Homeserve plc. Transition to International Financial Reporting Standards

Transcription

1 Homeserve plc Transition to International Financial Reporting Standards 28 November

2 Transition to International Financial Reporting Standards ( IFRS ) Homeserve is today announcing its interim results for the six months to 30 September This report provides additional information on the Group s conversion to International Financial Reporting Standards including the transition adjustments for the opening balance sheet at 1 April 2004, the six months to 30 September 2004, and the year ended 31 March These documents are available on our website 1. Introduction During 2002, the European Union (EU) approved an Accounting Regulation requiring all EU listed companies to follow International Financial Reporting Standards ( IFRS ) in their consolidated financial statements for financial years commencing on or after 1 January In accordance with these requirements, Homeserve plc (the Group ) will adopt IFRS in its financial statements for the year ending 31 March These financial statements will include comparatives for the year ended 31 March 2005 restated under IFRS. The Group is required to report under IFRS for the first time in its interim results for the six months ended 30 September 2005, with comparatives for the six months ended 30 September There is no change to the Group s cash flows under IFRS. Restatements and changes in presentation arise primarily as a result of: routine goodwill amortisation no longer being charged; reclassification of certain assets from goodwill to intangible assets; recognition of all employee benefit related assets and obligations, principally defined benefit pension schemes; inclusion of a fair value charge in relation to share-based payment; recognition of dividend liability when approved; changes to the recognition of deferred tax; and reclassification and valuation of operations held for disposal at 1 April 2004 and 30 September The restatements result in: an increase of 28.5m in profit for the year ended 31 March 2005 to 7.2m, and an increase of 17.4m for the six months ended 30 September 2004 to 0.1m; and an increase of 16.6m in net assets at 31 March 2005 to 176.9m; and a 3.0m increase in net assets at 30 September 2004 to 167.9m. However, in respect of the continuing operations at 31 March 2005, the profit before tax, exceptional operating costs and amortisation of goodwill and intangibles under UK GAAP of 42.0m is reduced by 0.1m, principally as a result of the recognition of the fair value of share based payments, offset by a one off reduction in the pension charge under IAS Summary This report explains how the Group s previously reported financial performance and position under UK GAAP are reported under IFRS. This includes, on an IFRS basis: the Group s consolidated balance sheet at 1 April 2004, the Group s date of transition to IFRS; the Group s consolidated balance sheets at 30 September 2004 and 31 March 2005; and 2

3 the Group s consolidated income statement for the year ended 31 March 2005 and the six months ended 30 September The significant changes as a result of the adoption of IFRS are discussed below, and the detailed restatements of the financial results follow on pages 10 to 15 and 25 to 28. The Group s significant accounting policies under IFRS are set out in section 9. For the year ended 31 March 2006 the Company will be required to prepare consolidated financial statements under International Accounting Standards as adopted by the European Commission. These will be those International Accounting Standards, International Financial Reporting Standards and related Interpretations (SIC-IFRIC interpretations), subsequent amendments to those standards and related interpretations, future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB) that have been endorsed by the European Commission. This process is ongoing and the Commission has yet to endorse certain standards issued by the IASB. In particular the Commission: have not given a final approval to an amendment to IAS 19 Employee benefits which would allow companies choosing to charge the whole of their actuarial gain or loss through a Statement of Total Recognised Income and Expense rather than the Income Statement.; endorsed a version of IAS 39 Financial instruments - recognition and measurement that differed from that issued by the IASB in two respects (the so-called 'carve-out'): the endorsed version of IAS 39 removes the option in the IASB version to fair value certain financial liabilities; and the endorsed version of IAS 39 widens the range of circumstances in which hedge accounting may be applied. The company has taken advantage of these provisions and therefore will comply with both versions of IAS 39. The preliminary opening balance sheet, IFRS comparatives for 2004/5 and GAAP reconciliation between UK and IFRS has been prepared by management using its best knowledge of the expected standards and interpretations of the International Accounting Standards Board, facts and circumstances, and accounting policies that will be applied when the company prepares its first complete set of IFRS financial statements as at 31 March, Therefore, until such time, the possibility cannot be excluded that the accompanying preliminary opening balance sheet may require adjustment before constituting the final opening balance sheet. Moreover, under IFRSs, only a complete set of financial statements comprising a balance sheet, income statement, statement of changes in equity, cash flow statement, together with comparative financial information and explanatory notes, can provide a fair presentation of the Company s financial position, results of operations and cash flow. The report also includes the independent auditors (Deloitte & Touche LLP) report to the Group in relation to the reconciliations between UK GAAP and IFRS of the consolidated balance sheets at 1 April 2004 and 31 March 2005 and the consolidated income statement for the year ended 31 March Demerged Water Supply Operation The Group s Water Supply operation was demerged on 6 April 2004 and hence the balance sheets of those companies are included in the Group s consolidated balance sheet at the date of transition. As a result, the balance sheet of the Water Supply operation has been restated under IFRS for the purposes of determining the adjustments required to the Group s consolidated balance sheet. 3

4 The details of the adjustments required are described in section 5 below. adjustments relate to: The principal reversal of discounts relating to deferred tax; revaluation of infrastructure assets; recognition of defined benefit pension scheme liabilities; and reversal of previous losses incurred by the joint venture. Of the total Group adjustment to equity at 1 April 2004 of 22.9m noted in section 6, the analysis between the demerged Water Supply operation and the remainder of the Group at that date is as follows: m Net assets under UK GAAP IFRS adjustment of Group (excluding Water Supply operation) (5.0) IFRS adjustment of Water Supply operation 27.9 Net assets under IFRS IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 1 establishes the transitional requirements for the preparation of financial statements in accordance with IFRS for the first time. The general principle is that the IFRS effective at the firsttime adoption reporting date (31 March 2006 for the Group) are to be applied retrospectively to the opening IFRS balance sheet (1 April 2004), the comparative period (year ended 31 March 2005) and the reporting period (year ended 31 March 2006). Outlined below is the Group s position in relation to key exemptions and exceptions that are available under IFRS. Share-based Payment IFRS 2 has only been applied to grants of equity instruments after 7 November 2002 that had not vested as at 1 January Accordingly, IFRS 2 has not been applied to the grants of equity instruments before 7 November 2002 or for those instruments that have vested or lapsed prior to 1 January Employee benefits Under IAS 19 Employee Benefits, the Group is required to reflect its obligations or surpluses under defined benefit pension schemes on the balance sheet. The Group has elected under IFRS 1 to recognise all cumulative actuarial gains and losses on defined benefit pension schemes at the date of transition to IFRS. On transition to IFRS, the Group has recognised the full IAS 19 liability in respect of Homeserve s share of the Water Companies Associations Pension Scheme. 4

5 Business combinations The Group has adopted the exemption not to apply IFRS 3 Business Combinations in respect of acquisitions occurring prior to 1 April Accordingly, the Group will adopt IFRS 3 to the extent that it applies to acquisitions post 1 April 2004 only. Acquisitions before that date will be recorded as under UK GAAP. Cumulative translation differences The Group has adopted the exemption to set cumulative translation differences for all foreign operations to zero at 1 April The gain or loss on a subsequent disposal of any foreign operation will exclude translation differences that arose before 1 April 2004, but will include later translation differences. 5

6 5. Key IFRS adjustments and their impact on the financial statements IAS 31 Interests in Joint Ventures Under UK GAAP, our investment in jointly controlled entities ( Joint-Ventures ) were accounted for under the gross equity method with the Group s share of Joint Ventures interest and tax included within the headings of interest and tax in the profit and loss account. IAS 31 requires that interests in Joint Ventures are recognised using either the proportionate consolidation or the equity method of accounting. This is a change from the gross equity method required under UK GAAP. The Group has elected to recognise its interest in Joint Ventures using the equity method of accounting. Accordingly, the presentation of the results from Joint Ventures will change, as the result from Joint Ventures after interest and tax is presented as a single line within the Group s profit before taxation. In addition, provision for the Group s share of Joint Venture losses are not recognised under IFRS if the recognition of such losses reduces the Group s share of the Joint Venture s net assets below zero. This is a change to UK GAAP. The provision previously recorded under UK GAAP is reversed, with a corresponding increase in equity, such that the Group s reported share of the Joint Venture s net liabilities is nil. No amounts are reported in the income statement in respect of the results of Joint Ventures until such time as the cumulative losses have sufficiently reduced such that the joint venture s net assets are positive. The de-recognition of the provision for Joint Venture losses increases equity by 0.7m as at 1 April 2004, 0.5m as at 30 September 2004 and 0.4m as at 31 March IFRS 3 Business Combinations IFRS prohibits the amortisation of goodwill as it is considered to have an indefinite life. Instead, it is reviewed for impairment annually. The goodwill amortisation charge under UK GAAP of 10.4m for the year ended 31 March 2005 and 4.8m for the six months ended 30 September 2004 has been reversed in the IFRS restated results. We have undertaken an impairment review at 1 April 2004 and 31 March 2005 in accordance with IAS 38- Intangible Assets. No impairment of goodwill was identified. IAS 38 Intangible Assets Franchise assets, customer databases and customer contracts which meet the criteria of identifiable non-monetary assets are classified as intangible assets in accordance with IAS 38. The effect of this is to reclassify assets from goodwill, in respect of acquisitions post 1 April 2004, to other intangible assets of 4.1m as at 31 March 2005 and 0.7m as at 30 September Net assets are not affected by this adjustment. The amortisation charge relating to these assets was 0.3m for the year ended 31 March 2005 and 0.1m for the six months ended 30 September IAS 38 requires software applications or licences that are not an inherent part of the IT hardware, for example the operating system, to be recognised as an intangible asset. The effect of this is to reclassify assets from fixed assets to other intangible assets of 3.9m as at 31 March 2005, 3.0m as at 30 September 2004 and 2.7m at 31 March Net assets are not affected by this adjustment. 6

7 IAS 19 Employee Benefits IAS 19 covers all forms of employee benefit, but the major impact for the Group is with regard to accounting policies for defined benefit pension schemes. Under IAS 19 the Group will recognise a liability on the balance sheet in respect of defined benefit pension schemes and reduce equity by a corresponding amount. The Group intends to apply the option within the Amendment to IAS 19 that allows for immediate recognition of all actuarial gains and losses in the period in which they occur, outside of the income statement, and presented in the statement of recognised income and expense. The current and past service pension costs will be presented as a charge to Profit from Operations. The unwinding of the discount of pension liabilities and expected return on pension assets will be presented as a financing item. The recognition of the Group s pension liabilities on the balance sheet results in a liability of 12.8m at 1 April 2004, 2.6m at 31 March 2005 and 2.5m at 30 September The impact on the income statement for the year ended 31 March 2005 is an increase in profit before tax of 0.4m and an increase of 0.1m for the six months ended 30 September IAS 10 Events After the Balance Sheet Date Under IAS 10, dividends declared after the balance sheet date are not recognised as a liability at the balance sheet date. Dividends are recorded in the Group s consolidated financial statements in the period in which they are approved by the Group s shareholders. The dividends proposed, but not approved, at the balance sheet date have been reversed from the financial statements. This has the effect of increasing the net assets of the Group by the amount of the proposed dividend of 8.9m as at 1 April 2004, 6.8m as at 31 March 2005 and 3.2m as at 30 September In addition, dividends are no longer reported within the income statement, but rather directly within equity. IFRS 2 Share-based Payment IFRS 2 Share-based Payment requires the recognition of an expense in relation to all sharebased payments such as the Group s share and share option schemes. The Group issues equity-settled share-based payments to certain employees and operates an Inland Revenue approved Save As You Earn share option scheme open to eligible employees which allows the purchase of shares at a discount to the market value. These are measured at fair value at the date of grant. The fair value is expensed on a straight-line basis over the vesting period, based on the Group s estimate of shares that will eventually vest. Fair value is measured by use of the Black Scholes or Monte Carlo Simulation models depending on the type of scheme. The IFRS 2 charge for the year ended 31 March 2005 was 1.0m and, after reversing the amortisation of shares held in the ESOP reserve of 0.5m under UK GAAP, the net effect is to reduce profit before tax by 0.5m for the year ended 31 March 2005 and 0.4m for the six months ended 30 September

8 IAS 12 Income Taxes Under IAS 12, deferred tax is recognised in respect of nearly all taxable temporary timing differences arising between the tax base and the accounting book value of balance sheet items. This results in deferred tax being recognised on certain timing differences that would not have given rise to deferred tax under UK GAAP. Under IFRS, a deferred tax balance is recognised in a business combination for any difference between the fair value of an acquired asset and its equivalent tax base. In recent years the Group has acquired certain assets that have fair value which is in excess of their tax base. Accordingly, the Group has recognised an incremental deferred tax liability of 0.6m at April 2004, 1.5m at 31 March 2005 and 0.7m at 30 September Under IFRS, deferred tax liabilities cannot be discounted as permitted by UK GAAP. The Group has historically adopted a policy of discounting and hence this represents a significant difference at the date of transition. However, as the deferred tax liability, and related discount, at the date of transition principally related to the demerged water supply operation, no significant continuing impact arises. The impact of IAS12 on the closing reserves in each period is summarised in the table below. Deferred tax asset/(liability) m March 04 Sept 04 March 05 Acquired properties and intangibles (0.6) (0.7) (1.5) Actuarial loss on defined benefit pension scheme De-recognition of deferred tax discounts (8.1) (0.3) (0.1) Share scheme charges (4.3) IAS 16 Property, Plant and Equipment There is no impact of IAS 16 on the continuing operations of the Group. However, at 1 April 2004 the assets of South Staffordshire Water plc, a subsidiary undertaking at that time which was part of the demerged Water Supply operation, included infrastructure assets, amounting to 49.5m. The methodology used by all water companies under UK GAAP to account for infrastructure assets is not consistent with IFRS and hence restatement is required. At 1 April 2004 the adjustment to infrastructure assets results in an increase in property, plant and equipment of 38.2m with a corresponding increase in equity. IFRS 5 Non Current Assets Held for Sale and Discontinued Operations During the year ended 31 March 2005 The Group demerged its Water Supply operation and disposed of all of its Commercial Outsourcing businesses. All of the above businesses have been presented as discontinued operations for all periods reported, consistent with UK GAAP. However, the presentation of the results of discontinued operations is significantly different under IFRS. In accordance with IFRS 5, the results after tax of the discontinued operations are presented as a single line item in the restated income statements for all periods reported. 8

9 In addition, the assets and liabilities of the Commercial Outsourcing businesses, many of which met the definition of a disposal group at 1 April 2004, have been restated to the lower of the carrying amount and fair value less costs to sell, as at 1 April In addition, they are separately disclosed as assets and liabilities held for disposal as at 1 April 2004 and 30 September The impact of these adjustments is to reduce equity at 1 April 2004 by 7.8m and reduce the reported loss on disposal in the year ended 31 March 2005 by an equivalent amount. By 31 March 2005, there is no cumulative difference in equity as a result of applying IFRS 5. 9

10 6. 1 April 2004 presentational changes, and equity reconciliation a) Impact of IAS 1 Presentation of Financial Statements on the consolidated balance sheet as at 1 April 2004 This table highlights the presentational impact of IFRS on the consolidated balance sheet as at 1 April Assets, liabilities and shareholders funds are stated under UK GAAP values and format, and are mapped from this starting position to the line item classification required under IFRS. The restated April 2004 column represents UK GAAP values presented in an IFRS format. UK GAAP IAS 1 UK GAAP presented under IAS 1 1 April Presentational 1 April 2004 changes 2004 UK GAAP values and format '000 '000 '000 UK GAAP values, IFRS format Fixed assets Non-current assets Goodwill 108, ,223 Goodwill Tangible assets 186, ,242 Property, plant and equipment Interests in Joint Ventures - (674) (674) Interests in Joint Ventures 294,465 (674) 293,791 Current assets Current assets Stocks 6,887 6,887 Inventories Debtors 90,221 90,221 Trade and other receivables Cash at bank and in hand 10,497 10,497 Cash and cash equivalents 107, , ,070 (674) 401,396 Total assets Creditors - amounts falling due within one year Current liabilities Borrowings (11,355) 11,355 - Other creditors (120,909) 120,909 - (111,895) (111,895) Trade and other payables (9,014) (9,014) Tax liabilities (1,586) (1,586) Obligations under finance leases (9,769) (9,769) Bank overdrafts and loans (132,264) Net current liabilities (24,659) - (24,659) Net current liabilities Total assets less current liabilities 269,806 Creditors - amounts falling due after more than one year Borrowing (92,649) 92,649 - Other creditors (4,138) 4,138 - Provisions for liabilities and charges (10,301) 10,301 Accruals and deferred income (19,552) 19,552 Non-current liabilities (89,574) (89,574) Interest-bearing loans (23,690) (23,690) Other financial liabilities (9,627) (9,627) Deferred tax liabilities (3,075) (3,075) Obligations under finance leases (125,966) 674 (258,230) Total liabilities Net assets 143, ,166 Total assets less total liabilities Capital and reserves Equity Share capital 6,366 6,366 Share capital Share premium 18,902 18,902 Share premium account Capital redemption reserve 1,200 1,200 Capital redemption reserve Profit and loss account 110, ,532 Retained earnings Equity shareholders' funds 137, ,000 Minority shareholders' equity interests 6,166 6,166 Minority shareholders' equity interests 143, ,166 10

11 b) Reconciliation of equity at 1 April 2004 This table highlights the financial impact of the IFRS adjustments on the consolidated balance sheet as at 1 April UK GAAP presented under IAS 1 IFRS 2 Share based payments IAS 10 IFRS 5 Events after Discontinued the balance operations sheet date IAS 12 Income taxes IAS 16 Property, plant & equipment IAS 19 Employee benefits IAS 31 Interests in joint ventures IAS 38 Intangible assets IFRS '000 '000 '000 '000 '000 '000 '000 '000 '000 '000 Non-current assets Goodwill 108,223 - (14,214) ,009 Property, plant and equipment 186,242 - (9,488) , (2,736) 212,218 Other intangible assets ,736 2,736 Interests in Joint Ventures (674) ,791 - (23,702) , ,963 Current assets Inventories 6,887 - (2,331) ,556 Trade and other receivables 90,221 - (8,951) ,270 Cash and cash equivalents 10,497 - (3,596) , ,605 - (14,878) ,727 Non-current assets classified as held for sale , ,580 Total assets 401, , ,270 Current liabilities Trade and other payables (111,895) - 9,760 8, (93,261) Tax liabilities (9,014) (9,014) Obligations under finance leases (1,586) (1,586) Bank overdrafts and loans (9,769) (9,769) (132,264) - 9,760 8, (113,630) Net current liabilities (24,659) - (5,118) 8, (20,903) Non-current liabilities Interest-bearing loans (89,574) (89,574) Other financial liabilities (23,690) (23,690) Retirement benefit obligation (12,810) - - (12,810) Deferred tax liabilities (9,627) (8,659) - 3, (13,858) Obligations under finance leases (3,075) (3,075) (125,966) (8,659) - (8,967) - - (143,007) Liabilities directly associated with noncurrent assets classified as held for sale - - (17,580) (17,580) Total liabilities (258,230) 585 (7,820) 8,874 (8,659) - (8,967) - - (274,217) Net assets 143, (7,820) 8,874 (8,659) 38,200 (8,967) ,053 Equity Share capital 6, ,366 Share premium account 18, ,902 Share incentive reserve Capital redemption reserve 1, ,200 Retained earnings 110, (7,820) 8,874 (8,659) 38,200 (8,967) ,183 Equity attributable to equity holders of the parent 137, (7,820) 8,874 (8,659) 38,200 (8,967) ,887 Minority shareholders' equity interests 6, ,166 Total equity 143, (7,820) 8,874 (8,659) 38,200 (8,967) ,053 11

12 7. 31 March 2005 presentational changes, and equity and profit reconciliations a) Impact of IAS 1 Presentation of Financial Statements on the consolidated profit and loss account for the year ended 31 March 2005 This table highlights the presentational impact of IFRS on the consolidated profit and loss account for the year ended 31 March Income and expense are stated under UK GAAP values and format, and are mapped from this starting position to the line item classification required under IFRS. The restated March 2005 column represents UK GAAP accounting policy balances presented in an IFRS format. UK GAAP IAS 1 UK GAAP presented under IAS 1 March Presentational March 2005 changes 2005 UK GAAP values and format '000 '000 '000 UK GAAP values, IFRS format Turnover Continuing operations (inc acqs) 223,086 (2,375) 220,711 Discontinued operations 60,179 (60,179) - 283,265 Less share of Joint Ventures' turnover Continuing operations (2,375) 2,375 - Discontinued operations (2,375) Group turnover 280,890 (60,179) 220,711 Revenue Operating costs including goodwill amortisation Continuing operations (190,466) 2,787 (187,679) Operating costs Discontinued operations (59,420) 59,420 - (249,886) Other operating income/(expenses) - Share of Joint Ventures operating profit Continuing operations 5 (23) (18) Share of results in joint ventures Discontinued operations - Total operating profit: Group and share of joint ventures Continuing operations 30,250 Discontinued operations ,009 Exceptional costs - loss on disposal of subsidiaries (39,149) 36,362 (2,787) Exceptional costs (8,140) 38,367 30,227 Profit from operations Net interest payable Investment income Continuing operations (343) (513) (856) Finance costs Discontinued operations (140) (483) (Loss)/profit on ordinary activities before taxation Continuing operations 29,907 Discontinued operations (38,530) (8,623) 38,530 29,907 Profit before tax Taxation on (loss)/profit on ordinary activities Continuing operations (12,187) (12,187) Tax Discontinued operations (502) (12,689) 17,720 Profit for the period from continuing operations Discontinued operations (39,032) Loss for the period from (39,032) discontinued operations (Loss)/profit on ordinary activities after taxation (21,312) - (21,312) Profit for the period Attributable to: (21,312) Equity holders of the parent Minority interest Loss for the financial period (21,312) - (21,312) Loss for the financial period Dividends paid and proposed (10,033) Dividend in specie (28,522) Retained (loss)/profit (59,867) 12

13 b) Reconciliation of the income statement for the year ended 31 March 2005 This table highlights the financial impact of the key IFRS adjustments on the consolidated income statement for the year ended 31 March UK GAAP IFRS 2 IFRS 3 IFRS 5 SIC 15 IAS 19 IAS 31 IAS 12 Interests in IAS 38 presented Share based Business Discontinued Lease Employee Income joint Intangible under IAS 1 payments combinations operations incentives benefits taxes ventures assets IFRS '000 '000 '000 '000 '000 '000 '000 '000 '000 '000 Revenue 220, ,711 Operating costs (187,679) (454) 9,321 - (22) (310) (178,782) Share of results in Joint Ventures (18) Exceptional costs (2,787) (2,787) Profit from operations 30,227 (454) 9,321 - (22) (310) 39,142 Investment income Finance costs (856) (856) Profit before tax 29,907 (454) 9,321 - (22) (310) 38,822 Tax (12,187) (109) (11,818) Profit for the period from continuing operations 17,720-9,321 - (15) (310) 27,004 Discontinued operations Loss for the period from discontinued operations (39,032) - 1,085 18, (19,803) Profit for the period (21,312) - 10,406 18,144 (15) (310) 7,201 Attributable to: Equity holders of the parent (21,312) - 10,406 18,144 (15) (310) 7,201 Minority interest (21,312) - 10,406 18,144 (15) (310) 7,201 13

14 c) Impact of IAS 1 Presentation of Financial Statements on the consolidated balance sheet as at 31 March 2005 This table highlights the presentational impact of IFRS on the consolidated balance sheet as at 31 March Assets, liabilities and shareholders funds are stated under UK GAAP values and format, and are mapped from this starting position to the line item classification required under IFRS. The restated March 2005 column represents UK GAAP accounting policy balances presented in an IFRS format. UK GAAP IAS 1 UK GAAP presented under IAS 1 March Presentational March 2005 changes 2005 UK GAAP values and format '000 '000 '000 UK GAAP values, IFRS format Fixed assets Non-current assets Goodwill 154, ,008 Goodwill Tangible assets 22,613 22,613 Property, plant and equipment Interests in Joint Ventures - (428) (428) Interests in Joint Ventures 176,621 (428) 176,193 Current assets Current assets Stocks 1,985 1,985 Inventories Debtors 88,556 88,556 Trade and other receivables Cash at bank and in hand 14,753 14,753 Cash and cash equivalents 105, , ,915 (428) 281,487 Total assets Creditors - amounts falling due within one year Current liabilities Borrowings (3,537) 3,537 - Other creditors (97,628) 97,628 - (88,591) (88,591) Trade and other payables (9,037) (9,037) Tax liabilities (30) (30) Obligations under finance leases (3,507) (3,507) Bank overdrafts and loans (101,165) Net current assets 4,129 4,129 Net current assets Total assets less current liabilities 180,750 Creditors -amounts falling due after more than one year Borrowing Other creditors (4,421) 4,421 - Provisions for liabilities and charges (939) Accruals and deferred income (15,109) 15,109 Non-current liabilities (19,530) (19,530) Other financial liabilities (511) (511) Deferred tax liabilities (20,041) 428 (121,206) Total liabilities Net assets 160, ,281 Total assets less total liabilities Capital and reserves Equity Share capital 7,987 7,987 Share capital Share premium 26,576 26,576 Share premium account Merger reserve 70,992 70,992 Merger reserve Capital redemption reserve 1,200 1,200 Capital redemption reserve Own shares reserve (8,447) (8,447) Own shares reserve Profit and loss account 61,973 61,973 Retained earnings Equity shareholders' funds 160, ,281 Minority shareholders' equity interests - - Minority shareholders' equity interests 160, ,281 14

15 d) Reconciliation of equity at 31 March 2005 This table highlights the financial impact of the IFRS adjustments on the consolidated balance sheet as at 31 March UK GAAP presented under IAS 1 IAS 10 Events after the IFRS 2 Share based IFRS 5 Discontinued IFRS 3 Business balance sheet IAS 12 IAS 19 Employee IAS 31 Interests IAS 38 Intangible SIC 15 Lease payments operations combinations date Income taxes benfits in joint ventures assets incentives IFRS '000 '000 '000 '000 '000 '000 '000 '000 '000 '000 '000 Non-current assets Goodwill 154,008 - (1,085) 10, (969) (4,075) - 159,262 Other intangible assets ,661-7,661 Property, plant and equipment 22, (3,896) - 18,717 Interests in Joint Ventures (428) , Deferred tax asset ,193 - (1,085) 10, (310) - 187,117 Current assets Inventories 1, ,985 Trade and other receivables 88, ,556 Cash and cash equivalents 14, , , ,294 Total assets 281,487 - (1,085) 10, (310) - 292,411 Current liabilities Trade and other payables (88,591) , (22) (80,911) Tax liabilities (9,037) (8,990) Obligations under finance leases (30) (30) Bank overdrafts and loans (3,507) (3,507) (101,165) , (15) (93,438) Net current assets 4, , (15) 11,856 Non-current liabilities Interest-bearing loans Other financial liabilities (19,530) (19,530) Retirement benefit obligation (2,578) (2,578) Deferred tax liabilities (511) 2, (1,620) (20,041) 2, (1,620) (2,526) (22,108) Total liabilities (121,206) 2, ,830 (1,580) (2,164) - - (15) (115,546) - Net assets 160,281 2,589 (1,085) 10,406 6,830 (603) (1,551) 323 (310) (15) 176,865 Equity Share capital 7, ,987 Share premium account 26, ,576 Merger reserve 70, ,992 Share incentive reserve - 1, ,200 Capital redemption reserve 1, ,200 Own shares reserve (8,447) (8,447) Retained earnings 61,973 1,389 (1,085) 10,406 6,830 (603) (1,551) 323 (310) (15) 77,357 Equity attributable to equity holders of the parent 160,281 2,589 (1,085) 10,406 6,830 (603) (1,551) 323 (310) (15) 176,865 Total equity 160,281 2,589 (1,085) 10,406 6,830 (603) (1,551) 323 (310) (15) 176,865 15

16 8. Independent Auditors Report To The Board Of Directors Of Homeserve Plc On The Preliminary Comparative IFRS Financial Information We have audited the preliminary comparative IFRS financial information of Homeserve plc contained in the IFRS transition document, which comprises the consolidated balance sheet as at 1 April 2005 and 31 March 2005 and consolidated income statement for the year ended 31 March 2005, the principal accounting policies and the related notes. This report is made solely to the Board of Directors, in accordance with our engagement letter dated 24 November 2005 and solely for the purpose of assisting with the transition to IFRS. Our audit work has been undertaken so that we might state to the Company s board of directors those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the Company for our audit work, for our report, or for the opinions we have formed. Respective responsibilities of directors and auditors The Company s directors are responsible for ensuring that the Company and the Group maintains proper accounting records and for the preparation of the preliminary comparative IFRS financial information on the basis set out in the IFRS transition document, which describes how IFRS will be applied under IFRS 1, including the assumptions the directors have made about the standards and interpretations expected to be effective, and the policies expected to be adopted, when the Company prepares its first complete set of IFRS financial statements as at 31 March Our responsibility is to audit the preliminary comparative financial information in accordance with relevant United Kingdom legal and regulatory requirements and auditing standards and report to you our opinion as to whether the preliminary comparative IFRS financial information is prepared, in all material respects, on the basis set out in the IFRS transition document. We read the other information contained in the IFRS transition document and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the preliminary comparative IFRS financial information. Basis of audit opinion We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the preliminary comparative IFRS financial information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the preliminary comparative IFRS financial information and of whether the accounting policies are appropriate to the circumstances of the Group, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the preliminary comparative IFRS financial information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the preliminary comparative IFRS financial information. Without qualifying our opinion, we draw attention to the fact that the IFRS transition document explains why there is a possibility that the accompanying preliminary comparative IFRS financial information may require adjustment before constituting the final comparative IFRS financial information. Moreover, we draw attention to the fact that, under IFRSs, only a complete set of financial statements comprising a balance sheet, income statement, statement of changes in 16

17 equity, cash flow statement, together with comparative financial information and explanatory notes, can provide a fair presentation of the Company s financial position, results of operations and cash flows in accordance with IFRSs. Opinion In our opinion the preliminary comparative IFRS financial information is prepared, in all material respects, on the basis set out in the IFRS transition document which describes how IFRS will be applied under IFRS 1, including the assumptions the directors have made about the standards and interpretations expected to be effective, and the policies expected to be adopted, when the company prepares its first complete set of IFRS financial statements as at 31 March Deloitte & Touche LLP Chartered Accountants Birmingham 28 November

18 9. Significant accounting policies The financial information has been prepared on the basis of financial reporting standards expected to be applicable for years ending on or after 31 March These are subject to ongoing review and endorsement by the European Union or possible amendment by interpretive guidance from the International Accounting Standards Board ( IASB ) and the International Financial Reporting Interpretations Committee ( IFRIC ) and are therefore still subject to change. The financial information has been prepared on the historical cost basis. The principal accounting policies adopted are set out below. Presentation of financial information The primary statements within the financial information contained in this document have been presented substantially in accordance with IAS 1 Presentation of Financial Statements. However, this format and presentation may require modification in the event that further guidance is issued and as practice develops. Basis of Consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 March each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Investments in Joint Ventures The Group s share of results of Joint Ventures are included in the consolidated income statement and the Group s share of their net assets are included in the consolidated balance sheet, including associated goodwill, using the equity method of accounting. Non-current Assets Held for Sale Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets (and disposal groups) are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within one year from the date of classification. 18

19 Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group s interest in the fair value of the identifiable assets and liabilities of a subsidiary or jointly controlled entity at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed. On disposal of a subsidiary, or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill arising on acquisitions 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. Revenue Recognition Revenue in respect of Policy Membership businesses include amounts receivable from the sale of policies, stated net of underwriting, commissions payable and Insurance Premium Tax. Revenue is recognised on sale of the policy except where an obligation exists to provide future services where an appropriate proportion of monies received in advance are treated as deferred income and recognised over the relevant period. Member acquisition costs are recognised in full on sale of the policy. Revenue in the Emergency Repair businesses represents amounts receivable, excluding VAT, from the sale of goods and services. Dividend income from investments is recognised when the shareholder s rights to receive payment have been established. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised. Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. 19

20 Foreign Currencies Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in net profit or loss 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. On consolidation, the assets and liabilities of the Group s overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the Group s translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Borrowing Costs Borrowing costs are recognised in profit or loss in the period in which they are incurred. Profit from Operations Profit from operations is stated after the share of results of Joint Ventures but before investment income and finance costs. Retirement Benefit Costs Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. For defined benefit retirement schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the income statement and presented in the statement of recognised income and expense. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the plan. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that 20

21 are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary difference can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in Joint Ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Property, Plant and Equipment Fixtures and equipment are stated at cost less accumulated depreciation and any recognised impairment loss. Depreciation is charged so as to write off the cost, less estimated residual value, of assets, other than land and properties under construction, over their estimated useful lives, using the straightline method, on the following bases: PCs IT Hardware Vehicles Furniture and Office Equipment Buildings Major Refurbishment 3 years 4-5 years 3 years 7 years 50 years 25 years Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in income. 21

22 Internally-generated Intangible Assets Research and Development Expenditure Expenditure on research activities is recognised as an expense in the period in which it is incurred. An internally-generated intangible asset arising from the Group s development is recognised only if all of the following conditions are met: an asset is created that can be identified (such as software and new processes); it is probable that the asset created will generate future economic benefits; and the development cost of the asset can be measured reliably. Internally-generated intangible assets are amortised on a straight-line basis over their useful lives. Where no internally generated intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Impairment of Tangible and Intangible Assets Excluding Goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the assets for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cashgenerating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Provision is made for obsolete, slow moving or defective items where appropriate. 22