International Financial Reporting Standards
('IFRS')
As of January 2005, Vedior will report under IFRS instead of generally accepted accounting principles in the Netherlands (‘Dutch GAAP’), which applied until the financial year 2004. All companies with securities listed within the European Union are obliged to report in accordance with IFRS from 2005. The 2005 financial statements will include 2004 financial data restated under IFRS to provide comparable information. The effect of the differences between Dutch GAAP and IFRS on the consolidated balance sheet as at 31 December 2004 and the consolidated income statement for the year ended 31 December 2004 are explained below.
IFRS also includes International Accounting Standards (‘IASs’), which are published by the International Accounting Standards Board (‘IASB’). IFRS applicable to Vedior are those standards (IFRSs and IASs) approved by the European Union. Although most standards have now been approved by the European Commission, some have not including IFRS 2 on Share-based Payments, and IAS 39 on financial instruments. IAS 39 is only partially approved, with two carve-outs relating to the use of the fair value option and fair value hedge accounting. Furthermore, the development of interpretations on all standards is still continuing.
For these reasons, any conclusion on the impact of the adoption of IFRS for Vedior’s 2004 consolidated statements is provisional and subject to change.
Due to the delay in approving IAS 32 (Financial Instruments: Disclosure and Presentation) and IAS 39 (Financial Instruments: Recognition and Measurement), the European Commission has allowed companies not to apply them to the 2004 comparative figures in the 2005 financial statements. Vedior will apply these standards as from 1 January 2005 only.
The effects of adopting IFRS as at 1 January 2004 will be recorded in Shareholders’ equity in the 2004 opening balance sheet.
The amounts mentioned in the paragraphs below are exclusive of any tax effects. These tax effects are however included in the consolidated balance sheets and consolidated income statements.
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Goodwill |
Under IFRS, goodwill is no longer systematically amortised. Instead, an impairment test will be performed, at least annually.
Furthermore, goodwill will be valued at current exchange rates under IFRS, whereas measurement at historical exchange rates was applicable under Dutch GAAP.
The goodwill amounts in local currency will be translated to euro at each reporting date and currency differences will be recorded in Shareholders’ equity. As a result of the elimination of goodwill amortisation, the 2004 net result and the carrying value of the goodwill in the balance sheet will increase by €276 million. However, due to movements in exchange rates, the carrying value of the goodwill will decrease by €23 million at 31 December 2004.
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Goodwill associates |
Under Dutch GAAP, goodwill arising on investments in associates was included with goodwill arising on other investments. Under IFRS, this goodwill which amounts to €4 million as at 31 December 2004, will be reclassified under investments in associates and included in the carrying value of associates.
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Niscom Disposal |
In September 2004, our investment in the Japanese company, Niscom, was disposed of.
Under Dutch GAAP the profit on disposal was based on the book value of goodwill as at September 2004. This book value was reduced by goodwill amortised of €5 million in the first nine months of 2004. Under IFRS, this amortisation is added back, which leads to a lower gain on the disposal.
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Share based payments |
Under IFRS, the costs of stock option plans and the Restricted Share Plan (‘RSP’) are taken into the income statement over the vesting period of the incentives. The value of the equity incentives granted to employees is measured at fair value, including an assessment of the probability that performance targets will be achieved.
Based on IFRS2, the cost of all equity incentives granted in 2003 and 2004 will be expensed through the 2004 consolidated income statement. The costs of incentives provided in earlier years will not be taken into account.
Under Dutch GAAP, only the cost for the Restricted Share Plan was expensed through the income statement. In 2004, an amount of €2 million was expensed for the RSP. The additional costs for the stock option plans under IFRS in 2004 amount to €3 million.
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Retirement schemes |
For defined benefit plans, IFRS requires that the assets and liabilities of the pension fund are accounted for by the employer.
The calculation of the income statement charges and the pension liability, if any, to be included in the balance sheet are based on actuarial assumptions. These assumptions relate principally to future salary increases and investment returns on the funds assets. The IFRS provision for retirement benefit obligations as at 31 December 2004 amounts to €15 million. The additional income statement charge for 2004 reported under IFRS, amounts to €1 million.
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Real estate companies in France |
In France, the Group owns several small companies which have activities in developing and holding real estate and which were exempt from consolidation under Dutch GAAP, as their activities are not part of our core business. These real estate companies were classified as investments in associates.
Under IFRS this exemption is no longer applicable and all companies where Vedior has management control are required to be consolidated as from January 2004, regardless of the nature of their activities. The impact on the consolidated sales and cost of sales for 2004 is €8 million. The effect on consolidated operating income over the year 2004 is nil.
Transition effects in 2005
As discussed above, Vedior will start to adopt IAS 32 and 39 on financial instruments as from January 2005. Following the adoption of these standards, the consolidated balance sheet as at 1 January 2005 and the consolidated income statement for the year ended 31 December 2005 will be affected by the reclassification of the cumulative preferred shares in the joint-venture which financed the acquisition of Acsys Inc. in 2000.
The cumulative preferred shares, amounting to €30 million, are classified as minority interest under Dutch GAAP. Under IFRS these shares will be classified as a loan in the balance sheet as from 1 January 2005.
The dividend on these shares of €2.4 million per annum will be classified as financial expense under IFRS in 2005, whereas under Dutch GAAP this was classified under minority interests.
The company also has a convertible loan of €44 million. The conversion option on this loan together with the conversion option on the preferred shares will be classified as an equity instrument and measured and recognised separately from the loan. |