Share
At 1 January 2007 90.3 155.2 (0.3) (1.7) 1.6 167.6 412.7 3.9 416.6
Total recognised income and expense
1.9 (1.0) 138.5 139.4 2.9 142.3
Issued in the year 0.6 8.1 8.7 8.7
Dividends paid (63.9) (63.9) (2.4) (66.3)
Minority interest
84.6 163.3 1.6 (2.7) 7.9 151.8 406.5 6.4 412.9
Total recognised income and expense
(3.8) 68.1 58.6 122.9 5.3 128.2
Issued in the year 0.1 1.8 1.9 1.9
Dividends paid (66.2) (66.2) (2.4) (68.6)
Share-based
84.7 165.1 (2.2) 65.4 7.9 131.5 452.4 9.3 461.7
IMI’s note on share capital and reserves discloses:
O
O They had a small share issue during the year (these were issued to employees).
O
O They spent £16.7 million buying back shares, most of these were treasury shares but some were for employee share schemes. It is considerably less than the amount they spent, £93.3 million, in 2007.
O
O They currently have 20.6 million shares in treasury.
O
O Exchange rates increased IMI’s net worth in 2008 by £68.1 million.
The aggregate amount of goodwill arising from relevant historical acquisitions prior to 1 January 2004 which had been deducted from the profit and loss reserves and incorporated into the IFRS transitional balance sheet as at 1 January 2004 amounted to £364m.
Share capital
The number of ordinary shares of two 25p each
2008 2007 2008 2007
m m m m
Authorised 480.0 480.0 120.0 120.0
Issued and fully paid:
In issue at the start of the year 338.3 361.0 84.6 90.3 Issued to satisfy employee share schemes 0.6 2.6 0.1 0.6
Cancellation of treasury shares – (25.3) – (6.3)
In issue at the end of the year 338.9 338.3 84.7 84.6 Of which held within retained earnings 20.6 17.2
During the year 0.6m shares were issued under employee share schemes realising £1.9m.
The Company made purchases of a total of 3.7m (2007: 17.2m) of its own shares with an aggregate market value of £16.7m (2007: £93.3m) and the nominal value of £0.9m (2007: £4.3m), including dealing costs of £0.1m (2007: £0.5m). Of the 20.6m (2007: 17.2m) shares held within retained earnings, 1.5m (2007: 1.2m) shares with an aggregate value of £9.1m (2007: £7.2m) are held in trust to satisfy employee share scheme vesting.
Summary
I’ve covered a lot of technical material, and I’d now like to summarise the key points that you need to remember.
The balance sheet is a snapshot of the company on a certain day, and like most snapshots it can be presented from different perspectives. Globally the most popular presentation groups assets and liabilities, whereas UK balance sheets usually look at the business from the shareholders’ point of view.
You’ll usually find two balance sheets in group accounts: one for the parent (sometimes called the company), and one for the group (sometimes referred to as the consolidated balance sheet). You are interested in the group’s bal-ance sheet, as this relates to the other financial statements. The parent’s balance sheet is included in the group balance sheet, with its investment in the group companies cancelled out by the group companies’ share capital.
I’ve summarised the important points about each balance sheet item in the table shown on the following pages. Some items may be shown as both cur-rent and non curcur-rent, and I’ve explained them in the first place you could find them in a typical UK balance sheet. Key differences in UK GAAP are italicised.
Non current assets or fixed assets
These are assets that the company doesn’t intend to realise within a year.
These differ from UK GAAP’s fixed assets, which are the assets that the business intends to use on a continuing basis.
Intangible assets These assets are those that can either be sold, transferred or licenced separate from the business as a whole, or those arising from contractual or other form of legal rights. They are largely purchased intangible assets, apart from development costs meeting certain criteria.
Acquisitive businesses have considerable intangible assets, as an acquired business’s intangible assets must be capitalised (if they can be reliably measured) even if they weren’t previously shown in the acquired company’s balance sheet.
Intangible assets can include internally generated software, brand names, patents and goodwill (see below). Acquired business’s intangible assets also include customer and supplier relationships, and order books.
Intangible assets with finite lives are amortised usually on a straight line basis. Their book value can not exceed their market value. If there is any indication that their value has fallen the company must conduct an impairment review and if necessary make an impairment charge to bring the asset’s value to the higher of its value in use or its market value less any selling costs.
UK GAAP only allows intangible assets to be recognised if they can be sold separately from the business as a whole, and have a market value that can be easily determined. This means that companies using UK GAAP are unlikely to recognise most acquired intangible assets.
Goodwill This represents the difference between the cost of acquiring a company and the fair value of its assets. (The acquiring company will probably change the value of the assets. It modifies them to reflect the market values at the date of the acquisition and aligns the accounting policies to those of the group.)
Only purchased goodwill, in other words that arising from an acquisition, can be shown on the balance sheet.
IFRS requires companies to conduct an impairment review, at least annually, to ensure that its value is not overstated in the accounts. UK GAAP requires companies to amortise goodwill on a systematic basis over its useful life.
Property, plant and equipment or tangible assets
These are usually depreciated, ensuring that the cost of acquiring the asset is charged to the income statement over its useful life. (The only exceptions are land and investment properties shown at market value.) The deprecation methods and assumptions must be reviewed each year to ensure that they are still appropriate. If there is any indication that the asset’s value has fallen the company must conduct an impairment review and if necessary make an impairment charge to bring the asset’s value to the higher of its value in use or its market value less any selling costs.
Companies have the option of revaluing assets to reflect current market values. If they choose to do this, the valuation is normally professional and has to be kept up to date. UK rules are more prescriptive than IFRS, requiring a full independent professional valuation every five years, with an interim valuation in the third year, and any other year where there’s a material change in value. If the company has revalued its assets, a revaluation reserve will be shown in the shareholders’ equity.
Investments These are the company’s long-term investments, and IFRS regards these as financial assets.
It identifies four different types of financial assets and specifies their accounting treatment:
O Financial assets at fair value through profit or loss, which can either be those held for trading or designated as such. They are shown at their fair value and any subsequent changes to their fair value are shown as a gain, or a loss, in the income statement.
O Loans and receivables, which are shown at their amortised cost, using the effective interest rate method.
O Held to maturity investments, which is debt, and is shown at amortised cost, using the effective interest rate method.
O Available for sale financial assets, which are all other financial assets and are shown at their fair value and any gains, or losses, are shown in the statement of recognised income and expense, or comprehensive income. Most small investments are classified as available for sale.
If a company can’t reliably measure the fair value of an unquoted equity investment, it is shown at cost.
Most companies using UK GAAP show their investments at cost less any impairment.
Investments in associates and joint ventures are shown separately on the balance sheet.
Associates and joint ventures are usually valued using the equity method, showing the investor’s share of the associate’s net assets in a single line on the balance sheet. Jointly controlled businesses can be valued using proportional consolidation.
Companies using UK GAAP report their investments in joint ventures using the gross equity method, where the company’s share of the joint venture’s gross liabilities is deducted from its gross assets to arrive at its balance sheet value.
Employee benefit net assets
This represents the amount that the employer can benefit from a surplus.
Companies using UK GAAP would not show employee benefit net assets as a fixed asset.
The surplus, or deficit, in final salary pension funds is shown separately on the balance sheet, after net assets.
Derivative financial instruments and hedging
A derivative is a hedging product whose value is derived from something else. Swaps, options and futures contracts are classified as derivatives and can be both assets and liabilities. They are shown at their market value plus any transaction costs, and any subsequent gains and losses are shown as financial income or expense in the income statement unless they are designated as hedges.
Hedge accounting changes the timing of the recognition of gains and losses, so that both the hedged item and the hedge affect the income statement in the same period. This means that profit is unaffected by an effective hedge, and is only affected by any ineffective part of the hedge.
A hedge is fully effective when the change in value of the hedging instrument is the same as the hedged item. However it is still regarded as effective when the hedging instrument has changed within 80–125% of the hedged item. Hedges outside of this range are regarded as ineffective, and hedge accounting can’t be used.
IFRS classifies hedges as:
O Fair value hedges, where the value of the hedged item and hedging instrument is shown at fair value and any gains or losses on revaluation are shown in the income statement.
O Cash flow hedges, where the effective part is shown in reserves until the gain or loss is realised. Any ineffective part would be shown in the income statement.
O Net investment hedges, which have the same accounting treatment as cash flow hedges.
Most companies using UK GAAP use historical cost accounting, so derivatives are rarely included in the balance sheet as their historical cost is effectively zero. However they are disclosed in the notes, which disclose their accounting policies and the fair values of their financial assets, financial liabilities and any hedges.
Deferred tax assets
This is the amount that the company expects to recover from the tax authorities in the future.
Companies using UK GAAP include material deferred tax assets in debtors.
Current assets If the company is using UK GAAP not all its current assets are short term, as they are simply those assets not satisfying the fixed asset definition. Debtors due in more than a year, which are often pension fund prepayments, are included as current assets.
Inventories or stocks
Inventories must be shown at the lower of cost and market value.
Companies using UK GAAP include long-term contract work in progress in stocks.
Trade and other receivables or debtors
Not all receivables represent a future cash inflow to the business, as they include prepayments.
The notes to the group balance sheet will disclose trade receivables (the amount owed by customers), other receivables, prepayments and accrued income and amounts owed by joint ventures and associates.
Companies using UK GAAP include debtors due in more than a year and also disclose in their note on debtors:
O loans financing the acquisition of own shares;
O unpaid called up share capital;
O deferred tax assets;
O amounts recoverable on contracts.
Investments These are classified and accounted for in the same way as non current asset investments, and are likely to be ‘available for sale’ or ‘held for trading’ investments. They include all short-term investments that aren’t classified as cash equivalents.
As UK GAAP doesn’t have cash equivalents, current asset investments include short-term deposits, loans to other organisations such as banks and building societies, marketable shares and other securities.
Cash and cash equivalents
This comprises cash and short-term deposits with a maturity of less than three months. A cash equivalent must have an insignificant risk of a change in its value.
Cash The Companies Act doesn’t define cash, but most companies now use the same definition they use in the cash flow statement, which is a maturity of 24 hours or less.
Non current assets held for sale
These are assets that are available for immediate sale, and where their sale is highly probable. Any assets are shown immediately after current assets, and liabilities immediately after current liabilities.
UK GAAP doesn’t require these to be shown separately, unless they’re acquisitions bought exclusively for resale, when they’re shown as current assets.
Current liabilities Interest bearing loans and borrowings
Companys’ borrowings can be a mixture of loans from banks and investors. Loans from investors are usually negotiable instruments (can be bought and sold). All loans may be either secured on the company’s assets or unsecured.
These are shown on the balance sheet at their amortised cost, unless they have been designated as a hedged item, and the hedge is effective, when their value is adjusted for the changes in the value of the risk being hedged.
Companies using UK GAAP usually don’t recognise hedges, so loans are shown at amortised cost.
Trade and other payables
The notes to the accounts analyse these into trade payables, other tax, social security, other payables and accruals and deferred income, and amounts payable to joint ventures and associates.
Current tax This is the amount payable to tax authorities in the next 12 months.
Provisions These are the unspent provisions for likely future costs, which are shown as current and non current depending on when they will be realised.
Non current liabilities Deferred tax liabilities
This represents the company’s future tax liabilities arising from the temporary differences between the tax value of assets and liabilities and their book value.
Companies using UK GAAP include these in ‘Provisions for liabilities and charges’.
Employee benefit obligations
This is the defined benefit obligation at the end of the year. The deficit/surplus on the employee benefit schemes is the employee benefit obligation less the employee benefit asset (shown in non current assets).
Shareholders’
equity
Share capital These are the shares in issue at the end of the financial year, shown at their nominal, or par, value.
Share premium account
This represents the amount above the par value received by the company for its shares. For example – the par value of a share is £1 and the company receives £5. The share capital would increase by £1, and the share premium account by £4.
Hedging reserve A reserve arising from the gains, and losses, from effective portion of cash flow hedges.
Translation reserve/
translation of foreign operations
A reserve arising from the effect of exchange rates on the value of overseas subsidiaries.
Merger reserve A reserve arising from mergers and group reconstructions. (IFRS doesn’t allow merger accounting, so these would arise from past mergers and group reconstructions.) Revaluation
reserve
This arises from the revaluation of assets.
Capital redemption reserve
This is created following a cancellation of shares after a share ‘buy back’.
Retained earnings or profit and loss account
This represents the accumulated profits and losses reinvested in the business since it started. It may be adjusted by:
O The write off of goodwill arising from acquisitions made before 31 December 1998.
O Share buy backs.
Companies using UK GAAP will usually also include exchange adjustments in the profit and loss account.
Minority interest/non controlling interests
This is the value of the net assets that aren’t owned by the company’s shareholders.