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INSIGHT – Maybe next year we’ll know what it means.

Most City analysts seem to agree that the recently announced Invensys results are so confusing that, ask them whether the BTR-Siebe merger (which created the new company) has been worthwhile, and the answer is a definite “Maybe.” The unwillingness or the inability to cope with the accounting is easily understandable. Acquisitions are common and so is acquisition accounting. In contrast, according to specialist magazine Company Reporting, only 1% of companies that indulge in business combinations use merger accounting – and Invensys is part of that tiny minority. Under merger accounting, results and cash flows are combined from the very start of the financial period in which the merger occurs. In the case of Invensys, that was the year to 31 March 1999. Except even that wasn’t simple, as BTR had a December year-end and it was Siebe that closed the books at the end of March. Profit and loss account and balance sheet comparatives are restated on the combined basis and adjustments are made to achieve consistency of accounting policies. In the preliminary results, the Invensys directors explain what they have done. They say: “The results for the year ended 31 March 1999 have been prepared under merger accounting and BTR and Siebe have been combined retrospectively as if the companies had always been combined.” The directors go on to explain – rather blandly – that to achieve uniformity, the accounting policies of the merged companies have been harmonised. They say, “the prime difference between the two companies’ policies has been the capitalisation of costs and their impact on intangible and tangible assets and other assets, together with the treatment of intangible assets on acquisitions.” Prior to the merger, the City was becoming increasingly tetchy over Siebe’s accounting, such as its policy of capitalising research and development rather than writing it all off to the profit and loss account in the year it was spent. The harmonisation has taken place with an emphasis on prudence. The directors say that both sides of the business now comply with FRS 15 – the standard on tangible fixed assets. This has particularly hit the way that overheads are included in the cost of fixed assets. The end result is that Invensys’ net assets have been reduced by £698m, which is not exactly peanuts, even when the 1999 balance sheet totals £4.3bn (1998 restated £4.736bn). The impact on operating profit in the year to 31 March 1999 is a reduction of £54m, the combined and restated 1998 results show a reduction of £72m. Finding a way around the consolidated profit and loss account is a nightmare. Total operating profit manages to stay above the magic billion mark (£1.008bn compared with 1998 restated of £1.609bn). Further down the p&l the profit on ordinary activities before tax is £295m, compared with a touch over £1.5bn the year before. If the merry-go-round of acquisitions, disposals, restructuring costs, impairment, goodwill amortisation, and costs of closure of continuing and discontinuing operations has made the p&l virtually meaningless for comparative purposes, the balance sheet is equally unfamiliar territory. Fixed assets especially have been re-engineered to add further to the complications. In 1998 goodwill amounted to zero, in 1999 it was £461m. The notes to the accounts explains: “Prior to the merger, Siebe’s policy had been to assign fair value to intangible assets. BTR subsumed such assets within goodwill. It is impractical to quantify the value, if any, of intangible assets arising on BTR acquisitions in prior years. In order to achieve consistency within the merged financial statements, the value of intangible assets arising on Siebe acquisitions prior to the merger has been written off.” Adding to the confusion and leading to the goodwill figure is FRS10 (accounting for goodwill and intangibles) which Invensys is dutifully following but which only came into force while the merger was taking place. Invensys has also dealt with FRS12 (Provisions, Contingent Liabilities and Contingent Assets), which was published in September last year. The major results were a £30m additional provision for “onerous property contracts” and a reduction in provisions of £38m for reorganisation provisions that failed the stiffer FRS 12 tests. Any of these changes – the new FRSs or the merger – would have altered the report and accounts, but taken together they are twisted almost beyond recognition, which is why the company was encouraging the City to look mostly at the top line. While the merger made sense for the process controls and automation businesses, FD Kathleen O’Donovan and the rest of the finance staff could have been forgiven for thinking otherwise. Putting together these two sets of books has clearly not been straightforward – yet they cover only seven weeks of combined trading. Perhaps they should be seen as a dress rehearsal for next year, when doubtless all will be clearer.

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