- Part 2: For the preceding part double click ID:nRSW8822Za
£143m in 2014. They comprised:
- Amortisation of intangible assets acquired in business combinations of £33m (2014: £39m) and a £27m goodwill impairment
charge for John Crane Production Solutions because of the impact of a lower oil price environment on its customers. The
ongoing amortisation charge relates principally to technology and customer relationships;
- £23m charge (2014: £53m) in connection with John Crane, Inc. asbestos litigation;
- £9m charge (2014: £11m) in connection with Titeflex Corporation litigation;
- £38m charge for restructuring (2014: £29m) in respect of the Fuel for Growth programme;
- £14m gain on changes to post-retirement benefits;
- £8m charge for retirement benefit finance (2014: £9m);
- £8m charge for legacy retirement benefit administration (2014: £6m);
- £4m of financing losses (2014: £2m);and
- £2m net gain (2014: £4m) on disposals and other acquisition costs.
In the period to 31 July 2014, in addition to the above, there was a £2m gain on the legal settlement of an item originally
reported as non-headline and a diabetes royalty payment which were also excluded from headline performance.
Cash generation and net debt
Operating cash generation remained strong with headline operating cash-flow of £484m (2014: £490m), representing 95% (2014:
97%) of headline operating profit (see note 27 to the accounts for a reconciliation of headline operating cash and free
cash-flow to statutory cash-flow measures). Free cash-flow increased by £15m to £158m (2014: £143m). Free cash-flow is
stated after all legacy costs, interest and taxes but before acquisitions and dividends.
On a statutory basis, net cash inflow from operations was £266m (2014: £256m).
Dividends paid in the year on ordinary shares amounted to £160m (2014: £275m including the annual dividend of £157m and
special dividend of £118m).
Net debt at 31 July was £818m, an increase of £14m from the £804m at 31 July 2014. The continued strong cash generation was
sufficient to fund the business operations, the legacy cash costs of pension contributions and product liability litigation
and dividends to shareholders.
Interest and other financing costs
Interest payable on debt, net of interest earned on cash deposits, was £52m compared with £59m in 2014. This reduction
primarily reflects lower interest rates on debt during the year. Interest costs were covered 9.8 times by headline
operating profit.
The Group accounts for pensions using IAS 19. As required by this standard, a finance charge of £8m (2014: £9m) is
recognised reflecting the unwinding of the discount on the net pension liability.
Research and development
Investment in research and development (R&D) drives future performance and is a measure of the Group's commitment to the
future organic growth of the business.
We invested a total of £110m in R&D (2014: £117m), equivalent to 3.8% of revenue (2014: 4.0%). Of that total, £104m was
funded by the Company compared with £109m in 2014, a decrease of 4%. This decrease was caused by some long-running
programmes coming to an end and as we seek to improve the efficiency of our innovation investment. We actively seek funding
from customers to support R&D and this amounted to £6m (2014: £8m). Under IFRS, certain development costs are capitalised,
and this amounted to £20m in the period (2014: £24m). The reduction in capitalised development relates to Smiths Detection
and the conclusion of certain long-running projects.
Taxation
The headline tax charge for 2015 of £117m (2014: £120m) represented an effective rate of 25.5% on the headline profit
before taxation (2014: 27.0%). On a statutory basis, the tax charge on continuing activities was £77m (2014: £67m).
The Group continues to take advantage of global manufacturing, research and development and other tax incentives, the
tax-efficient use of capital and tax compliance management. A rate of between 25.5% and 26.5% is expected in the year
ending 31 July 2016.
In the 2015 financial year, Smiths Group paid £91m in direct corporate tax on profits and £106m in employment and other
taxes. The Group additionally collected £216m on behalf of tax authorities primarily from employees but also other indirect
taxes such as VAT. The total amount of tax paid over to tax authorities during the year totalled £413m.
Return on capital employed
The return on capital employed (ROCE) is calculated over a rolling 12-month period and is the percentage that headline
operating profit comprises of monthly average capital employed. Capital employed comprises total equity adjusted for
goodwill recognised directly in reserves, post-retirement benefit-related assets and liabilities net of tax, litigation
provisions relating to exceptional items net of tax, and net debt. ROCE increased 30 basis points to 16.0% (2014: 15.7%) as
a result of increased profitability in Smiths Medical and Smiths Detection more than offsetting reduced profitability in
John Crane, Smiths Interconnect and Flex-Tek.
Retirement benefits
As required by IFRS the balance sheet reflects the net surplus or deficit in retirement benefit plans, taking assets at
their market values at 31 July 2015 and evaluating liabilities at period-end AA corporate bond interest rates.
The tables below disclose the net status across a number of individual plans. Where any individual plan shows a surplus
under IAS 19, this is disclosed on the balance sheet as a retirement benefit asset. The IAS 19 surplus of any one plan is
not available to fund the IAS 19 deficit of another plan. The net pension deficit has reduced to £108m at 31 July 2015 from
£242m at 31 July 2014. The deficit reduction reflects the benefit of contributions, gains on UK assets and an experience
gain on liabilities as part of the UK triennial valuations partly offset by the impact of lower UK bond yields and new
mortality assumptions for the US plans. The accounting basis under IAS 19 does not necessarily reflect the funding basis
agreed with the Trustees and, should the schemes be wound up while they had members, they would need to buy out the
benefits of all members. The buyouts would cost significantly more than the present value of scheme liabilities calculated
in accordance with IAS 19.
The retirement benefit position was:
Funded plans
UK plans - funding status 104% 99% 99%
US plans - funding status 78% 73% 84%
Other plans - funding status 86% 80% 79%
Other plans - funding status
86%
80%
79%
Deficit
Funded plans 7 (224) (135)
Unfunded plans (115) (114) (107)
Total deficit (108) (338) (242)
Retirement benefit assets 170 158 123
Retirement benefit liabilities (278) (496) (365)
(108) (338) (242)
(108)
(338)
(242)
In the coming year, cash contributions to all the schemes are expected to total approximately £132m (2014: £85m), including
£32m to fund a buyout arrangement for US pensioners in August 2015. In addition, the Group will invest £24m in an escrow
account as part of the funding plan agreed with the Smiths Industries Pension Scheme (SIPS). These contributions are
subject to the outcome of the triennial reviews with the UK trustees that are currently underway.
The approximate pension membership for the three main schemes at the end of July 2015 is set out in the table below.
Actions to provide a cash settlement to deferred members in the US helped to reduce overall pensioner numbers by around 8%.
The $500m buyout arrangement for US pensioners in August 2015 has resulted in a further reduction of c. 5,620 pensioners in
the coming financial year as individual annuities are purchased for all existing pensioners
Deferred active 390 250 2,510 3,150
Deferred 10,850 13,180 2,990 27,020
Pensioners 13,020 16,950 5,620 35,590
Total 24,260 30,380 11,120 65,760
Total
24,260
30,380
11,120
65,760
Exchange rates
The results of overseas operations are translated into sterling at average exchange rates. The net assets are translated at
period-end rates. The principal exchange rates, expressed in terms of the value of sterling, are shown in the following
table.
Average rates:
US dollar 1.56 1.64 Dollar strengthened 5% 1.59
Euro 1.33 1.21 Euro weakened 10% 1.27
Year-end rates:
US dollar 1.56 1.69 Dollar strengthened 7% 1.50
Euro 1.42 1.26 Euro weakened 13% 1.33
Euro
1.42
1.26
Euro weakened 13%
1.33
Financial information
The financial information in this preliminary announcement which comprises the consolidated income statement, consolidated
statement of comprehensive income, consolidated balance sheet, consolidated cash-flow statement, consolidated statement of
changes in equity, accounting policies and related notes does not constitute statutory accounts within the meaning of
Section 434 of the Companies Act 2006.
The statutory accounts for the year ended 31 July 2014 have been filed with the Registrar of Companies. The auditors have
reported on those accounts and on the statutory accounts for the year ended 31 July 2015, which will be filed with the
Registrar of Companies following the Annual General Meeting. Both the audit reports were unqualified and did not contain
any statement under section 498 of the Companies Act 2006.
__________________________________
Consolidated income statement
Notes Year ended Year ended
31 July 2015 31 July 2014
£m £m
Continuing operations
Revenue 1 2,897 2,952
Cost of sales (1,564) (1,626)
Gross profit 1,333 1,326
Sales and distribution costs (406) (398)
Administrative expenses (533) (550)
Operating profit 2 394 378
Comprising
- headline operating profit 3 511 504
- exceptional items, amortisation of acquired intangibles 3 (117) (126)
394 378
Interest receivable 3 3
Interest payable (55) (62)
Other financing losses (9) (8)
Net finance charges - retirement benefits 9 (8) (9)
Finance costs 5 (69) (76)
Profit before taxation 325 302
Comprising
- headline profit before taxation 3 459 445
- exceptional items, amortisation of acquired intangibles and other financing gains and losses 3 (134) (143)
325 302
Taxation 7 (77) (67)
Profit for the year 248 235
Attributable to
Smiths Group shareholders 246 233
Non-controlling interests 2 2
248 235
Earnings per share 6
Basic 62.4p 59.0p
Diluted 61.8p 58.4p
Consolidated statement of comprehensive income
Notes Year ended Year ended
31 July 2015 31 July 2014
£m £m
Profit for the period 248 235
Other comprehensive income
Actuarial gains/(losses) on retirement benefits 9 60 (77)
Taxation recognised on actuarial movements 7 21 6
Other comprehensive income and expenditure which will not be reclassified to the consolidated income statement 81 (71)
Other comprehensive income which will be, or has been, reclassified
Exchange gains/(losses) 9 (257)
Fair value gains/(losses)
- on available for sale financial assets 11 3
- deferred in the period on cash-flow and net investment hedges (6) 119
- reclassified to income statement 1 (3)
Total other comprehensive income 96 (209)
Total comprehensive income 344 26
Attributable to
Smiths Group shareholders 343 25
Non-controlling interests 1 1
344 26
Consolidated balance sheet
Notes 31 July 2015 31 July 2014
£m £m
Non-current assets
Intangible assets 11 1,518 1,544
Property, plant and equipment 13 259 258
Financial assets - other investments 17 156 117
Retirement benefit assets 9 170 123
Deferred tax assets 7 218 185
Trade and other receivables 15 40 35
Financial derivatives 20 4 9
2,365 2,271
Current assets
Inventories 14 454 427
Current tax receivable 30 34
Trade and other receivables 15 616 635
Cash and cash equivalents 18 495 190
Financial derivatives 20 20 8
1,615 1,294
Total assets 3,980 3,565
Non-current liabilities
Financial liabilities
- borrowings 18 (1,150) (982)
- financial derivatives 20 (6) (4)
Provisions for liabilities and charges 23 (253) (245)
Retirement benefit obligations 9 (278) (365)
Deferred tax liabilities 7 (71) (58)
Trade and other payables 16 (24) (28)
(1,782) (1,682)
Current liabilities
Financial liabilities
- borrowings 18 (163) (12)
- financial derivatives 20 (12) (5)
Provisions for liabilities and charges 23 (79) (82)
Trade and other payables 16 (466) (464)
Current tax payable (50) (75)
(770) (638)
Total liabilities (2,552) (2,320)
Net assets 1,428 1,245
Shareholders' equity
Share capital 24 148 148
Share premium account 349 346
Capital redemption reserve 6 6
Revaluation reserve 1 1
Merger reserve 235 235
Retained earnings 26 743 559
Hedge reserve 26 (63) (58)
Total shareholders' equity 1,419 1,237
Non-controlling interest equity 9 8
Total equity 1,428 1,245
Consolidated statement of changes in equity
Notes Share capital Other Retained earnings Hedge Equity Non-controlling Total
and share reserves £m reserve shareholders' Interest equity
premium £m £m funds £m £m
£m £m
At 31 July 2014 494 242 559 (58) 1,237 8 1,245
Profit for the year 246 246 2 248
Other comprehensive income
Actuarial gains on retirement benefits and related tax 81 81 81
Exchange gains/(losses) 10 10 (1) 9
Fair value gains/(losses) and related tax 11 (5) 6 6
Total comprehensive income for the year 348 (5) 343 1 344
Transactions relating to ownership interests
Exercises of share options 24 3 3 3
Taxation recognised on share options 7 (1) (1) (1)
Purchase of own shares 26 (11) (11) (11)
Dividends
- equity shareholders 25 (160) (160) (160)
- non-controlling interest
Share-based payment 10 8 8 8
At 31 July 2015 497 242 743 (63) 1,419 9 1,428
Notes Share capital Other Retained earnings Hedge Equity shareholders' Non-controlling Total
and share reserves £m reserve funds Interest equity
premium £m £m £m £m £m
£m
At 31 July 2013 488 242 930 (174) 1,486 7 1,493
Profit for the year 233 233 2 235
Other comprehensive income
Actuarial losses on retirement benefits and related tax (71) (71) (71)
Exchange (losses)/gains (256) (256) (1) (257)
Fair value gains/(losses) and related tax 3 116 119 119
Total comprehensive income for the year (91) 116 25 1 26
Transactions relating to ownership interests
Exercises of share options 24 6 6 6
Taxation recognised on share options 7 (1) (1) (1)
Purchase of own shares 26 (13) (13) (13)
Dividends
- equity shareholders 25 (275) (275) (275)
- non-controlling interest
Share-based payment 10 9 9 9
At 31 July 2014 494 242 559 (58) 1,237 8 1,245
Consolidated cash-flow statement
Notes Year ended Year ended
31 July 2015 31 July 2014
£m £m
Net cash inflow from operating activities 27 266 256
Cash-flows from investing activities
Expenditure on capitalised development (18) (23)
Expenditure on other intangible assets (18) (17)
Purchases of property, plant and equipment 13 (59) (54)
Disposals of property, plant and equipment 11 5
Investment in financial assets (27) (28)
Acquisition of businesses (1)
Disposals of businesses 2 3
Net cash-flow used in investing activities (109) (115)
Cash-flows from financing activities
Proceeds from exercise of share options 24 3 6
Purchase of own shares (11) (13)
Dividends paid to equity shareholders 25 (160) (275)
Cash inflow/(outflow) from matured derivative financial instruments 4 11
Increase in new borrowings 568 138
Reduction and repayment of borrowings (257) (180)
Net cash-flow used in financing activities 147 (313)
Net increase/(decrease) in cash and cash equivalents 304 (172)
Cash and cash equivalents at beginning of year 189 387
Exchange differences 2 (26)
Cash and cash equivalents at end of year 18 495 189
Cash and cash equivalents at end of year comprise
- cash at bank and in hand 104 115
- short-term deposits 391 75
- bank overdrafts (1)
495 189
Included in cash and cash equivalents per the balance sheet 495 190
Included in overdrafts per the balance sheet (1)
495 189
Reconciliation of net cash-flow to movement in net debt
Notes Year ended Year ended
31 July 2015 31 July 2014
£m £m
Net increase/(decrease) in cash and cash equivalents 304 (172)
Net (increase)/decrease in borrowings resulting from cash-flows (311) 42
Movement in net debt resulting from cash-flows (7) (130)
Capitalisation, interest accruals and unwind of capitalisation fees (1) 3
Movement from fair value hedging 7 (3)
Exchange differences (13) 70
Movement in net debt in the year 18 (14) (60)
Net debt at start of year (804) (744)
Net debt at end of year 18 (818) (804)
Accounting policies
Basis of preparation
The accounts have been prepared in accordance with the Companies Act 2006 applicable to companies reporting under
International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations Committee (IFRS
IC) interpretations, as adopted by the European Union, on a going concern basis and under the historical cost convention
modified to include revaluation of certain financial instruments, share options and pension assets and liabilities, held at
fair value as described below.
The accounting policies adopted are consistent with those of the previous financial year.
Significant judgements, key assumptions and estimates
The preparation of the accounts in conformity with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the accounts and the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from these estimates. The key estimates and assumptions used in these consolidated financial
statements are set out below.
Revenue recognition
The timing of revenue recognition on contracts depends on the assessed stage of completion of contract activity at the
balance sheet date. This assessment requires the expected total contract revenues and costs to be estimated based on the
current progress of the contract. Revenue of £39m (2014: £29m) has been recognised in the period in respect of contracts in
progress at the period end with a total expected value of £137m (2014: £113m) and cumulative revenue recognised to date of
£100m (2014: £70m). A 5% reduction in the proportion of the contract activity recognised in the current period would have
reduced operating profit by less than £1m for both Smiths Detection and Smiths Interconnect (2014: less than £1m).
In addition to contracts accounted for on a percentage of completion basis, Smiths Detection also has long-term contractual
arrangements for the sale of goods and services. Margins achieved on these contracts can reflect the impact of commercial
decisions made in different economic circumstances. In addition, contract delivery is subject to commercial and technical
risks which can affect the outcome of the contract.
Smiths Medical has rebate arrangements in place with some distributors in respect of sales to end customers where sales
prices have been negotiated by Smiths Medical. Rebates are estimated based on the level of discount derived from sales data
from distributors, the amount of inventory held by distributors and the time lag between the initial sale to the
distributor and the rebate being claimed. The rebate accrual at 31 July 2015 was £21m (2014: £19m).
Taxation
The Group has recognised deferred tax assets of £28m (2014: £21m) relating to losses and £99m (2014: £91m) relating to the
John Crane, Inc. and Titeflex Corporation litigation provisions. The recognition of assets pertaining to these items
involves judgement by management as to the likelihood of realisation of these deferred tax assets and this is based on a
number of factors, which seek to assess the expectation that the benefit of these assets will be realised, including
appropriate taxable temporary timing differences, and it has been concluded that there are sufficient taxable profits in
future periods to support recognition. Further detail on the Group's deferred taxation position is included in note 7.
Retirement benefits
The consolidated financial statements include costs in relation to, and provision for, retirement benefit obligations. The
costs and the present value of any related pension assets and liabilities depend on such factors as life expectancy of the
members, the returns that plan assets generate and the discount rate used to calculate the present value of the
liabilities. The Group uses previous experience and independent actuarial advice to select the values of critical
estimates. The estimates, and the effect of variances in key estimates, are disclosed in note 9.
At 31 July 2015 there is a retirement benefit asset of £170m (2014: £123m) which arises from the rights of the employers to
recover the surplus at the end of the life of the scheme. If the pension schemes were wound up while they still had
members, the schemes would need to buy out the benefits of all members. The buyouts would cost significantly more than the
present value of the scheme liabilities calculated in accordance with IAS 19: Employee benefits.
Working capital provisions
For inventory and receivables, if the carrying value is higher than the expected recoverable value, the Group makes
provisions writing down the assets to their recoverable value. The recoverable value of inventory is estimated using
historical selling prices, sales activity and customer contracts. The recoverable value of receivables is considered
individually for each customer and incorporates past experience and progress with collecting receivables.
At 31 July 2015 the carrying value of inventory incorporates provisions of £72m (2014: £76m). The inventory turn rate of
3.4 (2014: 3.8) varies across the five divisions. Smiths Detection has the slowest inventory utilisation with a turn rate
of 2.8 (2014: 3.1). See note 14 for additional information about inventory.
At 31 July 2015 the gross value of receivables partly provided for or more than three months overdue was £57m (2014: £45m)
and there were provisions of £22m (2014: £17m) against these receivables which were carried at a net value of £35m (2014:
£28m). See note 15 for disclosures on credit risk and ageing of trade receivables.
Impairment
Goodwill is tested at least annually for impairment and intangible assets acquired in business combinations are tested if
there are any indications of impairment, in accordance with the accounting policy set out below. The recoverable amounts of
cash generating units and intangible assets are determined based on value in use calculations. These calculations require
the use of estimates including projected future cash-flows and other future events.
See note 12 for details of the critical assumptions made, including the sales and margin volatility in Smiths Detection and
Smiths Interconnect and disclosures on the sensitivity of the impairment testing to these key assumptions, including
details of the changes in assumptions which would be required to trigger an impairment in Smiths Detection or Smiths
Interconnect Power.
Provisions for liabilities and charges
As previously reported, John Crane, Inc., a subsidiary of the Group, is currently one of many co-defendants in litigation
relating to products previously manufactured which contained asbestos. Provision of £216m (2014: £204m) has been made for
the future defence costs which the Group is expected to incur and the expected costs of future adverse judgments against
John Crane, Inc. Whilst published incidence curves can be used to estimate the likely future pattern of asbestos related
disease, John Crane, Inc.'s claims experience is significantly impacted by other factors which influence the US litigation
environment. These can include: changing approaches on the part of the plaintiffs' bar; changing attitudes amongst the
judiciary at both trial and appellate levels; and legislative and procedural changes in both the state and federal court
systems. Therefore, because of the significant uncertainty associated with the future level of asbestos claims and of the
costs arising out of the related litigation, there can be no guarantee that the assumptions used to estimate the provision
will result in an accurate prediction of the actual costs that may be incurred. John Crane, Inc. takes account of the
advice of an expert in asbestos liability estimation in quantifying the expected costs.
As previously reported, Titeflex Corporation, a subsidiary of the Group in the Flex-Tek division, has received a number of
claims from insurance companies seeking recompense on a subrogated basis for the effects of damage allegedly caused by
lightning strikes in relation to its flexible gas piping product. It has also received a number of product liability claims
regarding this product, some in the form of purported class actions. Titeflex Corporation believes that its products are a
safe and effective means of delivering gas when installed in accordance with the manufacturer's instructions and local and
national codes; however some claims have been settled on an individual basis without admission of liability. Provision of
£71m (2014: £61m) has been made for the costs which the Group is expected to incur in respect of these claims. However,
because of the significant uncertainty associated with the future level of claims, there can be no guarantee that the
assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred.
The Group has on occasion been required to take legal action to protect its intellectual property and other rights against
infringement. It has also had to defend itself against proceedings brought by other parties, including product liability
and insurance subrogation claims. Provision is made for any expected costs and liabilities in relation to these proceedings
where appropriate, though there can be no guarantee that such provisions (which may be subject to potentially material
revision from time to time) will accurately predict the actual costs and liabilities that may be incurred.
All provisions may be subject to potentially material revisions from time to time if new information becomes available as a
result of future events. See note 23 for details of the assumptions and disclosures on the sensitivity of the provision
calculations.
Accounting policies
Basis of consolidation
The consolidated accounts incorporate the financial statements of Smiths Group plc ("the Company") and its subsidiary
undertakings, together with the Group's share of the results of its associates.
Subsidiaries are all entities controlled by the Company. Subsidiaries are fully consolidated from the date on which control
is obtained by the Company to the date that control ceases.
Associates are entities over which the Group has significant influence but does not control, generally accompanied by a
share of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method.
Foreign currencies
The Company's presentational currency is sterling. The results and financial position of all subsidiaries and associates
that have a functional currency different from sterling are translated into sterling as follows:
· assets and liabilities are translated at the rate of exchange at the date of that balance sheet;
· income and expenses are translated at average exchange rates for the period; and
· all resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of
borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When
a foreign operation is sold, the cumulative amount of such exchange differences is recognised in the income statement as
part of the gain or loss on sale.
Exchange differences arising on transactions are recognised in the income statement. Those arising on trading are taken to
operating profit; those arising on borrowings are classified as finance income or cost.
For the convenience of users, supplementary primary financial statements translated into US dollars have been presented
after the Group financial record. Assets and liabilities have been translated into US dollars at the exchange rate at the
date of that balance sheet and income, expenses and cash-flows are translated at average exchange rates for the period.
Revenue
Revenue is measured at the fair value of the consideration received, net of trade discounts (including distributor rebates)
and sales taxes. Revenue is discounted only where the impact of discounting is material.
Sale of goods
Revenue from the sale of goods is recognised when the risks and rewards of ownership have been transferred to the customer,
the amount of revenue can be measured reliably and recovery of the consideration is probable. For established products with
simple installation requirements, revenue is recognised when the product is delivered to the customer in accordance with
the agreed delivery terms. For products which are technically innovative, highly customised or require complex
installation, revenue is recognised when the customer has completed its acceptance procedures.
Services
Revenue from services is recognised in accounting periods in which the services are rendered, by reference to completion of
the specific transaction, assessed on the basis of the actual service provided as a proportion of the total services to be
provided. Depending on the nature of the contract, revenue will be recognised on the basis of the proportion of the
contract term completed, the proportion of the contract costs incurred or the specific services provided to date.
Construction contracts
Contracts for the construction of substantial assets are accounted for as construction contracts if the customer specifies
major structural elements of the design, including the ability to amend the design during the construction process. These
projects normally involve installing customised systems with site-specific integration requirements.
Where the outcome of a construction contract can be estimated reliably, revenue and costs are recognised by reference to
the stage of completion of the contract activity at the balance sheet date. The Group uses the 'percentage of completion
method' to determine the appropriate amount to recognise in a given period. The assessment of the stage of completion is
dependent on the nature of the contract, but will generally be based on the estimated proportion of the total contract
costs which have been incurred to date. If a contract is expected to be loss-making, a provision is recognised for the
entire loss.
Employee benefits
Share-based compensation
The Group operates a number of equity-settled and cash-settled share-based compensation plans.
The fair value of the shares or share options granted is recognised as an expense over the vesting period to reflect the
value of the employee services received. The fair value of options granted, excluding the impact of any non-market vesting
conditions, is calculated using established option pricing models, principally binomial models. The probability of meeting
non-market vesting conditions, which include profitability targets, is used to estimate the number of share options which
are likely to vest.
For cash-settled share-based payment, a liability is recognised based on the fair value of the payment earned by the
balance sheet date. For equity-settled share-based payment, the corresponding credit is recognised directly in reserves.
Pension obligations and post-retirement benefits
The Group has defined benefit plans, defined contribution plans and post-retirement healthcare schemes.
For defined benefit plans and post-retirement healthcare schemes the liability for each scheme recognised in the balance
sheet is the present value of the obligation at the balance sheet date less the fair value of any plan assets. The
obligation is calculated annually by independent actuaries using the projected unit credit method. The present value is
determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are
denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms
of the related liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial
assumptions are recognised in full in the period in which they occur, outside of the income statement, and are presented in
the statement of comprehensive income. Past service costs are recognised immediately in the income statement.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans
on a mandatory, contractual or voluntary basis. Contributions are expensed as incurred.
Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as
operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over
the period of the lease.
Exceptional items
Items which are material either because of their size or their nature, and material items which are non-recurring, are
presented within their relevant consolidated income statement category, but highlighted through separate disclosure. The
separate reporting of exceptional items helps provide a better picture of the Company's underlying performance. Items which
are included within the exceptional category include:
· profits/(losses) on disposal of businesses and costs of acquisitions and disposals;
· spend on the integration of significant acquisitions and other major restructuring programmes;
· significant goodwill or other asset impairments;
· income and expenditure relating to material litigation in respect of products no longer in production; and
· other particularly significant or unusual items.
Exceptional items are excluded from the headline profit measures used by the Group. See note 3 for the basis of calculation
of these measures.
Taxation
The charge for taxation is based on profits for the year and takes into account taxation deferred because of temporary
differences between the treatment of certain items for taxation and accounting purposes.
Deferred tax is provided in full using the balance sheet liability method. A deferred tax asset is recognised where it is
probable that future taxable income will be sufficient to utilise the available relief. Tax is charged or credited to the
income statement except when it relates to items charged or credited directly to equity, in which case the tax is also
dealt with in equity.
Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the
timing of the reversal of the temporary differences is controlled by the Company and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax liabilities and assets are not discounted.
Discontinued operations
A discontinued operation is a component of the Group's business that represents a separate major line of business or
geographical area of operations that has been disposed of, has been abandoned or meets the criteria to be classified as
held for sale.
Discontinued operations are presented on the income statement as a separate line and are shown net of tax.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the identifiable
net assets of the acquired subsidiary at the date of acquisition.
Goodwill arising from acquisitions of subsidiaries after 1 August 1998 is included in intangible assets, tested annually
for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity
include the carrying amount of goodwill relating to the entity sold. Goodwill arising from acquisitions of subsidiaries
before 1 August 1998 was set against reserves in the year of acquisition.
Goodwill is tested for impairment at least annually. Any impairment is recognised immediately in the income statement.
Subsequent reversals of impairment losses for goodwill are not recognised.
Research and development
Expenditure on research and development is charged to the income statement in the year in which it is incurred with the
exception of:
· amounts recoverable from third parties; and
· expenditure incurred in respect of the development of major new products where the outcome of those projects is assessed
as being reasonably certain as regards viability and technical feasibility. Such expenditure is capitalised and amortised
straight line over the estimated period of sale for each product, commencing in the year that sales of the product are
first made.
The cost of development projects which are expected to take a substantial period of time to complete, and commenced after 1
August 2009, includes attributable borrowing costs.
Intangible assets acquired in business combinations
The identifiable net assets acquired as a result of a business combination may include intangible assets other than
goodwill. Any such intangible assets are amortised straight line over their expected useful lives as follows:
Patents, licences and trademarks up to 20 years
Technology up to 12 years
Customer relationships up to 7 years
The assets' useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Software, patents and intellectual property
The estimated useful lives are as follows:
Software up to 7 years
Patents and intellectual property shorter of the economic life and the period the right is legally enforceable
The assets' useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Property, plant and equipment
Property, plant and equipment is stated at historical cost less accumulated depreciation and any recognised impairment
losses.
Land is not depreciated. Depreciation is provided on other assets estimated to write off the depreciable amount of relevant
assets by equal annual instalments over their estimated useful lives. In general, the rates used are: Freehold and long
leasehold buildings - 2%; Short leasehold property - over the period of the lease; Plant, machinery, etc. - 10% to 20%;
Fixtures, fittings, tools and other equipment - 10% to 33%.
The cost of any assets which are expected to take a substantial period of time to complete and whose construction began
after 1 August 2009 includes attributable borrowing costs.
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An
asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater
than its estimated recoverable amount.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out
(FIFO) method. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs
and related production overheads (based on normal operating capacity). The cost of items of inventory which take a
substantial period of time to complete includes attributable borrowing costs for all items whose production began after 1
August 2009. Net realisable value is the estimated selling price in the ordinary course of business, less applicable
variable selling expenses.
Trade and other receivables
Trade receivables are initially recognised at fair value and subsequently measured at amortised cost, less any appropriate
provision for estimated irrecoverable amounts. A provision is established for irrecoverable amounts when there is objective
evidence that amounts due under the original payment terms will not be collected.
Provisions
Provisions for warranties and product liability, disposal indemnities, restructuring costs, vacant leasehold property and
legal claims are recognised when: the Company has a legal or constructive obligation as a result of a past event; it is
probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably
estimated. Provisions are not recognised for future operating losses.
Provisions are discounted where the time value of money is material.
Where there are a number of similar obligations, for example where a warranty has been given, the likelihood that an
outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is
recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may
be small.
Assets and businesses held for sale
Assets and businesses classified as held for sale are measured at the lower of carrying amount and fair value less costs to
sell. Impairment losses on initial classification as held for sale and gains or losses on subsequent remeasurements are
included in the income statement. No depreciation is charged on assets and businesses classified as held for sale.
Assets and businesses are classified as held for sale if their carrying amount will be recovered or settled principally
through a sale transaction rather than through continuing use. The asset or business must be available for immediate sale
and the sale must be highly probable within one year.
Cash and cash equivalents
Cash and cash equivalents include cash at bank and in hand and highly liquid interest-bearing securities with maturities of
three months or less.
In the cash-flow statement, cash and cash equivalents are shown net of bank overdrafts, which are included as current
borrowings in liabilities on the balance sheet.
Financial assets
The classification of financial assets depends on the purpose for which the assets were acquired. Management determines the
classification of an asset at initial recognition and re-evaluates the designation at each reporting date. Financial assets
are classified as: loans and receivables, available for sale financial assets or financial assets where changes in fair
value are charged (or credited) to the income statement.
Financial assets are initially recognised at transaction price when the Group becomes party to contractual obligations. The
transaction price used includes transaction
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