RNS Announcements

<< Back

Adoption of International Financial Reporting Standards
(IFRS)
Preliminary Restatement of 2004 Financial Information

6 July 2005

OVERVIEW OF ADOPTION OF IFRS

Introduction

Irish Continental Group plc (ICG), is adopting International Financial Reporting Standards (IFRS) as its primary accounting basis for all reporting periods beginning on or after 1 January 2005 as required for all EU listed Companies. As part of the transition from Irish GAAP, ICG now presents financial information prepared in accordance with IFRS at the date of transition 1 January 2004 and for the year ended 31 December 2004.

The purpose of this document is to provide information on the impact of the adoption of IFRS. This financial information represents our current best estimates and may be affected by changes to IFRS standards, interpretations thereof and the emergence of best practice. Certain of these standards are still subject to endorsement by the European Commission. For these reasons it is possible that the information presented
in this document may be subject to change prior to its finalisation in the 2005 Annual Report. The Financial information presented here is unaudited.

Financial Highlights: year ended 31 December 2004

Significant changes
The most significant impact on our Income & Expenditure Statement and Balance Sheet is due to the adoption of the following standards:

IAS 19 Accounting for retirement benefits
The adoption of IAS 19 results in a net increase in the charge for pension benefits in the P&L of €2.5m (before a deferred tax credit of €0.1m) and a reduction in net assets at 31 December 2004 of €2.9m. The Group is also a contributing employer to the Merchant Navy Officers Pension Fund (MNOPF), part of which is in deficit. Due to uncertainty regarding the allocation of the deficit among employers the Group continues to account for its membership of the MNOPF as if it were a defined contribution scheme.

IAS 16 Property, plant and equipment
The adoption of IAS 16 results in components of certain assets being depreciated at different rates. This results in an extra charge of €1.1m to the P&L in 2004 and a reduction of €12.4m in net assets at 31 December 2004.

IFRS1 First time adoption of IFRS
The restating of one vessel at valuation on transition to IFRS at 1 January 2004 reduces net assets and reserves by €10.2m.

The implementation of IFRS has no impact on either turnover or cashflows, nor does it affect the underlying operation of the business.

Expectations for 2005
The implementation of IFRS is expected to reduce the profit after tax which would have been reported under Irish GAAP by approximately €2.3m in the year ended 31 December 2005. The resulting impact on earnings per share is a reduction of approximately 10 cent.

The effect on net assets at 31 December 2005 is dependent on the adjustments set out above, taken in conjunction with the market conditions for the pension scheme at 31 December 2005.

ICG will issue its first results under IFRS, the interim results to 30 June 2005, on 8 September 2005.

Full details of the impact of transition are set out in the following pages.

Garry O’Dea
Finance Director
6 July 2005

DETAILS OF THE IMPACT OF TRANSITION

CONTENTS

Basis of Preparation

The financial information presented in this document has been prepared in accordance with IFRS, including all International Accounting Standards (IAS), and interpretations issued by the International Accounting Standards Board (IASB), the Standing Interpretations Committee (SIC) and the International Financial Reporting Interpretations Committee (IFRIC) effective at 31 December 2004.

The rules for first time adoption of IFRS are set out in IFRS 1 ‘First Time Adoption of International Financial Reporting Standards’. IFRS 1 requires application of the same accounting policies in the IFRS opening balance sheet and for all periods thereafter.

The Group’s transition to IFRS has been prepared on the basis of availing of the following exemptions under IFRS 1:

1. Business combinations prior to 1 January 2004 have not been restated to comply with IFRS 3 ‘Business Combinations’.
2. Cumulative translation differences on foreign operations are deemed to be nil 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.
3. The fair value of the fast ferry Dublin Swift has been taken as its deemed cost at the date of transition.

The financial information has been prepared under the historical cost convention.

EXPLANATORY NOTES ON THE IMPACT OF THE IFRS ADJUSTMENTS

A summary of the impact of the principal differences and resulting adjustments between Irish GAAP and IFRS as they apply to the Consolidated Income Statement for the year ended 31 December 2004, the Consolidated Balance Sheet as at 1 January 2004 and the Consolidated Balance Sheet as at 31 December 2004 are as follows:

(1) Employee Benefits (IAS 19)

Under Irish GAAP, the Group accounted for pensions in accordance with SSAP 24 Accounting for Pension Costs and complied with the disclosure requirements of FRS 17 Retirement Benefits.

Accounting for defined contribution pension plans remains unchanged under IFRS. The Irish GAAP defined benefit pension cost charged to the Consolidated Income Statement was based on current service cost plus the impact of spreading any deficits/surpluses arising on the Group’s defined benefit pension and post retirement plans over the estimated average remaining service lives of the employees. Under IFRS the defined benefit pension charge is based on current service cost and a financing charge/credit.

The 2004 Irish GAAP Consolidated Income Statement has been adjusted to comply with IAS 19 by:

• eliminating the credit/charge from spreading the surplus/deficit relating to past service under SSAP 24;
• taking account of differences in measurement bases in the current service cost;
• recognising the past service cost arising in 2004 under IFRS; and
• recognising the IFRS financing charge.

The Group has opted for the full recognition of pension deficits/surpluses on the Consolidated Balance Sheet under IFRS. The surplus arising on the Group’s defined benefit pension plans at 1 January 2004 and the deficit arising at 31 December 2004, as measured by the plans’ actuaries using the attained age method and the projected unit method under IFRS guidelines, have been recognised in full in the IFRS Consolidated Balance Sheets as at 1 January 2004 and 31 December 2004 respectively. The pension asset at 1 January 2004 has been included in debtors in current assets. The pension deficit at 31 December 2004 has been included in creditors falling due after more than one year. The net actuarial loss arising in 2004 has been taken to the Statement of Recognised Income and Expense.

The net impact on the 2004 Consolidated Income Statement of adopting IAS 19 is a decrease of €2.6m in operating profit which is the net amount of the service cost under IAS 19 and an increase in interest receivable. A deferred tax credit of €0.1m is set against this, giving a net change of €2.5m. The surplus in the Group’s defined benefit pension and post retirement plans at 1 January 2004 of €12.4m and the deficit at 31 December 2004 of €2.6m, have been recognised in full on the IFRS Consolidated Balance Sheet as at 1 January 2004 and 31 December 2004 respectively.
The reversing effect on the Consolidated Balance Sheet of eliminating the SSAP 24 deficit / surplus relating to past service is a €0.2m increase in reserves at 1 January 2004 and a €0.3m decrease in reserves at 31 December 2004.

Some ships’ officers employed in the Group participate in the Merchant Navy Officers Pension Fund (MNOPF), a defined benefit multi-employer retirement plan. At the last valuation date the Group had 60 contributing members to the scheme out of a total contributing membership to the scheme of 2,821. The scheme is divided into two sections, The Old Section and the New Section, both of which are closed to new members. The latest valuations were carried out as at 31 March 2003.

At 31 March 2003 there is an actuarial surplus in the Old Section of the fund, under which benefits accrued for service prior to April 1978, of GBP 167.0m.

The New Section of the fund relates to benefits accrued for service since 1978. It is closed to new members but existing contributors continue to accrue benefits. There is an actuarial deficit of GBP 194.0m in this section as at 31 March 2003. The Trustee Board of the MNOPF intends apportioning the deficit in this section among the participating employers and has applied to the courts for a determination on the apportionment of the liability between employees. The Trustee Board intends to require participating employers to increase contributions over a ten year period until the deficit is eliminated.

As disclosed in the notes to the 2004 Annual Report and Financial Statements, the apportionment of the deficit to ICG was estimated by the Trustees to range from GBP 2.7 million to GBP 6.2 million.

Judgement on the case was handed down on 22 March 2005 in the High Court. The judgement entitles the Trustee Board to seek contributions from the widest definition possible of participating employers. However, permission to appeal this judgement has been sought by a number of the employers. In the circumstances it is not possible to quantify the Group’s share of the deficit.

Consequently, as permitted by IAS 19, the Group will continue to account for the plan as if it were a defined contribution plan.

(2) Property, plant & equipment (IAS 16)

Under Irish GAAP each item of property, plant and equipment was depreciated over the total expected useful life of that item of property, plant or equipment.

IAS 16 states an entity allocates the amount initially recognised in respect of an item of property, plant and equipment to its significant parts and depreciates separately each such part.

In respect of passenger ships, cost is allocated between hull & machinery and hotel & catering areas. In respect of stevedoring equipment cost is allocated between structural frame and machinery.

Under IFRS, hotel & catering areas which are subject to intensive wear are assessed on initial recognition to have a useful life of 10 years, and are depreciated accordingly. Hull & machinery, which is subject to minor wear, are assessed on initial recognition to have a useful life of 15 years for fast ferries and 30 years for conventional ferries, and are depreciated accordingly.

This results in the net book value of ships at 1 January 2004 and 31 December 2004 being reduced by €11.3m and €12.4m respectively to take account of the depreciation of intensive wearing components which was not previously recognised.

Component accounting for passenger ships results in an extra charge to depreciation of €1.1m in 2004. This charge is stated after a €1.1m credit resulting from the revaluation of the fast ferry, Dublin Swift.

Under IFRS, stevedoring equipment components with intensive wear are depreciated over 7 years. Components with minor wear are depreciated over 12 years. The transition to IFRS has no effect on the net book value of stevedoring equipment at 1 January 2004 or 31 January 2004 and does not affect the depreciation charge in the 2004 Consolidated Income Statement.

(3) Fair value or revaluation as deemed cost (IFRS 1)

IFRS 1 permits an entity to elect to measure any item of property, plant and equipment at the date of transition to IFRS at its fair value and use that fair value as its deemed cost at that date.

At the date of transition to IFRS the company has chosen to measure one of its vessels, the fast ferry Dublin Swift, at its market value at that date. This results in a reduction in the value of property, plant and equipment on the balance sheet of €10.2 million at 1 January 2004 and a corresponding reduction in reserves.

(4) Financial instruments (IAS 39)

The Group’s activities expose it to risks of changes in foreign currency exchange rates and interest rates. The Group uses foreign exchange forward contracts and interest rate swaps to hedge these exposures.

Under Irish GAAP these financial instruments are not recognised on the balance sheet of the company.

Under IAS 39 interest rate swaps entered into by the company are treated as cashflow hedges and all derivative financial instruments are held in the Consolidated Balance Sheet at their fair value.

At 1 January 2004 this results in an increase in trade and other payables by €0.9m, with a corresponding decrease in retained earnings. At 31 December 2004 this amount is €0.5m.

(5) Intangible assets (IAS 38)

Under Irish/UK GAAP computer software was previously capitalised as a tangible asset. Under IAS 38, computer software that is not an integral part of an item of computer hardware is capitalised as an intangible asset.

Computer software as at 1 January 2004 and 31 December 2004 with a net book value of €0.4m and €0.1m respectively, has been transferred from tangible fixed assets to intangible fixed assets in the Consolidated Balance Sheets.

GROUP ACCOUNTING POLICIES UNDER IFRS

The significant accounting policies adopted by the Group are as follows:

Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries all of which present financial statements up to 3l December. The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from the date of their acquisition or up to the date of their disposal.

Reporting currency
The financial statements contained herein are presented in Euro.

Turnover
Turnover represents revenues from passenger and freight services supplied to third parties, exclusive of discounts and value added tax.

Passenger ticket revenue is recognised at the date of travel. Freight revenue is recognised at the date of transportation. Revenue from passenger tickets sold before the year end for a travel date after the year end is included in the balance sheet in creditors due within one year under the caption "accruals and deferred income". Unused tickets are recognised as revenue on a systematic basis.

Cash revenue from on-board sales is recognised immediately.

Segmental analysis
The Group’s primary format for segmental reporting is business segments. The risks and returns of the Group’s operations are primarily determined by the different services that the Group offers. The Group has two business segments, Ferries and Container & Terminal. Corporate activities, such as the cost of corporate stewardship, are reported along with the elimination of inter-group activities under the heading “Unallocated Liabilities”.

Segment assets and liabilities consist of property, plant and equipment and other assets and liabilities that can be reasonably allocated to the reported segment. Unallocated segment assets and liabilities mainly include current and deferred income tax balances together with financial assets and liabilities.

The Group’s secondary format for segmental reporting is geographical segments. There is no significant difference in risk profile between the routes the Group operates i.e. between geographical areas. Given that the Group is primarily an operator of ships there is no reasonable basis upon which to assign its main assets, ships, to any geographical area. Therefore the Group will only present geographical information relating to where revenues are earned.

Passenger ships
Passenger ships are stated at cost, with the exception of the fast ferry Dublin Swift which is stated at valuation at the transition date.

The amount initially recognised in respect of an item of property, plant and equipment is allocated to its significant parts and each such part is depreciated separately. In respect of passenger ships cost is allocated between hull & machinery and hotel & catering areas.

For passenger ships hotel & catering components with intensive wear are depreciated over 10 years. Hull & machinery components with minor wear are depreciated over the useful lives of the ships of 15 for fast ferries and 30 years for conventional ferries.

Other assets
Other tangible fixed assets are stated at cost less accumulated depreciation and any impairment losses. Cost comprises purchase price and directly attributable costs. Freehold land is not depreciated.

The amount initially recognised in respect of an item of property, plant and equipment is allocated to its significant parts and each such part is depreciated separately. In respect of stevedoring equipment cost is allocated between structural frame and machinery.

Depreciation on the tangible fixed assets is calculated by charging equal annual instalments to the Consolidated Income Statement so as to provide for their cost over the period of their expected useful lives at the following annual rates:

Drydocking
Costs incurred on the overhaul of vessels are capitalised and depreciated over the period to the next overhaul.

Financial fixed assets
Financial fixed assets are shown at cost less amounts charged to the profit and loss account where the Directors consider that there has been a permanent impairment in value.

Stocks
Stocks are stated at the lower of cost and net realisable value. Cost represents suppliers’ invoiced cost determined on a first in, first out, basis.

Taxation
Income taxes include all taxes based upon the taxable profits of the Group. A proportion of the Group’s profits fall within the charge to Tonnage Tax, under which regime taxable profits are based on the tonnage of the vessels employed during the period. The tonnage tax charge is included within the income tax charge.

The tax charge also includes income taxes payable based on taxable profit for the year and deferred taxes, which have been calculated on the basis set out in IAS 12 ‘income taxes’. 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 taxes are calculated based on the temporary differences that arise between the tax base of the asset or liability and its carrying value in the Consolidated Balance Sheet. Deferred tax is recognised on all temporary differences in existence at the balance sheet date except as provided under IAS 12. Deferred tax assets are recognised to the extent that it is probable that they will be utilised.

Deferred tax assets and deferred tax liabilities are offset where taxes are levied by the same taxation authority and relate to the same tax period.

Retirement benefits
Payments to defined contribution plans are recognised in the Consolidated Income Statement as they fall due and any contributions outstanding at the period end are included as an accrual in the Consolidated Balance Sheet.

The cost of providing benefits and the liabilities of defined benefit plans are determined, using the attained age method and the projected unit method, by independent and professionally qualified actuaries.

Current service cost, interest cost and return on plan assets are recognised in the Consolidated Income Statement. Actuarial gains and losses are recognised in full in the period in which they occur in the Statement of Recognised Income and Expense. Past service cost is recognised immediately to the extent that the benefits are already vested. Otherwise, past service cost is recognised on a straight line basis over the average period until the benefits become vested.

A small number of the Groups employees are members of a multi-employer defined benefit retirement plan. The liability of each participating employer to fund a deficit in this scheme is currently the subject of a legal action. In these circumstances it is not possible to quantify the Group’s share of the deficit. Consequently the scheme is currently accounted for as a defined contribution scheme and appropriate disclosures are given.

Grants
Grants of a capital nature are accounted for as deferred income and are released to the Consolidated Income Statement at the same rates as the related assets are depreciated. Grants of a revenue nature are credited to the Consolidated Income Statement to offset the matching expenditure.

Leases
Assets held under finance leases are capitalised and included in tangible fixed assets at an amount representing the outright purchase price of such assets. Depreciation is provided at rates designed to write-off the cost, less any residual value, in equal annual amounts over the shorter of the estimated useful lives of the assets, or the period of the leases.

The capital element of future rentals is treated as a liability and the interest element is charged to the Consolidated Income Statement over the period of the leases in proportion to the balances outstanding.

Annual rentals payable under operating leases are charged to the Consolidated Income Statement on a straight line basis over the period of the lease.

Foreign currency
Foreign currency transactions are translated into local currency at the rate of exchange ruling at the date of the transaction. Any exchange difference arising from either the retranslation of the resulting monetary asset or liability at the exchange rate at the balance sheet date or from the settlement of the balance at a different rate is recognised in the Consolidated Income Statement when it occurs.

The Income Statements of foreign currency subsidiaries are translated into Euro at the average exchange rate for the period. The Balance Sheets of such subsidiaries are translated at rates of exchange ruling at the balance sheet date. From 1 January 2004, a separate component of equity is maintained for the recognition of exchange differences arising on the translation of foreign currency subsidiaries.

On disposal of a foreign subsidiary the cumulative translation difference for that foreign subsidiary is transferred to the Consolidated Income Statement as part of the gain or loss on disposal.

The Group uses Cash flow hedges: Changes in the fair value of derivative financial instruments that are designated, and are effective, as hedges of changes in future cash flows are recognised directly in equity. Any ineffective portion of the hedge is recognised in the Consolidated Income Statement. When the cash flow hedge of a firm commitment or forecasted transaction subsequently results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are recognised in the Consolidated Income Statement.

The significant accounting policies applicable from 1 January 2005 are as follows:

Financial assets
Financial fixed assets classified as available-for-sale are stated at their fair market value at the balance sheet date. Any movements in value are taken to equity until the asset is disposed of unless there is deemed to be an impairment on the original cost in which case the loss is taken directly to the Consolidated Income Statement.

All other financial assets are stated at cost less provisions for impairment. Income from financial assets is recognised in the Consolidated Income Statement in the period in which it is receivable.

Borrowings
Debt instruments are initially reported at cost, which is the proceeds received, net of transaction costs. Subsequently they are reported at amortised cost. Any discount between the net proceeds received and the principal value due on redemption is amortised over the duration of the debt instrument, and is recognised as part of the interest expense in the Consolidated Income Statement. To the extent that debt instruments are hedged under qualifying fair value hedges, the hedged item is recorded at fair value.