IFRS_Restatement restatement

Adoption of International Financial Reporting Standards (IFRS)

Presentation - 20 May 2005

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Contents

1. Overview

2. Financial presentation under IFRS

3. Summary of accounting policy differences

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1. Overview

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IFRS – headlines• No material impact on cash resources

• Banking covenants not affected

• Main adjustments are:

- accounting for goodwill on disposals and goodwill amortisation (IFRS 1 and 3)

- capitalisation of development costs (IAS 38)

- foreign currency movements related to debt (IAS 21)

• IFRS 5, IAS 39 – adopted from 1 April 2005

• Financial impact 2004/05

- increase reported earnings by £378m

- increase operating profit by £9m

- increase equity at March 2005 by £34m

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IFRS – summary of financial impactRestatement of profit for 2004/05£ million Operating

profit(1)

Net profit for year

Profit/(loss) for year under UK GAAP 175 (473)

Adjustments:

Reversal of goodwill amortisation (IFRS 3) - 28

Reversal of goodwill charged on sale of subsidiary (IFRS 1) - 331

Capitalisation of development costs- additions 16 16

- depreciation (8) (8)

- net (IAS 38) 8 8

Foreign exchange gain on net debt (IAS 21) - 16

Foreign exchange loss on sale of subsidiaries (IAS 21) - (3)

Taxation (IAS 12) - (1)

Other 1 (1)

Profit/(loss) for year under IFRS 184 (95)

Notes:1. Before exceptional items, goodwill amortisation, goodwill impairment and foreign exchange gains/(losses).

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IFRS – IAS 21 Foreign currency gains/(losses)(1)

Average Movement in

relevant exchange

external rates Impact P&L

Currency of net debt net debt(2) 2004/05 gain/(loss)

£m % £m

US$ (430) 2.7 12

Euro (220) (3.3) (7)

Yen (110) 5.8 7

12

Intra-group balances and other currencies

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Total gain 2004/05 16

Notes:1. This analysis has been prepared to illustrate the impact of currency movements and includes a number of approximations.2. Relevant external net debt is debt held in Group companies with a funtional currency different from the debt.

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IFRS - OPBIT by segment 2004/05

Bridge UK GAAP to IFRS

£ million Intangible assets Employee

UK GAAP Capitalisation

Amortisation

Leases benefits IFRS

Process Systems 47 4 (1) 1 51

Eurotherm 17 17

APV 6 (1) 5

Rail Systems 56 12 (7) 61

Controls 89 1 90

Corporate costs (46) (46)

Retained businesses

169 16 (8) 2 (1) 178

Businesses for sale 9 9

Continuing operations

178 16 (8) 2 (1) 187

Discontinued operations

(3) (3)

Total group 175 16 (8) 2 (1) 184

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IFRS – summary of financial impactRestatement of equity as at 31 March 2004 and 2005

£ million 31 Mar 04 31 Mar 05

Equity – deficit under UK GAAP (304) (510)

Adjustments:

Capitalisation of development costs (IAS 38) 48 56Goodwill (IFRS 3) - 25Leases (IAS 17) (10) (10)Employee benefits (IAS 19) (20) (21)Taxation (IAS 12) (15) (16)Equity – deficit under IFRS (301) (476)

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2. Financial presentation under IFRS

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IFRS Income statement – Full year 2004/05

Bridge UK GAAP to IFRS£ million

UK GAAP

Intangible

assetsGoodwill Leases

Employee

benefits

Foreign

exchange

Taxation

Discontinued

operationsIFRS

Sales - Continuing 2,803 2,803

- Discontinued 120 (120) -

2,923 - - - - - - (120) 2,803

OPBIT - Continuing 178 8 2 (1) 187

- Discontinued (3) 3 -

175 8 - 2 (1) - - 3 187

Restructuring costs (58) (58)

Transition costs (17) (17)

Refinancing costs - -

Fixed asset impairment (63) (63)

Product recall costs (30) (30)

Goodwill amortisation (28) 28 -

Goodwill impairment (27) (1) (28)

PBIT pre corporate exceptionals

(48) 8 27 2 (1) - - 3 (9)

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IFRS Income statement – 2004/05 quarterly phasing

£ million FY Q4 Q3 Q2 Q1

Sales: Continuing 2,803 729 682 713 679

OPBIT:Continuing

187 71 46 51 19

Restructuring costs (58) (17) (13) (18) (10)

Transition costs (17) (2) (3) (8) (4)

Refinancing costs - - - - -

Fixed asset impairment (63) - - (63) -

Product recall costs (30) - - (30) -

Goodwill amortisation - - - - -

Goodwill impairment (28) - - - (28)


(9) 52 30 (68) (23)

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IFRS Income statement – Full year 2004/05


UK GAAP

Intangible

assetsGoodwill Leases

Employee

benefits

Foreign

exchange

Taxation

Discontinued

operations

IFRS


(48) 8 27 2 (1) - - 3 (9)

Profit on sale/closure 170 (3) (167) -

Goodwill write off (468) 331 137 -

Loss on sale of fixed assets (3) (3)

PBIT (349) 8 358 2 (1) (3) - (27) (12)

Foreign exchange gains - 16 16

Interest (136) (1) (137)

FRS 17/IAS 19 finance charges (15) (15)

PBT (500) 8 358 1 (1) 13 - (27) (148)

Taxation 16 (1) 1 16

Loss - continuing (484) 8 358 1 (1) 13 (1) (26) (132)

Profit - discontinued - 26 26

Loss for the year (484) 8 358 1 (1) 13 (1) - (106)

Attributable to:

Equity holders (473) 8 358 1 (1) 13 (1) - (95)

Minority interests (11) (11)

(484) 8 358 1 (1) 13 (1) - (106)

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IFRS Income statement – 2004/05 quarterly phasing£ million FY Q4 Q3 Q2 Q1

PBIT pre corporate exceptionals (9) 52 30 (68) (23)

Loss on sale of fixed assets (3) (2) - (1) -

PBIT (12) 50 30 (69) (23)

Foreign exchange gains/(losses) 16 (2) 25 (2) (5)

Interest (137) (35) (32) (33) (37)

FRS 17/IAS 19 finance charges (15) (4) (3) (4) (4)

PBT (148) 9 20 (108) (69)

Taxation 16 35 (7) (8) (4)

Loss – continuing (132) 44 13 (116) (73)

Profit/(loss) - discontinued 26 (13) - 8 31

Loss for the year (106) 31 13 (108) (42)

Attributable to:

Equity holders (95) 30 12 (94) (43)

Minority interests (11) 1 1 (14) 1

(106) 31 13 (108) (42)

EPS – basic (1.7)p 0.5p 0.2p (1.6)p (0.8)p

– total Group before exceptional items, goodwill impairment and IAS 21 0.3p 0.4p 0.1p 0.4p (0.6)p

Average number of shares 5,687m 5,687m 5,687m 5,687m 5,687m

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IFRS Segmental analysis – 2004/05£ million Sales Operating Profit(1)

FY Q4 Q3 Q2 Q1 FY Q4 Q3 Q2 Q1

Process Systems 709 190 174 178 167 51 22 10 15 4

Eurotherm 122 31 31 32 28 17 6 4 4 3

APV 360 99 87 92 82 5 6 7 - (8)

Rail Systems 412 105 100 103 104 61 16 16 14 15

Controls 921 230 227 236 228 90 25 19 28 18

Corporate costs - - - - - (46) (10) (10) (12) (14)

Retained businesses 2,524

655 619 641 609 178 65 46 49 18

Businesses for sale 279 74 63 72 70 9 6 - 2 1

Continuing operations

2,803

729 682 713 679 187 71 46 51 19

Discontinued operations

120 3 2 5 110 (3) - - - (3)

Total Group 2,923

732 684 718 789 184 71 46 51 16

Note:1. Before exceptional items, goodwill impairment and foreign exchange gains/(losses).

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Free cash flow – Full year 2004/05


UK GAAP Leases

Intangible

assets

Employee

benefitsIFRS

Operating profit 175 2 8 (1) 184

Depreciation/amortisation 73 1 8 82

Share-based payments 2 2

FRS 17 pension cost 48 48

Working capital movement 51 (1) 1 51

Environmental & litigation settlements

(34) (34)

Restructuring costs (45) (45)

Transition costs (24) (24)

Refinancing costs (8) (8)

Product recall costs (4) (4)

Capital expenditure - expenditure

(62) (16) (78)

- receipts 4 4

Pension contributions (131) (131)

Operating cash flow 45 2 - - 47

Interest paid (112) (1) (113)

Taxation paid (76) (76)

Free cash flow (143) 1 - - (142)

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Balance sheet – 31 March 2004


UK GAAP

Intangible

assetsLeases

Employee

benefitsTaxation IFRS

Tangible assets 660 (16) 9 653

Intangible assets - goodwill

478 478

Intangible assets - other - 75 75

1,138 59 9 - - 1,206

Net trading assets 156 (11) (8) (20) 117

Deferred taxation (6) (15) (21)

Net pension liability (606) (606)

682 48 1 (20) (15) 696

Share capital and reserves

(469) 48 (10) (20) (15) (466)

Minority interests 165 165

Total equity interests (304) 48 (10) (20) (15) (301)

Net debt 986 11 997

682 48 1 (20) (15) 696

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Balance sheet – 31 March 2005


UK GAAP

Intangible

assetsLeases

Employee

benefitsTaxation Goodwill IFRS

Tangible assets 442 (16) 8 434

Intangible assets - goodwill

285 25 310

Intangible assets - other - 83 83

727 67 8 - - 25 827

Net trading assets 124 (11) (8) (21) 84

Deferred taxation 5 (16) (11)

Net pension liability (574) (574)

282 56 - (21) (16) 25 326

Share capital and reserves

(643) 56 (10) (21) (16) 25 (609)

Minority interests 133 133

Total equity interests (510) 56 (10) (21) (16) 25 (476)

Net debt 792 10 802

282 56 - (21) (16) 25 326

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Movement in net debt

Bridge UK GAAP to IFRS£ million UK GAAP Leases IFRS

Opening net debt (986) (11) (997)

Free cash flow - operating 38 1 39

- legacy (181) - (181)

Dividends paid (14) - (14)

Acquisition costs (2) - (2)

Net divestment proceeds(1)(2) 352 - 352

Transfer of facility fees from prepayments 2 - 2

Amortisation of facility fees within debt (7) - (7)

Currency movement 6 - 6

Closing net debt (792) (10) (802)

Notes:1. Including net cash divested £18m.

2. Including pre-disposal working capital movement £(11)m.

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IFRS Debt financing at 31 March 05 comprised…

Maturity

(years) (1)

Effective

Rate –

Cash(2)

Drawn –

Cash

£ million

Drawn –

non-cash

£ million

Undrawn

£ million

High Yield 6.0 9.875% 663

144A 1.8 7.125% 1

144A 4.8 6.500% 106

EMTN 0.1 5.500% 24

2nd Lien 4.8 L + 4.75% 262

Term Loan B 4.5 L + 3.5% 363

RCF 4.0 L + 3.0% - 197

Bonding 4.0 L + 3.0% 25 213 151

Other debt 34

Total gross debt (before costs & discount)

1,478 213 348

High yield discount (10)

Debt issuance costs (27)

Total gross debt (after costs & discount)

1,441

Escrow account (3) (309)

EMTN deposit (26)

Cash collateral (111)

Other cash (193)

Total cash (639)

Net debt 802Notes:1. Excluding scheduled repayments.2. L+ = margin over LIBOR.3. Cash subject to “escrow” restrictions on usage.

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NO CHANGE

IFRS Movement in “legacy” liabilities…£ million

Taxation

Litigation/Environmen

tal TransitionDiscountin

g Pensions(2)

At 31 March 2003 256 140 100 204 931

At 31 March 2004 134 107 64 - 606

At 30 June 2004 129 104 48 - 582

At 30 Sept 2004 129 75 47 - 600

At 31 Dec 2004 125 71 45 - 596

Cash payments (37) - (5) (37)

Charge/(credit)(1) (29) - - 13

Disposals - - - -

Market movements(3) - - - 3

Exchange (1) - - (1)

At 31 Mar 2005 58 71 40 - 574Notes:1. The pension charge comprises service cost, finance charge and settlement/curtailments for defined benefit schemes only.2. Represents the Group’s defined benefit pension deficit.3. Changes in value of investments and liabilities.

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NO CHANGE£ million

(Deficit) at 31 March 2004 (606)

Return on assets less interest cost on liabilities (64)

Contributions and unfunded benefit payments less service cost 54

Experience gains, settlements and disposals 20

Exchange (4)

(Deficit) at 30 September 2004 (600)

Return on assets less interest cost on liabilities 81

Contributions and unfunded benefit payments less service cost 28

Experience gains, settlements and disposals 1

Change in discount rate (91)

Exchange 7

(Deficit) at 31 March 2005 (574)

FRS 17/IAS 19

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3. Summary of accounting policy differences

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Significant accounting differences

• Intangibles – IAS 38

• Business combinations and goodwill – IFRS 3

• Foreign exchange – IAS 21

• Financial instruments – IAS 39

• Share-based payment – IFRS 2

• Leases – IAS 17

• Taxation – IAS 12

• Employee benefits – IAS 19

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Intangible assets – IAS 38

Principal differences

• Requirement to capitalise qualifying development costs as intangible assets

Income statement impact

• Increase in operating profit of £8m in 2004/05

Balance sheet impact

• Capitalisation of hardware and software development costs at Rail Systems & Process Systems. No basis for capitalisation of costs at other business groups

• Capitalisation of separable development spend from point of technical & commercial feasibility of product. No capitalisation of stand-alone software development costs

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Business combinations and goodwill – IFRS 3Principal differences

• Amended calculation of profit/loss on disposal of businesses as goodwill previously written-off to reserves is no longer recycled through profit and loss account

• No amortisation of goodwill under IFRS, but annual impairment testing

Income statement impact

• Loss on disposal of businesses changes by £331m

• Reversal of £28m amortisation charge

IFRS 1 Exemption

• Business combinations before 1 April 2004 are not restated

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Foreign exchange – IAS 21

FX gains/losses on non qualifying net investment hedges

Principal difference• FX gains/losses on foreign currency denominated borrowings

are charged through the income statement rather than reserves to the extent that the borrowings exceed hedged assets held in equivalent foreign currency

• Under IFRS goodwill written off to reserves is not recognised as an asset and can not be included in the hedge determination

Income statement impact - £16m FX gain

Cumulative FX differences on disposal of foreign operations

Principal difference• On disposal of foreign operations the cumulative FX

differences deferred in a separate component of equity are recognised in the income statement (£3m loss)

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Financial instruments – IAS 32/39

IFRS 1 exemption taken to implement IAS 32 and 39 from 1 April 2005 without restatement of comparative data; no impact on 2004/05 accounts and transition balance sheet

Hedge accounting

• Cashflow hedges (future cashflows) will be fair valued on balance sheet and gains and losses transferred to equity and recycled through the income statement at the same time as the underlying hedged item is accounted for through the income statement

• Unhedged derivatives will be fair valued and gains and losses reflected in the income statement

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Share-based payment – IFRS 2

Principal differences

• Currently recognise expense for share options (except SAYE schemes), based on intrinsic value under UITF 17

• Under IFRS, expense recognised for awards of options based on fair value using option pricing modules

Impact

• No effect on Group operating profit as share option schemes are not extensively used and impact of SAYE schemes is minimal

• Balance sheet impact minimal

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Other standards

Leases – IAS 17

• More specific guidance on finance lease criteria has resulted in reclassification of two property operating leases as finance leases and a few equipment leases

• Balance sheet impact – decrease in net assets of £10m from reclassification from operating to finance leases

• Income statement impact – minimal

Taxation – IAS 12

• Reflects mainly impact of tax on undistributed overseas retained earnings and tax impact of IAS 38 adjustments

• Balance sheet impact – increase in liabilities of £15m at March 2004


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Other standards

Employee benefits – IAS 19

• No impact on accounting for pensions as Invensys applied FRS 17 at March 2004

• Change reflects increased accruals for accumulating compensated absences

• Balance sheet impact – £20m at March 2004


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IAS 39/IFRS 5 implementation

• Effective 1 April 2005 IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ and IAS 39 ‘Financial Instruments Recognition and Measurement’ will be implemented prospectively

• IFRS 5 - Lambda, a business held for sale, will be reclassified to Held for Sale/Discontinued and its assets and liabilities will be segregated from the remainder of the Group

• IAS 39 – impact on opening equity at 1 April 2005 is minimal