Pochin's PLC 24 February 2006 Section 4 Consolidated balance sheet As at 31 May 2005 Adjustments £'000 UK GAAP (1) (2) (3) (4) (5) (6) 31-May-05 Business Proposed Deferred Retirement Share £'000 combinations dividends tax benefits options Non current assets Intangible assets 1,164 406 (258) Property, plant and equipment 8.232 Investment properties 30,021 Investments Joint ventures - Share of gross assets 10,286 Share of gross liabilities (6,006) Goodwill 925 Associates 2,585 Other 2,157 Total non current assets 49,364 406 (258) - - - - Current assets Inventories 38,251 Trade and other receivables 22,583 Cash and cash equivalents 12,906 Total current assets 73,740 - - - - - - Total assets 123,104 406 (258) - - - - Equity Share capital (5,200) Own shares 847 Revaluation reserve (10,848) Retained earnings (34,549) (406) 258 (1,061) 2,086 3,074 Minority interest (223) Total equity (49,973) (406) 258 (1,061) 2,086 3,074 - Non current liabilities Bank loans (10,351) Retirement benefit obligation - (4,391) Deferred tax liabilities (1,308) (2,086) 1,317 Long term provisions (712) Obligations under finance leases (219) Other payables (3,675) Total non current liabilities (16,265) - - - (2,086) (3,074) - Current liabilities Trade and other payables (16,260) Tax liabilities (1,941) Obligations under finance leases (176) Bank loans & overdrafts (37,428) Dividends payable (1,061) 1,061 Financial derivatives - Total current liabilities (56,866) - - 1,061 - - - Total liabilities (73,131) - - 1,061 (2,086) (3,074) - Total equity and liabilities (123,104) (406) 258 - - - - Adjustments £'000 (7) (8) (9) (10) (11) IFRS Interest Property Revaluation 31-May-05 Investments rate sales gains Reallocate £'000 swap Non current assets Intangible assets 1,312 Property, plant and equipment 8,232 Investment properties 30.021 Investments Joint ventures 5,205 5,205 Share of gross assets (10,286) - Share of gross liabilities 6,006 - Goodwill (925) - Associates 2,585 Other 2,157 Total non current assets - - - - - 49,512 Current assets Inventories 2,560 40,811 Trade and other receivables (4,490) 18,093 Cash and cash equivalents 12,906 Total current assets - - (1,930) - - 71,810 Total assets - - (1,930) - - 121,322 Equity Share capital (5,200) Own shares 847 Revaluation reserve 2,459 7.793 (596) Retained earnings 262 1,351 (2,459) (7,793) (39,237) Minority interest (223) Total equity - 262 1,351 - - (44,409) Non current liabilities Bank loans (10,351) Retirement benefit obligation (4,391) Deferred tax liabilities 113 579 (1,385) Long term provisions (712) Obligations under finance leases (219) Other payables (3,675) Total non current liabilities - 113 579 - - (20,733) Current liabilities Trade and other payables (16,260) Tax liabilities (1,941) Obligations under finance leases (176) Bank loans & overdrafts (37,428) Dividends payable - Financial derivatives (375) (375) Total current liabilities - (375) - - - (56,180) Total liabilities - (262) 579 - - (76,913) Total equity and liabilities - - 1,930 - - (121,322) Consolidated balance sheet As at 30 November 2004 Adjustments £'000 UK GAAP (1) (2) (3) (4) (5) (6) (7) (9) (11) IFRS 30-Nov-04 Business Proposed Deferred Retirement Share Property 30-Nov-04 £'000 combinations dividends tax benefits options Investments sales Reallocate £'000 Non current assets Intangible 990 161 (95) 1,056 assets Property, 17,579 17,579 plant and equipment Investment 21,118 21,118 properties Investments Joint ventures - 3,210 3,210 Share of 9,228 (9,228) - gross assets Share of (6,943) 6,943 - gross liabilities Goodwill 925 (925) - Associates 2,564 2,564 Other 2,157 2,157 Total non 47,618 161 (95) - - - - - - - 47,684 current assets Current assets Inventories 32,593 1,131 33,724 Trade and 16,538 (1,715) 14,823 other receivables Cash and cash 11,521 11,521 equivalents Total current 60,652 - - - - - - - (584) - 60,068 assets Total assets 108,270 161 (95) - - - - - (584) - 107,752 Equity Share capital (5,200) (5,200) Own shares 847 847 Revaluation (8,725) 7,911 (814) reserve Retained (32,445) (161) 95 (520) 1,630 3,452 - 375 (7,911) (35,485) earnings Minority (211) (211) interest Total equity (45,734) (161) 95 (520) 1,630 3,452 - - 375 - (40,863) Non current liabilities Bank loans (10,172) (10,172) Retirement - (4,932) (4,932) benefit obligation Deferred tax (878) (1,630) 1,480 - 161 (867) liabilities Long term (753) (753) provisions Obligations (792) (792) under finance leases Other payables (3,464) 48 (3,416) Total non (16,059) - - - (1,630) (3,452) - - 209 - (20,932) current liabilities Current liabilities Bank loans (27,283) (27,283) & overdrafts Obligations (253) (253) under finance leases Trade and (18,134) - (18,134) other payables Tax (287) (287) liabilities Dividends (520) 520 - payable Total current (46,477) - - 520 - - - - - - (45,957) liabilities Total (62,536) - - 520 (1,630) (3,452) - - 209 - (66,889) liabilities Total equity (108,270) (161) 95 - - - - - 584 - (107,752) and liabilities Consolidated balance sheet As at 1 June 2004 Adjustments £'000 UK GAAP (3) (4) (5) (6) (7) (9) (11) IFRS 31-May-04 Proposed Deferred Retirement Share Property 31-May-04 £'000 dividends tax benefits options Investments sales Reallocate £'000 Non current assets Intangible 443 443 assets Property, 11,348 11,348 plant and equipment Investment 21,118 21,118 properties Investments Joint - 10,034 10,034 ventures Share of 20,228 (20,228) - gross assets Share of (11,182) 11,182 - gross liabilities Goodwill 988 (988) - Associates 2,547 2,547 Other 2,157 2,157 Total non 47,647 - - - - - - - 47,647 current assets Current assets Inventories 20,077 1,859 21,936 Trade and 11,342 (2,250) 9,092 other receivables Cash and 10,780 10,780 cash equivalents Total 42,199 - - - - - (391) - 41,808 current assets Total 89,846 - - - - - (391) - 89,455 assets Equity Share (5,200) (5,200) capital Own shares 607 607 Revaluation (8,807) 7,911 (896) reserve Retained (32,357) (967) 1,726 2,435 274 (7,911) (36,800) earnings Minority (208) (208) interest Total (45,965) (967) 1,726 2,435 - - 274 - (42,497) equity Non current liabilities Bank loans (300) (300) Retirement - (3,479) (3,479) benefit obligation Deferred (862) (1,726) 1,044 117 (1,427) tax liabilities Long term (852) (852) provisions Obligations (395) (395) under finance leases Other (2,674) (2,674) payables Total non (5,083) - (1,726) (2,435) - - 117 - (9,127) current liabilities Current liabilities Trade and (13,168) (13,168) other payables Loan notes (110) (110) Tax (1,350) (1,350) liabilities Obligations (192) (192) under finance leases Bank loans (23,011) (23,011) & overdrafts Dividends (967) 967 - payable Total (38,798) 967 - - - - - - (37,831) current liabilities Total (43,881) 967 (1,726) (2,435) - - 117 - (46,958) liabilities Total (89,846) - - - - - 391 - (89,455) equity and liabilities Changes in accounting policies - balance sheet Explanatory notes on the impact of IFRS adjustments to the consolidated balance sheet at 31 May 2005 (1) & (2) IFRS 3 - Business combinations Under UK GAAP, goodwill arising on consolidation and purchased goodwill were capitalised on the balance sheet and amortised over the assets' useful economic lives. IFRS 3 requires goodwill acquired in a business combination to be recognised by the acquirer as an asset from the date of acquisition and prohibits the amortisation of goodwill and instead requires the goodwill to be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. As a result, goodwill amortised post 31 May 2004, under UK GAAP, is to be reinstated. With regard to goodwill which had been recognised prior to 1 June 2004 this is to be frozen at the current level with there being no requirement to write back previously written off goodwill. The group and company has a 79% interest in a business which under UK GAAP meets the definition of a quasi-subsidiary, and was treated as if it were a legal subsidiary. This investment is treated as a subsidiary undertaking under IAS 27. (3) IAS 10 - Dividends Under UK GAAP, dividends declared to equity shareholders after the balance sheet date were recognised as a liability at the balance sheet date. IAS 10 states that if an entity declares dividends to equity shareholders after the balance sheet date the entity should not recognise those dividends as a liability at the balance sheet date because they do not meet the definition of a present obligation under IAS 37. As a result, the proposed dividends of £967,000, £520,000 and £1,061,000 included in the financial statements at 31 May 2004, 30 November 2004 and 31 May 2005 respectively, should not be recognised as liabilities. (4) IAS 12 - Income taxes Under IAS, deferred tax is to be applied in respect of all revalued assets included in the accounts, taking into account indexation of the base cost. (5) IAS 19 - Employee benefits The increase in the present value of the liabilities of the group's defined benefit pension scheme expected to arise from employee service in the period is charged to the profit from operations. The expected return on the scheme's assets and the increase during the period in the present value of the scheme's liabilities arising from the passage of time are included in finance income or finance costs respectively. Actuarial gains and losses are recognised in the consolidated statement of recognised income and expense. The related deferred tax impact of defined benefits is presented with other deferred tax under IFRS. Effect on balance sheet 31-May-05 30-Nov-04 £'000 £'000 Deficit in scheme at beginning of period 3,479 3,479 Movement in period: Current service cost 557 279 Past service costs 132 132 Net finance charge 70 35 Contributions (474) (237) Actuarial loss/(gain) 627 1,244 Deficit in scheme at end of period 4,391 4,932 (6) IFRS 2 - Share based payments The group has long-term incentive plans for several directors and key employees under which share options have been issued and, subject to certain performance conditions, will vest to the relevant option holders over a period of three years. In accordance with IFRS 2, the group is required to recognise an expense for options granted on or after 7 November 2002 which have not vested as at 1 January 2005. The options have been valued at the date of grant and an expense recognised over the period that the service benefit is to be provided by the employees under the terms of the scheme. (7) IAS 28 - Investments in associates and IAS 31 - Interests in joint ventures Under UK GAAP, disclosures made under FRS 9 gross equity method are no longer required on the face of the balance sheet. This is to be replaced by the equity method under IFRS with a single line entry appearing on the face of the balance sheet. (8) IAS 32 & IAS 39 - Interest rate swaps Derivative financial instruments such as interest rate swaps create rights and obligations that have the effect of transferring between the parties to the instrument one or more of the financial risks inherent in an underlying primary financial instrument. On inception, derivative financial instruments give one party a contractual obligation to exchange financial assets or liabilities with another party that are potentially favourable or unfavourable. Under IAS 39, derivatives are classified as held for trading instruments and are remeasured to fair value with movements being taken to the income statement. At 31 May 2005 the liability had been quantified at £375,000 before tax. Under UK GAAP, this liability had merely been disclosed by way of note to the financial statements. (9) IAS 18 - Revenue recognition Property sales have been recognised based on the completion of contract as oppose to the exchange of unconditional contract. (10) & (11) IAS 16 - Property, plant and equipment and IAS 40 - Surpluses/ deficits on revaluation of investment properties Under IFRS, changes in the fair value of investment properties are recognised separately in the income statement. Under UK GAAP, such revaluation surpluses/ deficits are recognised as a net movement within equity. When first applying IAS 40 revaluation surpluses on investment properties are to be reclassified in retained earnings. The balance remaining in the revaluation reserve represents revaluation surpluses arising on concrete pumps. Section 5 Consolidated cashflow statement Year ending 31 May 2005 Adjustments £'000 UK GAAP Impairment Retirement Share Interest Property IFRS £'000 Goodwill of assets benefits options rate sales £'000 swap Net cash from operating activities Profit for the 6,505 406 (258) (215) (24) (375) (1,539) 4,500 year Depreciation 1,577 1,577 charge Goodwill 406 (406) 258 258 impairment Profit on sale of (94) (94) fixed assets Income from joint 284 284 ventures Operating profit 8,678 - - (215) (24) (375) (1,539) 6,525 before changes in working capital and provisions Increase in (9,025) (701) (9,726) inventories Increase in (6,738) 2,240 (4,498) receivables Decrease in (1,357) 215 24 375 (743) payables Cash generated (8,442) - - - - - - (8,442) from operations Interest paid (886) (886) Income taxes paid (2,052) (2,052) Net cash used in (11,380) - - - - - - (11,380) operating activities Investing activities Interest received 396 396 Purchase of (2,741) (2,741) subsidiary undertaking Purchase of (3,677) (3,677) property, plant and equipment Proceeds from 827 827 sale of property, plant and equipment Receipt of 585 585 government grants Net cash on 2,972 2,972 purchase of subsidiary undertaking Increase in (1,602) (1,602) interest in joint ventures Purchase of (2,445) (2,445) intangible assets Purchase of own (240) (240) shares Cash withdrawn at (1,275) (1,275) call and short notice Net cash used in (7,200) - - - - - - (7,200) investing activities Financing activities Proceeds from 11,000 11,000 issue of loan capital Payment of loan (4,832) (4,832) capital Payment of (192) (192) finance lease liabilities Dividends paid (1,487) (1,487) Net cash from 4,489 - - - - - - 4,489 financing activities Net decrease in (14,091) - - - - - (14,091) cash and cash equivalents Cash and cash (22,607) (22,607) equivalents at beginning of year Cash and cash (36,698) - - - - - - (36,698) equivalents at end of year Section 6 Statement of Pochin's PLC accounting policies under IFRS The preparation of financial statements in conformity with IFRS requires the directors to make judgments and assumptions that affect the reported amounts of assets and liabilities and income and expense during the reported periods. Although these judgments and assumptions are based on the directors' best knowledge of the amount, events or actions, actual results may differ from these estimates. Basis of accounting The financial statements will be prepared in accordance with International Financial Reporting Standards as adopted by the European Union. In addition they will be prepared in accordance with International Financial Reporting Standards as issued by the International Auditing Standards Board. The following principal accounting policies have been applied consistently in dealing with items that are considered material in relation to the group's financial statements. Basis of consolidation The group financial statements include the accounts of Pochin's PLC and subsidiaries controlled by the group. Control exists where the company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are presently exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Associates are operations over which the group has the power to exercise significant influence but not control, generally accompanied by a share of between 20% and 50% of the voting rights. Associates are accounted for using the equity method. The group financial statements include the group's share of its joint ventures assets, liabilities, revenue and expenses from the date the venture commences until to the date of cessation. Intra group balances and transactions together with any unrealised gains/losses arising from intra group transactions are eliminated in preparing the consolidated financial statements. Unrealised gains/losses arising from transactions with joint ventures are eliminated to the extent of the group's interest in the entity. The group's share of unrealised gains/losses arising from transactions with associates is also eliminated. Revenue Revenue is measured at the fair value of the consideration received or receivable in respect of construction work executed during the year, development revenue and other revenue and services as supplied, but excludes value added tax. Development revenue is recognised on completion of contracts. Goodwill Goodwill represents the excess of the fair value of the cost of acquisition over the group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, joint venture or associate at the date of acquisition. Positive goodwill is stated at cost less any impairment losses and is reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement. Negative goodwill arising on an acquisition is recognised directly in the income statement. Other intangible assets Other intangible assets are carried at cost less accumulated amortisation and impairment losses. Amortisation begins when an asset is available for use and is calculated on a straight-line basis to allocate the cost of assets over their estimated useful lives. Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Construction contracts Where the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, revenue and costs are recognised by reference to the stage of completion of the contract activity at the balance sheet date, as measured by the proportion that contract costs incurred for work performed to date compare to the estimated contract costs. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. Where the outcome of a contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that it is probable will be recoverable. Construction work in progress is stated at cost plus profit recognised to date less a provision for foreseeable losses and less progress billings. Cost includes all expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the group's contract activities based on normal operating capacity. Property, plant and equipment The cost of non-current assets is their purchase cost, together with any incidental costs of acquisition. Depreciation is provided on the original cost or valuation of assets, in equal instalments over the assets useful economic lives. The following terms are generally applicable: Freehold buildings over 40 years Leasehold buildings over 40 years or the term of the lease if less Plant and machinery over 3 to 8 years Vehicles over 4 to 5 years Freehold land is not depreciated. Investment properties IAS 40 allows entities to choose either a fair value model, under which an investment property is measured at fair value with changes in fair value recognised in the income statement or a cost model, under which an investment property is measured at depreciated cost. In the case of Pochin's, investment properties are recorded at fair value with movements on revaluation included in the income statement, unlike UK GAAP where they are recorded in the Statement of Total Recognised Gains and Losses (STRGL). Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the 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 are never taxable or deductible. The group's liability for current tax is calculated using tax rates and laws 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 differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or other assets and liabilities (other than in a business combination) in a transaction that affects neither the taxable 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. 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. Leases Leases are classified as finance leases where substantially all the risks and rewards of ownership are transferred to the group. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Lease payments are apportioned between the liability and finance charge to produce a constant rate of interest on the finance lease balance outstanding. Assets capitalised under finance leases are depreciated over the shorter of the useful life of the asset or the lease term and adjusted for impairment losses. The interest expense component is recognised in the income statement. Leases other than finance leases are classified as operating leases. Payments made under operating leases are recognised as an expense in the income statement on a straight-line basis over the lease term. Inventories Inventories are stated at the lower of cost and net realisable value. Development work in progress includes development land and buildings and is stated at the lower of cost and net realisable value. Under IAS23, the benchmark is that borrowing costs shall be recognised as an expense in the income statement except in circumstances where they may be capitalised. In circumstances where the costs are directly attributable to a specfic development the borrowing costs are to be carried forward as development work in progress. Trade and other receivables Trade and other receivables are stated at cost less impairment losses. Retirement benefit obligations The group operates a pension scheme providing benefits based on final pensionable salary. The assets of the scheme are held separately from those of the group. Pension scheme assets are measured using market values. Pension scheme liabilities are measured using a projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation less the fair value of scheme assets at the balance sheet date. The increase in the present value of the liabilities of the group's defined benefit pension scheme expected to arise from employee service in the period is charged to the profit from operations. The expected return on the scheme's assets and the increase during the period in the present value of the scheme's liabilities arising from the passage of time are included in finance income or finance costs respectively. Actuarial gains and losses are recognised in the consolidated statement of recognised income and expense. The group is adopting from their date of transition the Amendment to IAS 19 Employee Benefits : Actuarial Gains and Losses, Group Plans and Disclosures. Share based payments For equity settled share options, the services received from employees are measured by reference to the fair value of the share options. The fair value is calculated at grant date and recognised in the income statement, together with a corresponding increase in shareholders' equity, on a straight line basis over the vesting period, based on an estimate of the number of options that will eventually vest. Vesting conditions, other than market conditions, are not taken into account when estimating the fair value. IFRS 2 has been applied, in accordance with IFRS 1, to equity settled share options granted on or after 7 November 2002 and not vested at 1 January 2005. Financial instruments Derivative financial instruments are measured at fair value and those utilised by the group's treasury operations include interest rate swaps. Any gain or loss is recognised in the income statement. The group has applied IAS 32 and 39 from the date of transition and have not taken advantage of the exemption in IFRS 1 not to restate their comparative year. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits and other short term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value Trade and other receivables Trade and other receivables are recognised at fair value on initial recognition (net of transaction costs) and carried subsequently at amortised cost. Trade payables Trade payables are initially measured at fair value , and are subsequently measured at amortised cost, using the effective interest rate method. Bank borrowings Interest bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of the borrowings. 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