January 23, 2008
EPCOS converts financial reporting to IFRS
IFRS accounting launched in Q1 2008
With effect from the start of fiscal 2008 (October 1, 2007, to September 30, 2008), EPCOS has aligned its accounting practice with International Accounting Standards (IAS). As of the first quarter (Q1) of fiscal 2008 (October 1 to December 31, 2007), the Group’s financial data will therefore be reported in accordance with International Financial Reporting Standards (IFRS). IFRS has thus replaced US GAAP accounting at EPCOS.
Financial reporting in compliance with IFRS has been compulsory since 2005 for companies whose shares are publicly traded in the European Union. Up to now, the fact that EPCOS was also listed on the New York Stock Exchange (NYSE) and was therefore also required to prepare US GAAP accounts allowed the Group to make use of an extended transitional period before introducing IFRS accounting. This extension permitted companies to adopt IFRS for their consolidated financial statements for the first time at the end of fiscal 2008.
In November 2007, EPCOS had its shares delisted on the NYSE and also applied to the Securities and Exchange Commission (SEC) for deregistration. In light of these developments, and to ensure consistent financial reporting for the whole of the fiscal year, EPCOS therefore decided to publish its financial reports solely in compliance with IFRS from the first quarter of fiscal 2008.
Comparison of key data for fiscal 2007 under IFRS and US GAAP
To provide a suitable basis for comparison, EPCOS has retroactively calculated its financial data for fiscal 2007 in accordance with IFRS. For this period, conversion to IFRS primarily affects the Group’s income figures. One example is net income, which differs from the figure reported under US GAAP essentially because of isolated issues that will not affect EPCOS’ business going forward. The balance sheet ratios remain virtually identical. Net cash flow remains unchanged.
|EUR million||US GAAP||IFRS (unaudited)|
|EBIT as % of sales||6%||6%|
|Income before taxes||78||59|
|Net income after tax||64||51|
|Earnings per share in EUR||0.98||0.78|
|Net cash flow||31||31|
*Interest income (expenses)
Differences in the two sets of figures for fiscal 2007 arise primarily in the following three areas:
1. Changed approach to accruals
IFRS requires companies to record an accrual the moment an obligation arises, whereas additional formal criteria must be met to record an accrual under US GAAP. As a result, accruals for planned restructuring projects had to be recorded in EPCOS’ IFRS consolidated financial statements for fiscal 2007 in anticipation of the cost of upcoming measures. Unlike US GAAP, IFRS also requires companies to record accruals for onerous sales contracts, which led to a slightly positive income result.
In total, the need to record higher accruals under IFRS negatively affected EBIT by about EUR 13 million.
2. Change in reporting of pension expense
The interest component of pension accrual is reported in the financial result under IFRS, whereas it is reported in US GAAP under EBIT. This effect caused EBIT for the year to increase and the financial result for the year to decrease by about EUR 9 million. Income before taxes and net income after tax were not affected.
Additionally, the conversion to IFRS required past actuarial losses to be recognized in equity. In the future too, such gains and losses will continue to be recognized directly in equity, whereas US GAAP required them to be amortized over 15 years in EBIT.
As a result, EBIT improved by about EUR 2 million in the IFRS figures for fiscal 2007. In the future, the difference in income will depend above all on the trend in long-term interest rates.
Taken together, these influences led to an EBIT improvement of EUR 11 million in fiscal 2007. Minus the decrease in the financial result (EUR 9 million), reported income before taxes was EUR 2 million higher under IFRS than under US GAAP.
3. Difference in treatment of the convertible bond issued in 2003
Under US GAAP, the convertible bond issued by EPCOS was reported at its nominal value. The associated effective interest expenses were recognized in profit and loss (i.e. reported in the income statement).
However, IFRS requires the conversion right in a convertible bond to be treated as an option and valued at the appropriate market rate. Since this option is characterized as debt (external financing), differences in the value are recognized in profit and loss. Under IFRS, the financial result for fiscal 2007 therefore decreased by about EUR 8 million. To avoid such income volatility in the future, EPCOS waived its right to cash settlement in August 2007. The option was therefore valued for the last time at the time of the waiver and should no longer affect income in the future.
Under IFRS, the value of the convertible bond at the time of issue (excluding the option value) is recorded as a liability. Interest is accrued over the term of the convertible bond such that, at the point of payback, the full liability is reflected in the balance sheet. This adds about EUR 3 million per annum to interest expenses reported in the income statement.
The overall change in the treatment of the convertible bond thus caused the financial result reported for fiscal 2007 to decrease by EUR 11 million.
Summary of the conversion from US GAAP to IFRS:
Only minimal impact on financial data in the future
Apart from one-time effects arising from changes in the treatment of the convertible bond and changes in the formation of accruals for restructuring expenses, the impact of the conversion to IFRS on EPCOS’ financial data is negligible. The only significant difference that remains is the fact that the interest component of the pension accrual will in the future be reported in the financial result and not under EBIT.
For more information about the conversion to IFRS, please visit www.epcos.com/ir.
EPCOS AG is a leading manufacturer of electronic components, modules and systems headquartered in Munich. With its broad portfolio EPCOS offers a comprehensive range of products from a single source and focuses on fast-growing and technologically demanding markets, in particular in the areas of information and communication technology, automotive electronics, industrial electronics and consumer electronics. The EPCOS Group has design and manufacturing locations and sales offices in Europe, Asia, and in North and South America.
Electronic components are found in virtually every electrical and electronic product and are indispensable for their flawless operation. Products from EPCOS store electrical energy, select frequencies, and protect against overvoltage and overcurrent.
In fiscal 2007 (October 1, 2006, to September 30, 2007), EPCOS posted sales of EUR 1.44 billion. At the end of the fiscal year, the company employed about 18,300 people worldwide.