SanomaWSOY's comparative IFRS data for 2004
SanomaWSOY Group began reporting according to the IFRS (International Financial Reporting Standards) on 1 January 2005. Interim Reports for 2005 are prepared in accordance with the recognition and measurement principles of IFRS. The Interim Report for the first quarter will be published on 4 May 2005.
This release describes the comparative data for full year and the first quarter of 2004 according to the IFRS. Income Statement according to the IFRS for each quarter in 2004 will be published in the January - March Interim Report on 4 May, 2005. The data is prepared in accordance with the latest standards effective at the time of this release. Figures may have to be amended before they are included in the Group?s first Financial Statements according to the IFRS as per 31 December 2005. This is due to the changes currently being made to the IFRS, which may have an impact on the financial statements of companies applying the IFRS as of 2005. Information on this release is unaudited.
Previously, SanomaWSOY reported in accordance with the Finnish Accounting Standards (FAS). Some changes in accounting principles required by the IFRS were already made in 2004 in accordance with FAS practice. The accounting practice of net sales was modified at the beginning of 2004. Press distribution was treated as commission sales and the accounting practice of granted discounts and purchased services was harmonised.
SanomaWSOY's transition date to IFRS is 1 January 2004. The Group applies the IFRS 1 (First-time Adoption of International Financial Reporting Standards), which permits some exemptions for the retrospective application of standards in the transition phase. The most significant exemptions are related to business combinations and the application of the IAS 32 and 39 standards (financial instruments). Business combinations made prior to the transition date have not been adjusted retrospectively according to the IFRS. The IAS 32 and 39 standards are applied as of 1 January 2005 and comparative data for 2004 has been prepared according to the FAS requirements. The IFRS 5 (Non-current Assets Held for Sale and Discontinued Operations) is applied as of 1 January 2005.
Income statement and balance sheet classifications are reported according to the IFRS. The comparable classifications according to the FAS in this release thus differ from the data disclosed earlier.
Most Significant Impacts of IFRS Transition
For SanomaWSOY the most significant changes arising from transition to the IFRS are related to:
· Impairment testing instead of goodwill amortisation
· Accounting treatment of pension schemes
· Valuation of inventories
· Stock option schemes for management
SanomaWSOY's operating profit according to the IFRS in 2004, excluding the most substantial non-recurring gains on the sales of assets disclosed earlier (EUR 25.8 million), is EUR 268.2 million, which is 10.8% of the net sales. Goodwill amortisation and amortisation on intangible assets with indefinite useful lives amounted to EUR 82.1 million in 2004. Renouncing this amortisation has the most significant impact on SanomaWSOY's result.
Reporting according to the IFRS increases the total assets and the equity of the balance sheet. Key indicators and earnings per share are also revised, mainly due to the valuation of the assets and renouncing from the goodwill amortisation.
KEY INDICATORS IFRS FAS IFRS FAS
EUR million 1-3/2004 1-3/2004 1-12/2004 1-12/2004
Earnings/share, EUR 0.17 0.05 1.31 0.87
Earnings/share, diluted, EUR *) 0.17 - 1.26 0.85
Cash flow from operations/share, EUR 0.20 0.28 1.54 1.67
Equity ratio, % 35.0 36.2 38.7 39.0
Gearing, % 81.9 80.5 82.1 85.4
Balance sheet total 2,448.0 2,369.2 2,689.2 2,528.8
Interest-bearing liabilities 715.1 704.9 894.8 885.9
Return on investment, % (ROI) **) - - 18.0 14.8
*) 1-3/2004 diluted earnings per share was higher than earnings per share, not published
**) ROI is calculated only on yearly basis
The material issues related to the transition are described in more detail in the following sections. More detailed and extensive IFRS accounting principles will be disclosed as part of the Financial Statements for 2005.
Business Combinations, Goodwill, and Impairment Testing
SanomaWSOY has applied purchase method in the accounting treatment of business combinations. Business combinations made as of 1 January 2004 have been valued at fair values on the purchase date. Acquisitions prior to the date have not been adjusted retrospectively. The purchase price is allocated to the assets and liabilities of the acquired entity by recording them at fair values on the purchase date. The IFRS accounting practice decreases the amount of consolidated goodwill of new acquisitions.
Goodwill is no longer amortised according to plan, but tested for impairment. Impairment testing is made annually or whenever a change in circumstances indicates a possible impairment.
An intangible asset with an indefinite useful life is not amortised either, but tested for impairment annually. Along with the transition to reporting according to the IFRS, SanomaWSOY has investigated the characteristics of intangible assets and classified these items according to their useful lives. In principle, the useful life can be defined, but the useful lives of some publishing rights cannot be defined.
According to the IFRS, the accounting treatment of pensions is dependent of the nature of the pension scheme. SanomaWSOY has evaluated its pension schemes in different countries and classified them as either defined benefit plans or contribution plans.
The disability element of the Finnish TEL system is not treated as a defined benefit plan in the opening balance sheet or in the comparative figures. Due to the changes in calculation methods approved by the Ministry of Social Affairs and Health in 2004, the TEL system will become a contribution plan. If these schemes were treated as defined benefit plans, the equity of the opening balance sheet without deferred taxes would decrease by EUR 27.9 million, the one time improvement of the operating profit in 2004 would be EUR 25.0 million and the equity on 31 December 2004 would decrease by EUR 2.9 million. The impact on key ratios would be minor.
In addition to TEL insurance policies, SanomaWSOY also has pension funds in Finland, which take care of both the statutory pension cover and the voluntary pension cover. All schemes in pension funds are treated as defined benefit plans.
As to the pension schemes outside Finland, both defined benefit plans and contribution plans exist. Pension cover is handled through both pension funds and insurance companies.
SanomaWSOY has chosen to apply the exemption given in IFRS 1, which allows the recording of all cumulative actuarial gains and losses in the opening balance sheet. After the transition date, the part of the actuarial gains and losses exceeding 10% of the net present value of receivable or liability is recorded in the income statement.
The purchase price of inventories includes the fixed overhead costs according to the IFRS. The most significant adjustments due to the transition to the IFRS are related to the valuation of WSOY's book inventories.
The Group has elected to apply IFRS 2 as of the beginning of 2004. The stock options for the management are valued at fair values on respective grant dates and are recorded to the personnel costs of Divisions through the vesting period. The valuation is based on an option pricing model (Black & Scholes).
SanomaWSOY complies with the exemption of IFRS 1 in how to apply the IAS 32 and 39 standards. The comparative data for 2004 is prepared according to the Finnish Accounting Standards. Transition to the IFRS does not thus affect the opening balance sheet of 1 January 2004. The effects of the IAS 32 and IAS 39 standards are recognised on 1 January 2005 by recording changes directly to the equity. The Interim Reports for 2005 will disclose the balance sheet for 2004 classified as comparatively as possible in relation to the IAS 32 and IAS 39 standards.
Convertible Capital Note
According to the Finnish Accounting Standards, the convertible capital note of SanomaWSOY Corporation was recorded in the equity. According to the IFRS, the capital note is a compound financial instrument, which contains both equity and liability component. According to the IAS 32 standard, the option feature of the convertible capital note is recorded in the premium fund of the equity as of 1 January 2005.
In the 2004 balance sheet, the total value of the capital note is presented in the interest-bearing liabilities to enhance comparability, regardless of the fact that the valuation principle changed only at the beginning of 2005.
According to the IFRS, the deferred taxes are recorded from all the temporary differences between the balance sheet and taxable values. Under FAS practice, deferred taxes were recorded only on those matching differences affecting the income statement and on consolidation-related measures and year-end provisions impacting the Group's result. The deferred tax receivables are recorded in an amount, which can probably be utilised against similar future income.
The Group's lease agreements, which qualify as finance leases according to the IFRS, are capitalised in the balance sheet during the lease period. The asset is capitalised to the amount, which is equivalent to the net present value of minimum lease payments. The asset is depreciated during the lease period and the rental payments are divided into interest expenses and repayments of lease liability.
According to the IFRS, a provision is recognised when there is an obligation as a result of a past event, which will probably cause an outflow of resources embodying economic benefits and of which the amount can be reliably estimated. In connection with the IFRS transition, certain restructuring provisions are released.
Real estate, which is mainly held to earn rental income or capital appreciation, is classified according to the IFRS as investment property. Investment property is valued at its cost and is presented as a separate item in the balance sheet. Investment property includes buildings, land and shares in housing companies and real estate, which are not used by entities of SanomaWSOY. Investments in shares are divided into either land or buildings based on their nature. The fair values of investment property are shown in the notes of the Financial Statement.
Investments in the Other Shares of Real Estate and Housing Companies
Investments in the shares of real estate and housing companies which are held for the Group's own use are classified as either land or buildings according to their more significant part. Investments in shares are not depreciated. Real estate is valued at cost. Mutual real estate is consolidated using the proportionate consolidation method.
Improvement costs of rented buildings are classified as other tangible assets in the balance sheet according to the IFRS. Earlier, according to the FAS, these were recorded as other long-term expenditures under intangible assets.
The segment reporting of SanomaWSOY is based on management control and internal reporting systems. The Group's five divisions are defined as primary segments (Sanoma Magazines, Sanoma, WSOY, SWelcom and Rautakirja). Geographical areas are secondary segments.
Net Sales and Other Operating Income
The most important changes relating to net sales took place at the beginning of 2004 in accordance with the Finnish Accounting Standards. The most significant changes were related to press distribution, which is treated as commission sales according to the new accounting practice, and to harmonising the accounting practice regarding granted discounts and purchased services. Changes related to Sanoma Magazines, Sanoma and Rautakirja were thus already included in the Financial Statement of 2004 according to the FAS.
In connection with the IFRS transition, the accounting practice related to the connection fees for cable TV services is also revised. The change decreases the 2004 net sales and operating profit of SWelcom by EUR 1.9 million.
The transition to reporting according to the IFRS does not affect the net sales of WSOY.
The accounting treatment of compensations of expenses is harmonised and certain adjustments are transferred to other operating income according to the IFRS.
Associated Companies and Minority Interests
The share of result of associated companies is presented as a separate item after the operating profit. According to the IFRS, minority interests are presented within the equity.