BOC Report and accounts 2005 - Alle jaarverslagen

60 The BOC Group plc Annual report and accounts 2005 Financial review
Inflation
Over the last three years, inflation has not had a material impact on the revenue or profit of the Group.
Critical accounting policies
The principal accounting policies affecting the results of operations and financial condition are set out on pages 91
and 92 of the financial statements.The application of certain of these policies requires assumptions or subjective
judgements by management. Management bases these on a combination of past experience and any other
evidence that is relevant to the particular circumstances.
The application of these assumptions and judgements affects the reported amounts of profit during the year
and the assets and liabilities at the balance sheet date.Actual results may differ from the estimates calculated using
these assumptions and judgements. Management believes that the following are the critical policies where the
assumptions and judgements made could have a significant impact on the consolidated financial statements.
Tangible fixed assets A significant part of the capital employed of the Group, particularly in the Process Gas
Solutions and Industrial and Special Products lines of business, is invested in tangible fixed assets.The nature of the
business demands significant capital investment to renew or increase production capacity or to enable the business
to achieve greater productivity and efficiency.
It is the Group’s policy to depreciate tangible fixed assets, except land, on a straight line basis over the effective
lives of the assets.This ensures that there is an appropriate matching of the revenue earned with the capital costs of
production and delivery of goods and services.A key element of this policy is the estimate of the effective life
applied to each category of fixed assets which, in turn, determines the annual depreciation charge. In deciding the
appropriate lives to be applied, management takes into account various factors including, among other things, the
accumulated experience of the effective asset lives from historic business operations and an assessment of the likely
impact of any changes in technology.
While Group earnings in any period would fluctuate if different asset lives were applied, in some cases the
original estimated life of an asset is closely related to contractual arrangements with large customers. Some of the
earnings impact of choosing a different asset life would be mitigated, as the different life may reflect different
contractual arrangements with such customers. Nevertheless, variations in the effective lives could impact the
earnings of the business through an increase or decrease in the depreciation charge. It is estimated that a change
of one year in the effective life of all plant, machinery, vehicles and cylinders would have an impact of between
£15 million and £20 million on annual Group operating profit.A change in the effective life of buildings would have
only a negligible impact.
Intangible fixed assets In a similar manner to tangible fixed assets, management uses its judgement to determine
the extent to which goodwill arising from the acquisition of a business has a value that will benefit the performance
of the Group over future periods. It is the Group’s policy to amortise goodwill on a straight line basis over its useful
economic life.This takes into account, among other things, the maturity of the business acquired and its product and
customer base.Any change in these assumptions would have an impact on the earnings of the Group.
It is estimated that a change of one year in the useful economic life of all goodwill would have an impact of
approximately £1 million on annual Group operating profit.
Retirement benefits Results of the Group include costs relating to the provision of retirement benefits for
employees. It is the directors’ responsibility to set the assumptions used in determining the key elements of the
costs of meeting such future obligations.The assumptions are based on actual historical experience and are set after
consultation with the Group’s actuaries.They include the assumptions used for regular service costs and for the
financing elements related to the pension schemes’ assets and liabilities.Whilst management believes that the
assumptions used are appropriate, a change in the assumptions used would affect both the operating profit and net
interest cost of the Group.
There are a number of elements used in the assumptions and these vary for the different countries in which
the Group operates.There may also be an inter-dependency between some of the assumptions, making it
potentially misleading to consider any approximate impact on Group results of a change in any one assumption in
isolation. Nevertheless, for the UK and US schemes together, it is estimated that an absolute 0.25 per cent change
in the assumptions on rates of inflation, discount rates and return on equities in pension scheme assets would
individually result in changes of approximately £6 million, £3 million and £3 million respectively in the total pension
cost in annual Group profit before tax.A similar change in the assumptions on all other schemes would have only a
negligible impact.
Environmental provisions In certain parts of the business, mainly in the US, the Group has obligations to carry out
environmental clean-ups at former and current production sites. Many of these obligations will not arise for a
number of years, and the costs are difficult to predict accurately. Management uses its judgement and experience to
provide an appropriate amount for the likely cost of such clean-ups, and the amounts, if material, are discounted to
present values. Both the amount of anticipated costs, and the interest rates used to discount such costs, are
subjective.The use of different assumptions would impact the earnings of the Group.
It is estimated that a change of one per cent in the interest rate used to discount such costs would have an
impact of approximately £1 million on annual Group profit before tax.