Notes to the accounts
23 Provisions for liabilities and charges
|
|
|
At |
Exchange |
Provisions |
Provisions |
Disposals |
Utilisation |
At |
|
Warranty provision and product liability |
|
68.6 |
(0.7) |
12.2 |
(7.0) |
(19.6) |
(19.0) |
34.5 |
|
Reorganisation |
|
16.7 |
(0.3) |
10.7 |
(1.3) |
(1.3) |
(13.7) |
10.8 |
|
Property |
|
10.4 |
(0.2) |
2.8 |
(3.4) |
(0.5) |
(2.4) |
6.7 |
|
Disposal |
|
|
|
60.3 |
|
|
|
60.3 |
|
Litigation |
|
12.6 |
(4.6) |
130.9 |
(8.9) |
(0.7) |
(8.1) |
121.2 |
|
|
|
108.3 |
(5.8) |
216.9 |
(20.6) |
(22.1) |
(43.2) |
233.5 |
Analysed as:
|
|
2007 |
2006 |
|
Current liabilities |
90.1 |
81.8 |
|
Non-current liabilities |
143.4 |
26.5 |
|
|
233.5 |
108.3 |
Warranty provision and product liability
Warranties over the Group’s products typically cover periods of between one and three years. Provision is made for the likely cost of after-sales support based on the recent past experience of individual businesses.
Reorganisation
Significant parts of the Group’s operations have been undergoing a phased restructuring programme. Full provision is made for reorganisation approved and committed by the end of each financial year.
Reorganisation provisions include £6.0m costs relating to restructuring supply arrangements following the automotive seals disposal. These costs are expected to be spread over the next six years.
The residual balance at 31 July 2007 relates mainly to Medical, and is expected to be utilised during the next financial year.
Property
As stated in the accounting policies, where a property is vacant, or sub-let under terms such that rental income is insufficient to meet all outgoings, the Group provides for the expected future shortfall up to termination of the lease. Provision is also made for the cost of reinstatement work on leased properties where there is an obligation under the lease, and the costs can be reasonably estimated. Where evidence of contamination is found on property in the Group’s occupation, provision is made for estimated remedial costs pending action on the affected site. Most of the balance is expected to be utilised within the next five years.
Disposal
The terms of the disposal of the Aerospace operations included certain obligations for which provision has been made, including £24.3m in respect of costs of transferring aerospace active pensioners. This provision is expected to be utilised in the forthcoming financial year.
Litigation
John Crane
As stated in note 25 John Crane Inc. (“John Crane”) is one of many co-defendants in litigation relating to products previously manufactured which contained asbestos, the manufacture of which ceased in 1985. Until recently, the awards, the related interest and all material defence costs were met directly by insurers. During the period, John Crane secured the commutation of certain insurance policies in respect of product liability and, as explained in note 4, has accounted for the proceeds as other operating income. While substantial insurance remains in place, John Crane has begun to meet defence costs directly, seeking appropriate contribution from insurers thereafter. No account has been taken of recoveries from insurers as their nature and timing are not yet sufficiently certain to permit recognition as an asset for these purposes. This year, John Crane established a provision to meet defence costs. No provision is held against awards (note 25).
The provision is based upon an assessment of the probable costs of defending known and expected future claims to the extent that such costs can be reliably estimated. The assumptions made in assessing the appropriate level of provision include the number of years over which claims will continue to be received – currently estimated at a 20 year period: the future trend of legal costs – assuming four years based on historical experience (allowing for 3% cost inflation) before allowing for decreasing costs in line with a published table of asbestos incidence projections. In the light of the significant uncertainty associated with asbestos claims, there can be no guarantee that the assumptions used to estimate the provision will be an accurate prediction of the actual costs that may be incurred and, as a result, the provision may be subject to revision from time to time as more information becomes available.
The provision shown in the table above is a discounted pre-tax provision using a discount rate of 5.3%, being the risk-free rate on US debt instruments. The deferred tax asset related to this provision is shown within the deferred tax balance (note 6). Set out below is the gross, discounted and post-tax information relating to this provision:
|
|
2007 |
2006 |
|
Gross provision |
142.2 |
|
|
Discount |
(45.8) |
|
|
Discounted pre-tax provision |
96.4 |
|
|
Deferred tax |
(36.6) |
|
|
Discounted post-tax provision |
59.8 |
|
Other litigation
The Group has on occasion been required to take legal action to protect its patents and other business intellectual property rights against infringement, and similarly to defend itself against proceedings brought by other parties. Provision is made for the expected fees and associated costs, based on professional advice as to the likely duration of each case. Provisions totalling £8.9m (2006: £1.1m) were released relating to litigation settled at less than the expected cost. Most of the balance is expected to be utilised within the next five years.
Apart from that relating to John Crane, none of the other provisions are discounted.