Imperial Chemical Industries (ICI)

ICI will be reporting its financial results in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) from 1 January 2005.

The transition date for adoption of IFRS is determined in accordance with IFRS 1 First Time Adopting of International Financial Reporting Standards, and has provisionally been determined as 1 January 2004. However, this transition date is subject to finalisation of the Securities and Exchange Commission (“SEC”) proposed rule for an exemption from provision of a second year of comparatives. If the SEC does not confirm this exemption, or the conditions are unduly onerous or impractical for the Group, the transition date will be 1 January 2003.

As noted in the 2003 Annual Report, the Group established a project team and Steering Committee to oversee the transition to IFRS. The project comprised a number of workstreams covering the areas identified as being impacted by the move to IFRS. There were fourteen of these workstreams covering key specific areas such as financial instruments, foreign exchange, share options, pensions and other areas such as Group policy databases, budget processes, systems and controls, training, presentation of accounts and investor relations.

The project team completed an impact analysis of each standard, which identified the main differences between the Group’s existing accounting policies and IFRS, the effect on the reporting process and the system changes required. The Group’s consolidation system was modified to comply with IFRS. Training on IFRS was delivered to key finance staff throughout the Group.

The key areas identified that affect the Group accounts under IFRS are as follows:

IAS 19 – Employee benefits
The Group will measure pension commitments and other related benefits in accordance with IAS 19. ICI plans to adopt the option in IAS 19 allowing all actuarial gains or losses to be taken directly to the statement of recognised income and expense, subject to endorsement by the EU. Measurement of the Group’s pension commitments and other related benefits under IAS 19 is estimated to produce broadly similar results to those under FRS 17. Disclosure of the Group’s retirement benefit arrangements in accordance with FRS 17 is provided in Note 36.

IFRS 2 – Share-based payments
The Group operates a range of share-based incentive schemes (both awards of options and shares) for employees that are impacted by IFRS 2. Under the Group’s current accounting policies, an expense has only been recognised for the awards of shares and this expense has been calculated and is based on intrinsic value. Under IFRS 2, an expense will be recognised in the income statement for all share based payments. This expense will be calculated based on the fair value at the date of the award using the Black-Scholes pricing model.

The Group does not intend to adopt the exemption under IFRS 2 to apply the standard only to awards made after 7 November 2002, instead a full retrospective approach will be followed in order to provide full year on year comparability of results.

IFRS 3 – Business combinations
The Group will adopt the exemption in IFRS 1 to apply IFRS 3 prospectively from the transition date and thus not to restate business combinations prior to this date. The Group has not undertaken any significant acquisitions since the transition date. The impact on the financial statements of adopting this standard is the cessation of amortisation of goodwill, which instead will be tested for impairment on transition, and annually thereafter.

IAS 21 – The effects of changes in foreign exchange rates
The Group has a range of intercompany funding arrangements in place in order to optimise the sourcing of finance for the Group and optimise the funding of its subsidiaries. Under both UK GAAP and IFRS, foreign exchange gains/losses on intra-group loans are recognised in the income

statement, unless the loans can be designated as part of the Group’s investment in its foreign operations, when the exchange gains/losses can then be recognised in reserves. However, IFRS is stricter in determining which loans can be designated as part of the Group’s investment in its foreign operations, including exclusion of intra-group loans that are not in the functional currency of either the lender or the borrower. Group Treasury has taken action to reduce the potential volatility arising from this change in accounting treatment. In particular, significant nonfunctional currency loans have been re-designated into sterling.

In addition to the above, the Group partially hedges its net investment in foreign subsidiaries by denominating external debt in a mix of foreign currencies. Under UK GAAP, the goodwill, which was offset against reserves is included as an asset in this hedge calculation. Under IFRS, goodwill in reserves is not designated as an asset and therefore cannot be used in the hedging calculation. The exclusion of goodwill in reserves from the assets in the hedge calculation will introduce volatility into the income statement as a result of the impact of foreign exchange differences arising from movements on that part of the debt that cannot be considered a part of the net investment hedge.

IAS 32 / IAS 39 – Financial instruments
The Group will take the exemption not to restate comparatives for IAS 32 Financial Instruments: Disclosure and Presentation, and IAS 39 Financial Instruments: Recognition and Measurement. As a result, the comparative information in the 2005 Financial Statements will be presented on the existing UK GAAP basis. The Group will present a reconciliation between the closing 2004 balance sheet and the opening 2005 balance sheet with the results for the six months to 30 June 2005.

The own shares that the Group has acquired, or is committed to acquire under forward contracts, to hedge its obligations under various share option schemes will be included as treasury stock under IAS 32. As the Group has the option to equity settle the forward contracts they will be included in treasury stock on transition and no fair valuation will be performed on such contracts going forward. The associated liabilities for these contracts will be included as part of net debt (for the amount reflecting the extent that the contracts are out of the money) and as an other liability (for the amount reflecting the current recoverable amount if the contracts were to be cash settled).

Other matters
IAS 1 does not provide definitive guidance on the format of the income statement, but states key lines that should be disclosed. It also requires additional line items and headings to be presented on the face of the income statement when such presentation is relevant to an understanding of the entity’s financial performance. IAS 1 explains that due to the effects of an entity’s various activities, transactions and other events differing in frequency, potential for gain or loss and predictability, disclosing components of financial performance assists in an understanding of the financial performance achieved and in making projections of future results. Factors to be considered include materiality and the nature and function of the components of income and expense. ICI believes items that were previously referred to as ‘exceptional items’ under UK GAAP should still be separately identified to assist in understanding the financial performance of the Group. Such items will be included within ‘special items’ under IFRS.

Whilst no changes to the segments are required beyond the existing International Business level, ICI intends, given the stricter definitions and to reflect better the structure of the Group. A reconciling item will be included in the Group's segment disclosure that represents Corporate and Other costs that are not directly attributable to individual segments i.e. largely those relating to operating as a "PLC".

Parent Company Accounts
ICI will to continue to present the Company accounts in accordance with UK GAAP for the foreseeable future. Consequently Company accounts will be presented separately from the Group accounts.

ICI will be reporting its financial results in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) from 1 January 2005.

The transition date for adoption of IFRS is determined in accordance with IFRS 1 First Time Adopting of International Financial Reporting Standards, and has provisionally been determined as 1 January 2004. However, this transition date is subject to finalisation of the Securities and Exchange Commission (“SEC”) proposed rule for an exemption from provision of a second year of comparatives. If the SEC does not confirm this exemption, or the conditions are unduly onerous or impractical for the Group, the transition date will be 1 January 2003.

As noted in the 2003 Annual Report, the Group established a project team and Steering Committee to oversee the transition to IFRS. The project comprised a number of workstreams covering the areas identified as being impacted by the move to IFRS. There were fourteen of these workstreams covering key specific areas such as financial instruments, foreign exchange, share options, pensions and other areas such as Group policy databases, budget processes, systems and controls, training, presentation of accounts and investor relations.

The project team completed an impact analysis of each standard, which identified the main differences between the Group’s existing accounting policies and IFRS, the effect on the reporting process and the system changes required. The Group’s consolidation system was modified to comply with IFRS. Training on IFRS was delivered to key finance staff throughout the Group.

The key areas identified that affect the Group accounts under IFRS are as follows:

IAS 19 – Employee benefits
The Group will measure pension commitments and other related benefits in accordance with IAS 19. ICI plans to adopt the option in IAS 19 allowing all actuarial gains or losses to be taken directly to the statement of recognised income and expense, subject to endorsement by the EU. Measurement of the Group’s pension commitments and other related benefits under IAS 19 is estimated to produce broadly similar results to those under FRS 17. Disclosure of the Group’s retirement benefit arrangements in accordance with FRS 17 is provided in Note 36.

IFRS 2 – Share-based payments
The Group operates a range of share-based incentive schemes (both awards of options and shares) for employees that are impacted by IFRS 2. Under the Group’s current accounting policies, an expense has only been recognised for the awards of shares and this expense has been calculated and is based on intrinsic value. Under IFRS 2, an expense will be recognised in the income statement for all share based payments. This expense will be calculated based on the fair value at the date of the award using the Black-Scholes pricing model.

The Group does not intend to adopt the exemption under IFRS 2 to apply the standard only to awards made after 7 November 2002, instead a full retrospective approach will be followed in order to provide full year on year comparability of results.

IFRS 3 – Business combinations
The Group will adopt the exemption in IFRS 1 to apply IFRS 3 prospectively from the transition date and thus not to restate business combinations prior to this date. The Group has not undertaken any significant acquisitions since the transition date. The impact on the financial statements of adopting this standard is the cessation of amortisation of goodwill, which instead will be tested for impairment on transition, and annually thereafter.

IAS 21 – The effects of changes in foreign exchange rates
The Group has a range of intercompany funding arrangements in place in order to optimise the sourcing of finance for the Group and optimise the funding of its subsidiaries. Under both UK GAAP and IFRS, foreign exchange gains/losses on intra-group loans are recognised in the income

statement, unless the loans can be designated as part of the Group’s investment in its foreign operations, when the exchange gains/losses can then be recognised in reserves. However, IFRS is stricter in determining which loans can be designated as part of the Group’s investment in its foreign operations, including exclusion of intra-group loans that are not in the functional currency of either the lender or the borrower. Group Treasury has taken action to reduce the potential volatility arising from this change in accounting treatment. In particular, significant nonfunctional currency loans have been re-designated into sterling.

In addition to the above, the Group partially hedges its net investment in foreign subsidiaries by denominating external debt in a mix of foreign currencies. Under UK GAAP, the goodwill, which was offset against reserves is included as an asset in this hedge calculation. Under IFRS, goodwill in reserves is not designated as an asset and therefore cannot be used in the hedging calculation. The exclusion of goodwill in reserves from the assets in the hedge calculation will introduce volatility into the income statement as a result of the impact of foreign exchange differences arising from movements on that part of the debt that cannot be considered a part of the net investment hedge.

IAS 32 / IAS 39 – Financial instruments
The Group will take the exemption not to restate comparatives for IAS 32 Financial Instruments: Disclosure and Presentation, and IAS 39 Financial Instruments: Recognition and Measurement. As a result, the comparative information in the 2005 Financial Statements will be presented on the existing UK GAAP basis. The Group will present a reconciliation between the closing 2004 balance sheet and the opening 2005 balance sheet with the results for the six months to 30 June 2005.

The own shares that the Group has acquired, or is committed to acquire under forward contracts, to hedge its obligations under various share option schemes will be included as treasury stock under IAS 32. As the Group has the option to equity settle the forward contracts they will be included in treasury stock on transition and no fair valuation will be performed on such contracts going forward. The associated liabilities for these contracts will be included as part of net debt (for the amount reflecting the extent that the contracts are out of the money) and as an other liability (for the amount reflecting the current recoverable amount if the contracts were to be cash settled).

Other matters
IAS 1 does not provide definitive guidance on the format of the income statement, but states key lines that should be disclosed. It also requires additional line items and headings to be presented on the face of the income statement when such presentation is relevant to an understanding of the entity’s financial performance. IAS 1 explains that due to the effects of an entity’s various activities, transactions and other events differing in frequency, potential for gain or loss and predictability, disclosing components of financial performance assists in an understanding of the financial performance achieved and in making projections of future results. Factors to be considered include materiality and the nature and function of the components of income and expense. ICI believes items that were previously referred to as ‘exceptional items’ under UK GAAP should still be separately identified to assist in understanding the financial performance of the Group. Such items will be included within ‘special items’ under IFRS.

Whilst no changes to the segments are required beyond the existing International Business level, ICI intends, given the stricter definitions and to reflect better the structure of the Group. A reconciling item will be included in the Group's segment disclosure that represents Corporate and Other costs that are not directly attributable to individual segments i.e. largely those relating to operating as a "PLC".

Parent Company Accounts
ICI will to continue to present the Company accounts in accordance with UK GAAP for the foreseeable future. Consequently Company accounts will be presented separately from the Group accounts.