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International Financial Reporting Standards

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Title: International Financial Reporting Standards


1
International Financial Reporting Standards
Presentation to Analysts and Investors 6 April
2005
2
Cautionary statement
  • International Financial Reporting Standards
    (IFRS) are being applied in the European Union
    for the first time. There are a number of new
    and revised Standards included within the body of
    Standards that comprise IFRS. There is not yet a
    significant body of established practice upon
    which to draw in forming opinions regarding their
    interpretation and application. Accordingly,
    practice is continuing to evolve. At this
    preliminary stage, therefore, the full financial
    effect of reporting under IFRS, as it will be
    applied and reported on in the Groups first IFRS
    financial statements, cannot be determined with
    certainty and may be subject to change.
  • The purpose of this presentation is to provide
    information on the expected impact of the
    adoption of IFRS. The unaudited financial
    information which follows represents our current
    view and may be impacted by changes in the
    business or to IFRS or the interpretation
    thereof. This presentation should be treated
    with appropriate caution and should not be relied
    upon.

3
Agenda
  • Overview
  • Development costs
  • Share-based payments
  • Financial instruments
  • Business combinations
  • Income taxes
  • Other issues
  • QA

4
Overview
  • IFRS represents a change in accounting not cash
    flows
  • Generally a move to more fair value accounting
  • this may generate greater volatility
  • The Standards that will have the most impact on
    Misys are
  • IAS 38 Intangible Assets - capitalisation of
    development costs
  • IFRS 2 Share-based Payment
  • IFRS 3 Business Combinations - goodwill
    accounting
  • IAS 39 Financial Instruments Recognition and
    Measurement
  • IAS 12 Income Taxes
  • The detailed interpretation of certain areas of
    the new Standards is still subject to debate
    within the accounting community

5
Annualised impact on profit
m
Removal of goodwill amortisation
50 - 55
Net effect of ongoing capitalised development
costs
5 - 10
Current year EMR / CPR incremental spend
5
10 - 15
Net effect of capitalised development costs (note
1)
Incremental charge for share-based payments
(7) - (10)
Taxation
(2) - (5)
Annualised incremental effect on profit excluding
goodwill amortisation (note 2)
(2) - 3
Note 1 Capitalisation of development costs is
still subject to ongoing review and audit. Given
the relatively steady growth in RD expenditure
over recent years on a like for like basis the
impact on the Income Statement is expected to be
a credit of 5m-10m pa plus the impact of the
anticipated additional spend on EMR and CPR
(expected to be 5m for year ending 31 May
2005) Note 2 Unaudited and subject to the
resolution of outstanding issues including
capitalisation of development costs
Like for like data excludes the impact of
acquisitions and disposals and is stated at
constant exchange rates.
6
Development costs
  • Issue
  • Under IFRS development costs must be capitalised
    when the future technical feasibility and
    economic benefit of the asset can be demonstrated
  • Under UK GAAP prudence was the overriding
    principle which resulted in all expenditure being
    expensed
  • Many industries like our own will therefore have
    to capitalise significant development costs which
    are currently expensed as incurred

7
IAS 38 Intangible assets
Development costs
  • Under IAS 38 an intangible asset arises from
    development if, and only if, all of the following
    can be demonstrated
  • technical feasibility of completing
  • intention to complete and the intention and
    ability to use or sell the intangible asset
  • how the intangible asset will generate probable
    future economic benefits
  • the availability of adequate technical, financial
    and other resources to complete the development
    and to use or sell the intangible asset
  • the ability to measure reliably the expenditure
    attributable to the intangible asset during its
    development

8
Development costs
  • Issue
  • Under IFRS development costs must be capitalised
    when the future technical feasibility and
    economic benefit of the asset can be demonstrated
  • Under UK GAAP prudence was the overriding
    principle which resulted in all expenditure being
    expensed
  • Many industries like our own will therefore have
    to capitalise significant development costs which
    are currently expensed as incurred
  • Impact
  • Currently all RD expenditure is expensed as
    incurred
  • A significant part of our development costs will
    meet the criteria for capitalisation
  • We are still reviewing this area including
    determining appropriate amortisation periods
  • Given the relatively steady growth in RD
    expenditure on a like for like basis over recent
    years the net impact on the Income Statement is
    expected to be a credit of 5m - 10m pa plus the
    impact of the additional spend on EMR and CPR
    which is expected to be 5m in the year ending 31
    May 2005. The impact on the Balance Sheet will
    be more significant.

Like for like data excludes the impact of
acquisitions and disposals and is stated at
constant exchange rates.
9
Share-based payments
  • Issue
  • Share-based payments represent a cost to
    businesses which should be reflected by an Income
    Statement charge
  • Charge represents the fair value of the options
    granted calculated using an option pricing model
  • Charge spread over the vesting period
  • No share schemes exempt including SAYE and all
    employee schemes
  • Impact likely to be greatest on technology
    companies due to share price volatility (higher
    cost per option) and number of options granted
  • Impact
  • Incremental impact on operating profits 7m -
    10m pa
  • Potential volatility of earnings from adjusting
    for options that do not vest
  • Increased charge due to the accounting for share
    schemes available to senior management and the
    all employee schemes

10
Financial instruments
  • Issue
  • Many financial instruments to be recognised at
    fair value on the Balance Sheet
  • Embedded derivatives must be separately
    identified and, where not closely related to the
    host contract, separately accounted for
  • Rules on hedging are more stringent including the
    effectiveness of the hedge being assessed at each
    Balance Sheet date and determining the ability to
    hedge account
  • Impact
  • Recognition of embedded derivatives may increase
    the volatility of earnings in Banking
  • The effect of accounting for embedded derivatives
    will be separately disclosed in our results
    announcements
  • In line with many companies we intend to take
    advantage of the transitional rules and only
    implement IAS 32 / 39 with effect from 1 June
    2005

11
Business combinations
  • Issue
  • Goodwill amortisation replaced by annual
    impairment tests
  • Intangible assets to be separately identified and
    disclosed on acquisition, reducing the amount of
    goodwill capitalised
  • Intangibles to be amortised over useful economic
    life
  • All assets and liabilities to be fair valued on
    acquisition in accordance with IFRS
  • Impact
  • No amortisation of goodwill in Income Statement
  • IFRS 3 Business Combinations will not be applied
    retrospectively to acquisitions made prior to 1
    June 2004
  • Amortisation of separately identifiable
    intangibles resulting from acquisitions made
    prior to 1 June 2004 has no significant impact

12
Income taxes
  • Issue
  • IAS 12 looks at temporary differences between
    tax and book values for deferred tax whereas UK
    GAAP assesses permanent and timing
    differences reversing in future periods
  • The effect on deferred tax of IFRS adjustments
    need to be assessed
  • Impact
  • No impact on cash payments as these remain based
    on local rules
  • Principal effect on Income Statement is the
    incremental charge in respect of capitalised
    development costs and share-based payments
  • Deferred tax asset (liability) will arise due to
    effect of capitalising development costs
  • Increased disclosures of current and deferred tax
    balances on the Balance Sheet and in the Income
    Statement

13
Other issues
  • Revenue recognition no impact expected from the
    transition to IFRS
  • Early adoption of FRS 17 Retirement Benefits
    means minimal impact on pensions
  • Minimal impact of accruing for holiday pay since
    this was already widely accounted for within the
    Group
  • Dividends declared after the Balance Sheet date
    are not recognised

14
Allowable options
  • IFRS 2 Share-based Payment - will be applied
    retrospectively in full to provide more
    meaningful comparatives
  • IFRS 3 Business Combinations - will not be
    applied retrospectively
  • IAS 32 / 39 Financial Instruments - will not be
    applied to the comparative period (ie year to 31
    May 2005) in first full IFRS statements
  • IAS 19 Employee Benefits - cumulative actuarial
    gains and losses on employee post retirement
    benefits will be taken to reserves consistent
    with the approach adopted under FRS 17
    Retirement Benefits

In implementing IFRS for the first time there are
certain optional treatments. The following
treatments will be adopted
15
Timetable
  • Mandatory for Misys financial year beginning 1
    June 2005
  • Annual results to 31 May 2005 will be reported
    under UK GAAP
  • Detailed reconciliation of UK GAAP to IFRS for
    the year to 31 May 2005 to be provided in Autumn
    2005
  • Interim results for the six months ending 30
    November 2005 reported in January 2006 and the
    trading update issued in December 2005 will be
    presented in accordance with IFRS

16
Balance sheet impact
1 June 2004
m
Net liabilities under UK GAAP as reported
(183)
Removal of dividend liability
21
Removal of goodwill amortisation post 1 June
-
-
Capitalised development costs (note 1)
110
60
-
Deferred taxation
(30)
(15)
Other
(3)
0
-
Net liabilities under IFRS as restated (note 2)
(82) - (120)
Note 1 Capitalisation of development costs is
still subject to ongoing review and audit Note
2 Unaudited and subject to the resolution of
outstanding issues including capitalisation of
development costs
17
Annualised impact on profit
m
Removal of goodwill amortisation
50 - 55
Net effect of ongoing capitalised development
costs
5 - 10
Current year EMR / CPR incremental spend
5
10 - 15
Net effect of capitalised development costs (note
1)
Incremental charge for share-based payments
(7) - (10)
Taxation
(2) - (5)
Annualised incremental effect on profit excluding
goodwill amortisation (note 2)
(2) - 3
Note 1 Capitalisation of development costs is
still subject to ongoing review and audit. Given
the relatively steady growth in RD expenditure
over recent years on a like for like basis the
impact on the Income Statement is expected to be
a credit of 5m-10m pa plus the impact of the
anticipated additional spend on EMR and CPR
(expected to be 5m for year ending 31 May
2005) Note 2 Unaudited and subject to the
resolution of outstanding issues including
capitalisation of development costs
Like for like data excludes the impact of
acquisitions and disposals and is stated at
constant exchange rates.
18
QA
19
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