annual report 2004

ACCOUNTING POLICIES

Basis of preparation

The Accounts are prepared under the historical cost convention and in accordance with the Companies Act 1985 and applicable accounting standards.

In preparing the Accounts, the following restatements have been made to the corresponding amounts:

  1. To reflect the movement from "Plastic Packaging" to "Disposals and businesses for sale" of the European thin wall container businesses sold during the year.
  2. To reflect the adoption of UITF38 “Accounting for ESOP Trusts” as described in the accounting policy "Share based payment".
  3. To reflect an £11m reduction in interest receivable debtors and interest payable creditors on interest rate swaps previously reported on a gross basis.

Basis of consolidation

Rexam PLC and its subsidiaries are together referred to as the Group. The Accounts of the Group include the results of all subsidiaries and the appropriate share of the results of associates from their effective date of acquisition or up to their date of disposal. As permitted by section 230 of the Companies Act 1985, the profit and loss account of Rexam PLC is not presented.

Where the fair value of the consideration for an acquisition of a business is different than the fair value of the identifiable net assets at the date of acquisition, the difference is treated as goodwill and dealt with in accordance with the Group’s accounting policy.

Foreign currencies

The profit and loss accounts and cash flows of overseas subsidiaries and associates are translated into sterling at the average rate of exchange for the year. The balance sheets of overseas subsidiaries and associates, together with currency assets and liabilities of United Kingdom subsidiaries and associates, are translated into sterling at the rates of exchange ruling at the balance sheet date or at those of related forward contracts.

Exchange differences arising on currency investments and on the consolidation of subsidiaries and associates are taken, together with those arising on related currency borrowings, net of attributable tax, to reserves. All other exchange differences are taken to the consolidated profit and loss account.

The principal exchange rates against sterling used in these Accounts were:

  2004
Average
2004
Closing
2003
Average
2003
Closing
United States dollar 1.83 1.93 1.63 1.77
Euro 1.47 1.42 1.45 1.42

Turnover

Turnover represents the amount receivable for goods supplied after deducting rebates, discounts and value added and sales taxes, and after eliminating sales between Group companies.

Turnover is recognised when the significant risks and rewards of ownership of the goods are transferred to the buyer and the amount can be measured reliably.

Retirement benefits

For defined benefit pension schemes and retiree medical, the amounts charged to operating profit comprise the current service cost and gains and losses on settlements and curtailments. Past service costs are similarly recognised if the benefits have vested. If the benefits have not vested immediately, the costs are recognised over the period until vesting occurs. The expected return on assets of funded defined benefit pension schemes and the interest on pension scheme liabilities and on retiree medical are shown as a net amount in the consolidated profit and loss account. Differences between the actual and expected returns on assets, changes in liabilities due to experience, changes in assumptions on liabilities and deferred tax thereon are included in the statement of total recognised gains and losses.

For funded defined benefit pension schemes, the assets are held separately from those of the Group in trustee administered funds. Pension scheme assets are measured at fair value. Liabilities of defined benefit pension schemes and retiree medical are measured on an actuarial basis using the projected unit method and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and duration to the scheme liabilities. The resulting asset or liability, net of the related deferred tax, is presented separately after other net assets on the face of the balance sheet.

Contributions to defined contribution schemes are charged to the consolidated profit and loss account as they become payable in accordance with the rules of those schemes.

Research and development

Expenditure on research and development is charged to the consolidated profit and loss account in the year in which it is incurred. Tangible fixed assets used for research and development are depreciated in accordance with the Group’s accounting policy.

Interest

Interest is recorded in the consolidated profit and loss account on an accruals basis, except where it relates to payments made over an extended period of development of large capital projects. Such interest is added to the capital cost and amortised over the expected lives of those projects. Financing fees to be written off in future periods are set against loan capital.

Interest includes exchange differences arising on cash or borrowings, including any hedges in respect of such cash or borrowings, that do not hedge any other assets or liabilities and which are denominated in a currency which is not the functional currency of the subsidiary.

Intangible fixed assets

Goodwill arising on acquisitions up to 31 December 1997 has been written off directly against reserves. Goodwill arising on acquisitions since 1 January 1998 has been capitalised and amortised on a straight line basis over its useful economic life, not exceeding 20 years. If a subsidiary or associate is subsequently sold or closed, any goodwill arising on acquisition that was written off directly against reserves or has not been amortised through the consolidated profit and loss account is included when determining the profit or loss on sale or closure.

Any impairment in the value of goodwill on the balance sheet, calculated by discounting estimated future cash flows, is taken to the consolidated profit and loss account in the year in which it arises.

Other acquired intangible assets are written off on acquisition.

Tangible fixed assets

Tangible fixed assets are stated in the consolidated balance sheet at cost less provision for depreciation. Depreciation is calculated to write off the cost, less estimated residual value, of tangible fixed assets over their expected lives by equal annual instalments. Depreciation is provided on all tangible fixed assets apart from freehold land and assets under construction. Assumed lives vary according to the class of asset, but are typically:

  • Freehold buildings
  • Leasehold buildings
  • Manufacturing machinery
  • Furnaces in glassworks
  • Computer hardware and software
  • Fixtures and fittings
  • Vehicles
  • Not exceeding 50 years
  • Shorter of 50 years or lease term
  • 7 to 17 years
  • 8 to 10 years
  • 2 to 7 years
     
  • 5 to 10 years
  • 4 to 10 years

Any impairment in the value of tangible fixed assets, calculated by discounting estimated future cash flows, is taken to the consolidated profit and loss account in the year in which it arises.

For major business systems implementations, the costs that are capitalised in tangible fixed assets are those that are directly attributable to the implementation, including where applicable internal labour.

Fixed asset investments

Investments in associates and joint ventures are stated in the consolidated balance sheet at the Group’s share of their underlying net asset value. The consolidated profit and loss account includes the results for the year proportionate to the Group’s equity holding.

Other fixed asset investments are stated at cost, with the exception of assets held to satisfy certain retirement benefit liabilities which are held at market value. Unrealised market value changes on these assets are taken to the statement of total recognised gains and losses.

Investments in subsidiaries of Rexam PLC are stated at cost less provisions for impairment where appropriate.

Stocks

Stocks are stated at the lower of cost, including production overheads, and net realisable value. Cost is determined using both a FIFO basis and a weighted average basis.

Current asset investments

Current asset investments are stated at the lower of cost and net realisable value.

Investment grants

Grants received in respect of capital expenditure are included in creditors and released to the consolidated profit and loss account in equal instalments over the expected useful lives of the related assets.

Provisions

Provisions are made when an obligation exists for a future liability in respect of a past event and where the amount of the obligation can be reliably estimated. Restructuring provisions are made for direct expenditures of a business reorganisation where the plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken at the balance sheet date. Provisions are discounted where the time value of money is considered material.

Leases

Assets acquired under finance leases are capitalised and the capital element of outstanding lease rentals is included in borrowings. The interest element of the rental obligations is charged to the consolidated profit and loss account over the period of the lease and represents a constant proportion of the balance of capital repayments outstanding. Depreciation is calculated to write off the cost of finance leased assets over the shorter of their useful lives and term of the lease. Operating lease rentals are charged to the consolidated profit and loss account evenly over the primary period of the lease.

Share based payment

In accordance with UITF38 “Accounting for ESOP Trusts”, own shares held by the Rexam Employee Share Trust are treated as a reduction to shareholders’ funds. They are held at cost until disposed. Any profit or loss on disposal is treated as a movement in reserves.

A charge is recognised in the consolidated profit and loss account for awards of share options over the period to which the performance criteria relates on a straight line basis. The charge is determined as the intrinsic value of the option, being the difference between its fair value at the date of grant and the amount that the employee is required to pay for the shares.

Inland Revenue approved Save As You Earn schemes are exempt from the requirements of UITF17 (revised) “Employee Share Schemes”.

As a result of implementation of UITF38, 2003 has been restated. The effect of this restatement on the consolidated profit and net assets for 2003 is set out below:

  £m
Profit before tax (2)
Tax 2
Profit after tax -
Net assets 1

 
The impact on profit in 2004 would not have been material if UITF38 had not been adopted.

Tax

Current tax, including UK corporation and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Timing differences are differences between the Group’s taxable profits and its results as stated in the Accounts that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the Accounts.

Deferred tax assets are recognised only to the extent that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

When fixed assets are sold and it is more likely than not that the taxable gain will be rolled over, being charged to tax only if and when the replacement assets are sold, deferred tax is not recognised.

Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries and associates only to the extent that, at the balance sheet date, dividends have been accrued as receivable or a binding agreement to distribute past earnings in the future has been entered into by the subsidiary or associate.

Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis.

Financial instruments

Financial instruments are used as hedges in the financing and financial risk management of the Group.

Forward foreign exchange contracts

Forward foreign exchange contracts (FX contracts) which hedge currency assets and liabilities are recognised in the Accounts together with the assets and liabilities that they hedge. The contract rate is used for translation. FX contracts which hedge future sales and purchases are not recognised in the Accounts until the transaction they hedge is itself recognised. If an FX contract ceases to be a hedge or it is a trading transaction, then any gain or loss is taken to the consolidated profit and loss account.

Foreign exchange option contracts

Premia paid or received on foreign exchange option contracts (FX option contracts) are recognised upon exercise or at maturity of the contract. Recognised gains or losses on FX option contracts are reflected in the Accounts on the same basis as FX contracts.

Commodity futures and options

Commodity futures and options are recognised in the Accounts on the same basis as FX contracts.

Cross currency swaps

Cross currency swaps are included in the Accounts at the rates of exchange ruling on the balance sheet date. Exchange differences arising are dealt with in accordance with the Group’s accounting policy on foreign currencies. Interest paid or received on cross currency swaps is recorded on an accruals basis in accordance with the Group’s accounting policy on interest. Apart from inclusion at the rate of exchange ruling at the balance sheet date, cross currency swaps are not revalued to fair value at the balance sheet date.

Interest rate swaps

Interest arising under interest rate swaps is taken to the consolidated profit and loss account in accordance with the Group’s accounting policy on interest. Interest rate swaps are not revalued to fair value at the balance sheet date.

Options

Options on cross currency or interest rate swaps are used either to hedge a bond transaction or as a means of entering into a swap (as a hedge) at a pre-determined target rate. Premia paid or received for such options are accounted for over the life of the resultant transaction, or, if immaterial or no transaction takes place, are recognised in the consolidated profit and loss account upon exercise or at maturity of the option contract.