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

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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
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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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