Kesko Corporation's comparative data in compliance with IFRS

Kesko Corporation's date of adoption for IFRS (International Financial Reporting Standards) was 1 January 2005. Before that Kesko's financial statements were prepared in accordance with the Finnish Accounting Standards (FAS). Comparative data for the year 2004 are presented in this release and in the attachments in order to explain the essential effects of the adoption of the IFRS standards on consolidated financial statements. Kesko's interim report for the period 1 January to 31 March 2004 included an account of the effects of the IFRS standards on the opening balance sheet of 1 January 2004. Kesko will prepare its year 2005 interim reports in compliance with the recognition and measurement principles of the IFRS standards.

 

The transition date for Kesko's adoption of the IFRS standards was 1 January 2004 and the IFRS 1 transition standard was applied. The financial statements were prepared on the basis of the IAS/IFRS standards effective at the end of 2005 with certain exceptions. The standards IFRS 5, IAS 32 and IAS 39 are applied as from 1 January 2005. The 2004 figures relating to IAS 32 and IAS 39 have been prepared in accordance with the Finnish accounting practices. The amendments of the standards made during 2005 may have some effects on the year 2004 figures.

 

 

Compared with the profit reported in accordance with the Finnish accounting practice, the adoption of the IFRS financial statements practices improved Kesko's profit for the 2004 financial year by a total of EUR 58 million. The operating profit increased by EUR 75 million, which includes a non-recurring item of EUR 41 million relating to retirement benefit plans recognised in the year 2004 fourth quarter results. According to IFRS 3, goodwill is not amortised, whereas the Finnish accounting practice required it to be amortised within its useful life. The exclusion of goodwill amortisation increases the year 2004 operating profit by EUR 15 million.

 

The adoption of the IFRS accounting principles increases the consolidated balance sheet total by EUR 342 million. This is mainly attributable to pension assets under defined benefit plans and the recognition of assets financed by leases and corresponding borrowing in the balance sheet.

 

The primary segments presented in the IFRS financial statements are the Kesko Group divisions Kesko Food, Rautakesko, Kesko Agro, Keswell, VV-Auto and Kaukomarkkinat. Contrary to the figures previously reported in accordance with the Finnish accounting practice, the operating profit from real estate operations organised in an intra-Group service unit has been allocated to the divisions as directly attributable. This change in the reporting practice supports the ongoing process of transferring financial responsibility for real estate to the division parent companies for the whole lifecycle. After the change common operations will include the costs of the corporate management and certain support functions.

 

 

The secondary segments to be presented in the IFRS financial statements will consist of four geographical areas in different economic conditions: Finland, the other Nordic countries, the Baltic countries and other countries.

The figures of this release are unaudited.

Kesko Group's interim report for the first three months of 2005 will be published on 28 April 2005.

 

Further information is available from Arja Talma, Senior Vice President, CFO, telephone +358 1053 22113 or Juhani Järvi, Corporate Executive Vice President, Deputy to President and CEO, telephone +358 1053 22209.

 

 

 

 

KESKO CORPORATION

 

 

 

Anne Leppälä-Nilsson

General Counsel

 

DISTRIBUTION
Helsinki Stock Exchange
Main news media

 

 

ATTACHMENTS
Kesko Corporation's financial information for 2004 prepared in accordance with the IFRS standards

 

 

 

 

Kesko Corporation's date of adoption for IFRS (International Financial Reporting Standards) is 1 January 2005. Before that Kesko's financial statements were prepared in accordance with the Finnish Accounting Standards (FAS).

 

The financial statements were prepared on the basis of the IAS/IFRS standards effective at the end of 2005 with certain exceptions. The standards IFRS 5, IAS 32 and IAS 39 are applied as from 1 January 2005. The 2004 figures relating to IAS 32 and IAS 39 have been prepared in accordance with the Finnish accounting practices. The amendments of the standards made during 2005 may have some effects on the year 2004 figures.

 

The IFRS financial statements have been prepared on the basis of original cost. The goodwill of business combinations effected prior to 1 January 2004 corresponds to the carrying amount established in accordance with the Finnish Accounting Standards at 1 January 2004, used as the deemed cost. Business combinations that were recognised before the date of the transition have not been restated in the opening balance sheet. No amortisation on goodwill was made in 2004. Goodwill has been tested for possible impairment.

 

The consolidated financial statements include all subsidiaries controlled by the Group. The associated companies in which the Group has a 20-50% ownership have been consolidated using the equity method. The joint venture Pikoil Oy, in which the Group has joint control, has been consolidated proportionately line by line. In accordance with IAS 31, mutual real estate companies have been consolidated as asset items under joint control line by line in proportion to ownership.

 

In accordance with IAS 17, leases under which essential parts of risks and rewards incident to ownership of a leased asset lie with the Group have been classified as finance leases. In consequence, the leased commodity is recognised as an asset item in the balance sheet and lease liabilities are included in the interest-bearing liabilities in the balance sheet. Assets leased out by the Group under finance leases have been recognised as receivables. Revenue recognition of gains in disposal and lease-back situations has been adjusted to comply with IAS 17.

 

The Group has several retirement benefit arrangements classified either as defined contribution plans or defined benefit plans. The contributions payable under defined contribution plans have been recognised as expense in the income statement for the financial period during which they incurred. The pension insurances under the Employees' Pensions Act arranged with insurance companies are mainly classified as defined contribution plans with the exception that during 2004, disability benefits of pensions under the Employees' Pensions Act have been recognised as defined benefit plans. As a result of the amendment in the premium base of disability pensions of the employee pension insurance taking effect at the beginning of 2006, the disability benefits of the employee pension insurance will transfer to defined contribution plans. The effect has been recognised in the profit for the fourth quarter of 2004. The retirement benefits arranged with the Kesko Pension Fund under the Employees' Pensions Act and additional retirement benefits have been recognised as defined benefit plans. All actuarial gains and losses have been included in the opening balance sheet at the transition date as allowed by IFRS 1.

 

The stock options issued by Kesko have been measured at fair value at issue date and recognised as expense on straight-line basis within the commitment period. In accordance with the adoption regulations of IFRS 2, stock options issued prior to 7 November 2002 have not been recognised in the income statement during the commitment period.

 

Other operating income includes income other than that relating to the sale of goods or service produced, namely rent income, various services income and commissions. Profits and losses from disposal of tangible assets have been reported in other income and expenses.

 

Income taxes have been reported in compliance with IAS 12, which means that taxes based on the taxable profit of the financial year are recognised in addition to deferred taxes on all tax deductible and non-deductible temporary differences

 

The primary segments presented in the IFRS financial statements are the Kesko Group divisions Kesko Food, Rautakesko, Kesko Agro, Keswell, VV-Auto and Kaukomarkkinat. Contrary to the figures previously reported in accordance with the Finnish accounting practice, the operating profit from real estate operations organised in an intra-Group service unit has been allocated to the divisions as directly attributable. This change in the reporting practice supports the ongoing process of transferring financial responsibility for real estate to the division parent companies for the whole lifecycle. After the change common operations will include the costs of the corporate management and certain support functions. Real estate operations in the divisions' operating profits by quarter presented below are allocated to the divisions in both FAS and IFRS figures.

 

The adoption of the IFRS standards will have no significant effects on the cash flow statement.

 

The most important effects of the adoption of IFRS on financial reporting for 2004 are presented below. Reconciliation calculations for equity and profit for the financial year are presented separately.

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation calculation of net profit for the period

 

 

 

 

 

 

 

IFRS Q1/2004 comparative data (EUR million)

 

INCOME STATEMENT

 

 

 

CONSOLIDATED BALANCE SHEET

 

 

 

 

IFRS Q2/2004 comparative data (EUR million)

 

INCOME STATEMENT

 

 

 

 

 

 

IFRS Q3/2004 comparative data (EUR million)

 

INCOME STATEMENT

 

 

 

 

 

IFRS Q4/2004 comparative data (EUR million)

 

 

INCOME STATEMENT

 

 

 

 

 

The Group's retirement benefit plans are classified either as defined contribution plans or defined benefit plans. The contributions payable under defined contribution plans are recognised as expenses in the financial period during which they incur. The pension insurances under the Employees' Pensions Act arranged with insurance companies are mainly classified as defined contribution plans. The long-term liabilities of the opening balance sheet included EUR 24 million in pension liabilities for pension insurances arranged with insurance companies plus EUR 1 million in other benefits. As a result of the amendment in the calculation bases of disability pensions of the Finnish earnings-related pension schemes taking effect at the beginning of 2006, the disability benefits of the employee pension insurance will transfer to defined contribution plans. The effect was recognised as income in the last quarter of 2004 by recognising a non-recurring item of EUR 23 million relating to disability benefits. At the end of 2004, the liabilities resulting from disability benefits of pension insurances under the Employees' Pensions Act and other insurances total EUR 2 million.

 

The retirement benefits arranged with the Kesko Pension Fund under the Employees' Pensions Act and additional retirement benefits have been recognised as defined benefit plans. All actuarial gains and losses were recognised in the opening balance sheet at the transition date as allowed by IFRS 1. The amount of pension assets under defined benefit plans in the opening balance sheet totalled EUR 167 million, which corresponds to the amount by which the fair value of the Kesko Pension Fund's assets exceeded the liabilities resulting from the arrangements. At the end of 2004, pension assets under defined benefit plans totalled EUR 196 million and their growth by EUR 29 million increases the operating profit for 2004. EUR 18 million in the growth of pension assets under defined benefit plans is attributable to the non-recurring decrease in pension liabilities resulting from amendments in pension legislation and the pension fund rules, and has been recognised in the last quarter of 2004.

 

In 2004, the total effect of IFRS treatment of Kesko's different retirement benefit arrangements increased the operating profit by EUR 52 million, EUR 41 million of which are non-recurring.

 

Leases meeting the criteria of IAS 17 have been classified as finance leases and recognised in the balance sheet. The tangible assets of the opening balance sheet include a total of EUR 89 million in buildings financed by leases and EUR 38 million in other tangible assets. The lease liabilities of finance leases have been recognised in the interest-bearing liabilities of the balance sheet. At the end of 2004, tangible assets included finance lease assets in a total value of EUR 118 million.

 

Lease payments have been apportioned between the finance charge and the reduction of the outstanding liability. Finance lease assets are depreciated over the shorter of the lease term or its useful life. At the end of 2004, the interest-bearing liabilities of the balances sheet included a total of EUR 158 million in finance lease liabilities. The Group's receivables from assets leased out under finance leases totalled EUR 32 million.

 

The stock options issued as part of the management's incentive and commitment programme have been measured at fair value at issue date. The fair value of the stock options has been calculated using the Black-Scholes option pricing model. The value established at issue date is recognised as expense in the income statement on a straight-line basis within the commitment period. For the year 2004, EUR 2 million of share-based payments were recognised as expense.

 

The goodwill arising from business combinations entered into prior to the IFRS adoption date included in the opening balance sheet corresponds to the carrying amount according to the Finnish accounting practice. According to IFRS 3, goodwill is not amortised. Goodwill has been tested for impairment. The change in goodwill amortisation practice ensuing from the IFRS adoption increases the year 2004 profit by EUR 15 million.

 

Deferred tax assets and liabilities have been recognised for all temporary differences between the taxable values and carrying amounts of liabilities. Deferred taxes have been calculated at tax bases effective on balance sheet date. Deferred tax assets and liabilities have been reported at net values in compliance with IAS 12. The opening IFRS balance sheet includes a deferred tax liability of EUR 41 million relating to IFRS differences. At the beginning of 2005, the Finnish corporate tax rate decreased by three percentage points, which has been taken into account in the deferred tax liabilities in the second quarter. The most important deferred tax liabilities result from defined benefits plans. At the end of 2004, deferred liabilities totalled EUR 102 million, which is EUR 53 million in excess of the FAS balance sheet at the corresponding date.

 

In the IFRS balance sheet, capitalised modernisation costs of leased premises are included in tangible assets. The modernisation costs capitalised according to the Finnish accounting practice are reported in intangible assets as capitalised expenditure. At the end of 2004, tangible assets included EUR 57 million of modernisation costs included in the intangible assets of the FAS balance sheet.

 

In compliance with IAS 36, the opening IFRS balance sheet recognised an impairment of EUR 6 million. The impairment was allocated to tangible assets withdrawn from use of the Group. During the last quarter of 2004, an impairment of EUR 0.5 million was made on tangible assets withdrawn from use.

 

The IFRS income statement reports the total income from associates under operating profit. In the FAS income statement, the income from real estate companies and associates engaged in business operations is reported above the operating profit.