alcaidesa Under IFRS £m £m £mCash flows from operating activities Profit for the period 15.2 (6.4) 8.8Adjustments for:Depreciation 1.1 1.1Investment income (22.9) (22.9)Interest expense 22.3 22.3Share of profit of associates (8.7) 6.4 (2.3)Tax expense 4.3 4.3Operating profit before changes in working 11.3 - 11.3capital and provisions