The Board of Directors of Compagnie Financière Richemont SA ('Richemont' or 'the Company') is pleased to submit its report on the activities of the Company and its subsidiary and associated undertakings (together, 'the Group') for the year ended 31 March 2005. The consolidated financial statements on the following pages set out the financial position of the Group at 31 March 2005 and the results and cash flows of its operations for the year then ended. The financial statements of the Company are presented on pages 92 to 96.
The agenda for the Annual General Meeting, which is to be held in Geneva on 15 September 2005, is set out on page 108.
Further information on the Group's activities during the year under review is given in the Financial Review on pages 51 to 64. A list of principal Group companies, held primarily through the Company's wholly-owned subsidiary Richemont SA, Luxembourg, is presented on page 37.
The financial statements are prepared in accordance with Swiss generally accepted accounting principles as issued by the Foundation for Accounting and Reporting Recommendations in Switzerland ('Swiss GAAP ARR') and comply with Swiss law.
The financial statements of each entity within the Group are measured using the currency that best reflects the economic substance of the underlying events relevant to the entity ('the measurement currency'). The consolidated financial statements are presented in millions of euros, the presentation currency of the Group.
Where necessary, comparative figures have been adjusted to conform with changes in presentation in the current year.
The financial statements are prepared under the historical cost convention, other than in those instances where fair value accounting is applied as disclosed in the accounting policies set out below.
The consolidated financial statements include the accounts of the Company and its subsidiary undertakings together with the Group's share of the results and retained post-acquisition reserves of associated undertakings.
Subsidiary undertakings are defined as those undertakings that are controlled by the Group. Control of an undertaking most commonly exists when the Company holds, directly or indirectly through other subsidiary undertakings, more than 50 per cent of the ordinary share capital and voting rights of the undertaking. The accounts of subsidiary undertakings are generally drawn up at 31 March of each year. Where audited accounts are not drawn up to this date, the amounts are arrived at by reference to the last audited accounts available. In consolidating the financial statements of subsidiary undertakings, intercompany transactions, balances, unrealised gains and losses are eliminated.
Associated undertakings are defined as those undertakings, not classified as subsidiary undertakings, where the Group is able to exercise a significant influence. Associated undertakings are accounted for under the equity method. The Group's share of the results and attributable net assets of associated undertakings is derived from accounts drawn up at 31 March of each year. Unrealised gains on transactions between the Group and its associated undertakings are eliminated to the extent of the Group's interest in the associated undertaking. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Joint ventures are enterprises that are jointly controlled by the Group and one or more other parties in accordance with contractual arrangements between the parties. The Group's interests in jointly controlled entities are accounted for by proportionate consolidation. Under this method the Group includes its share of the joint ventures' income and expenses, assets and liabilities and cash flows in the relevant components of the financial statements.
The attributable results of subsidiary undertakings, associated undertakings and joint ventures are included in the financial statements from their dates of acquisition.
Assets and liabilities denominated in foreign currencies, including investments in associated undertakings, are translated into euros at exchange rates prevailing at the balance sheet date. For consolidation purposes, the share capital of the Company is translated from Swiss francs into euros based on the historical rate applicable at the time the Group first adopted the euro as its presentation currency. The earnings of those undertakings in the Group, including associated undertakings, whose accounts are denominated in foreign currencies, are translated into euros at the average exchange rates prevailing during the year. Exchange adjustments arising from the translation of assets and liabilities of subsidiary undertakings and investments in associated undertakings, denominated in foreign currencies, are credited or charged directly to translation reserves. Changes in the fair value of a designated foreign currency derivative that qualifies as a hedge of a net investment in a foreign entity are recognised directly in equity (hedging reserve). Other exchange differences, including those arising from currency conversions in the normal course of business, are credited or charged to the income statement for the year.
Sales are the amounts receivable by the Company and its subsidiary undertakings from the provision of goods and services to third parties and are stated after deducting value added taxes, duties, other sales taxes and trade discounts. Sales are recognised when significant risks and rewards of ownership of the goods are transferred to the buyer. Sales include royalty income earned by the Group, which is recognised on an accrual basis.
Provision is made in each accounting period for all taxation expected to be payable in respect of profits earned to the end of the period, including taxation on dividends ordinarily expected to be payable within the Group out of such profits.
Deferred taxation is provided using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.
Currently enacted rates are used to determine deferred taxation. Deferred tax assets relating to unused tax losses carried forward are recognised to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised.
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line basis over the expected useful lives of the assets. Repairs and maintenance costs are charged to the income statement when incurred.
The costs of property, plant and equipment are depreciated over the expected useful lives of the assets, up to the limits of:
|
Freehold and leasehold buildings |
50 years |
|---|---|
|
Plant and machinery |
15 years |
|
Fixtures, fittings, tools and equipment |
10 years |
Freehold land and assets under construction are not depreciated.
Goodwill
Where the consideration paid in respect of the Group's investment in subsidiary and associated undertakings is in excess of the fair value to the Group of the separable net assets acquired, the excess is regarded as goodwill. Goodwill arising from the acquisition of subsidiary undertakings is deducted immediately from unitholders' funds. Goodwill arising from the acquisition of associated undertakings is capitalised within the cost of the investment and is amortised through the income statement on a straight-line basis over its estimated useful life, up to a maximum of 20 years.
Leasehold rights
Premiums paid at the inception of operating leases for leasehold buildings are capitalised and amortised over their expected useful lives or, if shorter, the lease periods.
Software
Costs that are directly associated with developing, implementing or improving identifiable software products having an expected benefit beyond one year are recognised as intangible assets and amortised using the straight-line method over their useful lives, not exceeding a period of five years. Costs associated with evaluating or maintaining computer software are expensed as incurred.
Research, development, patents and trademarks
These expenses are written off in the accounting period in which they are incurred and taken into account in arriving at profit for the year.
Assets held under finance leases are capitalised and depreciated over their expected useful lives or, if shorter, the lease periods. The liabilities corresponding to remaining capital payments under finance leases are included within current liabilities and long-term borrowings. Rentals payable for assets held under operating leases are charged to the income statement on the straight-line basis.
Property, plant and equipment and other non-current assets are reviewed for impairment losses whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. An impairment loss is recognised when the carrying amount of the asset exceeds its recoverable amount, defined as the higher of an asset's net selling price and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.
These expenses are written off in the accounting period in which they are incurred and taken into account in arriving at profit for the year, except for those costs relating to specific future events, which are carried forward to the accounting period in which those events take place.
Investments in associated undertakings are accounted for using the equity method, whereby the investment is initially recognised at cost and adjusted thereafter for the postacquisition change in the investor's share of net assets, adjusted where necessary and practicable to reflect the Group's accounting policies. The investment includes goodwill arising on acquisition, net of accumulated amortisation. The Group's share of associated undertakings' net profit, including the amortisation for the period of the Group's goodwill arising on the acquisition of such associated undertakings, is disclosed in a single line in the income statement. Full details of the Group's share of associated undertakings' operating results, goodwill amortisation, net interest, taxation and minority interests are provided within the notes to the financial statements.
Investments that are acquired principally for the purpose of generating a profit from short-term fluctuations in price are classified as trading investments and included within current assets. Investments that are initiated by the Group by providing money, goods or services directly to a debtor, other than those originated as trading investments, are classified as originated investments. Investments with fixed maturity which the Group has the intent and ability to hold to maturity are classified as held-to-maturity investments and are included within other long-term assets. Investments intended to be held for an indefinite period of time are classified as available-for-sale and are included within other long-term assets. Trading and available-for-sale investments are carried at fair value, whilst originated and held-to-maturity investments are carried at amortised cost. Realised and unrealised gains and losses arising from changes in the fair value of trading and available-for-sale investments are included in the income statement in the period in which they arise.
All purchases of investments are recognised at the trade date and the cost of purchase includes transaction costs. Sales of securities are recognised at the trade date.
Inventories are valued at the lower of cost and net realisable value. In general, cost is determined on either a weighted average basis or a 'first in first out' basis depending on the nature of the inventory. The cost of manufactured products comprises material cost plus direct labour, a proportion of overheads attributable to the stage of production reached and, where applicable, duties and taxes.
Trade and other debtors are stated at original invoiced amount, net of impairment provisions for amounts which are not expected to be recoverable in full.
The Group operates a number of defined benefit and defined contribution plans throughout the world, the assets of which are generally held in separate trustee-administered funds. The pension plans are generally funded by payments from employees and by the relevant Group companies, taking account of the recommendations of independent qualified actuaries.
For defined benefit plans, the pension accounting costs are assessed using the projected unit credit method. Under this method, the cost of providing pensions is charged to the income statement so as to spread the regular cost over the service lives of employees in accordance with the advice of qualified actuaries, who carry out valuations of the schemes on a cyclical basis, with each scheme being valued at least once every three years. Each pension obligation is measured as the present value of the estimated future cash outflows using interest rates of high quality corporate bonds which have terms to maturity approximating the terms of the related liability. Actuarial gains and losses, outside of a 10 per cent corridor, are spread forward over the average remaining service lives of employees.
The Group's contributions to the defined contribution pension plans are charged to the income statement in the year to which they relate.
The Group operates a stock option plan for executives. No amounts, other than employers' social security costs and taxes, are reflected in the income statement in respect of the granting, vesting or exercise of such options.
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount of the outflow can be reliably estimated. Provisions are quantified based on reliable estimates of the probable outcomes. Provisions are made for warranty repair costs relating to the sale of certain products which are sold under international guarantee against mechanical faults. Restructuring costs and all other provisions are recognised in the period in which the Group becomes legally or constructively committed to payment.
The international nature of the Group's activities exposes it to a variety of financial risks, including the effects of changes in foreign exchange rates and interest rates.
The Group's financial instruments include derivative instruments, as well as cash and cash equivalents, investments, receivables, accounts payable and borrowings. The Group utilises derivative financial instruments in order to hedge interest rate exposure and foreign exchange risk.
All derivatives are recognised on the balance sheet at their fair value. The Group designates certain derivatives, on the date that a derivative contract is entered into, as either a hedge of the fair value of a recognised asset or liability (fair value hedge); or a hedge of a firm commitment or of a forecast transaction (cash flow hedge); or a hedge of a net investment in a foreign entity.
Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge and is assessed as being highly effective are recorded in the income statement, along with the change in the fair value of the hedged asset or liability that is attributable to the hedged risk.
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge and is assessed as being highly effective are recognised directly in equity (hedging reserve). Amounts deferred in equity are included in the income statement in the same period as that during which the hedged firm commitment or forecast transaction affects net income. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting under International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the committed or forecast transaction is ultimately recognised in the income statement. When a committed or forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in unitholders' funds is immediately transferred to the income statement.
Certain derivative transactions, while providing effective economic hedges under the Group's risk management policies, do not qualify for hedge accounting under IAS 39. Changes in the fair value of derivatives that do not qualify for hedge accounting under IAS 39 and those elements of derivatives excluded from the measure of hedge effectiveness are recognised in the income statement.
Hedges of a net investment in a foreign entity are accounted for on a similar basis to cash flow hedges. Where the hedging instrument is a derivative, any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in unitholders' funds; the gain or loss relating to the ineffective portion is recognised immediately in the income statement.
The Group formally documents, at inception, all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives designated as hedges to specific assets and liabilities or to specific firm commitments or forecast transactions. The Group also formally assesses, both at the hedge inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 29. Movements on the hedging reserve are shown in note 21.
The fair value of publicly-traded derivatives, securities and investments is based on quoted market prices at the balance sheet date. In assessing the fair value of non-traded derivatives and other financial instruments, the Group uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date.
Cash and cash equivalents are carried in the balance sheet at cost. For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on call with banks, other short-term marketable investments, bank overdrafts and other short-term loans that are similar in nature to bank overdrafts.
The consideration paid on the acquisition of treasury units is included within the equity reserve for treasury units, is carried at cost and is deducted from unitholders' funds. On the disposal of such treasury units, the original consideration paid is eliminated from the carrying value of treasury units and gains or losses arising on disposal are included as movements in retained earnings and other reserves.
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