annual report 2005
rollsroyce group plc annual report 2005
10885 ra 2005  cover  15306  0759  page 1 rollsroyce group plc annual report 2005
company proﬁle
rollsroyce is a global business providing
power systems for use on landat sea 
and in the air the group has a balanced
business portfolio with leading positions 
in the civil and defence aerospacemarine 
and energy markets
there are some 54000 rollsroyce gas
turbines in service and they generate 
a demand for highvalue services 
throughout their operational lives
rollsroyce is a technology leader 
employing 36200 people in ofﬁces
manufacturing and service facilities 
in 50 countries
01 group ﬁnancial highlights
02 rollsroyce at a glance
04 chairman’s statement
06 chief executive’s review 
16 review of operations
24 finance director’s review
30 board of directors
32 report of the directors
39 directors’remuneration report
50 consolidated income statement 
51 consolidated balance sheet 
52 consolidated cash ﬂow statement 
54 consolidated statement of recognised 
income and expense 
54 summary of movements in equity 
55 notes to the ﬁnancial statements
108 statement of directors’responsibilities 
108 independent auditors’report 
109 company balance sheet
109 reconciliation of movements in shareholders’ funds 
110 notes to the company ﬁnancial statements 
113 independent auditors’report 
114 principal subsidiary undertakings 
116 principal joint ventures 
118 group ﬁveyear review 
119 shareholder information
rollsroyce group plc
registered ofﬁce
65 buckingham gate 
london sw1e 6at
t elephone 
020 7222 9020 
website 
wwwrollsroycecom
company number
4706930
shareholder enquiries
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po box 82
the pavilions 
bridgwater road 
bristol bs99 7nh
general helpline
0870 702 0111
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0870 703 0162
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10885 ra 2005  cover  15306  0800  page 2 01
group ﬁnancial highlights
rollsroyce group plc annual report 2005
1996 39
1997 43
1998 45
1999 46
2000 59
2001 63
2002 58
2003 56
2004 59
2005 66
£66bn
sales £bn
1996 143
1997 229
1998 368
1999 412
2000 253
2001 221
2002 344
2003 186
2004 191
2005 248
£248m
capital investment – property plant  
and equipment additions at cost £m
1996 237
1997 289
1998 333
1999 421
2000 559
2001 594
2002 362
2003 375
2004
 see note 2  see note 7
417
2005 679
£6 7 9m
underlying profit before financing costs  £m
1996 217
1997 268
1998 310
1999 337
2000 371
2001
2002 297
2003 281
2004 288
2005 282
£282m
net research and development £m
1996 9
1997 9
1998 2
2 1999
2000 57
2001 110
2002 22
2003 255
2004 235
2005 546
£546m
cash flow before acquisitions and disposals  £m
1996 1270
1997 1353
1998 1618
1999 1647
2000 1938
2001 2020
2002 1110
2003 1220
2004 1556
2005 2414
24 1 4p
underlying earnings per share p
1996 77
1997 101
1998 126
1999 132
2000 145
2001 167
2002 171
2003 187
2004 213
2005 244
£244bn
order book – firm and announced £bn
1996 21
1997 289
1998 342
413 1999
2000 289
2001 311
2002 212
2003 270
2004 417
2005 877
£8 77 m
profit before financing costs £m
1996 319
1997 1353
1998 1651
1560 1999
2000 507
2001 667
358
2002 329
2003 704
2004 1556
2005 2011
20  1 1 p
earnings per share p
note for background to the change from uk gaap accounting to ifrs in 
2005 and the retrospective adjustments made to the 2004 accounts see 
the relevant section on ifrs in the finance director’s review on page 29 
and note 33 to the ﬁnancial statements on page 96 2003 and earlier ﬁgures 
are as reported under uk gaap 
10885 ra 2005 actual  15306  0755  page 01 02
rollsroyce group plc annual report 2005
02
rollsroyce at a glance
rollsroyce derives its revenues from 
original equipment sales and high 
valueaddedproductrelated services 
in broadly equal measure
our four business sectors are all focused 
on power systems and they share a
common technology base
marine
civil aerospace
orders for 246 trent engines worth approximately 
us3 billion were announced
the airbus a380 powered by the trent 900 engine
made a successful maiden ﬂight and good progress
through its comprehensive ﬂighttest programme
agreement was reached with airbus for rollsroyce to
supply the trent 1700 to power the new a350 airliner
the 1000th br710 engine was delivered to gulfstream 
to power its g550 longrange business jet
international aero engines iae achieved a record 
order intake of approximately 600 engines worth 
over us15 billion to rollsroyce
2005 highlights
a £137 million service and support contract was secured
for ships in service with the royal navy and the french
belgian and royal netherlands navies
the ﬁrst mt30 marine gas turbine was delivered to power
landbased test runs of the us navy’s ddx destroyer
lockheed martin installed two mt30 marine gas turbines
on the ﬁrst prototype littoral combat ship for the us navy
a university technology centre utc was established by
the group in norway to conduct research programmes in
the marine sector
a new marine facility in shanghai was formally opened
2005 highlights
sales
£3 5 1 0m
53 of group sales
sales
£1 09 7 m
17  of group sales
10885 ra 2005 actual  15306  0755  page 02 03
rollsroyce group plc annual report 2005
03
energy
defence aerospace
group
good progress was made with the group’s development
work for the us department of defense’s dod’s 
joint strike fighter programme
airtanker was awarded preferred bidder status for the 
uk’s future strategic tanker aircraft programme
the ﬁrst series of tests was completed for the tp400d6
engine for the airbus a400m military transport aircraft
mission ready management solutions services contracts
were signed with the uk ministry of defence mod 
and the us dod covering combattransport and 
trainer aircraft engines
a new operations centre was opened in bristol as 
part of the growing inservice support business for 
military engines
2005 highlights
the ﬁrst 12 industrial rb211based compression packages
were installed and commissioned for the westeast 
pipeline project in china four months ahead of schedule
an additional three gas turbine units were ordered for 
the expansion of the pipeline’s capacity
six industrial trentbased compression packages were
delivered to qatar for the middle east dolphin project
this is the ﬁrst mechanical drive application of the trent 60
the most powerful and efﬁcient aeroderived gas turbine
on the market
sharjah electricity and water authority chose two trent 60
powergeneration sets for the latest phase of the wasit
powerplant expansion and the ﬁrst trent 60 for asia was
ordered by a major electricity producer in yinchuan china
ten rb211 industrial gas turbine powergeneration units
were ordered to provide electrical power for f ﬂoating
production storage and ofﬂoading vessels operated by
total off the coast of nigeria and by petrobras off the coast
of brazil
the 500th industrial rb211 was shipped from the 
rollsroyce assembly and test facility in montreal
a joint venture was established with a singaporean
consortium to continue development work on solidoxide
fuel cell technology
2005 highlights
rollsroyce is a global powersystems business
with ofﬁcesmanufacturing and service facilities
in 50 countriesthe group invests in technology
and capabilities that can be exploited across all 
of its market sectorscivil aerospacedefence
aerospacemarine and energy
group sales overview 2005 highlights
£66bn
turnover
15 0
customer countries 
employees
36

200
sales
£1 4 1 3m
21  of group sales
breakdown of sales
46 original equipment
54 aftermarket services
record ﬁrm order book at £229 billion 
sales increased to £6603 million
services revenues including 100 per cent of
repair and overhaul joint ventures increased by
12 per cent on an underlying basis
underlying proﬁt before taxation increased 
to £584 million
average net debt fell to £260 million
sales
£505m
8 of group sales
note sales analysis excludes financial services £78 million 2004 £81 million equivalent to one per cent of sales
10885 ra 2005 actual  15306  0755  page 03 04
chairman’ s statement
rollsroyce group plc annual report 2005
we have continued to demonstrate the
strength of our business model and to create
value for shareholders
simon robertson chairman
10885 ra 2005 actual  15306  0755  page 04 having completed my ﬁrst 12 months as
chairman i am delighted to be able to report
another year of strong progress for the group
we have continued to demonstrate the
strength of our business model and to create
value for shareholders
our ﬁnancial results for 2005 reﬂect the
value of past investment and of the group’s
consistent strategy underlying proﬁts rose by 
49 per cent earnings per share by 55 per cent
and debt levels were signiﬁcantly reduced
we are therefore proposing an increase in the
payment to shareholders
rollsroyce is continuing to invest in 
new technologies products and programmes
the longterm nature of these investments 
and the increasing numbers of our engines in
service should enable the group to generate
growth and improving returns over many years
the group attaches a particular priority to
the environment by investing in technologies
which minimise the environmental impact of
our operations and products
we also take seriously our obligations to all
our stakeholders as we believe that excellence
in corporate responsibility delivers competitive
advantage and longterm success
there have been a number of board
changes over the year after nearly 40 years 
with the group mike howse retired from the
board in june as director of engineering and
technology and has been succeeded by 
colin smith i would like to thank mike for 
the outstanding contribution he has made
colin smith has been with the group for over
30 years and brings to the board a similar
wealth of engineering expertise
we announced in january of this year that 
colin green is to retire from the group and 
the board in april again i would like to thank
colin for the huge contribution he has made 
to the company and to the aerospace industry
which was publicly recognised last year when
he received a well deserved cbe
as foreshadowed in last year’s report iain
conn has joined the board as a nonexecutive
director and has brought to our discussions 
his extensive international business experience
i would like to thank the management 
and all our employees very much for another
successful yeartheir commitment has been
outstanding i should also pay tribute to my
fellow directors for the considerable contribution
they have made in support of the group
our past investments have enabled us to
build strong positions in markets which offer
longterm growthlooking forward we continue
to lay the foundations for longterm success
and value creation in a demanding international
business environment i expect the group 
to continue to make progress in 2006 as the
returns from past investments grow while 
we continue to invest in new technologies 
and products
simon robertson chairman
february 8 2006
05
rollsroyce group plc annual report 2005
10885 ra 2005 actual  15306  0755  page 05 06
chief executive’ s review
rollsroyce group plc annual report 2005
rollsroyce continued to make 
good ﬁnancial progress in 2005
sir john rose chief executive
10885 ra 2005 actual  15306  0756  page 06 07
rollsroyce group plc annual report 2005
rollsroyce continued to make good ﬁnancial
progress in 2005 with a substantial increase in
our proﬁtability and cash ﬂow by cutting costs
and working more efﬁciently we were able to
counter the impact of higher commodity prices
and an adverse trend in our achieved us dollar
exchange rate it was good to see the results
reﬂected in a rising share price
we continue to grow organically and 
our sales increased in 2005 by 11 per cent to
£6603 million with growth achieved in each 
of the group’s market sectors our underlying
proﬁt on a likeforlike basis increased by 49 per
cent and a strong cash inﬂow of £552 million
resulted in positive net funds of £335 million on
the balance sheet at the yearendaverage net
debt was reduced by a further 59 per cent
to £260 million
underlying earnings per share rose 55 per
cent to 2414p and basic earnings per share 
rose 29 per cent to 2011p a ﬁnal payment to
shareholders has been proposed of 538p per
share making a total payment for the year of
872p per share a 66 per cent increase
compared to the payment in 2004
we attach great importance to minimising
the impact on our ﬁnances of volatility in the
global currency marketswe continued in 2005
to pursue our strategy of hedging future net
dollar revenues and at the end of the year we
had approximately us105 billion of forward
cover at an average exchange rate of 
167 dollars to the poundthe achieved rate in
2005 deteriorated by four cents relative to 2004
we will use this hedge book – in conjunction
with costreduction initiatives and further
‘dollarisation’of our cost base – to manage 
our future foreign exchange exposure
we believe it desirable to continue to increase
the strength of the balance sheet reﬂecting the
longterm nature of the businessthis will also
stand us in good stead as we manage pension
obligations over the coming years
new orders in 2005 reached a record level
of £113 billion and brought the yearend ﬁrm
order book to a record £229 billion an increase
of 21 per cent over 2004over the past ten years
the order book has grown at an annual
compound rate of 14 per cent over the past
ﬁve years asia has been a signiﬁcant source 
of new business and it now represents 
33 per cent of the order book
progress in asia
growth in asia is prompting more air travel
both for business and for pleasure increasing
the energy requirements to support industrial
development and larger numbers of afﬂuent
homes it is stimulating investment in oil and
gas exploration and transmission and it is
boosting orders for marine propulsion systems
from asia’s ship building industries now the
largest and fastest growing in the world
these are all target markets for rollsroyce 
and we are beneﬁting accordinglyin 2005 
sales to the region increased by 18 per cent 
and the order book for the region increased 
by 70 per cent
our physical presence in asia is also
growingwe incorporated a new subsidiary 
in bangalore in order to expand engineering
capacity over a range of new programmes
we established a joint venture in singapore
to develop a commercially viable power system
based on solid oxide fuel cell technology
we opened a new marine factory in shanghai
from which the group’s £300 million turnover
merchant business will be managed and we
established new sources of supply in markets
such as china indonesia malaysia singapore
and taiwan
all this added to the increasingly international
nature of the grouptoday 40 per cent of our
employees work outside the uk 87 per cent 
of our sales are to destinations outside the uk
and we have ofﬁces manufacturing and locally
supported service facilities in 50 countries
priorities
we focused on three priority areas in 2005
– investment in technology and products
acquisition of new technologies is
conducted very methodicallywe aim to
have ‘ontheshelf’innovations ready to
incorporate into our next generation of
products whilst at the same time exploring
what might be possible further into the
futurewe see no shortage of market
opportunities and expect the level of 
selffunded investment in our research 
and development work to remain at
approximately ﬁve per cent of group sales
the impact of this investment on our
income in any one year will reﬂect the mix
and maturity of our current development
programmes during 2005 we launched 
a number of new programmes notably 
the trent 1700 for the airbus a350 and 
the avon 200 an upgrade of the existing 
avon engine that has been so successful 
in the energy sector
total shareholder return index
total shareholder return over 10 years  rollsroyce against ftse 1 00
ftse 100 rollsroyce
0
121995 121996 121997 121998 121999 122000 122001 122002 122003 122004 122005
50
100
150
200
250
300
350
400
delivering shareholder value
10885 ra 2005 actual  15306  0756  page 07 08
chief executive’ s review continued
rollsroyce group plc annual report 2005
– operational and unit cost reduction
we made further progress in improving
efﬁciency thereby offsetting the impact 
of higher commodity prices by cutting
costswe achieved this by increasing
productivity in our plants managing 
our supply chain better and buying more 
from lowcost sourceswhere we had 
to carry higher inventories to facilitate 
our factorymodernisation programme
we more than offset their ﬁnancial impact
through a rigorous management of our
working capital importantly more efﬁcient
working practices were implemented as 
a precondition for new factory investment
a signiﬁcantly higher work load particularly
in relation to our civil aerospace engines
has challenged the ability of our supply
chain to match our needs and this remains
an area for attention
– continued development of 
aftermarket services
aftermarket service revenues including 
100 per cent of our repair and overhaul
joint ventures increased by 12 per cent in
2005 and have grown at 11 per cent per
annum compound over the past ten years
services now represent 54 per cent of our
revenuesthis is a consequence of the
successful broadening of the group’s product
range the steady increase in the number of
our engines in service and the investment
we have made in a comprehensive range
of aftermarketservice capabilities
increasingly we are taking responsibility
for the maintenance of our engines and
systems under longterm service agreements
this aligns our commercial interests closely
with those of our customers and maximises
the value that our skills and assets can 
add during 2005 a number of innovative
service agreements were announced 
in each of the group’s business sectors
technology and the environment 
we continued to pay particular attention 
in 2005 to the environmental impact of our
products and of our manufacturing operations
in civil aerospace our strategy is to seek to
maintain the beneﬁts to society of the growth
in air travel whilst helping to rein back as 
much as possible the negative consequences 
of air travel for the global environmentwe are
accordingly pursuing new technologies that
should enable us to meet a series of highly
demanding environmental targets described 
in more detail on pages 36 and 37
we will succeed in this because our
engineers and scientists have the skills and
dedication to tackle some daunting technical
challengestheir talents are a timely reminder 
of the importance of attracting gifted
individuals to a career in the sciences as a
group we are increasingly impressed by the
commitment to science teaching in many
countries especially in asiathe picture in the
uk though is very different with increasing
evidence that young people’s enthusiasm 
for the physical sciences is in decline
to help address this issue in 2004 we
introduced the rollsroyce science prize it has
been designed to reward imaginative science
teaching projects in the classrooms of the uk
and ireland each year across all ages
it offers substantial cash awards for the
winning entrants it gathered momentum
encouragingly in 2005 with a 55 per cent
increase in the number of schools taking part 
in the prize as compared with its inaugural year
community
the group’s other community activities in 
2005 were far rangingthey involved the active
participation and generosity of our employees
this was notably true of our response to the 
sad consequences of both the tsunami that
struck in the indian ocean just before the start
of the year and the gulf of mexico hurricanes
that swept across the southern us in
september employees added over £250000 
of their own money to our corporate donations
of £500000 for recovery projects in asia
several of these were supported by rollsroyce
managers and engineers based in the region
in the us where three sites with 136 employees
were directly affected group assistance was
similarly backed up by generous support from
rollsroyce colleagues
we received a gold award from the uk
institute of fundraising in 2005 for our payroll
giving schemethis provides and pays for the
administration of employees’donations to
charity enabling them to be made regularly 
and in a taxefﬁcient way employees last year
gave in excess of £396000 to charities of their
own choosing
employees
our contribution to community activities
reﬂects a strong corporate culture that 
remains one of the group’s most valuable
assets it owes much to the unusually long
average tenure of our employees many of
whom spend their entire careers with 
rollsroyce it is therefore especially pleasing
that the rise in our share price will beneﬁt a
broad constituency of shareholders within 
the company with a signiﬁcant number of our
employees participating in ‘sharesave’schemes
and a large number owning shares directly
a consistent strategy built around ﬁve objectives
all four of our market sectors are characterised
by strong demand trends that stretch well 
into the future our business strategy is built
around ﬁve key objectives
address four global markets 
we are a leading powersystems company
operating in the civil and defence aerospace
marine and energy marketswe manufacture 
in 20 countries and serve customers in 
150 countries
invest in technology
capability and infrastructure
over the past ﬁve years we have invested
more than £3 billion in research and
developmentwe invest on average £30 million
annually on trainingand the group invests 
£200 – £300 million every year in capital projects
10885 ra 2005 actual  15306  0756  page 08 09
rollsroyce group plc annual report 2005
our improved ﬁnancial performance has 
also meant that for the ﬁrst time in many 
years executive share options have vested
the vesting of this component of executive
remuneration is tied to performance criteria
designed with a view to securing and
rewarding longterm success it is worth 
noting that our executive directors all 
own either directly or in trust substantial
shareholdings in rollsroycethis demonstrates
their commitment to the group and has the
added beneﬁt of aligning their personal
interests with those of all other shareholders
future prospects
rollsroyce is addressing four longterm growth
marketstheir aggregate demand for engines
and services over the next 20 years is estimated
to be worth approximately two trillion dollars
the group’s consistent investment in
technology and in new products and services
enables us to respond effectively to new
developments creating opportunities for
organic growth in each of the four markets
in civil aerospace we see the market
continuing to recover from the recession that
began at the start of this decade the impact of
which was exacerbated by the events of 911
sars and the gulf warwe expect to beneﬁt
further from this recoverythe number of 
rollsroyce jet engines in service is increasing
and ﬂying hours across our ﬂeet are
accumulating steadilythis growth combined
with our broadening of the services we make
available is expected to lead to a steady
increase in our service revenues
in defence aerospace we have developed a
broad product portfolio that addresses all of the
major market sectors from combat and trainer
aircraft to transport and tactical aircraft and
helicopters our mix of mature programmes
new production programmes development
programmes and service revenues is expected
to enable the group to make good progress in
spite of the volatility that may be experienced
on individual programmes as exempliﬁed by
the uncertainties surrounding the alternate
engine for the joint strike fighter in the wake 
of the us quadrennial defense review
our marine business is beneﬁting from its
broad access to naval and commercial markets
here again we are bringing new products to
market from gas turbines such as the mt30 
to rimdriven tunnel thrusters which we believe
are likely to have a major impact on marine
propulsion systems boosted by the rise in oil
and gas prices the commercial offshore market
remains very strong – and we are conﬁdent 
that we can continue to capture a good share
of the available business
our energy business is strengthening its
presence in emerging oil and gas markets and
is well positioned to secure a growing share 
of the powergeneration market its proﬁtability
will be constrained for some time by the
investments it is making in new technology –
including the development of solidoxide fuel
cell systems
in aggregate we are expecting continued
progress in 2006 underpinned by the rising
order book the growth in service revenues 
and sustained cost reduction as a result
though we see no likelihood of any reduction 
in competitive intensity in our markets we do
expect increased proﬁts and a positive cash
ﬂow for the year
the proposed increase in the payment to
shareholders for 2005 represents an increase 
of 66 per cent over the payment made in 2004
this reﬂects our conﬁdence in the future
prospects of the business i would like here to
acknowledge the hard work and dedication of
all the people in rollsroyce around the world
that have helped us establish this position
sir john rose chief executive
develop a competitive portfolio 
of products and services
our strong product portfolio means that 
we are involved in many of the major future
projects in the markets we servethese key
projects will shape the powersystems market
for the next 50 years
grow market share and 
installed product base 
across the group the growing number 
of engines in service and their long service 
lives are expected to generate attractive 
returns over many decades
add value through the provision 
of productrelated services
we seek to add value for our customers 
with aftermarket services that will enhance 
the performance and reliability of our products
this approach is fundamental to developing
and sustaining collaborative longterm
relationships in all our markets
10885 ra 2005 actual  15306  0756  page 09 innovation
10885 ra 2005 actual  15306  0756  page 10 rollsroyce programmes have long 
lifecyclesoften lasting more than 50 years
our technologyacquisition strategy is focused
on both developing new products and
enhancing their throughlife performance
main image
trent 1000 for the boeing 787
the image shows a closeup of compressor blades used 
in the trent 1000 engine this member of the trent family 
is in development for the new boeing 787 family of airliners
rollsroyce has secured important new customers on this
programme such as ana of japan and northwest airlines
of the us
below
airbus a380
the ﬁrst ﬂight of the airbus a380 took place on april 27
2005 powered by four trent 900 engines as the next trent 
to enter service the trent 900 features an advanced hollow
swept fan contrarotating and 3d computerdesigned
compressors and a low nox combustor all developed 
as a result of our investment in new technology
below
fuel cells 
rollsroyce is developing this technology with a view 
to producing a new source of energy characterised 
by minimal noise and emission levels rollsroyce fuel 
cell systems is building a fuel cell that if successful
will produce a commercially viable onemegawatt
stationary power system capable of servicing the energy
needs of for example a business park or large hospital
below
tp400
this large 11000 shaft horsepower shp turboprop 
engine is being developed by europrop international
a consortium in which rollsroyce is a major partner
the engine will power the airbus a400m transport aircraft
and is scheduled for certiﬁcation in 2007 more than 750
engines will be required to meet the needs of the partners
in the programme germany france the uk spainturkey
belgium and luxembourg
focused investment in technology and products
10885 ra 2005 actual  15306  0756  page 11 we are investing in new facilities and 
the most efﬁcient working practices
to manufacture high valueadded 
components in our factories we also 
work closely with a highly capable
international supply chain
main image and below
derby
two new facilities each costing £50 million have been built
in derby providing additional capacity for the production 
of compressor systems and for our aeroengine repair 
overhaul aro business a programme of investment 
in engine testbeds is also under way
below
shanghai
our largest investment yet in china the new marine facility
in shanghai will produce a wide range of propulsion and
steering systems and deck machinery for the fastgrowing
shipyards of northeast asia
below
bristol
bristol is a main centre for the group’s military 
engine activities and here £80 million is being 
invested in new facilities for the manufacture of 
turbine systems and components and their assembly 
into ﬁnished gas turbines
operational and unit cost reduction
10885 ra 2005 actual  15306  0756  page 12 integrity
10885 ra 2005 actual  15306  0756  page 13 rollsroyce provides reliable products and 
a comprehensive range of productrelated
services our longterm support contracts
enable us to add value for our customers by
using our technology and skills to help them
achieve their objectives
reliability
10885 ra 2005 actual  15306  0756  page 14 main image
euroﬁghter typhoon
under a £57 million contract signed in 2005 rollsroyce 
will provide a complete support package that will ensure
the raf always has enough ej200 engines available 
to meet its expanding ﬂying programme for the new
euroﬁghter typhoon aircraft which has just entered service
below
marine
a longterm service contract worth £137 million has been
agreed for our marine business to support rollsroyce 
gas turbines in service with the royal navy and the french
belgian and royal netherlands naviesthis service and
support contract runs until 2017 and covers olympus and
tyne engines powering 27 ships
below
customer care
both the civil aerospace and defence aerospace businesses
are now running operations centres – based at derby and
bristol respectively – providing 24hour inservice support
for customersthe centres monitor engine operations 
in real time coordinating and integrating data that allow 
rollsroyce to provide better predictive information and
operational advice to customers
below
building relationships
malaysian oil and gas giant petronas and rollsroyce 
have been fostering stronger customersupplier links
through a successful technologytransfer programme
the programme has seen rollsroyce increase the
knowledge and expertise in gas turbine technology 
of key petronas personnel it has involved training 
and handson experience for petronas participants 
at rollsroyce facilities in europe and north america
continued development of aftermarket services
10885 ra 2005 actual  15306  0756  page 15 16
review of operations
rollsroyce group plc annual report 2005
the group has four businesses
civil aerospacedefence aerospace
marine and energy 
we invest in technology and capabilities 
that can be applied to products and 
services in each of the global markets 
we serve we aim to add value for our
customers by providing innovative 
products and productrelated services
10885 ra 2005 actual  15306  0756  page 16 17
rollsroyce group plc annual report 2005
highlights of the year
orders for 246 trent engines worth
approximately us3 billion were announced
the airbus a380 powered by the trent 900
engine made a successful maiden ﬂight and
good progress through its comprehensive 
ﬂighttest programme
agreement was reached with airbus for 
rollsroyce to supply the trent 1700 to 
power the new a350 airliner
the 1000th br710 engine was delivered to
gulfstream to power its g550 longrange
business jet
international aero engines iae achieved 
a record order intake of approximately 
600 engines worth over us15 billion to 
rollsroyce
rollsroyce has established a strong market
position in civil aerospace through its portfolio
of competitive aero engines powering a broad
range of aircraft from corporate jets to the
largest airliners
we made good progress with the
development of our product rangethe 
trent 900 engine powered the airbus a380 
on its maiden ﬂight and has now accumulated 
4000 hours of ﬂying experiencethe ﬁrst 
trent 1000 engine build for the boeing 787
was commenced on schedule in november
and the trent 1700 became the sixth member
of the trent engine family following its selection 
by airbus to power the a350the trent family
celebrated the tenth anniversary of its entry into
service and passed the milestone of 15 million
ﬂying hours during the year
we extended our links with japanese
industry on the trent 1000 programme by
selecting sumitomo precision products to
supply the heat management system for the
engine carlton the us forging and machining
specialist also became a risk and revenue
sharing partner on the trent 1000 engine
international aero engines iae in which
rollsroyce is a principal shareholder took an
increasing share of the strong singleaisle market
with a record order intake of approximately 600
engines worth over us15 billion to rollsroyce
this included signiﬁcant success in the rapidly
growing indian lowcost airline market where
the v2500 engine was selected by a number 
of new operators
iae also launched v2500select
sm
 a combined
engine upgrade and aftermarket service
programme which improves fuel burn reduces
operating costs and offers timeonwing
improvementsby the end of 2005 contracts for
aftermarketservice agreements with iae were
covering almost 1000 engines
civil engine deliveries increased by seven
per cent to 881 reﬂecting strong growth in
v2500 deliveries and continuing recovery in the
corporate jet market partially offset by a decline
in regional airline engine deliverieswhile the
decline in regional deliveries is expected to
continue the group expects total civil engine
deliveries to grow in 2006 as the trent 900
enters servicev2500 deliveries increase and 
the corporate sector remains strong
the rollsroyce civil ﬂeet ﬂying hours
increased by 11 per cent compared to 2004 
as a result of a combination of world trafﬁc
growth and increased ﬂeet size
the installed base of civil jet engines 
grew to 11500this provides a signiﬁcant
aftermarketservices opportunity which the
group is addressing with innovative longterm
service arrangements for its customers
totalcare contracts worth more than 
us13 billion have now been signed
covering 80 per cent of new customers since
2001the group achieved record growth for 
its corporatecare programme signing 90
contracts in 2005 totalcare contracts covered
77 per cent of all the engines ordered in 2005
services sales increased by 14 per cent 
to £21 billion representing 59 per cent of 
civil aerospace saleswe expect services sales 
to continue growing at a doubledigit rate
civil aerospace
2005 2004  2003  2002  2001  
revenue £m  3510 3040 2694  2739  3443  
underlying proﬁt before ﬁnancing costs £m see note 2 454 194 131  150  347  
net assets £m  1278 1343 1099  1219  1124  
order book – ﬁrm £bn  176 141 134  122  100  
engine deliveries  881 824 746  856  1362  
installed engine base  11500 10970 10450  9910  9212  
employees  21000 20100 19800  21100  23900  
contribution to 
group revenue
2005
53
mike t errett 
president – civil aerospace
sales analysis 2005
1
1 original equipment – airline
2 original equipment – corporate and regional
3 services
23
 for background to the change from uk gaap accounting to ifrs in 
2005 and the retrospective adjustments made to the 2004 accounts see 
the relevant section on ifrs in the finance director’s review on page 29 
and note 33 to the ﬁnancial statements on page 96 2003 and earlier 
ﬁgures are as reported under uk gaap 
10885 ra 2005 actual  15306  0756  page 17 18
review of operations continued
rollsroyce group plc annual report 2005
highlights of the year
good progress was made with the group’s
development work for the us department 
of defense’s dod’s joint strike fighter
programme
airtanker was awarded preferred bidder status
for the uk’s future strategic tanker aircraft
programme
the ﬁrst series of tests was completed for the
tp400d6 engine for the airbus a400m military
transport aircraft
mission ready management solutions services
contracts were signed with the uk ministry 
of defence mod and the us dod covering
combat transport and trainer aircraft engines
a new operations centre was opened 
in bristol as part of the growing inservice 
support business for military engines
the group’s defence aerospace business 
is broadly based with a strong portfolio of
products and services covering the key defence
aerospace market sectorsthis enables the
group to make good progress in spite of the
volatility that may be experienced on individual
programmes as exempliﬁed by the uncertainties
surrounding the alternate engine for the joint
strike fighter following the recent us
quadrennial defense review
in 2005 rollsroyce continued to develop
its range of engine programmes and customer
services more than 3000 hours of testing
were completed on the liftfan® system for 
the us dod’s joint strike fighter programme
in december an agreement was signed 
by the governments of the kingdom of 
saudi arabia and the uk under which the 
royal saudi air force will acquire euroﬁghter
typhoon aircraft powered by the ej200 engine
in the transport sector rollsroyce is a
member of the european consortium that
successfully completed the ﬁrst series of tests for
the tp400d6 turboprop engine being developed
for the a400m military transport aircraft
the us dod approved full production 
for the v22 osprey aircraft powered by 
rollsroyce ae 1107cliberty engines and
placed equipment and services orders related
to the engine worth more than us64 million
rollsroyce is a 20 per cent shareholder in 
the airtanker consortium which was awarded
preferred bidder status for the future strategic
tanker aircraft programme by the uk mod
australia selected the rollsroyce
turbomeca rtm322 engine to power its 
nh90 helicopter ﬂeet and the ﬁrst rtm322 to
be assembled under licence by khi in japan
was delivered to the japan defense agency 
and the japan maritime selfdefense force
the provision of services contributed 
55 per cent of the group’s defence sales
new services contracts announced during the
year included a £185 million service contract 
for the rb199 engines which power the 
mod’s ﬂeet of tornado aircraft a renewal of 
the contract for the support of the f405 adour
engine in the us navy’s t45 training aircraft
worth us63 million a £57 million contract 
to support the ej200 engines that power the 
uk’s typhoon ﬂeet and a £40 million contract 
to support the uk’s ﬂeet of ae 2100 engines 
that power the c130j a new operations
centre was opened in bristol as part of the
growing inservice support business for 
military engines
defence aerospace
2005 2004  2003  2002  2001  
revenue £m 1413 1374 1398  1376  1400  
underlying proﬁt before ﬁnancing costs £m  180 179 147  183  175  
net assets £m  59 51 69  25  179  
order book – ﬁrm £bn  31 30 24  21  26  
engine deliveries  565 548 510  505  472
employees  5200 5100 4900  5100  6700
contribution to 
group revenue
2005
21 
colin green
president – defence aerospace
20 20 40 40 60 60 80 80
sales analysis 2005
1
1 original equipment
2 development 
3 services
3 2
10885 ra 2005 actual  15306  0756  page 18 19
rollsroyce group plc annual report 2005
highlights of the year
a £137 million service and support contract 
was secured for ships in service with the 
royal navy and the french belgian and 
royal netherlands navies
the ﬁrst mt30 marine gas turbine was delivered
to power landbased test runs of the us navy’s
ddx destroyer
lockheed martin installed two mt30 marine gas
turbines on the ﬁrst prototype littoral combat
ship for the us navy
a university technology centre utc was
established by the group in norway to conduct
research programmes in the marine sector
a new marine facility in shanghai was 
formally opened
the rollsroyce marine business is a global
leader in marine propulsion engineering and
hydrodynamics expertise with a broad product
range and a full systemsintegration capability
in 2005 the marine business made good
progress with higher sales and higher proﬁt
the recovery of the offshore oil and gas support
market continued and rollsroyce secured a
good share of the available businessthe 500th
order was placed for a rollsroyce utdesign
vessel one of the most successful designs in 
the history of commercial shipping utdesign
ships are sold as complete systems and are
ﬁtted with a range of rollsroyce equipment
the group is developing rimdriven 
tunnelthruster technology which is likely to
have a major impact on marine propulsion 
in the futurethe ﬁrst thrusters are to be 
ﬁtted to an offshore support vessel but the
technology will also be suitable for merchant
and cruise ships
asia’s ship building accounts for nearly 
80 per cent of the world’s commercial ship
construction during 2005 rollsroyce
expanded its presence in asia opening a new
factory in shanghai which together with our
existing factory in korea creates a northeast
asian production hub
in the naval market sector rollsroyce achieved
a major development milestone when the mt30
gas turbine was awarded american bureau of
shipping certiﬁcation in february 2005 the ﬁrst
mt30 marine gas turbine generator set was
delivered to the us navy to power landbased
test runs for the ddx destroyer
lockheed martin installed two mt30 gas
turbines on the ﬁrst prototype littoral combat
ship for the us navythese gas turbines are the
largest ever installed on a naval ship
the group is working with the us navy as
prime contractor on the advanced electric ship
demonstrator project that will be the proving
ground for the rollsroyce awj21 waterjet
the next generation of naval waterjet
in 2005 40 per cent of marine sales were
derived from services and support activities
the group announced a £137 million longterm
service and support contract for olympus and
tyne engines that power 27 ships in service
with the royal navy and the french belgian and
royal netherlands navies
marine
2005 2004  2003  2002  2001  
revenue £m 1097 963 1003  984  827
underlying proﬁt before ﬁnancing costs £m  89 78 78 82  73
net assets £m  592 565 577  550  513
order book – ﬁrm £bn  17 14 12  13  13
employees  7200 7100 7300 6500  6500  
restated following the transfer of the diesel business from energy to marine
contribution to 
group revenue
2005
17 
dr saul lanyado
president – marine
20 20 40 40 60 60 80 80
sales analysis 2005
1
1 commercial original equipment
2 commercial services
3 naval original equipment 
4 naval services
23 4
10885 ra 2005 actual  15306  0756  page 19 20
review of operations continued
rollsroyce group plc annual report 2005
highlights of the year
the ﬁrst 12 industrial rb211based compression
packages were installed and commissioned 
for the westeast pipeline project in china
four months ahead of schedule an additional
three gas turbine units were ordered for the
expansion of the pipeline’s capacity
six industrial trentbased compression 
packages were delivered to qatar for the 
middle east dolphin projectthis is the ﬁrst
mechanical drive application of the trent 60
the most powerful and efﬁcient aeroderived
gas turbine on the market
sharjah electricity and water authority chose
two trent 60 powergeneration sets for the
latest phase of the wasit powerplant
expansion and the ﬁrst trent 60 for asia was
ordered by a major electricity producer in
yinchuan china
ten rb211 industrial gas turbine power
generation units were ordered to provide
electrical power for f ﬂoating production storage
and ofﬂoading vessels operated by total off the
coast of nigeria and by petrobras off the coast
of brazil
the 500th industrial rb211 was shipped from
the rollsroyce assembly and test facility in
montreal
a joint venture was established with a
singaporean consortium to continue
development work on solidoxide fuel 
cell technology
the rollsroyce energy business supplies a wide
range of gas turbine packages to the worldwide
oil  gas and powergeneration markets with
more than 4000 industrial gas turbines sold and
over 140 million hours of operating experience
the ﬁnancial results for 2005 reﬂect a
strong performance by the oil  gas business
offset by the slow recovery of the power
generation market and continued investment 
in new product technologies
in oil  gas we continued to strengthen 
our presence in emerging markets winning
orders worth over us120 million for projects in
west africa over us100 million from customers 
in asia and over us70 million for gas turbine
packages for brazil
the international powergeneration market
has shown signs of recovery and the group
won important new orders for the industrial
trent in the united arab emirates and china
in 2005 the group continued to invest 
in its fuel cell technology rollsroyce and the
singaporean consortium enertek singapore 
pte ltd will between them invest a further
us100 million in the project in addition
rollsroyce fuel cell systems limited opened 
a new rollsroyce facility in the uk that will pilot
the production of ceramic components for use 
in fuel cell systemsthis business is developing
solidoxide fuel cell systems for megawattscale
stationary powergeneration applications 
with the goal of introducing a competitive
product this decade
the services sector enjoyed a record order
intake in 2005 and contributed 38 per cent 
of energy sector sales strong growth in 
longterm service agreements was maintained
with a further £93 million of business secured
during the yearthis brings the backlog of
energy business longterm service agreements
to £220 million
energy
2005 2004  2003  2002  2001  
revenue £m 505 489 508  639  608  
underlying proﬁt before ﬁnancing costs £m  4 14 23  41  64  
net assets £m  314 324 346  348  381  
order book – ﬁrm £bn  04 04 04  06  04  
engine deliveries  61 47 54  68  72  
employees  2700 3000 3100 4500  4900  
restated following the transfer of the diesel business from energy to marine
contribution to 
group revenue
2005
8
tom curley
president – energy
sales analysis 2005
1
1 oil  gas 
2 power generation
3 services
23
10885 ra 2005 actual  15306  0757  page 20 21
rollsroyce group plc annual report 2005
the ability to innovate is at the heart of 
our business and is the means by which we
maintain our worldclass positionwe continue
to invest signiﬁcant amounts in research and
developmentthese deliver new and improved
technology lower costs and better aftermarket
services on new and existing products across
their lifecycle
in 2005 we invested £663 million gross 
in research and development an increase of 
10 per cent on 2004the net charge to the
income statement was £282 million
the markets in which we operate are
exceptionally challengingcustomer expectations
are increasing which combined with growing
environmental pressures causes us to drive our
technology forward
in 2005 we made signiﬁcant technological
strides towards meeting the environmental
challenge one example is the completion of 
a 30hour test programme in may for the antle
engine successfully demonstrating a number 
of environmentally friendly technologies in a
european collaborative projectthe demonstrated
technologies from antle will be rolled out
across our products in the coming years
we have continued the product development
of the high efﬁciency solidoxide fuel cell
programme for the energy business with a
number of successful rig tests forming the
building blocks for subassembly demonstration
in 2006
for some years our university technology
centre network has been key to our research
work in 2005 we further strengthened this
global network by opening two new centres – 
one in cottbus germany researching structural
mechanics and vibration and the other in
trondheimnorwaycovering ship performance
amongst our many research achievements
we ﬁled a record 306 patent applications
we have continued to develop our
engineering tools for use on all our projects
one key aspect to this work has been the
progressive rollout of product lifecycle
management plm a computersystem tool
that signiﬁcantly increases our design capabilities
and then enables us to manage data cost
effectively throughout the product lifecycle
we have continued to build on the 
success of the trent familythe trent 900 is
gaining maturity during the intensive airbus
a380 ﬂighttest period and the trent 1000 for
the boeing 787 is progressing towards its
enginetest programme
our marine business saw the trent 800derived
mt30 running in the landbased ddx
demonstrator and a novel 50kw rimdriven
tunnel thruster which we believe will have a
major impact on marine propulsion systems
in the defence aerospace sector the 
multipartner tp400 engine for the airbus
a400m made a successful ﬁrst run in october
excellent progress continues to be made on 
our joint strike fighter jsf programmes with
the liftfan® being developed to support the
ﬁrst stovl aircraft ﬂight in 2007 and the
completion of the successful f136 concept
demonstrator phase leading to the award in
august of the system development and
demonstration contract worth around 
us1 billion to rollsroyce
in 2006 we will continue to build on our
proven strategy of  ‘invest once and use many
times’at both the technology and product level
focused investment in technology
highlights of the year
first run of the tp400 engine for the airbus a400m
following a successful conceptdemonstrator phase the jsf f136 system development 
and demonstration contract was awarded
successful trent 1000 fan rig test for the boeing 787
first ﬂight of the trent 900 in the airbus a380 aircraft achieved in april
two new university technology centres opened in norway and germany
completion of the antle advanced nearterm low emissions demonstrator
record number of 306 patents ﬁled
colin smith
director – engineering and technology
2001 636
2002 590
2003 619
2004 601
2005 663
gross research and development  £m
2001 358
2002 297
2003 281
2004 288
2005 282
net research and development £m
10885 ra 2005 actual  15306  0757  page 21 22
review of operations continued
rollsroyce group plc annual report 2005
2005 was a year of considerable change
our loading increased by 17 per cent over 2004
within this total uk load increased whilst us
load fell as the mix shifted away from regional
jet engines towards smaller helicopter engines
operationally the year was signiﬁcantly
affected by raw material supply issues
the speciality metals industry struggled to 
meet our increased demand which gave rise 
to some delivery disruption during the year
notwithstanding this we delivered a creditable
result as usual i take this opportunity to thank
all our employees and suppliers for their efforts
in 2005 in this regard
we made good progress in 2005 on our
programme to restructure our supply chain
our supplier base was reduced by 13 to 698
even though we added 38 new suppliers our
sourcing in emerging lowcost markets
increased from six per cent to nine per cent of
purchases our newest civil aerospace product
the trent 1000 was launched with an external
supply chain of only 71 suppliers
the prices of metals and of fuel rose
throughout the year and closed at or close to
new highs we are accustomed to managing
this through longterm supplier relationships
that reduce volatility together with longterm
positions in the metals market for those that
are traded
we continued to drive for lower operating costs
against a background of steeply rising volume
we increased our employee population by 
two per cent and delivered an improvement
from £169000 to £186000 in sales per employee
in 2005 we were able to deliver a small reduction
in product unit cost effectively neutralising the
effects of commodityprice inﬂation
we completed construction of new
factories at derby and hucknall and commenced
commissioningwe completed all the remaining
moves into our new factory at inchinnan from
hillington the latter site was closed and sold in
its entirety in december construction of new
factories at barnoldswick and bristol is
proceeding satisfactorily towards completion in
2006 and full operation in 2007we constructed 
a new factory for our commercial marine
business in shanghai and commenced
operations in november
more efﬁcient working practices which 
are a precondition for new factory investment
are now implemented in most uk locations 
and are under discussion elsewhere our new
global council covering all our employees met
successfully twice in 2005
our process excellence culturechange
programme continued through 2005 delivering
training to 27000 employees and putting in
place fully accredited sixsigma ‘black belts’and
‘green belts’at 06 per cent and 20 per cent of
total employee population respectively
in conjunction with our it supply chain and our
principal it partner eds further reductions in
the operating cost of our it estate provided the
opportunity to increase our new investment in
this area whilst maintaining total it expenditure
within 26 per cent of turnover in 2005 we
connected 70 per cent of our worldwide
operations to a single wideareanetwork
took important steps towards full global
standardisation of our erp systems and
commenced the rollout of the latest generation
of product lifecycle management software
as forecast our inventories increased in
2005 to respond to higher output volume 
and to buffer the moves associated with new
factorieswe offset this increase by tighter
management of ﬁnancial working capital 
to effect a further improvement of working
capital utilisation
in 2006 our priorities will be to complete
our infrastructurerenewal projects in the uk
and to advance our move into the new
factories we shall persist with operating 
and product unitcost reduction turning 
our focus towards overhead costs in particular
and we will continue our drive with process
excellence to eliminate waste and achieve
continuous improvement
operational excellence
highlights of the year
production load increased signiﬁcantly
product cost improved slightly despite considerable
commodity inﬂation
product quality continued to improve
uk factory infrastructure construction advanced signiﬁcantly
it operating costs reduced further new it investment
increased
working capital utilisation improved again
john chefﬁns 
chief operating ofﬁcer
1996 91
1997 101
1998 106
1999 113
2000 126
2001 146
2002 148
2003 156
2004 169
2005 186
sales per employee £000
10885 ra 2005 actual  15306  0757  page 22 23
rollsroyce group plc annual report 2005
we have been following a consistent strategy 
in services for a number of years focused on
generating value for our customers and
ourselves by delivering high equipment
availability at an affordable and predictable 
costthese principles are fundamental to
developing and sustaining the collaborative
longterm relationships that underpin our
success in the marketplace
under totalcare in the civil aerospace
market and similar contracts in defence
aerospace energy and marine we provide
services over the long term at ﬁxed prices
we are wellqualiﬁed to manage the risks 
we assume in such contracts through our
knowledge of the product and the data we
capture in respect of its service life
in the defence aerospace sector we 
provide these services under the banner
mission ready management solutions
the uk defence industrial strategy published 
in december 2005 cited our spey and rb199
contracts as exemplars for the style of through
life support contract that will increasingly
become the norm for the uk defence market
in the civil aerospace market some 
45 per cent by value of our ﬂeet is now under
our management a notable contract was the
totalcare agreement signed by lcal allowing
this leader in the leasing industry to provide an
innovative transferable enginemaintenance
agreement with its aircraft
earlier investments to support our service
business continue to deliver beneﬁts
aeromanager our customercare portal for the
civil aerospace market now provides access to
our services for some 700 customers and over
10000 users data systems  solutions retains a
leadership position in the realtime equipment
healthmonitoring market with a portfolio of
more than 6000 engines and the civil
operations room is providing an aroundthe
clockservice to our customers during 2005 
we continued to invest with the defence
aerospace business opening its operations
room in bristol and the opening of our new
repair and overhaul facility in derby
a feature of our engine repair and overhaul
network is our partnership with customers and
leading independent maintenance repair and
overhaul companiesthe sharing of good
practice across the network and the deployment
of a common informationtechnology platform
has enabled efﬁciency improvements and
reduced turnaround times
in 2006 our priorities for services will remain
the same innovation in service products to
create value for customers and generate growth
in our revenues improvements in our service
delivery capability and further progress with the
development of a responsive customerfocused
service culture among our employees
services
miles cowdry 
director – services
2001 2723
2002 2860
2003 3081
2004
including 100 per cent of our repair and overhaul  
joint ventures
3459
2005 3862
services revenues £m
10885 ra 2005 actual  15306  0757  page 23 24
finance director’ s review
rollsroyce group plc annual report 2005
our ﬁnancial performance improved again in
2005 rising volumes and good management
of costs resulted in higher proﬁts and lower
levels of average borrowing
andrew shilston finance director
10885 ra 2005 actual  15306  0757  page 24 25
rollsroyce group plc annual report 2005
our ﬁnancial performance improved again in
2005rising volumes and good management of
costs resulted in higher proﬁts and lower levels
of average borrowing
results for the year
underlying proﬁt before tax on a ‘likeforlike’
basis see above increased by 49 per cent 
to £584 million 2004 £392 million and
underlying earnings per share were 2414p
2004 1556p basic earnings per share were
2011p 2004 1556p
the group implemented international
financial reporting standards ifrs during the 
yearcomparative ﬁgures for 2004 are restated
accordingly a full analysis of the impact is
provided in note 33 to the ﬁnancial statements
sales growth in all market segments
sales increased by 11 per cent
– civil aerospace engine deliveries 
increased by seven per cent to 881 engines
civil aftermarket sales grew by 14 per cent
– defence aerospace sales increased slightly
with small increases in both original
equipment sales and services revenues
– marine sales increased by 14 per cent
with strong growth in the offshore oil  
gas support market sector
– energy sales increased by three per cent
with sales in the oil  gas sector offsetting
the effects of the depressed power
generation market
group aftermarketservices revenues including
100 per cent of repair and overhaul joint ventures
grew by 12 per cent to £39 billion and have
grown by 11 per cent per annum compound
over the past ten years service revenues
accounted for 54 per cent of total revenues
87 per cent of sales were to customers
outside the uk
margins beneﬁted from some improvement
in demand continuing growth in services sales
and our focus on cost reduction which
mitigated headwinds caused by commodity
price inﬂation and an adverse trend in our
achieved us dollar exchange rate
underlying ﬁnancing costs amounted 
to £95 million comprising principally net
interest £39 million risk and revenue sharing
partners’ﬁnance cost £43 million and net
pension scheme ﬁnance cost £9 million
group interest was covered 162 times 
2004 76 times based upon underlying proﬁt
before interest excluding joint ventures
restructuring charges of £48 million 2004 
£37 million which were incurred for ongoing
operational improvements were included
within operating costs
the group made an underlying proﬁt 
before tax of £584 million 2004 £364 million
the group deﬁnes an underlying measure of
proﬁt to avoid the distortions caused primarily 
by the treatment of derivative foreign exchange
and commodity contracts under ias 39 see
note 28the adjustments to reported proﬁt are
a reverse the impact of releasing the transition
hedging reserve arising on the valuation of
derivatives on january 1 2005 b eliminate 
the impact of unrealised gains and losses 
on derivatives and other ﬁnancial assets and
liabilities recognised during the year and 
c include the realised gains and losses 
of derivative contracts settled in the year
an adjustment is also made to eliminate the
restructuring remeasurement and foreign
exchange gains and losses of ﬁnancial rrsps
proﬁt before tax was £477 million 2004 
£364 million
a ﬁnal payment to ordinary shareholders 
of 538p is proposed making a total of 872p 
per ordinary share 2004 818pthe company
will continue to issue b shares in place of
dividends in order to accelerate the recovery 
of its advance corporation tax
order book
the order book at constant exchange rates
was £229 billion 2004 £189 billion items are
included in the order book when a ﬁrm signed
contract exists
in civil aerospace it is common for a
customer to take options for future orders in
addition to ﬁrm orders placed such options 
are excluded from the order book until they
become ﬁrm signed orders
in defence aerospacelongterm programmes
are often ordered for only one year at a time
in such circumstances even though there may
be no alternative engine choice available to 
the customer only the contracted business is
included in the order book
aftermarketservices agreements including
totalcare packages represented 38 per cent of
the order bookthese are longterm contracts
where only the ﬁrst seven years’revenue is
included in the order book
business which has been announced but
for which contracts have not yet been signed 
is excluded from the order bookthis amounted
to a further £15 billion at the year end 2004 
£24 billion
2001 990
2002 1090
2003 950
2004 632
2005 260
average net debt £m derivation of‘likeforlike’results £m
ias 32 and ias 39 were adopted prospectively from january 1 2005 accordingly the 2004 results have not been restated 
in respect of these standards including the revised treatment of ﬁnancial rrsps as ﬁnancial liabilities and the consequent
impact on the income statement see note 33the ‘likeforlike’adjustments restate the 2004 results for the effect of the
revised treatment of ﬁnancial rrsps as if this had applied in 2004
2005 2004 yearonyear
£m £m changes
proﬁt before ﬁnance costs
underlying proﬁt before ﬁnance costs see note 2 679 417
2004 treatment of ﬁnancial rrsp net charges – 69
likeforlike proﬁt before ﬁnance costs 679 486 40
proﬁt before tax
underlying proﬁt before tax see note 2 584 364
2004 treatment of ﬁnancial rrsp net charges – 69
equivalent notional ﬁnance charge – 41 
likeforlike proﬁt before tax 584 392 49
10885 ra 2005 actual  15306  0757  page 25 26
finance director’ s review continued
rollsroyce group plc annual report 2005
aftermarket services
the group continues to be successful in
developing its aftermarketservices activities
these accounted for 54 per cent of revenue
in 2005
in particulartotalcare packages in the 
civil aerospace sector now cover 45 per cent
by value of the installed ﬂeettotalcare 
packages cover longterm management of 
the maintenance and associated logistics for 
our engines and systems monitoring the
equipment in service to deliver the system
availability our customers require with
predictable coststhe pricing of such contracts
reﬂects their longterm nature revenues and
costs are recognised based on the stage of
completion of the contract generally measured
by reference to ﬂyinghoursthe overall net
position of assets and liabilities on the balance
sheet for totalcare packages was an asset of
£367 million 2004 £389 million
cash
the group cash ﬂow statement is shown on
pages 52 and 53 of the ﬁnancial statements
the group generated a positive cash ﬂow 
of £552 million during 2005 2004 £251 million
the net cash balance at the yearend was 
£335 million 2004 net debt £217 million after
adjustment for the implementation of ifrs
net working capital reduced yearonyear with
the main items being increased inventories 
of £219 million offset by an increase in customer
advances of £181 million and an increase in
payables of £294 millionthe average net debt
level reduced from £632 million to £260 million
with positive cash ﬂow expected again in
2006there should be little if any average net debt
and the balance sheet will strengthen further
net cash ﬂow from operating activities 
was £1060 million 2004 £610 million
t axation
the overall tax charge on the proﬁt before tax
was £130 million 2004 £100 million a rate of
273 per cent 2004 275 per cent
the tax charge was reduced by £18 million
2004 £13 million in respect of the expected
beneﬁt of the uk research and development 
tax credit
the tax charge on underlying proﬁt was 
£167 million 2004 £100 million a rate of 
286 per cent 2004 275 per cent
pensions
as a result of the transition to ifrs the charges
for pensions are now calculated in accordance
with the requirements of ias 19 employee
beneﬁts the amounts for 2004 have been
restated accordingly ias 19 is broadly similar 
to frs 17 the effects of which were disclosed 
in previous years its principal impact is to
include the entire surplus or deﬁcit of any
deﬁned beneﬁt scheme on the balance sheet
based on deﬁned valuation requirements
details of the pensions charge and the
deﬁned beneﬁt schemes’assets and liabilities
are shown in note 23 to the ﬁnancial
statementsthis shows a net deﬁcit after taking
account of deferred tax of £1154 million 2004
£984 million changes in this deﬁcit are affected
by the assumptions made in valuing the
liabilities and the market performance of the
assets most importantly the discount rate used
for measuring the uk deﬁned beneﬁt liabilities
has fallen from 53 per cent in 2004 to 47 per
cent in 2005 in addition the mortality
assumptions have been updated for the 
rollsroyce pension fund the largest scheme
in the group based on the actual mortality
experience within the scheme and also to allow
for future mortality improvementsthese factors
more than offset the better than expected
returns on the scheme assets
during 2005 a revised beneﬁt structure was
agreed with the members of the rollsroyce
group pension scheme similar to that
implemented in the rollsroyce pension fund 
in 2003
the next actuarial review is due in 2006 
in respect of the rollsroyce pension fund
investments
the group continues to subject all investments
to rigorous examination of risks and future 
cash ﬂows to ensure that they create
shareholder value all major investments 
require board approval
the group has a portfolio of projects at 
different stages of their life cycles discounted
cash ﬂow analysis of the remaining life of projects
is performed on a regular basis sales of engines
in production are assessed against criteria in 
the original development programme to ensure
that overall value is enhanced
gross research and development
investment amounted to £663 million 2004
£601 million net research and development
was £282 million 2004 £288 millionthe level
of selffunded investment in research and
development is expected to remain at
approximately ﬁve per cent of sales in the
futurethe impact of this investment on the
income statement will reﬂect the mix and
maturity of individual development
programmes and will result in a signiﬁcantly
lower level of capitalisation of costs in 2006
investment in training was £30 million 
2004 £30 million
capital expenditure on property plant and
equipment was £248 million 2004 £191 million
and is expected to increase over the next year
partnerships
the development of effective partnerships
continues to be a key feature of the group’s 
longterm strategy major partnerships are of 
two types joint ventures and risk and revenue
sharing partners
joint ventures
joint ventures are an integral part of our
businessthey are involved in engineering 
and manufacturing repair and overhaul
and ﬁnancial services they are also normal
business structures for companies participating
in international collaborative defence projects
they share risk and investment bring
expertise and access to markets and provide
external objectivity some of our joint ventures
have become substantial businesses a major
proportion of the debt of the joint ventures 
is secured on the assets of the respective
companies and is nonrecourse to the group
the group’s share of joint venture assets
and liabilities is shown in the chart below
joint ventures rollsroyce share £m
repair and overhaul financial services other total
gross assets 131 499 604 1234 
debt 13 392 75 480 
other liabilities 50 66 391 507 
gross liabilities 63 458 466 987 
net assets 68 41 138 247
10885 ra 2005 actual  15306  0757  page 26 27
rollsroyce group plc annual report 2005
risk and revenue sharing partners rrsps
rrsps have enabled the group to build a broad
portfolio of engines thereby reducing the
exposure of the business to individual product
riskthe primary ﬁnancial beneﬁt is a reduction
of the burden of research and development
rd expenditure on new programmes
the related rd expenditure is expensed
through the income statement and the initial
programme receipts from partners which 
reimburse the group for past rd expenditure
are also recorded in the income statement
as other operating income
rrsp agreements are a standard form 
of cooperation in the civil aeroengine 
industrythey bring beneﬁts to the engine
manufacturer and the partner speciﬁcally
for the manufacturer they bring some or all 
of the following beneﬁts additional ﬁnancial 
and engineering resource sharing of risk and
initial programme contribution as appropriate
the partner also supplies components and as
consideration for these components receives
a share of the longterm revenues generated
by the engine programme in proportion to its
purchased programme share
the sharing of risk is fundamental to rrsp
agreements in general partners share ﬁnancial
investment in the programme they share market
risk as they receive their return from future 
sales they share currency risk as their returns 
are denominated in us dollars they share 
sales ﬁnancing obligations they share warranty 
costs and where they are manufacturing or
development partners they share technical 
and cost risk partners that do not undertake
development work or supply components are
referred to as ﬁnancial rrsps and under ifrs
from 2005 are accounted for as ﬁnancial
instruments as described below
in 2005 the group secured new partners
for the trent 1000 engine programme
however as the number of new programmes
has reduced and in particular as government
launch investment was not sought for the 
trent 1000 programme receipts from partners
have declined in 2005 other operating income
amounted to £60 million 2004 £73 million 
and is expected to be at a similar level in 2006
payments to rrsps are recorded within cost
of sales and increase as the related programme
sales increasethese payments amounted 
to £146 million 2004 £240 million including 
£98 million in respect of ﬁnancial rrsps
the classiﬁcation of ﬁnancial rrsps as 
ﬁnancial instrument has resulted in a liability of
£423 million being incorporated in the balance
sheet and an associated underlying ﬁnancing
cost of £43 million recorded in the income
statement in 2005 the restructuring of
arrangements with a ﬁnancial partner resulted
in a reduction of the liability of £86 million
with an associated gain within ﬁnancing costs
in the income statement this gain has been
excluded from the underlying proﬁt calculation
in the past the group has also received
government launch investment in respect of
certain programmesthe treatment of this
investment is similar to nonﬁnancial rrsps
financial services 
the ﬁnancial services businesses comprise
engine leasing rollsroyce  partners finance
aircraft leasing pembroke and electrical power
project development rollsroyce power ventures
rollsroyce  partners finance the group’s
joint venture engineleasing businessowns 
a portfolio of 281 engines with 35 customers
the proportion of engines on lease remains
high at 98 per cent by value
pembroke the group’s joint venture 
aircraftleasing business owns 19 aircraft all of
which are on lease to 12 customers a charge 
of £13 million was incorporated in the 2005
results to reﬂect the current market valuation 
of pembroke’s aircraft assets
rollsroyce power ventures the group’s
powerproject developer has 11 power
generation projects under waythe business is
being restructured and proceeds of £49 million
were raised from asset sales
intangible assets 
the group carried forward £1281 million 2004
£1227 million of intangible assetsthis comprised
purchased goodwill of £751 million engine
certiﬁcation costs and participation fees of 
£146 million development costs of £265 million
and recoverable engine costs of £119 million
the recognition of development costs and
recoverable engine costs has resulted from 
the transition to ifrs see note 33
risk management
the board has an establishedstructured approach
to risk managementthe risk committee see
report of the directors has accountability for 
the system of risk management and reporting
the key risks and associated mitigating actions
the director of risk reports to the finance
directorthe group’s policy is to preserve the
resources upon which its continuing reputation
viability and proﬁtability are built in order to
enable the corporate objectives to be achieved
through the operation of the rollsroyce
business processesrisks are formally identiﬁed
and recorded in a corporate risk register and 
its subsidiary registers within the business
which are reviewed and updated on a regular
basis with risk mitigation plans identiﬁed for 
all signiﬁcant risks
financial risk
the group uses various ﬁnancial instruments in
order to manage the exposures that arise from 
its business operations as a result of movements
in ﬁnancial markets all treasury activities are
focused on the management and hedging 
of risk it is the group’s policy not to trade
ﬁnancial instruments or to engage in
speculative ﬁnancial transactionsthere have
been no signiﬁcant changes in the group’s
policies in the last year
the principal economic and market risks 
continue to be movements in foreign currency
exchange rates interest rates and commodity
pricesthe board regularly reviews the group’s
exposures and ﬁnancial risk management and 
a specialist committee also considers these 
in detail all such exposures are managed by 
the group treasury function which reports to
the finance director and which operates within
written policies approved by the board and
within the internal control framework described
in the report of the directors
counterparty credit risk
the group has an established policy towards
managing counterparty credit risk a common
framework exists to measure report and control
exposures to counterparties across the group
using value at risk and fair value techniques
counterparties are assigned a credit limit that
reﬂects their credit standingthe group assigns
an internal credit rating to each counterparty
which is assessed with reference to publicly
available credit information such as that
provided by moody’s standard  poor’s and
other recognised market sources and is
reviewed regularly
10885 ra 2005 actual  15306  0757  page 27 28
finance director’ s review continued
rollsroyce group plc annual report 2005
financial instruments are only transacted with
counterparties that have a publicly assigned
longterm credit rating from standard  poor’s of
‘a‘ or better and from moody’s of ‘a3’or better
funding and liquidity
the group ﬁnances its operations through 
a mixture of shareholders’funds bank
borrowings bonds notes and ﬁnance leases
the group borrows in the major global markets
in a range of currencies
it employs derivatives where appropriate 
to generate the desired currency and interest
rate proﬁle
the group took advantage of favourable
market conditions during 2005 to extend the
maturity proﬁle of its main £250 million
revolving credit facility from 2009 to 2012 on
improved pricing and terms as at december 31
2005 the group had total committed borrowing
facilities of £17 billion on an ifrs basis 2004
£18 billion
there are no rating triggers contained in
any of the group’s facilities that could require
the group to accelerate or repay any facility for 
a given movement in the group’s credit rating
and no material impact on the group’s interest
charge is expected to arise from a movement 
in the group’s credit rating
the group holds ﬁnancial investments and
maintains undrawn committed facilities at a
level sufﬁcient to ensure the group has available
funds to meet its mediumterm capital and
funding obligations and to meet any
unforeseen obligations and opportunities
the group from time to time holds cash and
shortterm investments which together with
the undrawn committed facilities enable the
group to manage its liquidity risk
the group continues to have access to 
all the major global debt markets
credit rating
the group subscribes to both moody’s investors
service and standard  poor’s for its ofﬁcial
publicised credit ratings as at december 31
2005 the group’s assigned longterm credit
ratings were
rating agency rating outlook category
moody’s baa1 stable investment 
grade
standard  poor’s bbb stable investment 
grade
during the year the group saw positive actions
by moody’s and standard  poor’s such that the
ratings and outlook from both agencies are
now equivalent
the group attaches signiﬁcant importance
to maintaining an investment grade credit
rating which it views as necessary for the
business to operate effectively
the group’s mediumterm objective is to
achieve through the normal course of business
an ‘a’category investment grade credit rating
from both agencies
currency risk
the group is exposed to movements in exchange
rates for both foreign currency transactions and
the translation of net assets and proﬁt and loss
accounts of foreign subsidiaries
the group regards its interests in overseas
subsidiary companies as longterm investments
the group has tended to manage its
translational exposures through the currency
matching of assets and liabilities where
applicable the matching is reviewed regularly
appropriate risk mitigation is undertaken where
material mismatches arise
the group is exposed to a number 
of foreign currenciesthe most signiﬁcant
transactional currency exposure is the us dollar
followed by the eurous dollar income net of
expenditure represented 27 per cent of group
turnover in 2005 2004 26 per cent
the group operates a hedging policy 
using a variety of ﬁnancial instruments with 
the objective of minimising the impact of
ﬂuctuations in exchange rates on future
transactions and cash ﬂows
the permitted range of the amount 
of cover taken is determined by the written
policies set by the board based on known 
and forecast income levels
the forward cover is managed within the
parameters of these policies in order to achieve
the group’s objectives having regard to the
group’s view of longterm exchange rates
forward cover is in the form of standard foreign
exchange contracts and instruments on which
the exchange rates achieved are dependent 
on future interest ratesthe group may also
write currency options against a portion of 
the unhedged dollar income at a rate which 
is consistent with the group’s longterm 
target rate at the end of 2005 the group 
had approximately us105 billion of forward 
cover 2004 us90 billion
the consequence of this policy has been 
to maintain relatively stable longterm foreign
exchange rates note 20 includes the impact of
revaluing forward currency contracts at market
values on december 31 2005 showing a value
of £228 million 2004 £986 million which will
ﬂuctuate with exchange rates over time
the group has entered into these forward
contracts as part of the hedging policy
described above in order to mitigate the 
impact of volatile exchange rates
interest rate risk
the group uses ﬁxed rate bonds and ﬂoating
rate debt as funding sourcesthe group’s policy
is to maintain a higher proportion of net debt 
at ﬁxed rates of interest having regard to the
prevailing interestrate outlookto implement
this policy the group may utilise a combination
of interestrate swaps forwardrate agreements
and interestrate caps to manage the exposure
commodity risk
the group has an ongoing exposure to the
price of jet fuel and base metals arising from
business operationsthe group’s objective 
is to minimise the impact of price ﬂuctuations
the exposure is hedged in accordance with
parameters contained in a written policy set 
by the board
10885 ra 2005 actual  15306  0757  page 28 sales ﬁnancing 
in connection with the sale of its products
the group will on some occasions provide
ﬁnancing support for its customersthis may
involve the group guaranteeing ﬁnancing for
customers providing assetvalue guarantees
avgs on aircraft for a proportion of their
expected future value or entering into leasing
transactions
the group manages and monitors its 
sales ﬁnance related exposures to customers
and products within written policies approved
by the board and within the internal framework
described in the report of the directorsthe
contingent liabilities represent the maximum
discounted aggregate gross and net exposure
that the group has in respect of delivered
aircraft regardless of the point in time at which
such exposures may arise
the group uses airclaims limited as an
independent appraiser to value its security
portfolio at both the halfyear and yearend
airclaims provides speciﬁc values both current
and forecast future values for each asset in the
security portfoliothese values are then used 
to assess the group’s net exposure
the permitted levels of gross and net
exposure are limited in aggregate by
counterparty by product type and by calendar
yearthe group’s gross exposures are divided
approximately 6040 between avgs and credit
guaranteesthey are spread over many years 
and relate to a number of customers and a
broad product portfolio
the board regularly reviews the group’s
sales ﬁnance related exposures and risk
management activities each ﬁnancing
commitment is subject to a credit and asset
review process and prior approval by the 
chief executive and the finance director
the group operates a sophisticated 
riskpricing model to assess risk and exposure
costs and exposures associated with providing
ﬁnancing support are incorporated in any
decision to secure new business
the group seeks to minimise the level of
exposure from sales ﬁnance commitments by
– the use of third party nonrecourse debt
where appropriate
– the transfer sale or reinsurance of risks and
– ensuring the proportionate ﬂow down 
of risk and exposure to relevant rrsps
each of the above forms an active part of 
the group’s exposure management process
where exposures arise the strategy has
been and continues to be to assume where
possible liquid forms of ﬁnancing commitment
that may be sold or transferred to third parties
when the opportunity arises
note 30 to the accounts describes the
group’s contingent liabilities as revised following
the adoption of ifrs
there were no material changes to the
group’s gross and net contingent liabilities in
this respect in 2005
international financial reporting standards 
as we described last year from 2005 all
european union listed companies are required
to adopt international financial reporting
standards ifrs for their ﬁnancial statements
accordingly these are the ﬁrst ﬁnancial
statements prepared on this basis on april 14
2005 we announced the impact on rollsroyce
of the transition to ifrsthis is set out in note 33
to the ﬁnancial statements and further details
are available in the investors section on the
group’s website at wwwrollsroycecom
in summary the key areas of impact for
rollsroyce relate to
– ﬁnancial instruments accounting under 
ias 32 and ias 39
– capitalisation of development expenditure
under ias 38
– the impact of ias 32 and ias 39 on
accounting for ﬁnancial rrsp receipts 
and payments
– pensionscheme accounting under ias 19
– fair valuing shareoption schemes in
accordance with ifrs 2 and
– the cessation of goodwill amortisation 
in accordance with ifrs 3
during 2005 the international accounting
standards board has published further new
standards and amendments to existing
standards of these the group has chosen 
to adopt early the amendment to ias 19
employee beneﬁts allowing the recognition
in full of actuarial gains and losses on post
retirement beneﬁt schemes in the statement 
of recognised income and expense in 2005
a summary of other changes which have not
been adopted in 2005 is included within the
accounting policies in note 1 to the ﬁnancial
statements
share price 
during the year the rollsroyce share 
price increased by 73 per cent from 247p to
4275p per share compared to a 55 per cent
increase for the aerospace and defence sector
and a 17 per cent increase for the ftse 100
the company’s shares ranged in price from
236p in april to 4305p in december
the number of shares in issue at the end 
of the year was 1759 million an increase of 
54 million of which 19 million related to share
options and 35 million related to conversion 
of b shares into ordinary shares
the average number of shares in issue was
1740 million 2004 1690 million underlying
earnings per share were 2414p an increase of 
55 per cent over 2004
andrew shilston finance director
29
rollsroyce group plc annual report 2005
10885 ra 2005 actual  15306  0757  page 29 rollsroyce group plc annual report 2005
30
board of directors at february 8 2006
simon robertson  nonexecutive chairman
appointed to the board in 2004 and appointed nonexecutive chairman
in january 2005 he is the founder member of simon robertson
associates llp and a nonexecutive director of hsbc holdings plc berry
bros  rudd ltd and the economist newspaper limited he is chairman
of the royal academy trust a director of the royal opera house covent
garden limited and a trustee of the eden project and the royal opera
house endowment fund he is the former president of goldman sachs
europe limited age 64
sir john rose  chief executive
appointed to the board in 1992 he joined rollsroyce in 1984 and was
appointed chief executive in 1996 age 53
hon amy bondurant  nonexecutive director
appointed to the board in 2003 managing director of bozman partners
a private investment fund based in washington a board member of the
american hospital in paris and a member of the council on foreign
relations and of the council of american ambassadors a former 
us ambassador to the oecd from 1997 to 2001 and former senior
member partner and board member of the washington dc law ﬁrm
verner liipfert bernhard mcpherson and hand and former senior
counsel to the united states senate committee on commerce science
and transportation and to the consumer subcommittee age 54
peter byrom bsc fca  nonexecutive director
appointed to the board in 1997 he is chairman of domino printing
sciences plc and molins plc and a nonexecutive director of both 
wilson bowden plc and amec plc he is a fellow of the royal
aeronautical society he was a director of n m rothschild  sons limited
from 1977 to 1996 age 61
john chefﬁns bsc ing freng fraes  chief operating ofﬁcer
appointed to the board in 2001 he joined rollsroyce in 1967 became
president and chief executive ofﬁcer of rollsroyce industries canada inc
in 1991 director civil engine business in 1993 president – civil aerospace
in 1998 and chief operating ofﬁcer in 2001 he is a fellow of the royal
academy of engineering and of the royal aeronautical society he is a
member of the institution of electrical engineers and of the order of
engineers of quebec age 58
iain conn  nonexecutive director
appointed to the board in january 2005 he is an executive director of 
bp plc having held a range of executive positions within the bp group
worldwide he is chairman of the advisory board of the imperial college
london tanaka business school age 43
carlpeter forster  nonexecutive director
appointed to the board in 2003 president of general motors europe 
and chairman of the supervisory board of adam opel ag as well as 
chairman of saab he is chairman of the supervisory boards of the
germanybased asic manufacturer zmd ag and the austrian based
private equity company lead equities ag former managing director 
of bmw south africa and former executive board member for
manufacturing at bmw ag age 51
colin green cbe bsc ceng freng fimeche fraes
president – defence aerospace
appointed to the board in 1996 he joined rollsroyce in 1968 became
director – military engines in 1989 executive vice president – business
operations allison engine company inc in 1995 managing director –
aerospace group in 1996 director – operations in 1998 and was
appointed president – defence aerospace in 2001 he is a fellow of the
royal academy of engineering the royal aeronautical society and the
institution of mechanical engineers he is a former president of the
society of british aerospace companies age 57
james guyette bsc  president and chief executive ofﬁcer 
of rollsroyce north america inc
appointed to the board in 1998 he became president and chief
executive ofﬁcer of rollsroyce north america inc in october 1997
he is a director of the private bank and trust company of chicago illinois
and of pricelinecom inc until 1995 he was executive vice president
marketing and planning of united airlines age 60
andrew shilston ma aca mct  finance director
appointed to the board as finance director in january 2003 having
joined rollsroyce in 2002 he is a nonexecutive director of cairn 
energy plc he was finance director of enterprise oil plc from 1993 
until 2002 age 50
membership of principal board committees
audit committee – peter byrom chairman iain conn and ian strachan
remuneration committee – carl symon chairman hon amy bondurant
peter byrom carlpeter forster and sir john taylor
nominations committee – simon robertson chairman hon amy bondurant
peter byrom iain conn carlpeter forster sir john rose ian strachan carl symon
and sir john taylor
2005 directorsremqxd  15306  0757  page 30 rollsroyce group plc annual report 2005
31
the group executive
the group executive is responsible for the management of the 
group within the strategy determined by the board it is chaired by 
sir john rose chief executive and its other members are
axel arendt chairman rollsroyce deutschland ltd  co kg
brian baker commercial director and general counsel
charles blundell company secretary and 
director of government relations
john chefﬁns chief operating ofﬁcer
miles cowdry director – services
tom curley president – energy
colin green president – defence aerospace
james guyette president and chief executive ofﬁcer of 
rollsroyce north america inc
chris hole director of procurement
dr saul lanyado president – marine
dr mike lloyd director – gas turbine operations
john paterson managing director aero repair and overhaul
john rivers director – human resources
andrew shilston finance director
colin smith director – engineering and technology 
mike terrett president – civil aerospace
colin smith bsc hons freng fraes fimeche 
director – engineering and technology
appointed to the board in 2005 he joined rollsroyce in 1974 and has
held a variety of key positions within engineering including director –
research and technology and director of engineering and technology –
civil aerospace he is a fellow of the royal academy of engineering the
royal aeronautical society and the institution of mechanical engineers
age 50
ian strachan  nonexecutive director
appointed to the board in 2003 a nonexecutive director of reuters
group plc johnson matthey plc xstrata plc and transocean inc he is 
the former chief executive of btr plc former deputy chief executive
1991 to 1995 and chief financial ofﬁcer 1987 to 1991 of rio tinto plc
former nonexecutive chairman of instinet group inc and former 
nonexecutive director of commercial union age 62
carl symon bsc msc  nonexecutive director
appointed to the board in 1999 he is chairman of hmv group plc the 
bt group equality of access board and a number of private companies
he is also a nonexecutive director of bt group plc and rexam plc
he was previously chairman and chief executive ofﬁcer ibm uk he held
numerous executive positions in ibm corp in canada usa latin america
asia and europe during a 32 year international career age 59
prof sir john taylor obe frs freng  nonexecutive director
appointed to the board in 2004 he is currently chairman of roke manor
research ltd and a member of council of the royal academy of
engineering an honorary fellow of emmanuel college cambridge and 
a visiting professor at oxford university he is the former director general
of research councils and the former director of hewlett packard
laboratories bristol he was chair of the south west rda’s shadow
science and industry council and director of the uk foresight project 
on cognitive systems he previously served as president of the institution
of electrical engineers and as chairman of the uk technology foresight
panel in it electronics and communications age 62
charles blundell ma  company secretary
he joined rollsroyce in 1993 and was appointed company secretary 
in 1995 age 54
2005 directorsremqxd  15306  0757  page 31 rollsroyce group plc annual report 2005
32
the directors present their report and the audited ﬁnancial statements of 
rollsroyce group plc the company and its subsidiaries together referred to as
the group for the year ended december 31 2005
principal activities
rollsroyce is a global business providing power systems for use on land at sea 
and in the airthe group has a balanced business portfolio with leading positions
in the civil and defence aerospace marine and energy marketsthere are some
54000 rollsroyce gas turbines in service and they generate a demand for 
highvalue services throughout their operational lives rollsroyce is a technology
leader employing 36200 people in ofﬁces manufacturing and service facilities in
50 countries
results for the year and the issue of b shares
the chairman’s statement the chief executive’s review and the finance director’s
review describe the year’s operations research and development activities and
prospects
at the annual general meeting agm on may 3 2006 the directors will
recommend an issue of 538 b shares with a total nominal value of 538p for each
ordinary sharetogether with the interim issue on january 3 2006 of 334 b shares
for each ordinary share with a total nominal value of 334p this is the equivalent of
a total annual payment to ordinary shareholders of 872p for each ordinary share
shareholders are given the opportunity to redeem their b shares for cash or
to convert them into additional ordinary shares in the company for those
shareholders who have not elected to redeem or convert their b shares a b share
dividend at a rate of 75 per cent of the london interbank offered rate libor is
payable half yearly in arrears
the board believes that there continues to be a signiﬁcant beneﬁt to be
gained from the issue of b shares payments to shareholders will therefore
continue to be made through further issues of b shares generally in january and
july each year
going concern
after making enquiries the directors have a reasonable expectation that the
company has adequate resources to continue in operational existence for the
foreseeable future for this reason they continue to adopt the going concern basis
in preparing the ﬁnancial statements
share capital
the following shareholder has a notiﬁable interest in the company’s ordinary
shares at february 8 2006
 of issued ordinary 
share capital
bmw ag 902
authority to purchase own shares
at the agm in 2005 the company was authorised by shareholders to purchase
up to 173313853 of its own ordinary shares representing ten per cent of its
issued ordinary share capital as at february 9 2005the company did not make
use of this authority during 2005
the authority for the company to purchase its own shares expires at the
conclusion of the agm in 2006 and a resolution to renew it will be proposed at
that meeting
auditors
a resolution to reappoint the auditors kpmg audit plc and to authorise the
directors to determine their remuneration will also be proposed at the agm
political donations
in line with its established policy the group made no political donations 
during 2005
directors
the directors’biographical details including their other signiﬁcant commitments
are set out on pages 30 and 31 during the year there were a number of board
changes simon robertson was appointed nonexecutive chairman with effect
from january 1 2005 iain conn was appointed as an independent nonexecutive
director with effect from january 20 2005 sir robin nicholson retired as the
company’s senior independent director on february 9 2005 and as a 
nonexecutive director at the conclusion of the agm on may 4 2005 peter byrom
succeeded him as the senior independent director dr mike howse retired as an
executive director on june 30 2005 and colin smith was appointed as an
executive director of the company on july 1 2005 colin green will retire from the
board as an executive director on april 4 2006
under the company’s articles of association one third of the directors are
subject to reelection every year with each director also being subject to 
reelection at intervals of not more than three years any director appointed
during the year is separately required to retire and seek reelection by the
shareholders at the next agmthe board also requires any nonexecutive director
who has served on the board for more than nine years to be subject to annual 
reelection at the agmthe directors retiring at this year’s agm are peter byrom
sir john rose colin smith ian strachan and carl symonthey all offer themselves
for reelection
the company has entered into separate deeds of indemnity in favour of its
directorsthe deeds provide substantially the same protection as that already
provided to directors under the indemnity in article 170 of the company’s
articles of associationthe company has also arranged appropriate insurance
cover for any legal action taken against its directors
corporate governance
statement on corporate governance compliance 
rollsroyce attaches the highest priority to corporate governance the system by
which the company is directed managed and controlled in the interests of all its
stakeholdersthe strength of the company’s corporate values its reputation and
its ability to achieve its objectives are inﬂuenced by the effectiveness of the
company’s approach towards corporate governance
the board conﬁrms that throughout 2005 the company complied with the
combined code on corporate governance the combined codethis report
and where appropriate the directors’remuneration report explain how the
company discharges its corporate governance responsibilities
the board’ s composition and directors’independence
simon robertson chairs the board of the company and sir john rose is the chief
executivethe division of responsibilities between them is set down in writing and
agreed by the board peter byrom is the company’s senior independent director
there are currently 14 directors on the board comprising the nonexecutive
chairman the chief executive ﬁve other executive directors and seven 
nonexecutive directors
the quality and broad experience of the directors the balance of the board’s
composition and the dynamics of the board as a group ensure the board’s
effectiveness and also prevent any individual or small group dominating the
board’s decision making
each executive director receives a service contract on appointment see the
directors’remuneration report for further information and each nonexecutive
director receives a letter setting out the conditions of their appointment
nonexecutive directors are appointed for an initial term of three years which may
be extended subsequently with the agreement of the board executive directors
are employees who have executive responsibilities in addition to their duties as
directors nonexecutive directors are not employees and do not participate in the
daily business management of the group
report of the directors
2005 directorsremqxd  15306  0757  page 32 rollsroyce group plc annual report 2005
33
the board applies a rigorous process in order to satisfy itself that its nonexecutive
directors remain independent on his appointment as chairman on january 1
2005 simon robertson met the criteria for independence contained in the
combined code his other signiﬁcant commitments are described on page 30
in the case of the nonexecutive directors the board reviews their independence
every year using its own judgement when applying the criteria in the combined
code having undertaken this review in 2005 the board conﬁrms that all the 
nonexecutive directors are considered to be independent in character and
judgement
on january 1 2006 peter byrom completed nine years service on the board
and therefore does not meet one of the criteria for independence contained in
the combined code having conducted a thorough review the board has
concluded that peter byrom remains independent in character and judgement
that there are no relationships or circumstances which are likely to affect his
independent judgement and that he is in no way dependent on the
remuneration he receives from the companythe board believes strongly that in
a longterm complex and technologically advanced business it is essential that
nonexecutive directors have the opportunity to acquire over a number of years
the experience and knowledge of the business and the sectors within which the
group operateswith his ﬁnancial background city experience and deep
knowledge of the group’s business peter byrom is particularly well qualiﬁed to
serve as the chairman of the audit committee and as the senior independent
directorthe board therefore considers it to be in the interests of shareholders that
he should continue to support the company in both these roles a judgement
which has been endorsed by the independent consultancy which undertook a
review of the board’s effectiveness during 2005 see below in line with the policy
adopted by the board peter byrom will in future be subject to annual reelection
by shareholders
role of the board 
the board is responsible to all its stakeholders for the conduct and performance
of the company
the daytoday running of the company is delegated by the board to the
executive team under the leadership of sir john rose the chief executive
the board retains responsibility for the approval of certain matters which
affect the shape and risk proﬁle of the company as well as such items as the
annual budget and performance targets the published accounts payments to
shareholders major capital investments and any substantial change to balance
sheet management policythis division of responsibilities between the board and
the executive team is set out in detail in a schedule approved annually by the
board which deﬁnes those decisions which can only be taken by the board itself
the board has approved the following statement summarising its core
responsibilities
primary goal
the primary goal of the board is to ensure that the company’s strategy creates
value for the longterm investor within an acceptable risk proﬁle
the boards tasks
in line with its primary goal the board’s principal tasks are to
– ensure the development of the company’s strategy and keep it under
rigorous review
– monitor the implementation of the strategy ensuring that the necessary
ﬁnancial and human resources are in place to deliver it and that effective
controls exist to manage risk
– safeguard the values of the company including its brand and corporate
reputation and the safety of its products
– oversee the quality and performance of management and ensure through
effective succession planning and remuneration policies that it is maintained
at worldclass standards and
– maintain an effective corporate governance framework that delivers 
longterm value to shareholders
directors’induction training and information
newly appointed directors participate in a structured induction programme and
receive a comprehensive data pack providing detailed information on the group
an existing executive director acts as a mentor to each newly appointed 
nonexecutive director giving guidance and advice as required as part of their
brieﬁng nonexecutive directors visit key sites and meet a crosssection of
managers and employees to gain a better understanding of the group and its
operations ongoing training is available for all the directors including
presentations by the executive team on particular aspects of the business
there is an agreed procedure for directors to take independent professional
advice at the company’s expensethis is in addition to the access every director
has to the company secretary and the general counsel
board effectiveness
the chairman meets at least once a year with the nonexecutive directors
without the executive directors present in order to review the operation of the
board
the chairman has an annual meeting with each nonexecutive director to
review their contribution to the boardthe senior independent director chairs an
annual meeting with the nonexecutive directors to review the performance of
the chairman the outcome of which is reported back to him
each year the chairman reviews the performance of the chief executive as
part of the annual salary review process overseen by the remuneration
committeethe chief executive reviews the performance of the other executive
directors in the same way
the board attaches considerable importance to ensuring that it performs
effectively as a team in 2005 an indepth review of the effectiveness of the board
and its committees was undertaken by consilium associates an independent
consultancythe review covered board and committee structure board dynamics
the conduct of board meetings the information provided to directors and
corporate governancethe report prepared by consilium associates was
discussed by the board in december 2005 and will be used by the directors in
2006 to implement a number of improvements in the way the board operates
the audit remuneration and nominations committees have separately
undertaken reviews of their terms of reference and effectiveness during 2005
2005 directorsremqxd  15306  0758  page 33 rollsroyce group plc annual report 2005
34
report of the directors continued
board committees
the board is assisted by its committees details of their membership and 
principal terms of reference are set out below and on page 39their full terms 
of reference are available in the investors section on the group’s website at
wwwrollsroycecom 
the following table shows the level of attendance by the directors at board
and principal committee meetings in 2005
attendance at meetings of the board and its principal committees in 2005 
board audit nominations remuneration
director held attended held attended held attended held attended
hon amy bondurant 88 555 4
peter byrom 8844556 6
john chefﬁns 8 8
iain conn 874311
carlpeter forster 8 5 5 3 6 3
colin green 8 8
james guyette 8 8
dr mike howse 4 4
sir robin nicholson 3 3 2 2 1 1 
simon robertston 8 8 5 5
sir john rose 8 8 5 5 
andrew shilston 8 8 
colin smith 4 4
ian strachan 8 74455
carl symon 8 8 5 5 6 6
sir john taylor 8 8 1 1 5 5 
 the number of meetings held during the period a director was in ofﬁce or a member of a
committee
 during 2005 carlpeter forster was unable to attend the board and committee meetings shown above
as a result of the demands placed on him at short notice in his capacity as president of general motors
europe in all cases when he was unable to attend a meeting he communicated his views to the board or
committee chairman and in the board’s view he continues to make a very strong contribution to the
company and to the work of the board and its committees
nominations committee
in 2005 the nominations committee was chaired by simon robertson its other
members were the hon amy bondurant peter byrom carlpeter forster
sir john rose ian strachan carl symon and sir robin nicholson until his
retirement as a nonexecutive director on may 4 2005 on november 17 2005
iain conn and sir john taylor joined the committee reﬂecting the board’s view
that all the nonexecutive directors should serve as members of the committee
the committee met ﬁve times during the year
the committee makes recommendations to the board on the appointment
of executive and nonexecutive directors and on the membership of board
committees it is assisted in the former task by external recruitment consultants
it reviews succession planning for appointments to the board and to other senior
positions within the group
in carrying out these tasks the committee gives careful consideration to the
balance of skills required on the board including the need to reﬂect diversity
international experience and strong managerial and business skills before
recommending the appointment of a nonexecutive director to the board the
committee satisﬁes itself that the candidate will have sufﬁcient time available to
discharge his or her responsibilities effectively
remuneration committee
the remuneration committee determines appropriate levels of remuneration for
the executive directors and other senior executivesthe committee met six times
during the yearthe committee’s membership and principal terms of reference
are set out in the directors’remuneration report on page 39
audit committee
the audit committee consists exclusively of independent nonexecutive directors
and is chaired by peter byrom who has recent and relevant ﬁnancial experience
in 2005 its other members were sir robin nicholson until may 4 2005 and 
ian strachan iain conn became a member of the committee with effect from
january 20 2005the committee met four times during the year
the committee has responsibility for recommending to the board the
published accounts and for reviewing the group’s ﬁnancial reporting and
accounting policies including major announcements made to a regulatory
information service it is also responsible for the relationship with the external
auditors and for the internal audit function which in rollsroyce is termed
business assurance in addition the committee reviews the group’s procedures 
for detecting monitoring and managing the risk of fraud
the committee has responsibility for recommending to the board the
appointment of the external auditors and for reviewing the scope of the audit
approving the audit fee and on an annual basis satisfying itself that the auditors
are independent it keeps under review the group’s internal controls and systems
for assessing and mitigating ﬁnancial and nonﬁnancial risk it also reviews and
approves the business assurance work programmes and ensures that this
function is adequately resourced and coordinated with the work of the external
auditors
in order to safeguard auditor independence and objectivity the following
policy is applied in relation to services provided by the auditors
audit related services – these are undertaken by the auditors as it is work that they
must or are best suited to perform it includes formalities relating to borrowings
shareholder and other circulars risk management services various regulatory
reports and work in respect of acquisitions and disposals
taxaccounting and mergers and acquisitions – the auditors are used for this work
where they are best suited to undertake it all other signiﬁcant consulting work in
these areas is put out to tender
all other advisory servicesconsulting – the auditors are generally prohibited from
providing these services
throughout the year the committee monitors the cost of nonaudit work
undertaken by the auditors and is therefore in a position to take action if at any
time it believes that there is a risk of the auditors’independence being
undermined through the award of this work
risk committee
the board has a risk committee chaired by the chief executive with speciﬁc
accountability for the system of risk management and for reporting key risks and
their associated mitigating actions to the board in 2005 membership of the
committee comprised john chefﬁns colin green james guyette sir john rose
and andrew shilston dr mike howse was a member of the committee until his
retirement on june 30 2005 colin smith became a member with effect from 
july 1 2005 colin green will cease to be a member of the committee when he
retires from the company on april 4 2006
2005 directorsremqxd  15306  0758  page 34 rollsroyce group plc annual report 2005
35
internal controls and risk management
directors’ responsibilities
the directors are responsible for the group’s system of internal control and for
maintaining and reviewing its effectiveness from both a ﬁnancial and operational
perspectivethe system of internal control is designed to manage rather than
eliminate the risk of failure to achieve business objectives and to provide
reasonable but not absolute assurance against material misstatement or loss
the group’s approach to internal control is based on the underlying principle of
line management’s accountability for control and risk management
in reviewing the effectiveness of the system of internal control the board 
has taken account of the results of the work carried out to audit and review the
activities of the group
there is an ongoing process to identify assess and manage risk including
those risks affecting the group’s reputationthis process is subject to continuous
improvement and has been in place throughout the ﬁnancial year to which these
statements apply and up to the date of their approval in 2005 the risk review
framework has been enhanced at both programme and sector level and
assurance activities more closely coordinated with the risk management process
the board has reviewed the risk management process and conﬁrms that
ongoing processes and systems ensure that rollsroyce continues to be
compliant with the current turnbull committee guidance on internal control and
the revised guidance for directors on the combined code issued in october
2005 which takes effect for ﬁnancial years beginning on or after january 1 2006
organisation
the group has a clearly deﬁned organisation structure within which operational
management has detailed responsibilities and levels of authorisation supported
by written job descriptions and operating manuals
rollsroyce also has a code of business ethics which lays down the principles
to be followed by employees in the course of conducting businessthe code 
also gives guidance to support achievement of the required standards
additionally conﬁdential reporting lines enable uk and us employees to report
outside the normal management chain any concerns they may have with regard
to business conduct
the risk management system
the risk management system is an integral part of management’s approach to
delivering business objectives and is a systematic process designed to identify
assess treat manage and communicate risks it also provides a method of
escalation and delegation to the appropriate level within the organisation and
ensures actions are owned deﬁned resourced and effective
management is responsible for the ongoing identiﬁcation and evaluation of
signiﬁcant risks within their areas of responsibility and using a common process
for the operation of suitable controls or mitigation actions risks are recorded in
regularly updated risk registers operating at all levels of the organisation and are
continuously reviewed and monitored during the review process signiﬁcant
emphasis is placed on learning from and sharing prior experience risks may arise
from a variety of internal and external sourcesthey may be associated with
regulations customer requirements and competitor actions or could result from
the capability of the processes used to execute the business or from external and
largely unpredictable events such as terrorist activity or war
risks irrespective of source are managed through processes operated by
project and functional teams management reports regularly to the risk
committee on its view of risks and how they are managed so that the board can
then consider and review these risks in terms of their potential impact
management has continued to perform comprehensive risk reviews for all
key projects programmes and business change plans in addition all the
processes operated by the company are subject to continuous improvement
including the risk management process itself
systems of internal control 
the general managers of individual businesses are aware of their responsibility 
to operate systems of internal control which provide reasonable assurance of
effective and efﬁcient operations reliable ﬁnancial information and compliance
with laws and regulations financial managers are required to acknowledge in
writing that their routine ﬁnancial reporting is based on reliable data and that
their results are properly stated in accordance with group requirements
the group has a comprehensive budgeting system with an annual 
budget approved by the board revised forecasts for the year are reported at 
least quarterly actual results are reported monthly against budget and variances
reviewed
the activities of the group are subject to review by the department of risk
including business assurance and project risk assessment and the assurance
functions of health safety and environment quality and engineeringthese
functions operate to work programmes agreed by the appropriate board
member
the business assurance function which works closely with the external
auditors undertakes a programme of ﬁnancial and operational audits and reviews
agreed by the audit committee and covering all group activitiesthe programme
includes independent reviews of the systems of internal control and risk
managementthe ﬁndings and the status of corrective actions taken to  address
these are reported to the audit committee four times a year and to the risk
committee twice a year
export controls 
the group attaches the highest priority to complying fully with export controls in
all the jurisdictions in which it operates detailed processes have been put in place
to ensure that the group follows all applicable legal and regulatory requirements
the board has established an exports committee chaired by the chief
operating ofﬁcer which has responsibility for the application of appropriate
controls to the group’s export activity
in the uk the group fully complies with the provisions of the uk export
control act on tangible and intangible exports and trade between third parties
additionally the group complies with the relevant eu regulations regarding the
export of dual use goods and technology in other jurisdictions most notably the
usa the group vigorously enforces a policy of compliance with both the relevant
national legislation and its underlying regulatory intent
communication with shareholders  
the company attaches importance to the effectiveness of its communications
with shareholders it publishes an annual review and summary ﬁnancial
statement as well as a full annual reportthere are also separate reports for the
environment and community relations
the company maintains a regular dialogue with institutional shareholders
and the ﬁnancial communitythis includes presentations of the preliminary and
interim results regular meetings with major shareholders participation in
stockbrokers’seminars and site visits
in november 2005 the company hosted a major investors’seminar in derby
at which a number of board directors and other senior executives described the
group’s progress all shareholders can gain access to these and other
presentations as well as to the annual report and other information about the
group on the group’s website at wwwrollsroycecom
holders of ordinary shares may attend the company’s agm at which the
company highlights key business developments during the year and at which
shareholders have an opportunity to ask questionsthe chairmen of the audit
remuneration and nominations committees are available to answer any questions
from shareholders on the work of their committees
2005 directorsremqxd  15306  0758  page 35 rollsroyce group plc annual report 2005
36
report of the directors continued
the company conﬁrms that it sends the agm notice and relevant
documentation to all shareholders at least 20 working days before the date of
the agm for those shareholders who have elected to receive communications
electronically notice is given of the availability of documents on the group’s
website
responsibility for maintaining regular communications with shareholders
rests with the executive management team led by the chief executive however
the board is informed on a regular basis of key shareholder issues including share
price performance the composition of the shareholder register and city
expectations independent research is commissioned annually into institutional
shareholder perceptions of the groupthe chairman the senior independent
director and the nonexecutive directors make themselves available to meet with
shareholders as required
corporate responsibility 
the group believes that excellence in corporate responsibility delivers
competitive advantage and contributes to longterm success it helps the group
attract and retain the best people and maintain successful working relationships
with customers suppliers and governments it also enables the group to build
goodwill and to support the communities in which its employees live and work
the sustained wealth created by providing thousands of highly skilled jobs
represents the group’s single greatest contribution to those communities
charitable donations and community involvement are encouraged within a
global framework which assists local regeneration and promotes education in
business and technologybased studies
the group supports its own employees with welldeveloped policies and
practices in health safety and environment employment policy and employee
learning and developmentthe group also operates proactive policies to manage
its supplier and customer relationships responsibly
the group’s achievements during the year were recognised when it was
ranked in 9th position in the 2004 uk business in the community corporate
responsibility index and retained its inclusion in the dow jones sustainability
indices
the following paragraphs describe in more detail how the group addresses
speciﬁc aspects of its policy and practice in the ﬁeld of corporate responsibility
supply chain 
the group makes its approved suppliers aware of the expected business
requirements and performance standards through its supplier quality system
‘supplier advanced business relationships’sabrethis includes a supplier code
of conduct and a health safety and environmental management system which
set minimum standards regular visits are made to suppliers to assess their
performance and a supplier awareness programme is delivered through
conferences and regular communicationsthe rollsroyce purchasing code of
conduct for employees complements the supplier code of conduct and ensures
that employees act consistently with suppliers
in 2005 rollsroyce won a uk award from the chartered institute of
purchasing and supply in recognition of its contribution to corporate
responsibility through the recycling of material in its supply chain
the group’s sourcing policies in the usa reﬂect us government regulations
on small and disadvantaged businesses and our performance is monitored
regularly
health safety and environment hse
rollsroyce recognises that exceptional hse performance makes sound
business sense our strategy is to protect our employees contractors and the
wider community attract and retain a motivated workforce maintain business
continuity avoid asset damage and reduce overall costswe also aim to have zero
injuries and environmental incidents and to minimise the environmental impact
of our operations
the chief executive chairs the hse committee which is responsible for
deﬁning strategy the management system group objectives and all performance
measuresthe group is supported by the environmental advisory board eab
whose members include respected external authoritiesthe eab reviews and
makes independent recommendations on the environmental and sustainability
aspects of the group’s activities
the chief operating ofﬁcer chairs the major incident board which reviews
incidents to ensure that lessons learnt are effectively communicated throughout
the group incidents considered in 2005 were a ﬁre in a magnesium cutting
operation and an explosion in a hydrogen bell furnace fortunately these
regrettable incidents did not result in any injuries and the group experienced no
workrelated fatalities in 2005
threeyear targets were set across the group in 2003 covering lost time
injury rate number of working days lost incident rate of occupational diseases
and other work related ill health 100 per cent health surveillance of any
populations at risk energy use solid waste solid waste recycling and hazardous
liquid waste programmes are in place to improve performance in these areas and
an update with data for 2005 will be published on the group’s website in april
2006 independent assurance is provided by deloitte  touche llp 
the group operates three sites in the uk which manufacture test and
support nuclear reactor cores for royal navy submarines all these sites continue
to maintain a strong health safety and environmental record
the group’s hse audit programme independently assesses the
implementation of its hse management system several audits were completed
in 2005 covering operations in the uk usa finland and norway good progress
continues to be made in implementing the groupwide standard for an
integrated hse management system hse reviews were also undertaken at
joint venture operations in the uk and the usa and at selected suppliers in
bulgaria romania and taiwan
the group recognises hse performance with annual awards presented by
the chief executive recognition was given in 2005 to those sites achieving zero
lost time injuries
environment 
the group operates environmental management systems which are third party
certiﬁed to the international standard iso 14001 in 2005 the group’s operations at
oberursel and dahlewitz in germany received certiﬁcation and all the group’s
major sites are now certiﬁed our aim is for newly acquired businesses to achieve
certiﬁcation within two years of acquisition
the group continues to make excellent progress in improving the
environmental performance of its products with environmental impacts reduced
by sustained investment in technologywe work with industry groups to support
these objectives and in 2005 we were a key participant in the development of
the uk sustainable aviation initiativethis deﬁnes a longterm strategy to maintain
the beneﬁts of growth in air travel whilst managing the environmental impacts
within sustainable limits
the group also supports the longterm goals published by the advisory
council for aeronautics research in europe acare acare seeks by 2020 from a
2000 baseline to develop aeroengine technology to help reduce fuel burn and
carbon dioxide emissions per passenger kilometre by 50 per cent noise by 50 per
cent and emissions of oxides of nitrogen by 80 per cent rollsroyce engines for
the airbus a380 and the boeing 787 show improvements in environmental
performance which are fully consistent with achieving these goals similar
programmes are being followed in the energy and marine businesses
2005 directorsremqxd  15306  0758  page 36 rollsroyce group plc annual report 2005
37
the group continues to participate in the uk carbon dioxide emissions trading
scheme and the chicago climate exchange and has targets for reduced carbon
dioxide emissions from its operations in the uk and north america in 2005 the
group again exceeded its obligations to reduce emissions under the uk
emissions trading scheme and sold some emissions units thereby enhancing the
costsaving beneﬁts of energy reduction
in 2005 the group was again placed ﬁrst in its business sector in the
business in the environment index of corporate environmental management its
environmental achievements have also been recognised by several uk awards
including business in the community’s  ‘big tick’business commitment to the
environment and the energy accreditation scheme
occupational health 
the group’s strategy is to provide a progressive occupational health service
recognised for delivering best practice based upon prevention and with
processes fully integrated into the quality management system
the group recognises the link between physical and mental health and the
need for employees to enjoy working effectively and successfully with proper
regard for their personal wellbeingto support the link between wellbeing and
productivity the hse committee in 2005 endorsed a preventative occupational
health strategy which concentrates on four key areas screening and surveillance
rehabilitation health promotion and education
in screening and surveillance stringent targets are set for assessing ﬁtness for
work reducing occupational disease and workrelated ill health a campaign
continues to reduce noiseinduced hearing loss and the company played a
signiﬁcant part in 2005 in advising on the introduction of ‘the control of vibration
at work regulations’and their supporting guidance
the priority in rehabilitation is early intervention and active case
management of individualstraining is provided to assist managers in managing
absence and rehabilitation effectively
health promotion in 2005 included awareness campaigns on smoking and
obesity employees are encouraged to stop smoking by highlighting the many
beneﬁts of not smoking and promoting the wide range of help and support in
giving up a threemonth educational campaign called ‘reduce hazardous waist’
was launched with the aim of reducing health problems associated with obesity
the group’s approach to managing workplace pressure has previously been
recognised as an example of best practice by the uk’s health and safety
executive hse commissioned report on ‘beacons of excellence’  similarly its
approach to absence management was cited by the hse in its ‘better business’
campaign
dr ian lawson the group’s chief medical ofﬁcer has recently completed a
term of ofﬁce as president of the society of occupational medicine and has
become a member of the international commission on occupational health
employment policy
at the end of 2005 the group employed 36191 employees 2004 35372
the group and employee representatives continue to work closely together
to improve the quality of employee engagement and participation in the
development of the businessthis was reﬂected by the creation in april 2005 of a
global council it comprises employee representatives from countries worldwide
and provides a structured approach to consultation and communication on
international issuesthe global council meets at least twice a year supported by
the global council’s executive committee which progresses issues between the
council meetings
in 2005 the group consulted widely over changes to the rollsroyce group
pension scheme for uk employees new arrangements took effect from july 1
2005 after agreement with employee representatives and acceptance by
employeesthe changes introduced were similar to those made to the 
rollsroyce pension fund in 2004
as part of its commitment to effective consultation with all employees the group
carried out a worldwide employee engagement survey in 2004 in 2005 the
results of this survey were shared with all employees each business identiﬁed an
action programme to address the issues arising
the group’s global policy on diversity and equality continues to develop in
consultation with employee representativesthe group is committed to equal
opportunities and to developing a diverse and inclusive workforce it continues 
to support initiatives to encourage more women and people from ethnic
minorities to pursue careers in engineeringthe group recognises the need to
promote its policies effectively and widely reﬂecting the international scope of 
its operations
the group’s policy is to provide wherever possible employment and training
and development opportunities for disabled people it is also committed to
supporting employees who become disabled and to helping disabled employees
make the best possible use of their skills and potential
the group actively encourages employee share ownership all employees
are regularly invited to participate in sharesave plans and the workforce has
committed to save over £90 million to buy shares in the company in addition
statutory arrangements enable uk employees to receive part of their annual
bonus in company shares and make monthly share purchases from their salary
learning and development 
to strengthen its competitive position the group has over many years invested in
the training and development of its employees customers and suppliers in 2005
we spent £30 million on the education training and professional development of
employees
training programmes were delivered to support major change programmes
in particular we have launched the ‘process excellence’initiative to improve our
management and operating processes and we have trained people to undertake
speciﬁc projects to raise standards of performance and improve customer
satisfaction
some 2000 people were trained to support ‘product lifecycle management’
which enables the group and its supply chain to deliver products and services at
a higher quality and with greater efﬁciency
the company offers employees access to wideranging courses online and
over 5000 employees have taken an online course over the past two years
the group continues to attract trainees into its skilled and professional
workforce in the uk graduate applications totalled over 3500 in 2005 and we
recruited 183 graduateswe also recruited 136 apprentices and technicians in
addition over 500 undergraduate students were employed for training periods of
between two and 12 months at the end of the year worldwide there were 273
graduates and 370 apprentices and technicians in formal training programmes
in 2005 the group was ranked ﬁrst in its business sector and 24th overall in
the uk times newspaper top 100 graduate employers list
the group continues to work closely with schools colleges and universities
to promote science technology and enterprise our policy is to work with
government local and national bodies and educational institutions to widen
pupils’and students’experience of industry and to promote careers in the
aerospace marine and energy sectors in 2005 the group progressed two ﬂagship
activities proﬁtable pursuit a business simulation to stimulate enterprise
education in schools and the rollsroyce science prize which promotes and
rewards science teaching in schools and colleges in the uk and the republic of
ireland in 2005 the ﬁrst round ﬁnalists and special merit award winning teams
were selected representing a wide range of schools
2005 directorsremqxd  15306  0758  page 37 rollsroyce group plc annual report 2005
38
report of the directors continued
the group supports educational projects and initiatives to promote engineering
education in schools including open industry specialist schools education action
zones and science and engineering ambassadors in north america rollsroyce
supports ‘project lead the way’a programme which creates partnerships with
schools to encourage more students to consider careers in engineering and
technology
some of the group’s training facilities are made available to local
communities with free places being offered on internal training programmes
in addition working on local community projects forms a key part in developing
employees
we continue to meet customer training needs with management and
business educationwe led the initiative to establish the british university in dubai
and developed executive programmes for china’s aviation industry leaders under
the uk government’s chevening scheme the group sponsored students from
brazil china india indonesia malaysia and taiwanwe also manage a company
scheme for placing english language teachers in china arranging 40 assignments
for uk graduates
community investment 
the group community investment committee is responsible for the group’s
policy on charitable donations in 2005 total charitable donations amounted to
£1484000 a list of the principal donations made in the year is available on
written request to the company secretary
the committee is supported by national committees and all operate within
the following guidelines
‘as a forwardlooking innovative and global company rollsroyce group plc
is committed to being a good corporate citizen in its operations throughout the
worldthe group’s policy on donations is to direct its support primarily to causes
with educational engineering and scientiﬁc objectives as well as to social
objectives connected with the group’s business and place in the wider
community’
during 2005 charitable donations in the uk amounted to £671000they
included support for the prince’s trust community foundations ss great britain
the industrial trust and duxford airspace
the group has made charitable donations of £563000 in other major
regions in north america this included support for the work of united way
habitat for humanity the smithsonian national air and space museum and
purdue university in germany the group supported a range of organisations
including the brandenburg summer festivalworld youth day and the
international airport race in the nordic countries it supported a number of local
sports and artsbased projects
in response to the tsunami disaster in south east asia the group contributed
£250000 in 2004 and an additional £250000 in 2005 to match employee
donations funding is being used to support a number of projects in the affected
areas including the construction of a primary care clinic in aceh indonesia the
construction of a school in india and other projects in thailand
our response to the hurricane katrina disaster was very visible in the
devastated communities affectedthe group provided housing transportation
and medical support followed by a range of special support services employee
groups mobilised their support through food and clothing drives and also raised
over £35000the rollsroyce response was exemplary and was recognised as
such both externally and internally
in addition to our charitable donations contributions of £1700000 were
made by the group’s sponsorship committee and individual business groups
primarily to support arts and educational programmes
the group also ﬁnances the administration of the payroll giving scheme for
uk employees in 2005 the scheme helped employees make donations of over
£396000 to over 200 charities of their choice sixteen per cent of employees
participate one of the highest levels in the ukthe scheme received a gold award
from the uk institute of fundraising in 2005 in addition 36 per cent of employees
in north america have contributed over £200000 to good causes through ‘united
way’schemes which are partly matched by the company
the company also supports its commitment to being a good corporate citizen
by supporting projects in which employees are encouraged to participate
examples include
– running successful mentoring and literacy programmes for school pupils
through education business partnerships 
– participating in the uk’s science and engineering ambassadors scheme
– undertaking community projects with trainees as part of their training
– supporting employees who are school governors and
– providing business mentors and advisers through the prince’s trust and
young enterprise
the group offers support inkind to local initiatives including providing places on
inhouse training programmes donating surplus computer equipment and
furniture and offering the free use of meeting rooms and premises
the company is a member of business in the community and actively
supports common purpose programmes across the ukthese two organisations
aim to promote greater business awareness and involvement in wider
community issues and to encourage greater employee participation
rollsroyce has a long and successful history of community involvement
which it is determined to maintainwe continue to attach particular priority to
supporting education the environment the arts and economic and social
regeneration our approach supports our values of reliability integrity and
innovation
by order of the board
charles blundell company secretary
february 8 2006
2005 directorsremqxd  15306  0758  page 38 rollsroyce group plc annual report 2005
39
directors’remuneration report information not subject to audit
introduction
this report to shareholders covers
– the policy under which the executive directors the chairman and the 
nonexecutive directors are remunerated and
– details of the remuneration and share interests of the executive directors
and the fees paid to the chairman and the nonexecutive directors
it provides the information required by the directors’remuneration report
regulations 2002 the regulations and describes how the company applies 
the principles of the combined code in relation to executive directors’
remunerationthe company conﬁrms that it complies with the requirements 
of the combined code
the report was approved by the remuneration committee the committee
on february 6 2006 and was signed on the board’s behalf by carl symon as 
the chairman of the committee a resolution will be put to shareholders at 
the annual general meeting agm on may 3 2006 inviting them to approve 
this report
the remuneration committee
the committee has responsibility for making recommendations to the board on
the group’s policy towards executive remunerationthe committee determines
on the board’s behalf the speciﬁc remuneration packages of the executive
directors and a number of senior executives it also makes recommendations to
the board on the remuneration of the chairman a copy of the committee’s terms
of reference is available in the investors section on the group’s website at 
wwwrollsroycecom
the committee consists exclusively of independent nonexecutive directors
at january 1 2005 it was chaired by carl symon and its other members were
peter byrom and carlpeter forster with effect from february 9 2005 the 
hon amy bondurant and sir john taylor joined the committee with the
chairmanship and other members of the committee remaining unchanged
throughout the year
in 2005 simon robertson chairman sir john rose chief executive
john rivers director – human resources and charles blundell company
secretary attended meetings by invitation of the committee but were not
present during any discussion of their own emoluments
the committee met on six occasions in 2005 and details of members’
attendance are set out on page 34
advice to the remuneration committee
the committee may call for information and advice from advisers inside and
outside the group in 2005 simon robertson and sir john rose made
recommendations to the committee relating to the performance of their direct
reports internal support was provided primarily by john rivers advised by
deloitte  touche llp  additional advice was provided by senior employees from
human resources finance and business development
the committee received advice on remuneration matters from deloitte 
touche llp and the company’s lawyers freshﬁelds bruckhaus deringer
during 2005 deloitte  touche llp also advised the group on tax assurance
pensions and corporate ﬁnance
remuneration policy
the policy framework
the group operates in a highly competitive international market its business is
complex technologically advanced and has long time horizonsthe group is
committed to achieving sustained improvements in performance and this
depends crucially on the individual contributions made by the executive team
and by employees at all levelsthe board therefore believes that an effective
remuneration strategy plays an essential part in the future success of the group
accordingly the board has adopted on the recommendation of the
committee a remuneration policy reﬂecting the following broad principles which
it will continue to apply in 2006
i the remuneration of executive directors and other senior executives should
reﬂect their responsibilities and contain incentives to deliver the group’s
performance objectives it must also be capable of attracting and retaining
the individuals necessary for business success
ii a signiﬁcant proportion of total remuneration should be based on group
and individual performance both in the short and long term and
iii the system of remuneration should establish a close identity of interest
between senior executives and shareholders through measures such as
encouraging the acquisition of a signiﬁcant shareholding in the company
when determining remuneration the committee takes into account pay and
employment conditions elsewhere in the group
the committee regularly reviews both the competitiveness of the group’s
remuneration structure and its effectiveness in incentivising executives to
enhance value for shareholders over the longer term it considers that a successful
remuneration policy needs to be sufﬁciently ﬂexible to take account of future
changes in the group’s business environment and in remuneration practice
the main components of remuneration 
the main components of remuneration comprise base salary annual incentive
arrangements longterm sharebased incentives and pension and life assurance
beneﬁts executive directors and senior executives are also entitled to a company
car or car allowance private medical insurance ﬁnancial counselling and in the
case of james guyette a housing allowance
the committee considers that there should be a continuing emphasis on
those elements of remuneration such as annual and longterm incentives which
directly inﬂuence the performance of senior executives
base salaries
in determining the relative importance of these elements of remuneration the
committee believes that base salaries should be set at levels required to recruit
and retain high quality senior executives
the committee believes that base salaries should be set with reference to
the median level of the relevant marketplace for companies of a similar size and
complexity all salary increases must be justiﬁed on the basis of performance and
are not automatic
other beneﬁts are generally at the median of market practice
2005 directorsremqxd  15306  0758  page 39 rollsroyce group plc annual report 2005
40
directors’remuneration report continued information not subject to audit
annual incentives
executive directors and selected senior executives participate in the annual
performance related award plan apra for uk participants apra awards do not
form part of pensionable earnings
target and maximum apra bonus opportunity
under apra as operated in 2005 executive directors were eligible for awards in
accordance with the table below
target bonus maximum bonus
as a  of salary
1
as a  of salary
1
john chefﬁns 48 80
colin green 
2
48 80
james guyette 48 80
dr mike howse 48 80
sir john rose 60 100
andrew shilston 48 80
colin smith 
3
375 625
1
it is possible for a bonus award to be increased by a further 20 per cent to reﬂect exceptional 
personal performance
2
the award for colin green reﬂected the performance of the business sector for which he is
responsible in addition to group and personal objectives
3
colin smith was appointed as an executive director on july 1 2005 his maximum bonus award was
increased from 45 per cent to 80 per cent from the date of his appointment as an executive director
performance measures
the apra performance measures set by the committee are based on the group’s
annual operating plans for 2005 the measures for executive directors included
underlying proﬁt average cash balance cash ﬂow and personal performance
against speciﬁc personal objectives forty per cent of any apra bonus depends
on personal performance against these speciﬁc objectives
in 2005 to emphasise the importance of the corporate result the apra
bonus pool available for distribution to all participants was generated solely by
the ﬁnancial performance of the group and no bonus would have been available
to any participant unless the group achieved predetermined performance
targetsthe performance of the business sector in which an executive is
employed is also a factor in that it determines the extent to which an executive
has access to the pool generated by corporate performance
all executive directors have a high proportion of their annual remuneration
at risk for the chief executive his 120 per cent maximum bonus opportunity
means that 55 per cent of his combined basic pay and bonus opportunity is
directly related to annual ﬁnancial and personal performance in 2005 the level of
achievement against the ﬁnancial measures was sufﬁcient to generate 95 per
cent of the bonus for individual participants
deferred apra award
one third of the value of apra is delivered in the form of a deferred award in the
company’s shares a participant who is granted a deferred share award under
apra must normally continue to remain an employee of the group for two years
from the date of the award in order to retain the full number of shares although
shares will be released early in certain circumstances including retirement or
redundancy
the value of any deferred share awards is derived from the annual bonus
criteria and is therefore dependent on personal and business ﬁnancial
performance the release of deferred share awards is not dependent on the
achievement of any further performance conditionsthe deferred share element
operated for 2005 will result in share awards as described on page 43the
committee intends to maintain the deferred share element in respect of 2006
this arrangement provides a strong link between performance and
remuneration promotes a culture of share ownership amongst the group’s senior
management and encourages decisions in the longterm interest of shareholders
other annual incentives
the same targets set for apra are used for the allemployee bonus scheme
which enables all employees worldwide to receive a bonus of up to two weeks’
pay based on corporate and business performancethose executives
participating in apra are excluded from the allemployee bonus scheme
a deferred share incentive plan dsip was operated for 2002 which was
restricted to a small number of key executives including executive directors no
awards under the dsip were made in 2005 and it is not intended that the plan
will be operated again dsip grants made in 2002 vest in april 2006
longterm incentives
in 2003 the committee completed a review of longterm incentive arrangements
and concluded that the introduction of a new plan the rollsroyce group plc
performance share plan psp would provide stronger incentives to improve
group performance than executive share options shareholders approved the
introduction of the psp at the 2004 agm as stated in the 2004 annual report the
committee does not intend to make further grants under the rollsroyce 1999
executive share option plan
rollsroyce group plc performance share plan
the psp is designed to reward and incentivise selected senior executives who can
inﬂuence the longterm performance of the group
under the rules of the psp selected executives are granted conditional share
awards entitling them to a number of shares determined by reference to
corporate performance over a threeyear performance periodthe measures of
corporate performance are cash generation earnings and total shareholder
returnthese measures are considered particularly important in generating
shareholder value and are explained in more detail on page 41there is no
retesting of the performance criteria and no automatic vesting in the event of 
a takeover
psp award levels
the sizes of the awards under the psp are aimed at the median of the
marketplace for uk companies of a similar size and complexity to the group
in 2005 sir john rose received an award of shares with a market value at the time
of grant of 100 per cent of his annual salary for other executive directors and
business heads the grant was 666 per cent and 50 per cent for other members of
the group executive during the year the committee reviewed the psp award
levels against market practice and for 2006 it is intended that the award level
policy will be 110 per cent 80 per cent and 65 per cent of annual salary
respectively for the chief executive executive directors and business heads and
other members of the group executivethe rules of the psp permit grants of up
to 200 per cent of annual salary as described below it is possible for the number
of shares under an award to be increased by a further 25 per cent based on the
company’s total shareholder return tsr performance
2005 directorsremqxd  15306  0758  page 40 rollsroyce group plc annual report 2005
41
performance measures
no shares will be released from the psp unless the growth in the company’s
earnings per share eps exceeds the uk retail price index by three per cent per
year over the performance period
the number of shares released if any will be determined in accordance
with cash flow per share cps targets which will not be adjusted for inﬂation
cps is calculated as cash ﬂow after interest taxation and capital expenditure but
before cost of business acquisitions or proceeds of disposals and payments to
shareholders divided by the weighted average number of shares in issue
shareholders have authorised the committee to set cps performance
targets for future grants provided that in the committee’s reasonable judgement
the targets are no less challenging in the light of the group’s business
circumstances and its internal forecasts than the targets for the initial grant in
2004 as approved by shareholders
the following cps targets will apply to the grants to be made in 2006
aggregate cps over percentage of
threeyear performance period maximum award released
52p 30
69p 100
the committee believes that these cps targets are challenging and that the
performance necessary to achieve awards towards the upper end of the range is
stretchingthey should not therefore be interpreted as providing guidance on
the group’s performance over the relevant period
intermediate levels of performance attract pro rata releasesthe shares
released will be determined by the total cps generated over the threeyear
period
the company’s tsr over the performance period will be compared with 
the tsr of the companies constituting the ftse 100 index on the date of grant
this comparison will be carried out by an external independent agency if the
company’s tsr exceeds the median of that group of companies the number of
shares due to be released to an executive following achievement of the eps and
cps targets will be increased by 25 per cent
eps and tsr performance measures are calculated from a base year which 
is the year before grant
in line with the committee’s established policy it is envisaged that existing
shares will be used to satisfy awards but in order to provide ﬂexibility the psp
rules permit the issue of new issue shares within standard limits
share retention policy
the committee requires participants in the psp to retain at least one half of the
number of after tax shares released from the psp until their retirement except
that shares may be sold within one year before the normal or agreed retirement
date or on leaving for any other reason once a committed date has been agreed
this exception is intended to ensure that participants are not disadvantaged
under capital gains tax rules on leaving employment
executive share option plan
as mentioned on page 40 following the introduction of the psp it is not intended
to continue granting executive share options
the exercise of existing options is subject to a performance condition that
the company’s growth in underlying eps must exceed the uk retail price index
by an average of three per cent per year over a rolling threeyear periodthese
performance conditions apply to all the executive directorsthe committee
reviews achievement of the eps target annually
in 2001 in order to help meet a series of demanding challenges key
members of the executive team including the executive directors received a
larger than normal level of grant as described in the company’s 2001 annual
report this award had more demanding performance criteria and personal share
ownership requirements see pages 46 and 47
allemployee share plans
the committee believes that sharebased plans make a signiﬁcant contribution to
the close involvement and interest of all employees in the group’s performance
executive directors are eligible to participate in the group’s allemployee share
plans on the same terms as other employeesthere are three main elements to
these arrangements
i the sharesave plan – a savingsrelated share option plan available to all
employeesthis plan operates within speciﬁc tax legislation including a
requirement to ﬁnance the exercise of the option using the proceeds of a
monthly savings contractthe exercise of the option is not subject to the
achievement of a performance target
ii the ‘free share’element of the share incentive plan under which uk
employees receive shares of up to the equivalent of one week’s pay as part
of the company component of any bonus paid for 2005 and
iii the ‘partnership share’element of the share incentive plan under which uk
employees may make regular purchases of shares from pretax income
international financial reporting standards
the committee is working closely with the audit committee to monitor and react
appropriately to any impact which the introduction of international financial
reporting standards ifrs may have on the performance measures under annual
and longterm incentive plans in particular since many of the performance
targets were set based on uk gaap  but will be measured under ifrs appropriate
adjustments will be made to ensure that performance is measured on a
consistent basis
service contracts
the committee’s policy is that executive directors appointed to the board are
offered notice periods of 12 monthsthe committee recognises that in the case of
appointments to the board from outside the group it may be necessary to offer a
longer initial notice period which would subsequently reduce to 12 months after
that initial period
the committee has a deﬁned policy on compensation and mitigation to be
applied in the event of a uk director’s contract being prematurely terminated in
these circumstances steps are taken to ensure that poor performance is not
rewardedwhen calculating termination payments the committee takes into
account a range of factors such as age length of service contract and the
director’s obligation to mitigate his or her own loss
the following table summarises the terms of executive directors’service
contracts
notice period notice period 
date of contract unexpired term company individual
john chefﬁns 4 may 2001 12 months 12 months 6 months
colin green 1 march 1991 12 months 12 months
1
6 months
james guyette 29 september 1997 indeﬁnite 30 days
2
30 days
sir john rose 4 december 1992 12 months 12 months
1
6 months
andrew shilston 5 november 2002 12 months 12 months 6 months
colin smith 1 july 2005 12 months 12 months 6 months
1
in the event of the service contracts for sir john rose or colin green being terminated by the
company other than in accordance with the contracts’terms they are entitled to receive a liquidated
sum calculated as 12 months’salary and beneﬁts performance related payments are not covered under
this arrangement although an annual bonus may be paid if the executive is in post at the end of the
year
2
james guyette has a contract with rollsroyce north america inc drawn up under the laws of the
state of virginia it provides that on termination without cause he is entitled to 12 months’severance
pay without mitigation and in addition appropriate relocation costs
information not subject to audit
2005 directorsremqxd  15306  0758  page 41 rollsroyce group plc annual report 2005
42
directors’remuneration report continued information not subject to audit
executive directors’directorships of other companies
during 2005 sir john rose was a nonexecutive director of eli lilly and company
until his resignation on october 14 2005 james guyette was a director of the
private bank and trust company of chicago illinois and of pricelinecom inc and
andrew shilston was a nonexecutive director of cairn energy plc
in all these cases the director retained the relevant fees from serving on the
boards of these companies as shown in the table below
external directorship fees
payment received 
£000
james guyette 
12
48
sir john rose 
13
25
andrew shilston 45
1
sir john rose and james guyette were paid in us dollars translated at 182  £1
2
in addition to an annual fee james guyette received 8000 stock options in pricelinecom at an option
price of us2259 per share he also received 3000 stock options in private bank at an option price of
us3059 per share
3
following the resignation of sir john rose from the board of eli lilly and company he received 
1216 shares in respect of the release of shares from the lilly directors’deferral plan
nonexecutive directors
the chairman and the nonexecutive directors have letters of appointment rather
than service contracts no compensation is payable to the chairman or to any
nonexecutive director if the appointment is terminated early
nonexecutive directors’fees
the board takes account of independent market surveys in determining the fees
payable to the chairman and the nonexecutive directorsthe committee makes
recommendations to the board on the remuneration of the chairmanthe fees
paid to the chairman and nonexecutive directors are shown in the emoluments
table on page 43
up to april 2005 each nonexecutive director received an annual fee of
£30000 in addition fees of £6000 per annum were paid to members of the audit
remuneration and nominations committees with the chairmen of the audit and
remuneration committees receiving a further £6000 per annum
in february 2005 the board reviewed the fees payable to nonexecutive
directors as reported in the 2004 annual report it concluded that there was a
strong case for increasing the nonexecutive directors’fees to more competitive
levels in order to reﬂect the increased responsibilities and time commitments
which changes in corporate governance were imposing on all nonexecutive
directorsthe board therefore agreed that with effect from may 2005 a 
nonexecutive director would receive an annual fee of £50000 covering his or 
her membership of the board and of board committeesthe audit committee
chairman and the remuneration committee chairman would receive additional
fees of £15000 and £12000 per annum respectivelythe senior independent
director would receive an additional fee of £5000 per annum for carrying out 
this role
the chairman and the nonexecutive directors are not eligible to participate
in any of the group’s share schemes incentive arrangements or pension schemes
a facility is in place which enables nonexecutive directors to use some or all of
their fees after the appropriate statutory deductions to make market purchases of
shares in the company on a monthly basis
t otal shareholder return – rollsroyce against the ftse 1 00
total shareholder return index
ftse 100 rollsroyce
0
50
1200 1201 1202 1203 1204 1205
100
150
200
250
300
performance graph
the company’s total shareholder return performance over the previous ﬁve
years compared to a broad equity market index is shown in the graph below
the ftse 100 has been chosen as the comparator index because it contains a
broad range of other leading uk listed companies
2005 directorsremqxd  15306  0758  page 42 rollsroyce group plc annual report 2005
43
directors’remuneration report continued information subject to audit
individual directors’emoluments and compensation
the individual directors’emoluments are analysed as follows
2005 2004
annual performance related award plan apra aggregate aggregate
emoluments emoluments
board and excluding excluding
basic committee cash deferred t otal srs t axable pensions pensions
salaries fees bonus shares
1
apra payments
2
beneﬁts
3
contributions
4
contributions
4
£000 £000 £000 £000 £000 £000 £000 £000 £000
john chefﬁns 459 — 189 94 283 — 24 766 772
colin green 378 — 154 77 231 — 30 639 657
james guyette
5
371 — 209 104 313 — 38 722 648
dr mike howse 
6
162 — 108 — 108 — 12 282 585
sir john rose 685 — 383 191 574 — 17 1276 1285
andrew shilston 422 — 211 106 317 51 13 803 775
colin smith
7
125 — 68 34 102 — 6 233 —
hon amy bondurant — 45————— 45 36
peter byrom — 65————— 65 52
iain conn 
8
— 43————— 43 —
carlpeter forster — 47————— 47 40
simon robertson — 330 ————— 330 5
ian strachan — 47————— 47 40
carl symon — 57————— 57 46
sir john taylor — 43————— 43 5
euan baird
9
———————— 54
lord moore of lower marsh
10
———————— 250
sir robin nicholson
11
— 14————— 14 42
sir john weston
12
———————— 37
2602 691 1322 606 1928 51 140 5412 5329
1
shares forming part of the bonus under apra have been valued at date of award an investment is expected to be made by march 31 2006 when the trustee will acquire the required number of shares at the
prevailing market price
2
payments made to andrew shilston in connection with his participation in the rollsroyce supplementary retirement scheme srs see page 49 enabling him to discharge the income tax liability incurred by
him on the contributions made by the group into the srs
3
taxable beneﬁts include the following company car or car allowance private medical insurance and ﬁnancial counselling and in the case of james guyette a housing allowance and appropriate club
membership fees
4
details of the directors’pensions are set out on pages 48 and 49
5
james guyette was paid in us dollars translated at 182  £1
6
dr mike howse retired as a director with effect from june 30 2005the emoluments shown in the table above are the amounts paid up to his date of retirement from the board
7
colin smith was appointed to the board as a director with effect from july 1 2005the emoluments shown in the table above are the amounts paid from his date of appointment to the board
8
iain conn was appointed to the board as a nonexecutive director with effect from january 20 2005
9
euan baird resigned as chairman with effect from june 21 2004
10
lord moore of lower marsh retired as interim chairman with effect from december 31 2004
11
sir robin nicholson retired as a nonexecutive director with effect from may 4 2005
12
sir john weston retired as a nonexecutive director with effect from december 1 2004
payments made to former directors of the company
dr mike howse retired from the board on june 30 2005the board considered it to be in the interests of the company to retain his expertise in engineering for a
period following his retirement he continued to be employed by the group and received a salary totalling £49000 and beneﬁts of £12000 between his date of
retirement from the board and the year end
lord moore of lower marsh retired as interim chairman on december 31 2004 he has continued to chair the trustees of the rollsroyce pension fund and the
investment subcommittee of the trustees and attends meetings of the trustees audit committee lord moore received an annual fee of £35000
sir robin nicholson retired as a nonexecutive director on may 4 2005 he was retained by rollsroyce fuel cell systems limited for his management and
technical expertise and to provide advice on business related matters sir robin was paid an annual fee of £30000
phil rufﬂes retired from the board on october 18 2001 he was retained by rollsroyce fuel cell systems limited to give general advice on the best contacts and
direction for the business phil rufﬂes received a fee of £1270 for each day or a pro rata amount for any part day that he performed these services it is expected that
he will spend approximately ﬁve working days on this activity per year
2005 directorsremqxd  15306  0758  page 43 rollsroyce group plc annual report 2005
44
directors’remuneration report continued information subject to audit
directors’share interests
at december 31 2005 the directors and their immediate families had beneﬁcial interests in the ordinary shares and b shares 
1
of the company as shown in the
following table
ordinary shares b shares
january 1 changes in december 31 january 1 changes in december 31
2005  2005 2005 § 2005  2005 2005 § 
john chefﬁns
2
164748 65868 230616 123850 123850 —
colin green 196796 56199 252995 — — —
james guyette
2
180982 60968 241950 7707750 7707750 —
dr mike howse
2 3
90088 47260 137348 3696750 3696750 —
sir john rose 300618 97533 398151 — — —
andrew shilston 127948 4187 132135 — — —
colin smith
4
13079 254 13333 — 417800 417800
hon amy bondurant 3400 136 3536 — — —
peter byrom 148110 1110 147000 — — —
iain conn
5
— 3184 3184 — 18800 18800
carlpeter forster 1967 3764 5731 — — —
sir robin nicholson
6
17437 222 17659 — — —
simon robertson 20000 395 20395 — — —
ian strachan 11500 — 11500 — — —
carl symon 6551 215 6766 — — —
sir john taylor — 5098 5098 — — —
 or date of appointment if later
§ or date of retirement if earlier
1
noncumulative redeemable preference shares of 01p each
2
on january 5 2005 john chefﬁns james guyette and dr mike howse converted their b share holdings into 50 3083 and 1478 ordinary shares respectively
3
dr mike howse retired as a director with effect from june 30 2005
4
colin smith was appointed a director with effect from july 1 2005
5
iain conn was appointed a nonexecutive director with effect from january 20 2005
6
sir robin nicholson retired as a nonexecutive director with effect  from may 4 2005
on january 3 2006 iain conn received 80460 b shares on january 4 2006 colin smith converted his b shares holding into 117 ordinary shares on january 4 2006 pursuant to elections submitted the following
directors received ordinary shares in respect of the conversion of b shares john chefﬁns 2163 colin green 2515 james guyette 2269 sir john rose 3735 andrew shilston 1240 colin smith 124
hon amy bondurant 33 peter byrom 1375 carlpeter forster 55 simon robertson 191 carl symon 63 and sir john taylor 47 iain conn purchased 223 shares on january 9 2006 and 222 shares on february 7 2006
under arrangements made for nonexecutive directors to purchase shares on a monthly basis using a percentage of their after tax fees otherwise there have been no changes in the directors’interests between
december 31 2005 and february 8 2006
in addition the directors are for companies act purposes interested in the 68536712 rollsroyce group plc shares held by the rollsroyce 2003 employee share trust
2005 directorsremqxd  15306  0758  page 44 rollsroyce group plc annual report 2005
45
shares held in trust
shares held in trust under the proﬁt sharing share scheme
1
ordinary shares b shares
2
january 1 changes in december 31 january 1 changes in december 31
2005  2005 2005 § 2005  2005 2005 §
john chefﬁns
3
3830 3830 — 191500 191500 —
colin green 3660 3660 ————
dr mike howse
4
2615 2615 ————
sir john rose 4361 4361 ————
‘partnership shares’held in trust under the share incentive plan
5
ordinary shares b shares
2
january 1 changes in december 31 january 1 changes in december 31
2005  2005 2005 § 2005  2005 2005 §
colin green
6 7
2096 572 2668 — — —
sir john rose
6 7
2096 572 2668 — — —
andrew shilston
6 7
1652 557 2209 — — —
colin smith
6 7 8
2409 259 2668 — — —
‘free shares’held in trust under the share incentive plan
9
ordinary shares b shares
2
january 1 changes in december 31 january 1 changes in december 31
2005  2005 2005 § 2005  2005 2005 §
john chefﬁns
10 11
4911 1402 6313 180700 180700 —
colin green
10
4996 1332 6328 — — —
dr mike howse
4
3699 47 3746 — — —
sir john rose
10
4996 1332 6328 — — —
andrew shilston
10
2332 1246 3578 — — —
colin smith
8 10
1046 — 1046 — — —
 or date of appointment if later
§ or date of retirement if earlier
1
under the proﬁt sharing share scheme shares vest after three years
2
noncumulative redeemable convertible preference shares of 01p each
3
on january 5 2005 pursuant to an election submitted john chefﬁns converted his b share holding and received 76 ordinary shares
4
dr mike howse retired as a director with effect from june 30 2005
5
under the ‘partnership share’element of the share incentive plan shares vest on the ﬁfth anniversary of each monthly purchase
6
on january 4 2006 pursuant to elections submitted colin green sir john rose andrew shilston and colin smith received 24 24 20 and 24 ordinary shares respectively following the conversion of b shares
7
colin green sir john rose andrew shilston and colin smith purchased 28 shares each respectively on january 9 2006 and february 7 2006 under the inland revenue approved share incentive plan
8
colin smith was appointed a director with effect from july 1 2005
9
under the ‘free share’element of the share incentive plan shares vest after ﬁve years
10
on january 4 2006 john chefﬁns colin green sir john rose andrew shilston and colin smith received 59 59 59 33 and 10 ordinary shares respectively following the conversion of b shares
11
on january 5 2005 pursuant to an election submitted john chefﬁns converted his b share holding and received 72 ordinary shares
information subject to audit
2005 directorsremqxd  15306  0758  page 45 rollsroyce group plc annual report 2005
46
directors’remuneration report continued information subject to audit
share options
the directors at december 31 2005 held the following options under the rollsroyce plc executive share option scheme the rollsroyce 1999 executive share
option plan and the rollsroyce international sharesave plan
all employees were eligible for options under the international sharesave plan and the 1997 7 year 1999 5 year and 2001 3 year plans matured on
february 1 2005 options awarded under the rollsroyce 1999 executive share option plan vest on february 9 2006 and march 28 2006
market price aggregate aggregate
january 1 granted lapsed exercised december 31 exercise at date gains 2005 gains 2004 exercisable
2005  in 2005 in 2005 in 2005 2005 §
1
price exercised £000 £000 dates
john chefﬁns 72250 72250 — 176p 35850p 132 —
15444 15444 194p 20062010
118405 118405 194p 20062010
173612 173612 216p 20062011
4398 4398 — 108p 25300p 6 —
398936 398936 188p 20062012
499189 499189 77p 20062013
694445 694445
2
216p 20072011
1976679 76648 1900031 172p
3
138
colin green 4756 4756 — 205p 26450p 3 —
154441 154441 194p 20062010
162038 162038 216p 20062011
279255 279255 188p 20062012
465910 465910 77p 20062013
3103 3103
4
141p 2006
648149 648149
2
216p 20072011
4053 4053
4
194p 2007
551 551
4
108p 2007
1722256 4756 1717500 172p
3
338
james guyette 114581 114581
5
269p 20062009
167799 167799 194p 20062010
179161 179161 216p 20062011
4398 4398 — 108p 26750p 7 —
450140 450140 188p 20062012
506084 506084 77p 20062013
3122 3122
4
141p 2006
716641 716641
2 
216p 20072011
— 1397 1397
4
298p 2009
2141926 1397 4398 2138925 178p
3
7
dr mike howse 
6
63836 63836 194p 20062010
69445 69445 216p 20062011
1407 1407 — 108p 26450p 2 —
199468 199468 188p 20062012
138889 138889
2
216p 20072011
473045 1407 471638 201p 
3
224
sir john rose 116750 116750 — 176p 35850p 213 —
283141 283141 194p 20062010
254630 254630 216p 20062011
638298 638298 188p 20062012
798702 798702 77p 20062013
2894 2894
4
141p 2006
1018519 1018519
2
216p 20072011
7662 7662
4
108p 2007
3120596 116750 3003846 171p
3
213
2005 directorsremqxd  15306  0758  page 46 rollsroyce group plc annual report 2005
47
share options continued 
market price aggregate aggregate
january 1 granted lapsed exercised december 31 exercise at date gains 2005 gains 2004 exercisable
2005  in 2005 in 2005 in 2005 2005 §
1
price exercised £000 £000 dates
andrew shilston 633117 633117 77p 20062013
633117 633117 77p
colin smith
7
3862 3862 194p 20062010
15444 15444 194p 20062010
19676 19676 216p 20062011
99734 99734 188p 20062012
166364 166364 77p 20062013
78704 78704
2
216p 20072011
1780 1780
4
194p 2007
6362 6362
4
141p 20082009
2396 2396
4
108p 2009
— 1233 1233
4
298p 2011
394322 1233 395555 148p
3
 or date of appointment if later
§ or date of retirement if earlier
1
unless otherwise indicated all the above options were granted under the rollsroyce plc executive share option scheme and the rollsroyce 1999 executive share option plan and are subject to the
achievement of performance targets see page 41 all options were granted at the market value on the date of issue and no discount was applied no options were varied during the year and no consideration
was paid for the grant of optionsthe market price of the company’s ordinary shares ranged between 236p and 43050p during 2005the closing price on december 31 2005 was 42750p
2
supplementary options – vesting of these options is subject to attainment of signiﬁcant personal share holding targets and the requirement that the growth in eps exceeds an average of six per cent year on
year as well as exceeding the uk rpi by three per cent per annum over a rolling threeyear periodthe increases are measured from the year 2000 or the base year of the rolling threeyear period whichever is 
the more stringent
3
weighted average exercise price of december 31 2005 balance
4
sharesave plans
5
performance target achieved option capable of exercise
6
dr mike howse retired as a director with effect from june 30 2005
7
colin smith was appointed as a director with effect from july 1 2005
longterm incentive awards 
the directors as at december 31 2005 had the following share awards in the annual performance related award plan
shares held in trust under the annual performance related award plan
1
shares held in trust under the deferred share incentive plan
2
january 1 vested during granted during december 31 january 1 vested during granted during december 31
2005  2005 2005 2005 § 2005  2005 2005 2005 § 
john chefﬁns 119671 77419 43107 85359 171928 — — 171928 
colin green 120983 83049 33165 71099 160467 — — 160467 
james guyette 106740 78487 32764 61017 174303 — — 174303 
dr mike howse
3
88248 60424 31803 59627 ————
sir john rose 186501 123869 80813 143445 275086 — — 275086
andrew shilston 36824 — 46633 83457 ————
colin smith
4
14712 — — 14712 43058 — — 43058
 or date of appointment if later
§ or date of retirement if earlier
1
under the annual performance related award plan shares vest after two years see page 40 shares went into trust in 2003 2004 and 2005 at prices of 7646p 22000p and 26019p at december 31 2005
the amounts stated in the emoluments table on page 43 representing the 2005 apra deferred shares had not yet been applied by the trustee to purchase shares an investment is expected to be made by 
march 31 2006 when the trustee will acquire the required number of shares at the prevailing market pricethe market value per share which vested under the annual performance related award plan 
during 2005 was 24575p
2
under the deferred share incentive plan shares vest after three years shares went into trust in 2003 at a price of 7646p
3
dr mike howse retired as a director with effect from june 30 2005
4
colin smith was appointed as a director with effect from july 1 2005
information subject to audit
2005 directorsremqxd  15306  0758  page 47 rollsroyce group plc annual report 2005
48
directors’remuneration report continued information subject to audit
longterm incentive awards continued 
conditional awards granted under the rollsroyce group plc performance share plan psp to executive directors in 2004 and 2005 are set out belowthe number of
shares released will be dependent upon certain performance criteria being achieved over a threeyear performance period see page 41
psp
market price
january 1 granted during vested during december 31 at date
2005  2005 2005 2005 § performance period of grant
john chefﬁns 112777 — — 112777 jan 1 2004 to dec 31 2006 23292p
— 118517 — 118517 jan 1 2005 to dec 31 2007 26158p
112777 118517 — 231294
colin green 105255 — — 105255 jan 1 2004 to dec 31 2006 23292p
— 97006 — 97006 jan 1 2005 to dec 31 2007 26158p
105255 97006 — 202261
james guyette 101654 — — 101654 jan 1 2004 to dec 31 2006 23292p
— 93871 — 93871 jan 1 2005 to dec 31 2007 26158p
101654 93871 — 195525
dr mike howse 
1
88017 — — 88017 jan 1 2004 to dec 31 2006 23292p
— 83599 — 83599 jan 1 2005 to dec 31 2007 26158p
88017 83599 — 171616
sir john rose 270640 — — 270640 jan 1 2004 to dec 31 2006 23292p
— 263782 — 263782 jan 1 2005 to dec 31 2007 26158p
270640 263782 — 534422
andrew shilston 95352 — — 95352 jan 1 2004 to dec 31 2006 23292p
— 109596 — 109596 jan 1 2005 to dec 31 2007 26158p
95352 109596 — 204948
colin smith
2
24043 — — 24043 jan 1 2004 to dec 31 2006 23292p
22403 — — 22403 jan 1 2005 to dec 31 2007 26158p
46446 — — 46446
 or date of appointment if later
§ or date of retirement if earlier
1
dr mike howse retired as a director with effect from june 30 2005
2
colin smith was appointed as a director with effect from july 1 2005
the number of shares released on the achievement of the eps and cps targets will be increased by 25 per cent if the total shareholder return exceeds the median for
the ftse 100 companies over the threeyear performance period
pensions
james guyette participates in pension plans sponsored by rollsroyce north america inc
all other executive directors who are under their normal retirement ages are members of the group’s uk pension schemesthese schemes are funded and
approved deﬁned beneﬁt pension schemes providing at retirement a pension of up to two thirds of ﬁnal remuneration
new hm revenue and customs hmrc pensions regulations are effective from april 2006there is no intention to compensate directors or other senior
executives for any additional tax they may be required to pay as a result of these regulations
the committee has determined that where further pension accrual would exceed the new hmrc annual andor lifetime allowances applicable from april 6 2006
executives may choose to opt out of pension accrual and receive a cash allowance in lieu of pension provision alternatively as permitted under the new pension
regime the committee will have the discretion to enable the drawing of pension beneﬁts to commence while the executive is still in employment with the group
in such circumstances the pension schemes provide for appropriate early retirement factors to reduce the pension payable
2005 directorsremqxd  15306  0758  page 48 rollsroyce group plc annual report 2005
49
pensions continued
details of the pension beneﬁts which accrued over the year in the group’s approved uk deﬁned beneﬁt pension schemes are given below
8
the pension position of dr mike howse who passed his normal retirement age in 2004 and who is excluded from the table below is described in note 5 below
increase in
increase in total accrued transfer value as transfer value 
accrued pension pension transfer value at dec 31 2004 over 2005 
during the entitlement at of accrued of accrued net of the 
year ended the year ended pension as at pension member’s own
dec 31 2005
1
dec 31 2005
2
dec 31 2005
3
at that date
3 
contributions
4
£000pa £000pa £000 £000 £000
john chefﬁns 40 29 387 6378 5091 1259 481
colin green 33 24 342 5749 4505 1221 401
sir john rose 52 40 436 7916 5683 2192 716
andrew shilston
6
2 2 5 134 64 138 113
colin smith
7
12 12 97 1840 1110 725 508
details of the retirement beneﬁts which accrued over the year in the deﬁned beneﬁt plans sponsored by rollsroyce north america inc are given below
increase in total accrued transfer value as increase in 
accrued retirement retirement transfer value at dec 31 2004 transfer value 
lump sum lump sum of accrued of accrued over 2005
during the entitlement at retirement retirement net of the 
year ended the year ended lump sum as at lump sum member’s own
dec 31 2005
1
dec 31 2005
10
dec 31 2005
11
at that date
11 
contributions
4
£000 £000 £000 £000 £000
james guyette 
912 
73 62 337 337 264 496 485
1
the ﬁgure in brackets is the increase in pensionretirement lump sum during the year ended december 31 2005 but in this case excluding the effect of inﬂation
2
the pension entitlement shown is that which would be paid annually on retirement based on service to the end of the year
3
the transfer values stated represent liabilities of the rollsroyce sponsored pension schemes and not sums paid to the individualsthe transfer values have been calculated on the basis of actuarial advice in
accordance with actuarial guidance note gn11 gn11 gn11 covers individual transfer calculations and the above ﬁgures have been calculated using assumptions certiﬁed by the actuaries as being consistent
with gn11transfer values calculated on this basis will vary up or down from one year to the next due to changes in ﬁnancial conditions principally longterm interest rates from which the actuary derives the
assumptions used to place a capital value on the pension entitlementwhilst ﬂuctuating up or down in individual years transfer values generally trend upwards over time as individuals complete more service
and become older a large part of the increase in transfer values over 2005 is attributable to falls in the market interest rates on which the transfer value calculations are based
4
the ﬁgure in brackets is the transfer value of the increase in pensionretirement lump sum during the year ended december 31 2005 excluding the effect of inﬂation and net of the member’s own contributions
5
dr mike howse ceased to accrue pension beneﬁts after reaching his normal retirement age on july 1 2004 he began receiving his pension beneﬁts from this date although he remained an executive director
until he retired from the board on june 30 2005 no pension beneﬁts were therefore earned by dr mike howse over the six month period in 2005 while he remained a director
6
the group operates the rollsroyce supplementary retirement scheme srsthe purpose of the srs is to fund pension provision above the pensionable earnings cap which was imposed on approved pension
schemes under the 1989 finance act membership of the srs is restricted to executive directors and to a limited number of senior executivesthe members of the srs include andrew shilston he joined the
group after the introduction of the earnings cap and his terms and conditions on joining the group included a commitment to provide pension and life cover based on total salary in line with other directors and
senior executives employer contributions to the srs during 2005 have been added to the increase in transfer value over 2005 for the approved deﬁned beneﬁt plans and are therefore included in the ﬁgures
shown in the right hand column of the ﬁrst table in addition the employer has paid £51000 to andrew shilston directly in order to meet the income tax liability that he will incur on these employer contributions
to the unapproved plan
7
colin smith was appointed as a director with effect from july 1 2005the additional pension earned and the corresponding transfer value relate only to the period for which he was a director ie to the period 
july 1 2005 to december 31 2005 for colin smith the comparator transfer value ﬁgure at the start of the year is the value as at june 30 2005 immediately before his date of appointment as a director
8
members of the schemes have the option to pay additional voluntary contributions neither the contributions nor the resulting beneﬁts are included in the above table
9
beneﬁts are translated at us182  £1
10
the lump sum entitlement shown is that which would be paid on immediate retirement based on service to the end of the year
11
the transfer values have been calculated on the basis of actuarial advice
12
james guyette is a member of two deﬁned beneﬁt plans in the usa one qualiﬁed and one nonqualiﬁed he accrues a retirement lump sum beneﬁt in both of these plans which as cash balance arrangements
operate on the same basis as deﬁned contribution except a guaranteed minimum rate of interest of four per cent is applied to investmentsthe aggregate value of the retirement lump sums accrued in these
two plans and the transfer values of these beneﬁts are shown in the second table in addition james guyette is a member of two 401k deﬁned beneﬁt savings plans in the usa one qualiﬁed and one 
nonqualiﬁed to which both he and his employer rollsroyce north america inc contributethe aggregate employer contribution invested in the cash balance and 401k plans each year is calculated with
reference to taxable basic and annual incentive compensation to reﬂect market practice in the usa however this is capped at no more than 26 per cent of basic salary james guyette is also a member of an
unfunded nonqualiﬁed deferred compensation plan in the usa to which his employer makes notional contributions calculated with reference to his basic salary employer contributions to the 401k and
deferred compensation plans during 2005 have been added to the increase in transfer value over 2005 for the deﬁned beneﬁt plans and are therefore included in the ﬁgures shown in the right hand column of
the second table
approval of the directors’remuneration report
the directors’remuneration report above was approved by the board of directors on february 8 2006
carl g symon
chairman of the remuneration committee
information subject to audit
2005 directorsremqxd  15306  0758  page 49 rollsroyce group plc annual report 2005
50
consolidated income statement for the year ended december 31 2005
2005 2004
notes £m £m
revenue 2 3 6603 5947
cost of sales 4924 4744
gross proﬁt 1679 1203
other operating income 4 60 73
commercial and administrative costs 624 599
research and development costs 282 288
share of proﬁt of joint ventures 11 46 19
group operating proﬁt 879 408
lossproﬁt on sale of businesses 32 2 9
proﬁt before ﬁnancing costs 877 417
financial income 5 442 372
financial expenses 5 842 425
net ﬁnancing costs 400 53
proﬁt before taxation 4 477 364
taxation 6 130 100
proﬁt for the period 347 264
attributable to
equity holders of the parent 350 263
minority interest 3 1
proﬁt for the period 347 264
earnings per ordinary share
basic 7 2011p 1556p
diluted 7 1931p 1505p
payments to shareholders 154 140
net interest payable 5 39 52
underlying proﬁt before taxation 2 584 364
2005 group financialsqxd  15306  0758  page 50 rollsroyce group plc annual report 2005
51
consolidated balance sheet at december 31 2005
2005 2004
notes £m £m
assets
noncurrent assets
intangible assets 9 1281 1227
property plant and equipment 10 1683 1672
investments – joint ventures 11 247 211
other investments 12 52 57
deferred tax assets 21 439 318
3702 3485
current assets
inventory 13 1309 1090
trade and other receivables 14 2047 2049
taxation recoverable 3 2
other ﬁnancial assets 20 464
shortterm investments 37 36
cash and cash equivalents 15 1757 1452
5617 4629
total assets 9319 8114
liabilities
current liabilities
borrowings 16 75 207
other ﬁnancial liabilities 20 234
trade and other payables 17 2689 2395
current tax liabilities 171 176
provisions 22 138 173
3307 2951
noncurrent liabilities
borrowings 18 1458 1430
other ﬁnancial liabilities 20 339
other payables 19 650 543
deferred tax liabilities 21 178 115
provisions 22 223 220
postretirement beneﬁt obligations 23 1659 1409
4507 3717
total liabilities 7814 6668
net assets 1505 1446
equity 
capital and reserves
calledup share capital 24 352 346
share premium account 25 30 4
merger reserve 25 3 3
capital redemption reserve 25 206 74
transition hedging reserve 25 379
cash ﬂow hedging reserve 25 —
translation reserve 25 17 38
retained earnings 25 512 1053
equity attributable to equity holders of the parent 1499 1442
minority interest 26 6 4
total equity 1505 1446
the ﬁnancial statements on pages 50 to 107 and 114 to 117 were approved by the board on february 8 2006 and signed on its behalf by
simon robertson chairman andrew shilston finance director
2005 group financialsqxd  15306  0758  page 51 rollsroyce group plc annual report 2005
52
consolidated cash ﬂow statement for the year ended december 31 2005
2005 2004
£m £m
reconciliation of operating cash ﬂows
proﬁt before taxation 477 364
share of proﬁt of joint ventures 46 19
lossgain on sale of businesses 2 9
loss on sale of property plant and equipment 1 2
net interest payable 39 52
net other ﬁnancing expenses 361 1
taxation paid 60 84
depreciation of intangible assets note 9 54 58
depreciation of property plant and equipment note 10 200 242
decrease in provisions 31 8
increase in inventories 221 116
increasedecrease in trade and other receivables 252 179
increasedecrease in payables 720 31
decrease in other ﬁnancial assets and liabilities 283
postretirement beneﬁts adjustment 69 42
sharebased payments 26 6
hedge reserve movements 459
dividends received from joint ventures 35 15
net cash inﬂow from operating activities 1060 610
cash ﬂows from investing activities
disposals of unlisted investments 5 —
additions to intangible assets 116 142
purchases of property plant and equipment 235 175
disposals of property plant and equipment 69 66
disposals of businesses note 32 1 16
investments in joint ventures 13 2
net cash outﬂow from investing activities 289 237
cash ﬂows from ﬁnancing activities
borrowings due within one year – repayment of loans 202 57
– increase in loans — —
borrowings due after one year – repayment of loans 5 95
– increase in loans — 500
capital element of ﬁnance lease payments 11 52
net cash outﬂowinﬂow from decreaseincrease in borrowings 218 296
interest received 41 58
interest paid 88 107
interest element of ﬁnance lease payments 2 3
increasedecrease in government securities and corporate bonds 1 3
equity dividends paid — 33
issue of ordinary shares 26 4
settlement of ﬁnancial liabilities to purchase own shares 149 2
redemption of b shares 52 27
net cash outﬂowinﬂow from ﬁnancing activities 443 189
increase in cash and cash equivalents 328 562
cash and cash equivalents at january 1 1439 909
exchange and other noncash adjustments 46 32
adjustment on implementation of ias 32 and ias 39 68
cash and cash equivalents at december 31 1745 1439
2005 group financialsqxd  15306  0758  page 52 rollsroyce group plc annual report 2005
53
2005 2004
£m £m
reconciliation of increase in cash and cash equivalents to movement in net funds
increase in cash and cash equivalents 328 562
cash outﬂowinﬂow from increasedecrease in government securities and corporate bonds 1 3
net cash outﬂowinﬂow from decreaseincrease in borrowings 218 296
change in net funds resulting from cash ﬂows 547 263
borrowings of businesses disposed 1 —
finance lease additions 1 —
zerocoupon bonds 20052007 90 interest accretion — 4
exchange adjustments 5 8
fair value adjustments 47
movement in net funds 599 251
net debt at january 1 149 400
adjustment on implementation of ias 32 and ias 39 189
261 149
fair value of swaps hedging ﬁxed rate borrowings 74
net fundsdebt at december 31 335 149
at adjustment restated at borrowings other at
january 1 for january 1 of businesses exchange fair value noncash december 31
2005 ias 3239 2005 cash ﬂow disposed adjustments adjustments changes 2005
analysis of net funds £m £m £m £m £m £m £m £m £m
cash at bank and in hand 758 68 690 374 — 22 — — 338
overdrafts 13 — 13 — 1 — — — 12
shortterm deposits 694 — 694 702 — 23 — — 1419
cash and cash equivalents 1439 68 1371 328 1 45 — — 1745
investments 36 — 36 1 ———— 37
other borrowings due within one year 182 7 189 202 — 5 7 70 55
borrowings due after one year 1410 114 1524 5 — 35 40 70 1444
finance leases 32 — 32 11 — — — 1 22
149 189 338 547 1 5 47 1 261
fair value of swaps hedging
ﬁxed rate borrowings 121 121 47 74
149 68 217 547 1 5 — 1 335
2005 group financialsqxd  15306  0758  page 53 rollsroyce group plc annual report 2005
54
consolidated statement of recognised income and expense for the year ended december 31 2005
2005 2004
£m £m
foreign exchange adjustments
1
49 38
actuarial losses 282 7
deferred taxation on actuarial losses 84 2
transfers from transition hedging reserve 324
transfers from cash ﬂow hedging reserve 3
other adjustments — 2
net expense recognised directly in equity 470 41
proﬁt for the period 347 264
total recognised income and expense for the period 123 223
attributable to
equity holders of the parent 120 222
minority interest 3 1
total recognised income and expense for the period 123 223
total recognised income and expense for the period 123 223
adjustments relating to implementation of ias 32 and ias 39 from january 1 2005 
2
151
28 223
1
loss on net investment hedge relating to foreign subsidiaries £26m 2004 £19m gain
2
see note 33
2005 2004
£m £m
at january 1 as previously reported under uk gaap 1446 2143
adjustments on adoption of ifrs from january 1 2004 
1
927
at january 1 1446 1216
total recognised income and expense for the period 123 223
adjustments relating to implementation of ias 32 and ias 39 from january 1 2005 
1
151
scrip dividend adjustments — 20
redemption of b shares 27
issue of b shares 141
on issue of ordinary shares 117 4
relating to own shares 2 2
sharebased payment adjustment 48 12
sale of shares in subsidiary company to a minority interest 5 —
at december 31 1505 1446
attributable to
equity holders of the parent 1499 1442
minority interest 6 4
total equity 1505 1446
1
see note 33
summary of movements in equity for the year ended december 31 2005
2005 group financialsqxd  15306  0758  page 54 rollsroyce group plc annual report 2005
55
notes to the ﬁnancial statements
1  signiﬁcant accounting policies
the company
rollsroyce group plc the ‘company’ is a company domiciled in the united
kingdomthe consolidated ﬁnancial statements of the company for the year
ended december 31 2005 comprise the company and its subsidiaries together
referred to as the ‘group’ and the group’s interest in jointly controlled entities
the ﬁnancial statements were authorised for issue by the directors on 
february 8 2006
basis of preparation and statement of compliance
in accordance with european union eu regulations these ﬁnancial statements
have been prepared in accordance with international financial reporting
standards ifrs issued by the international accounting standards board iasb as
adopted for use in the eu effective at december 31 2005 together with the
amendment to ias 19 employee beneﬁts – as explained under postretirement
beneﬁts belowthe company has elected to prepare its parent company
accounts under uk generally accepted accounting practices gaap
these are the group’s ﬁrst consolidated ﬁnancial statements prepared in
accordance with adopted ifrs
the group has adopted the exemption granted by ifrs 1 firsttime
adoption of international financial reporting standards that ias 32 and ias 39
financial instruments need not be applied to the comparative period
consequently the restated results for the year ended december 31 2004 have
been prepared using the accounting policies for ﬁnancial instruments previously
adopted under uk gaap  additionally the following optional exemptions
provided by ifrs 1 from full retrospective application of ifrs accounting policies
have been applied
– business combinations – the provisions of ifrs 3 have been applied from
january 1 2004the net carrying value of goodwill at december 31 2003
under the previous accounting policies has been deemed to be the cost at
january 1 2004
– property plant and equipment – where assets have previously been
revalued the revalued amount at january 1 2004 has been deemed to be
the cost at january 1 2004
– cumulative translation differences arising on consolidation of overseas
subsidiaries are required to be held in a separate reservethis reserve has
been deemed to be nil on january 1 2004
an explanation of how the transition to ifrs has affected the reported ﬁnancial
position ﬁnancial performance and cash ﬂows of the group is provided in 
note 33 which also includes the balance sheet at january 1 2005 showing the
impact of the adoption of ias 32 and ias 39 in 2005
the ﬁnancial statements have been prepared on the historical cost basis
except where ifrs require an alternative treatmentthe principal variations from
the historical cost basis relate to pensions ias 19 monetary items ias 21
ﬁnancial instruments ias 39 and sharebased payments ifrs 2
the group’s signiﬁcant accounting policies are set out below together with
the judgements made by management in applying these policies which have
the most signiﬁcant effect on the amounts recognised in the ﬁnancial statements
apart from those involving estimations which are dealt with separately below
these accounting policies have been applied consistently to all periods presented
in these consolidated ﬁnancial statements and in preparing an opening ifrs
balance sheet at january 1 2004 for the purposes of the transition to ifrs subject
to the application of ifrs 1 as noted
the accounting policies have been applied consistently by group entities
basis of consolidation
the group ﬁnancial statements include the ﬁnancial statements of the company
and all of its subsidiary undertakings made up to december 31 together with the
group’s share of the results of joint ventures up to december 31
a subsidiary is an entity controlled by the company control exists when the
company has the power directly or indirectly to govern the ﬁnancial and
operating policies of the entity so as to derive beneﬁts from its activities
a joint venture is an entity in which the group holds a longterm interest
and which is jointly controlled by the group and one or more other venturers
under a contractual arrangementthe results of joint ventures are accounted for
using the equity method of accounting
any subsidiary undertakings and joint ventures sold or acquired during the
year are included up to or from the dates of change of control
signiﬁcant accounting policies and judgements applied
foreign currency translation
assets and liabilities denominated in foreign currencies are translated into local
currency at the rate ruling at the year end exchange differences arising on foreign
exchange transactions and the retranslation of assets and liabilities into sterling at
the rate ruling at the year end are taken into account in determining proﬁt before
taxation
the trading results of overseas undertakings are translated at the average
exchange rates for the year exchange adjustments arising from the retranslation
of the opening net investments and from the translation of the proﬁts or losses at
average rates are taken to equitythe net investment hedging of overseas
undertakings is described under hedge accounting
revenue recognition
revenues comprise sales to outside customers after discounts excluding value
added tax
sales of products are recognised when the signiﬁcant risks and rewards of
ownership of the goods are transferred to the customer the sales price agreed
and the receipt of payment can be assured on occasion the group may
participate in the ﬁnancing of engines in conjunction with airframe
manufacturers in such circumstances the contingent obligations arising under
these arrangements are taken into account in assessing whether signiﬁcant risk
and rewards of ownership have been transferred to the customerwhere it is
judged that sufﬁcient risks and rewards are not transferred the transaction is
treated as a leasing transaction resulting in an operating lease between the
group and the customer no deliveries of engines were treated as operating
leases during 2005 depending on the speciﬁc circumstances where applicable
the ﬁnancing arrangements may result in the consolidation of the entity
established to facilitate the ﬁnancing such special purpose entities will be
consolidated as required by ias 27 consolidated and separate financial
statements if it is considered that the group controls the entitythe group has
consolidated one such entity pembroke 717 holdings limited
sales of services are recognised by reference to the stage of completion
based on services performed to datethe assessment of the stage of completion
is dependent on the nature of the contract but will generally be based on costs
incurred to the extent these relate to services performed up to the reporting date
achievement of contractual milestones where appropriate or ﬂying hours or
equivalent for longterm aftermarket arrangements
linked sales of product and services are treated as a single contract where
these components have been negotiated as a single commercial package and
are so closely interrelated that they do not operate independently of each other
and are considered to form a single project with an overall proﬁt margin revenue
is recognised on the same basis as for other sales of products and services as
described above
provided that the outcome of construction contracts can be assessed with
reasonable certainty the revenues and costs on such contracts are recognised
based on stage of completion and the overall contract proﬁtability
2005 group financialsqxd  15306  0758  page 55 rollsroyce group plc annual report 2005
56
notes to the ﬁnancial statements continued
full provision is made for any estimated losses to completion of contracts having
regard to the overall substance of the arrangements
progress payments received when greater than recorded revenue are
deducted from the value of work in progress except to the extent that payments
on account exceed the value of work in progress on any contract where the
excess is included in trade and other payablesthe amount by which recorded
revenue of longterm contracts is in excess of payments on account is classiﬁed
as ‘amounts recoverable on contracts’and is separately disclosed within trade and
other receivables
risk and revenue sharing partnerships rrsps
from time to time the group enters into arrangements with partners who in
return for a share in future programme revenues or proﬁts make cash payments
that are not refundable except under certain remote circumstances cash sums
received which reimburse the group for past expenditure are credited to other
operating incomethe arrangements also require partners to undertake
development work andor supply components for use in the programme at their
own expense no accounting entries are recorded where partners undertake such
development work or where programme components are supplied by partners
because no obligation arises unless and until programme sales are made instead
payments to partners for their share in the programme are charged to cost of
sales as programme revenues arise
the group has arrangements with partners who do not undertake
development work or supply parts such arrangements are considered to be
ﬁnancial instruments as deﬁned by ias 32 and are accounted for using the
amortised cost method
government investment
where a government or similar body invests in a development programme the
group treats such receipts as the sale of an interest in the programme
subsequent payments are royalty payments and are matched to related sales
research and development
in accordance with ias 38 ‘intangible assets’  expenditure incurred on research
and development excluding known recoverable amounts on contracts and
contributions to shared engineering programmes is distinguished as relating
either to a research phase or to a development phase
all research phase expenditure is charged to the income statement for
development expenditure this is capitalised as an internally generated intangible
asset only if it meets strict criteria relating in particular to technical feasibility and
generation of future economic beneﬁts
expenditure that cannot be classiﬁed into these two categories is treated as
being incurred in the research phasethe group considers that due to the
complex nature of new equipment programmes it is not possible to distinguish
reliably between research and development activities until relatively late in the
programme
expenditure capitalised is amortised over its useful economic life up to a
maximum of 15 years from the entryintoservice of the productthe intangible
assets are assessed for impairment biannually or earlier if there are indications of
impairment
recoverable engine costs
on occasion the group may sell original equipment to customers at a value
below its cost on the basis that this deﬁcit will be recovered from future
aftermarket sales to the original customerwhere the group has a contractual
right to supply aftermarket parts to the customer and its intellectual rights
warranty arrangements and statutory airworthiness requirements provide
reasonable control over this supply these arrangements are considered to meet
the deﬁnition of an intangible asset such intangible assets are recognised and
amortised on a straightline basis over the expected period of utilisation by the
original customer generally a maximum of ten years unless the speciﬁc
contractual circumstances indicate a longer periodthe assets are tested for
impairment on a biannual basis
purchased goodwill
goodwill represents the excess of the fair value of the purchase consideration for
shares in subsidiary undertakings and joint ventures over the fair value to the
group of the net assets acquired
i to december 31 1997 goodwill was written off to reserves in the year of
acquisition
ii from january 1 1998 goodwill was recognised within intangible assets in
the year in which it arose and amortised on a straight line basis over its
useful economic life up to a maximum of 20 years
iii from january 1 2004 in accordance with ifrs 3 ‘business combinations’
goodwill is recognised as per ii above but is no longer amortised instead it
is subject to annual impairment testing
certiﬁcation costs and participation fees
costs incurred in respect of meeting regulatory certiﬁcation requirements for new
civil engineaircraft combinations and payments made to airframe manufacturers
for this and participation fees are carried forward in intangible assets to the extent
that they can be recovered out of future sales and are charged to the income
statement over the programme life up to a maximum of 15 years
postretirement beneﬁts
pensions and similar beneﬁts principally healthcare are accounted for under 
ias 19 ‘employee beneﬁts’  for deﬁned beneﬁt plans obligations are measured at
discounted present value whilst plan assets are recorded at fair valuethe service
and ﬁnancing costs of such plans are recognised separately in the income
statement current service costs are spread systematically over the lives of
employees and ﬁnancing costs are recognised in the periods in which they arise
the group has adopted the amendment to ias 19 early whereby actuarial gains
and losses are recognised immediately in the statement of recognised income
and expense
payments to deﬁned contribution schemes are charged as an expense as
they fall due
sharebased payments
the group applied the requirements of ifrs 2 sharebased payments from
january 1 2004 in accordance with the transition provisions ifrs 2 has been
applied to all grants made after november 7 2002 that were unvested as of
january 1 2005
the group issues equitysettled and cashsettled sharebased payments to
certain employees equitysettled sharebased payments are measured at fair
value excluding the effect of nonmarket based vesting conditions at the date 
of grantthe fair value determined at the grant date of the equitysettled 
sharebased payments is expensed on a straightline basis over the vesting
period based on the group’s estimate of shares or options that will eventually
vest for cashsettled sharebased payments a liability equal to the proportion of
the goods or services received is recognised at the current fair value determined
at each balance sheet date
2005 group financialsqxd  15306  0758  page 56 rollsroyce group plc annual report 2005
57
fair value is measured using the binomial pricing model for the sharesave plans
and the executive share option plan esop fair values of awards made under the
performance share plan psp are measured using a pricing model adjusted to
reﬂect nonentitlement to dividends or equivalent and the total shareholder
return marketbased performance condition
see note 27 for further description of the sharebased payment plans
financial instruments
ias 39 requires the classiﬁcation of ﬁnancial instruments into separate categories
for which the accounting requirement is different rollsroyce has classiﬁed its
ﬁnancial instruments as follows
– fixed deposits principally comprising funds held with banks and other
ﬁnancial institutions and trade receivables are classiﬁed as loans and
receivables
– investments other than interests in joint ventures and ﬁxed deposits and
shortterm deposits other than ﬁxed deposits are classiﬁed as available 
for sale
– borrowings trade payables certain risk and revenue sharing partnerships and
b shares are classiﬁed as other liabilities
– derivatives comprising foreign exchange contracts interest rate swaps and
commodity swaps are classiﬁed as held for trading
financial instruments are initially measured at fair valuetheir subsequent
measurement depends on their classiﬁcation
– loans and receivables and other liabilities are held at amortised cost and not
revalued unless they are included in a fair value hedge accounting
relationshipwhere such a relationship exists the instruments are revalued in
respect of the risk being hedged if instruments held at amortised cost are
hedged generally by interest rate swaps and the hedges are effective the
carrying values are adjusted for changes in fair value which are included in
the income statement
– available for sale assets are held at fair value changes in fair value arising
from changes in exchange rates are included in the income statement all
other changes in fair value are taken to equity on disposal of the related
asset the accumulated changes in value recorded in equity are included in
the gain or loss recorded in the income statement
– held for trading instruments are held at fair value changes in fair value are
included in the income statement unless the instrument is included in a
cash ﬂow hedge if the instruments are included in a cash ﬂow hedging
relationship which is effective changes in value are taken to equitywhen
the hedged forecast transaction occurs amounts previously recorded in
equity are recognised in the income statement
– foreign exchange gains and losses arising on transactions are recognised in
the income statement
hedge accounting
the group does not apply hedge accounting in respect of forward foreign
exchange contracts held to manage the cash ﬂow exposures of forecast
transactions denominated in foreign currencies
the group does not apply hedge accounting in respect of commodity
swaps held to manage the cash ﬂow exposures of forecast transactions in those
commodities
the group applies hedge accounting in respect of transactions entered into
to manage the fair value and cash ﬂow exposures of its borrowings forward
foreign exchange contracts are held to manage the fair value exposures of
borrowings denominated in foreign currencies and are designated as fair value
hedges interest rate swaps are held to manage the interest rate exposures and
are designated as fair value or cash ﬂow hedges of ﬁxed and ﬂoating rate
borrowings respectively
changes in the fair values of derivatives that are designated as cash ﬂow hedges
and are effective are recognised directly in equity any ineffectiveness in the
hedging relationships is included in the income statementthe amounts deferred
in equity are recognised in the income statement to match the recognition of the
hedged item
changes in the fair values of derivatives designated as fair value hedges and
changes in fair value of the related hedged item are recognised directly in the
income statement
hedge accounting is discontinued when the hedging instrument expires or
is sold terminated or exercised or no longer qualiﬁes for hedge accounting at
that time for cash ﬂow hedges any cumulative gain or loss on the hedging
instrument recognised in equity is retained in equity until the forecast transaction
occurs if a hedged transaction is no longer expected to occur the net cumulative
gain or loss recognised in equity is transferred to the income statement
the portion of a gain or loss on an instrument used to hedge a net
investment in a foreign operation that is determined to be an effective hedge is
recognised directly in equitythe ineffective portion is recognised immediately in
the income statement
until december 31 2004 and as allowed by ifrs 1 the group applied hedge
accounting for forecast foreign exchange transactions and commodity exposures
in accordance with uk gaap  on january 1 2005 the fair values of derivatives used
for hedging these exposures were included in the transition hedging reservethis
reserve is released to the income statement based on the designation of the
hedges on january 1 2005
interest
interest receivablepayable is creditedcharged to the income statement using
the effective interest method
taxation
the tax charge on the proﬁt or loss for the year comprises current and 
deferred tax
current tax is the expected tax payable for the year using tax rates enacted
or substantively enacted at the balance sheet date and any adjustment to tax
payable in respect of previous years
deferred tax is provided using the balance sheet liability method providing
for temporary differences between the carrying amounts of the assets and
liabilities for ﬁnancial reporting purposes and the amounts used for taxation
purposes
deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and joint ventures except where the group
is able to control the reversal of the temporary difference and it is probable that
the temporary difference will not reverse in the foreseeable future
deferred tax is calculated using the enacted or substantively enacted rates
that are expected to apply when the asset or liability is settled deferred tax is
charged or credited in the income statement except when it relates to items
credited or charged directly to equity in which case the deferred tax is also dealt
with in equity
deferred tax assets are recognised only to the extent that it is probable that
future taxable proﬁts will be available against which the assets can be utilised
segmental reporting
a segment is a distinguishable component of the group that is engaged in
providing products and services as the risks and rates of return are predominately
affected by differences in these products and services the primary format for
reporting segment information is based on business segments
2005 group financialsqxd  15306  0758  page 57 rollsroyce group plc annual report 2005
58
notes to the ﬁnancial statements continued
inventory
inventory and work in progress are valued at the lower of cost and net realisable
value on a ﬁrstin ﬁrstout basis cost comprises direct materials and where
applicable direct labour costs and those overheads that have been incurred in
bringing the inventories to their present location and condition net realisable
value represents the estimated selling prices less all estimated costs of
completion and costs to be incurred in marketing selling and distribution
cash and cash equivalents
cash and cash equivalents include cash at bank and in hand and shortterm
deposits with a maturity of three months or less on inceptionthe group
considers overdrafts repayable on demand to be an integral part of its cash
management activities and these are included in cash and cash equivalents for
the purposes of the cash ﬂow statement
propertyplant and equipment
property plant and equipment assets are stated at cost less accumulated
depreciation and any provision for impairments in value
depreciation is provided on a straightline basis to write off the cost less the
estimated residual value of property plant and equipment over their estimated
useful lives estimated useful lives are as follows
i land and buildings as advised by the group’s professional advisors
a freehold buildings – ﬁve to 45 years average 23 years
b leasehold buildings – lower of advisors’estimates or period of lease
c no depreciation is provided on freehold land
ii plant and equipment – ﬁve to 25 years average 16 years
iii aircraft and engines – ﬁve to 20 years average 13 years
iv no depreciation is provided on assets in the course of construction
leases
i as lessee
assets ﬁnanced by leasing agreements which give rights approximating to
ownership ﬁnance leases have been capitalised at their fair value and
depreciation is provided on the basis of the group depreciation policythe
capital elements of future obligations under ﬁnance leases are included as
liabilities in the balance sheet and the current year’s interest element having
been allocated to accounting periods to give a constant periodic rate of
charge on the outstanding liability is charged to the income statementthe
annual payments under all other lease arrangements known as operating
leases are charged to the income statement on a straightline basis
ii as lessor
amounts receivable under ﬁnance leases are included within receivables
and represent the total amount outstanding under the lease agreements
less unearned income finance lease income having been allocated to
accounting periods to give a constant periodic rate of return on the net
investment is included in revenue
rentals receivable under operating leases are included in revenue on a
straightline basis
provisions
provisions are recognised when the group has a present obligation as a result of a
past event and it is probable that the group will be required to settle that
obligation provisions are measured at the directors‘ best estimate of the
expenditure required to settle the obligation at the balance sheet date and are
discounted to present value where the effect is material
contingent liabilities
in connection with the sale of its products the group will on some occasions
provide ﬁnancing support for its customersthese arrangements fall into two
categories credit based guarantees and asset value guarantees in accordance
with the requirements of ias 39 and ifrs 4 credit based guarantees are treated as
insurance contracts as the group considers asset value guarantees as being 
nonﬁnancial liabilities these have also been treated as insurance contracts
the group’s contingent liabilities related to ﬁnancing arrangements are
spread over many years and relate to a number of customers and a broad
product portfolio and are reported on a discounted basis
government grants
government grants are recognised as income over the periods necessary to
match them with the related costs which they are intended to compensate
key sources of estimation uncertainty
in applying the above accounting policies management has made appropriate
estimates in many areas and the actual outcome may differ from those
calculatedthe key sources of estimation uncertainty at the balance sheet date
that have a signiﬁcant risk of causing material adjustment to the carrying
amounts of assets and liabilities within the next ﬁnancial year are
forecasts and discount rates
the carrying value of a number of items on the balance sheet are dependent on
the estimates of future cash ﬂows arising from the group’s operations
– the impairment tests for goodwill are dependent on forecasts of the cash
ﬂows of the cash generating units that give rise to the goodwill and the
discount rate applied no impairment resulted from the annual impairment
tests in 2005
– if the assessment of development participation certiﬁcation and recoverable
engine costs recognised as intangible assets indicates the possibility of
impairment a detailed impairment test is undertakenthe impairment test
would be dependent on the forecast cash ﬂows of the engine programmes
and customer aftermarket activity as appropriate and the discount rate
applied no impairment resulted from the assessment in 2005
– the ﬁnancial liabilities arising from ﬁnancial risk and revenue sharing
partnerships are valued at each reporting date using the amortised cost
methodthis involves calculating the present value of the forecast cash ﬂows
of the arrangement using the internal rate of return at the inception of the
arrangement as the discount rate
– the realisation of the deferred tax assets recognised is dependent on the
generation of sufﬁcient future taxable proﬁtsthe group recognises deferred
tax assets where it is more likely than not that the beneﬁt will be realised
assessment of longterm contractual arrangements
the group has longterm contracts that fall into different accounting periods in
assessing the allocation of revenues and costs to individual accounting periods
and the consequential assets and liabilities the group estimates the total
revenues and costs forecast to arise in respect of the contract and the stage of
completion based on an appropriate measure of performance
postretirement beneﬁts
the group’s deﬁned beneﬁt pension schemes and similar arrangements are
assessed annually in accordance with ias 19the accounting valuation which was
based on assumptions determined with independent actuarial advice resulted in
a deﬁcit of £1659m before deferred taxation being recognised on the balance
sheet at december 31 2005the size of the deﬁcit is sensitive to the market value
of the assets held by the schemes and to actuarial assumptions which include
price inﬂation pension and salary increases the discount rate used in assessing
actuarial liabilities mortality and other demographic assumptions and the levels
of contributions further details are included in note 23
2005 group financialsqxd  15306  0758  page 58 rollsroyce group plc annual report 2005
59
provisions
as described in the accounting policy above the group measures provisions at
the directors’best estimate of the expenditure required to settle the obligation at
the balance sheet datethese estimates are made taking account of information
available and different possible outcomes
contingent liabilities
as described in note 30 the group has signiﬁcant longterm contingent
obligationsthe directors consider that the possibility that there will be any
signiﬁcant loss arising from these contingencies as remote in reaching this
opinion the directors have considered the likelihood of the contingency
crystallising and have taken account of forecast aircraft values that generally
provide security against the contingent liability
2004 policies relating to ﬁnancial instruments
the group has adopted the exemption granted by ifrs 1 that ias 32 and ias 39
financial instruments need not be applied to the comparative period
consequently the 2004 disclosure provided for ﬁnancial instruments note 28 is
in accordance with uk gaap  under which the accounting treatment of the key
ﬁnancial instruments used by the group is as follows
i gains or losses arising on forward exchange contracts are taken to the proﬁt
and loss account in the same period as the underlying transaction
ii  net interest arising on interest rate agreements is taken to the proﬁt and loss
account
iii premiums paid or received on currency options are taken to the proﬁt and
loss account when the option expires or matures
iv gains or losses arising on jet fuel swaps are taken to the proﬁt and loss
account in the same period as the underlying transaction
if the underlying transaction to a hedge ceases to exist the hedge is terminated
and the proﬁts and losses on termination are recognised in the proﬁt and loss
account immediately if the hedge transaction is terminated the proﬁts and losses
on termination are held in the balance sheet and amortised over the life of the
original underlying transactions
revisions to ifrs not applicable in 2005
during 2005 the iasb published an amendment to ias 39 relating to financial
guarantee contractsthis amendment is applicable from 2006 and will require
the accounting policy for credit based guarantees to be amendedthe group has
not ﬁnalised its assessment of the impact of adopting this amendment but does
not anticipate that its impact on the income statement will be signiﬁcant
ifrs 7 financial instruments disclosures and amendment to ias 1 capital
disclosures are applicable from 2007these amendments to disclosure
requirements will have no effect on the reported results
the group does not consider that any other standards or interpretations
issued by the iasb but not yet applicable will have a signiﬁcant impact on the
ﬁnancial statements
2005 group financialsqxd  15306  0758  page 59 rollsroyce group plc annual report 2005
60
notes to the ﬁnancial statements continued
2  segmental analysis
the group operates in ﬁve segments which reﬂect the internal organisation and management structure according to the nature of the products 
and services provided
civil aerospace – development manufacture marketing and sales of commercial aero engines and aftermarket services
defence aerospace – development manufacture marketing and sales of military aero engines and aftermarket services
marine – development manufacture marketing and sales of marine propulsion systems and aftermarket services
energy – development manufacture marketing and sales of power systems for the offshore oil  gas industry electrical power generation 
and aftermarket services
financial services – engine leasing aircraft leasing and electrical power project development
details for these primary reporting segments are shown below
civil defence financial central
aerospace aerospace marine energy services items eliminations consolidated
£m £m £m £m £m £m £m £m
analysis by business segments
for year ended december 31 2005
total revenue 3510 1413 1097 505 78 — — 6603
group operating proﬁt excluding share of
proﬁt of joint ventures 625 170 86 1 2 45 — 833
share of proﬁt of joint ventures 34715 1 — — 46
loss on sale of businesses ——— 2 ——— 2
proﬁt before ﬁnance charges and taxation 659 177 87 2 3 45 — 877
financial income 442 442
financial expenses 842 842
taxation 130 130
proﬁt for the period 347
other information
segment assets 4325 816 1136 566 250 — 273 6820
investments in joint ventures 147 28 1 30 41 — — 247
cash and shortterm investments 1794 1794
fair value of swaps hedging ﬁxed rate borrowings 74 74
unallocated assets 384 384
total assets 9319
segment liabilities 3194 904 545 282 91 — 273 4743
borrowings 1533 1533
unallocated liabilities 1538 1538
total liabilities 7814
expenditure on intangible assets and
property plant and equipment 262 48 29 14 11 364
depreciation and amortisation 164 32 19 9 19 243
impairments ———— 11 11
2005 group financialsqxd  15306  0758  page 60 rollsroyce group plc annual report 2005
61
2  segmental analysis continued
civil defence financial central
aerospace aerospace marine energy services items eliminations consolidated
£m £m £m £m £m £m £m £m
analysis by business segments
for year ended december 31 2004
total revenue 3040 1374 963 489 81 — — 5947
group operating proﬁt excluding share of
proﬁt of joint ventures 177 177 78 7 9 41 — 389
share of proﬁt of joint ventures 8 2 — 7 2 — — 19
proﬁt on sale of businesses 9 —————— 9
proﬁt before ﬁnance charges and taxation 194 179 78 14 7 41 — 417
financial income 372 372
financial expenses 425 425
taxation 100 100
proﬁt for the period 264
other information
segment assets 3634 791 1107 579 350 — 236 6225
investments in joint ventures 117 25 2 25 42 — — 211
cash and shortterm investments 1488 1488
unallocated assets 190 190
total assets 8114
segment liabilities 2408 765 544 280 78 — 236 3839
borrowings 1637 1637
unallocated liabilities 1192 1192
total liabilities 6668
expenditure on intangible assets and
property plant and equipment 239 40 32 14 8 333
depreciation and amortisation 159 33 18 9 31 250
impairments 36 — 1 — 13 50
2005 group financialsqxd  15306  0758  page 61 rollsroyce group plc annual report 2005
62
notes to the ﬁnancial statements continued
2  segmental analysis continued
geographical segments
the group’s revenue by destination is shown below
2005 2004
£m £m
united kingdom 886 915
rest of europe 1059 954
usa 2408 1944
canada 191 205
asia 1516 1290
africa 152 196
australasia 96 93
other 295 350
6603 5947
the following analysis shows the carrying amounts of the group’s assets and additions to intangible assets and property plant and equipment by the geographical
area in which the assets are located
additions to intangible assets and
segment assets property plant and equipment
2005 2004 2005 2004
£m £m £m £m
united kingdom 6730 5842 316 293
north america 1265 1066 24 25
nordics 832 814 11 8
germany 652 515 5 5
other 310 238 8 2
eliminations 470 361 — —
total 9319 8114 364 333
underlying proﬁt reconciliation
2005 2004
underlying underlying underlying underlying
adjustments results adjustments results
£m £m £m £m £m £m
proﬁt before ﬁnancing costs
civil aerospace 659 205 454 194 — 194
defence aerospace 177 3 180 179 — 179
marine 87 2 89 78 — 78
energy 224 14 — 14
financial services 3 — 3 7 — 7
central items 45 — 45 41 — 41
877 198 679 417 — 417
financing costs 400 305 95 53 — 53
proﬁt before tax 477 107 584 364 — 364
underlying adjustments
2005 2004
proﬁt before proﬁt before proﬁt before proﬁt before
ﬁnancing costs tax ﬁnancing costs tax
£m £m £m £m
release of transition hedge reserve 452 452 ——
realised gains on settled derivative contracts 328 396 ——
gains carried forward in contract balances 74 74 ——
net unrealised fair value changes to derivative contracts — 345 ——
revaluation of trading assets and liabilities — 78 ——
exchange differences and forecast changes relating to rrsps — 30 ——
198 107 ——
the reconciliation of underlying earnings per share is provided in note 7
2005 group financialsqxd  15306  0758  page 62 rollsroyce group plc annual report 2005
63
3  revenue
the group’s revenue is analysed as follows
2005 2004
£m £m
revenue from sale of original equipment 3061 2696
revenue from aftermarket services 3542 3251
total revenue 6603 5947
4  proﬁt before taxation
2005 2004
£m £m
after crediting
risk and revenue sharing partnership receipts – credited to other operating income 60 73
operating lease rentals receivable – credited within revenues from aftermarket services 39 37
after charging
amortisation of certiﬁcation costs 9 15
amortisation of development costs 13 17
amortisation of recoverable engine costs 32 26
depreciation of owned property plant and equipment
1
192 230
depreciation of property plant and equipment held under ﬁnance leases 
1
8 12
operating lease rentals payable – hire of plant and equipment 58 55
– hire of other assets 19 17
research and development expenditure 282 288
rrsp payments – included in cost of sales 146 240
1
including appropriate amounts charged to inventories
auditors’fees were as follows during the year
audit 2005 – group £34m 2004 £32m
other 2005 – united kingdom £11m 2004 £09m
– rest of world £05m 2004 £06m
other fees paid to the auditors comprise
taxation £05m 2004 £07m
accounting £11m 2004 £07m
mergers and acquisitions £nil 2004 £01m
accounting fees in 2005 include £09m for ifrs implementation 2004 £05m
2005 group financialsqxd  15306  0758  page 63 rollsroyce group plc annual report 2005
64
notes to the ﬁnancial statements continued
5  net ﬁnancing costs
2005 2004
£m £m
interest receivable 65 58
fair value gains on commodity derivatives note 20 54
expected return on pension scheme assets note 23 312 314
net foreign exchange gains 11
financial income 442 372
interest payable 104 110
fair value losses on foreign currency contracts note 20 399
finance charge and valuation changes relating to ﬁnancial rrsps note 20 13
interest on pension scheme liabilities note 23 321 315
other ﬁnancing charges 5
financial expenses 842 425
net ﬁnancing costs 400 53
analysed as
net interest payable 39 52
net other ﬁnancing expenses 361 1
net ﬁnancing costs 400 53
6  taxation
uk overseas t otal
2005 2004 2005 2004 2005 2004
current tax £m £m £m £m £m £m
current tax charge for the period 25 52 63 70 88 122
less double tax relief 25 48 — — 25 48
— 4 63 70 63 74
adjustments in respect of prior periods 3 1 4 — 7 1
3 5 59 70 56 75
deferred tax
deferred tax chargecredit for the period 61 17 2 16 59 33
adjustments in respect of prior periods 3 12 12 4 15 8
61 10 69 90 130 100
deferred taxation balances are analysed in note 21
tax reconciliation
proﬁt before taxation 477 364
less share of proﬁts of joint ventures note 11 46 19
proﬁt before taxation excluding joint ventures 431 345
nominal tax charge at uk corporation tax rate 30 2004 30 129 103
uk rd tax credit 18 13
other items 11 17
adjustments in respect of prior periods 8 7
130 100
analysis of taxation charge
trading activities 167 100
nonunderlying items 37 —
130 100
2005 group financialsqxd  15306  0758  page 64 rollsroyce group plc annual report 2005
65
7  earnings per ordinary share and underlying proﬁt reconciliation
the group seeks to present a measure of underlying performance which excludes items considered to be nonoperating in nature underlying proﬁt excludes the
unrealised amounts arising from revaluations required by ias 32 and ias 39 and includes the realised amounts arising from settled derivative hedging transactionsthe
calculation of underlying proﬁt and underlying earnings per share is shown below for the year to december 31 2004 ias 32 and ias 39 were not applied and
consequently no adjustment is required
basic earnings per ordinary share are calculated by dividing the proﬁt attributable to ordinary shareholders of £350m 2004 £263m by 1740 million
2004 1690 million ordinary shares being the average number of ordinary shares in issue during the period excluding own shares held under trust which have been
treated as if they had been cancelled
underlying earnings per ordinary share have been calculated as follows
2005 2004
pence £m pence £m
proﬁt attributable to equity holders of the parent 2011 350 1556 263
exclude
release of hedge reserves 2597 452 ——
unrealised fair value changes to derivative contracts 1983 345 ——
revaluation of trading assets and liabilities 449 78 ——
exchange differences and forecast changes relating to ﬁnancial rrsps 172 30 ——
include
realised gain on settled derivative contracts 2276 396 ——
less foreign exchange derivative gains carried forward in contract accounting 425 74 ——
related tax effect 213 37 ——
underlying earnings per ordinary share 2414 420 1556 263
diluted earnings per ordinary share are calculated by dividing the proﬁt attributable to ordinary shareholders of £350m 2004 £263m 
by 1813 million 2004 1747 million ordinary shares being 1740 million 2004 1690 million as above adjusted by the bonus element of 
existing share options of 73 million 2004 57 million
8  employee information
2005 2004
number number
average weekly number of group employees during the year
united kingdom 21300 21000
overseas 14300 14200
35600 35200
civil aerospace 20400 19900
defence aerospace 5100 5100
marine 7200 7200
energy 2800 2900
financial services 100 100
35600 35200
£m £m
group employment costs
1
wages and salaries 1320 1278
social security costs 138 128
sharebased payment note 27 26 19
pensions and other postretirement beneﬁts note 23 132 103
1616 1528
1
directors’remuneration is shown on page 43
2005 group financialsqxd  15306  0758  page 65 rollsroyce group plc annual report 2005
66
notes to the ﬁnancial statements continued
9  intangible assets
certiﬁcation internally
costs and generated
participation development recoverable
goodwill
1
fees expenditure engine costs total
£m £m £m £m £m
cost
at january 1 2004 759 175 289 208 1431
additions —992221 142
at january 1 2005 759 274 311 229 1573
exchange adjustments 8 — — — 8
additions —107036 116
at december 31 2005 751 284 381 265 1681
accumulated amortisation and impairment
at january 1 2004 — 114 86 88 288
provided during the year — 15 17 26 58
at january 1 2005 — 129 103 114 346
provided during the year — 9 13 32 54
at december 31 2005 — 138 116 146 400
net book value at december 31 2005 751 146 265 119 1281
net book value at december 31 2004 759 145 208 115 1227
net book value at january 1 2004 759 61 203 120 1143
1
goodwill principally relates to civil aerospace £194m marine £489m and energy £61mthe carrying value of goodwill has been assessed on a valueinuse basis using internal forecasts and a discount rate based on
the group’s weighted average cost of capital
2005 group financialsqxd  15306  0758  page 66 rollsroyce group plc annual report 2005
67
10  property plant and equipment
land and plant and aircraft and in course of
buildings equipment engines construction t otal
£m £m £m £m £m
cost
at january 1 2004 522 1949 337 156 2964
exchange adjustments 1 17 16 3 37
additions 10 56 6 119 191
on disposals of businesses 1 6 — — 7
reclassiﬁcations 11 86 — 97 —
disposalswriteoffs 6 100 102 — 208
at january 1 2005 535 1968 225 175 2903
exchange adjustments 93620 3 68
additions 20 79 9 140 248
on disposals of businesses —5 — — 5
reclassiﬁcations 23 78 — 101 —
disposalswriteoffs — 166 42 — 208
at december 31 2005 587 1990 212 217 3006
accumulated depreciation and impairment
at january 1 2004 96 941 108 — 1145
exchange adjustments — 10 5 — 15
provided during the year 
1
20 176 46 — 242
on disposals of businesses — 4 — — 4
disposalswriteoffs 1 79 57 — 137
at january 1 2005 115 1024 92 — 1231
exchange adjustments 424 9 —37
provided during the year 
1
22 154 24 — 200
on disposals of businesses —4 — — 4
disposalswriteoffs — 122 19 — 141
at december 31 2005 141 1076 106 — 1323
net book value at december 31 2005 446 914 106 217 1683
net book value at december 31 2004 420 944 133 175 1672
net book value at january 1 2004 426 1008 229 156 1819
1
includes impairment charge of £11m 2004 £50m relating to the writedown of aircraft to values provided by independent aircraft appraisers
property plant and equipment includes
2005 2004
£m £m
net book value of ﬁnance leased assets 41 48
assets held for use in operating leases
cost 196 206
depreciation 93 79
net book value 103 127
nondepreciable land 96 97
land and buildings at net book value comprise
freehold 416 388
long leasehold 14 16
short leasehold 16 16
446 420
capitalised interest included in net book value of assets in course of construction — 2
capital expenditure commitments – contracted but not provided for 147 86
net book value of assets held as security for liabilities 49 46
cost of fully depreciated assets 399 342
2005 group financialsqxd  15306  0758  page 67 rollsroyce group plc annual report 2005
68
notes to the ﬁnancial statements continued
11  investments – joint ventures
share of post
shares acquisition
at cost reserves loans total
£m £m £m £m
at january 1 2004 128 79 6 213
exchange adjustments 4 4 — 8
additions 1— 1 2
share of retained proﬁt —4 —4
at january 1 2005 125 79 7 211
1
exchange adjustments 45 —9
additions 2 — 11 13
taxation paid by the group —3 —3
share of retained proﬁt —11 — 11
at december 31 2005 131 98 18 247
1
the principal joint ventures are listed on pages 116 and 117
1
investments in joint ventures are represented by
2005 2004
£m £m
share of aggregate assets
noncurrent assets 671 618
current assets 559 460
share of aggregate liabilities
2
noncurrent liabilities 522 391
current liabilities 465 481
goodwill 4 5
247 211
2
includes borrowings of £480m 2004 £456m
2005 2004
£m £m
share of income 80 50
share of interest 24 22
share of taxation 10 9
46 19
dividend received 35 15
share of retained proﬁt 11 4
the tax charge on joint venture proﬁts represents an effective tax rate of 18 per cent 2004 32 per cent a reduction of 14 per centthis results from a change in proﬁt
mix between joint ventures taxed at different effective rates
2005 group financialsqxd  15306  0758  page 68 rollsroyce group plc annual report 2005
69
12  investments – other
2005 2004
£m £m
unlisted investments at cost
at january 1 57 63
additions 1 —
amortisationdisposals 6 6
at december 31 52 57
the fair values of these available for sale assets are not signiﬁcantly different to cost
13  inventory
2005 2004
£m £m
raw materials 151 147
work in progress 487 423
longterm contracts work in progress 137 148
finished goods 808 624
payments on account 47 63
1630 1405
progress payments received against
1
longterm contracts 104 178
other inventory 217 137
1309 1090
inventories stated at net realisable value 112 110
inventories pledged as security for liabilities — —
amount of inventory writedown 30 23
reversal of inventory writedown 3 3
1
includes payments received from joint ventures 14 15
2005 group financialsqxd  15306  0758  page 69 rollsroyce group plc annual report 2005
70
notes to the ﬁnancial statements continued
14  trade and other receivables
2005 2004
£m £m
trade receivables 738 756
amounts recoverable on contracts 698 625
amounts owed by joint ventures 215 239
other receivables 226 245
prepayments and accrued income 170 184
2047
1
2049
1
1 
trade and other receivables expected to be recovered in more than one year
trade receivables 5 14
amounts recoverable on contracts 526 534
amounts owed by joint ventures 27 37
other receivables 58 58
prepayments and accrued income 30 51
646 694
15  cash and cash equivalents
2005 2004
£m £m
cash at bank and in hand 338 758
shortterm deposits 1419 694
1757 1452
overdrafts note 16 12 13
cash and cash equivalents per cash ﬂow statement page 52 1745 1439
2005 group financialsqxd  15306  0758  page 70 rollsroyce group plc annual report 2005
71
16  borrowings – amounts falling due within one year
2005 2004
£m £m
overdrafts 12 13
bank loans 55 5
obligations under ﬁnance leases note 29 8 12
4
1
2 notes 2005
1
— 177
75 207
1
the group borrowed through a subsidiary company s256m in order to provide a loan for general purposesthis note was the subject of currency swap agreements under which counterparties undertook to 
pay amounts at ﬁxed rates of interest and exchange in consideration for amounts payable by the subsidiary at variable rates of interest at ﬁxed exchange rates
17  trade and other payables
2005 2004
£m £m
payments received on account 
1
362 277
trade payables 537 573
amounts owed to joint ventures 162 110
other taxation and social security 62 71
other payables 680 612
accruals and deferred income 886 752
2689 2395
1
includes payments received from joint ventures 115 66
  rollsroyce group plc annual report 2005
72
notes to the ﬁnancial statements continued
18  borrowings – amounts falling due after one year
2005 2004
£m £m
unsecured
bank loans 4 73
6
3
8 notes 2007 
1
354 310
7
3
8 notes 2016
2
200 200
584 notes 2010 
3
107 97
638 notes 2013 
3
134 120
655 notes 2015 
3
49 43
4
1
2 notes 2011 
1
524 500
other loan 2009 interest rate nil 1 1
secured
bank loans
4
71 66
obligations under ﬁnance leases payable
5
note 29
between one and two years 5 6
between two and ﬁve years 8 14
after ﬁve years 1 —
1458 1430
repayable
between one and two years – by instalments 49 12
– otherwise — 65
between two and ﬁve years – by instalments 11 57
– otherwise 354 310
after ﬁve years – by instalments 29 26
– otherwise 1015 960
1458 1430
1
the group has borrowed through a subsidiary s1250m in order to provide a loan for general purposesthese notes are the subject of currency swap agreements under which counterparties have undertaken 
to pay amounts at ﬁxed rates of interest and exchange in consideration for amounts payable by the subsidiary at variable rates of interest and at ﬁxed exchange rates
2
the group has borrowed through a subsidiary £200m in order to provide a loan for general purposes
3
the group has borrowed through a subsidiary us500m in the us private placement marketthis borrowing is the subject of interest rate swap agreements under which the group has undertaken to pay 
ﬂoating rates of interest and currency swaps which form a fair value hedge until october 5 2005 the borrowing was included in a net investment hedging relationship from october 6 2005 the borrowing has
been included in a fair value hedging relationship in respect of the foreign exchange risk
4
secured on aircraft
5
obligations under ﬁnance leases are secured by related leased assets
19  other payables – amounts falling due after one year
2005 2004
£m £m
payments received on account 
1
214 118
amounts owed to joint ventures 30 25
other payables 104 129
accruals and deferred income 302 271
650 543
1
includes payments received from joint ventures 13 19 rollsroyce group plc annual report 2005
73
20  other ﬁnancial assets and liabilities
details of the group’s policies on the use of ﬁnancial instruments are given in note 28 and in the accounting policies on pages 55 to 59
in accordance with the option allowed by ifrs 1 ‘first time adoption of international financial reporting standards’  the group has implemented ias 32 and 
ias 39 financial instruments prospectively from january 1 2005 see note 33
the values of other ﬁnancial assets and liabilities held by the group are as follows
foreign exchange commodity interest rate financial
contracts contracts contracts rrsps b shares total
£m £m £m £m £m £m
assets 364 31 69 — — 464
liabilities 136 — 7 423 7 573
228 31 62 423 7 109
other ﬁnancial liabilities are analysed as follows
current liabilities 234
noncurrent liabilities 339
573
the group uses various ﬁnancial instruments to manage its exposure to movements in foreign exchange ratesthe group uses commodity swaps to manage its
exposure to movements in the price of jet fuel from january 1 2005 the group does not include foreign exchange or commodity ﬁnancial instruments in any cash
ﬂow hedging relationships for accounting purposesto hedge the currency risk associated with a borrowing denominated in us the group has currency derivatives
designated as part of a fair value hedge
movements in the fair values of foreign exchange and commodity ﬁnancial instruments were as follows
foreign exchange ﬁnancial instruments
included in
transition included in
hedging income
t otal reserve statement
£m £m £m
fair value at january 1 2005 on implementation of ias 39 986 986
1
fair value changes to derivative contracts not in accounting hedging relationships 399 — 399
fair value changes to fair value hedges 5— 5
fair value of contracts utilised 364 — —
transferred to income statement — 448
1
448
fair value at december 31 2005 228 538
1
additionallly £10m relating to derivatives settled prior to transition to ifrs was included in the transition hedging reserve and transferred to the income statement for the year
commodity ﬁnancial instruments
included in
transition included in
hedging income
t otal reserve statement
£m £m £m
fair value at january 1 2005 on implementation of ias 39 99
fair value changes to derivative contracts not in accounting hedging relationships 54 — 54
fair value of contracts utilised 32 — —
transferred to income statement —4 4
fair value at december 31 2005 31 5
where applicable market values have been used to determine fair valueswhere market values are not available fair values have been calculated by discounting
expected future cash ﬂows at prevailing interest and exchange rates
2005 group financialsqxd  15306  0758  page 73 rollsroyce group plc annual report 2005
74
notes to the ﬁnancial statements continued
20  other ﬁnancial assets and liabilities continued
the group uses interest rate swaps forward rate agreements and interest rate caps to manage its exposure to movements in interest rateswhere the effectiveness of
the hedge relationship in a cash ﬂow hedge is demonstrated changes in the fair value are included in the hedging reserve and released to match actual payments on
the hedged item
movements in the fair values of interest rate ﬁnancial instruments were as follows
interest rate ﬁnancial instruments
included in other included in
fair value interest rate cash ﬂow included in
hedging ﬁnancial hedging income
t otal relationships instruments reserve statement
£m £m £m £m £m
fair value at january 1 2005 on implementation of ias 39 110 121 11 3
changes deemed effective for cash ﬂow hedge accounting purposes —————
changes deemed ineffective for cash ﬂow hedge accounting purposes 4— 4— 4
other changes 52 52 — — 52
transferred to income statement ——— 3 3
fair value at december 31 2005 62 69 7 —
financial risk and revenue sharing partnerships rrsps
the group has ﬁnancial liabilities arising from ﬁnancial rrspsthese ﬁnancial liabilities are valued at each reporting date using the amortised cost methodthis involves
calculating the present value of the forecast cash ﬂows of the arrangements using the internal rate of return at the inception of the arrangements as the discount rate
movements in the amortised cost values of rrsps were as follows
£m £m
on implementation of ias 32 and ias 39 at january 1 2005 468
cash paid to partners 58
amount included in the income statement
financing charge 43
excluded from underlying proﬁt
exchange adjustments 56
restructuring of rrsp agreements and forecast adjustments 86 13
at december 31 2005 423
own share total return swaps
the group entered into forward contracts to purchase its own shares for the purposes of meeting obligations to issue shares under employee share schemes
under ias 32 these contracts were categorised as ﬁnancial liabilities and accounted for on the amortised cost basisthese contracts have been settled during the year
£m
at january 1 2005 on implementation of ias 39 142
on settlement of forward purchase contracts 141
transferred to income statement 1
fair value at december 31 2005 —
2005 group financialsqxd  15306  0758  page 74 rollsroyce group plc annual report 2005
75
20  other ﬁnancial assets and liabilities continued
b shares
since july 2004 the company has issued noncumulative redeemable convertible preference shares b shares as an alternative to paying a cash dividend
shareholders are able to redeem any number of their b shares for cash or convert them into ordinary shares any b shares retained attract a dividend of 75 per cent of
libor on the 01p nominal value of each share paid on a twiceyearly basis and have limited voting rights in certain circumstances the company has the option to
compulsorily redeem the b shares at any time if the aggregate number of b shares in issue is less than ten per cent of the aggregate number of b shares issued or on
the acquisition or capital restructuring of the company
on a return of capital on a windingup the holders of b shares shall be entitled in priority to any payment to the holders of ordinary shares to the repayment of
the nominal capital paidup or credited as paidup on the b shares held by them together with a sum equal to the outstanding preferential dividend which will have
been accrued but not been paid until the date of return of capital
movements in the b shares during the year were as follows
nominal
b shares value
of 001p £m
authorised
at january 1 and december 31 2005 1000000000000 1000
issued and fully paid
at january 1 2005 
1
4600710064 5
shares issued 141013817330 141
shares converted into ordinary shares 87425228890 87
shares redeemed 51638258304 52
at december 31 2005 6551040200 7
1
the adoption of ias 32 and ias 39 from january 1 2005 has led to the reclassiﬁcation of b shares from equity to other ﬁnancial liabilities
2005 group financialsqxd  15306  0758  page 75 rollsroyce group plc annual report 2005
76
notes to the ﬁnancial statements continued
21  deferred taxation
£m
at january 1 2004 restated 219
amount charged to income statement 25
amount credited to statement of recognised income and expense 2
amount credited to equity 6
exchange movements 1
at january 1 2005 203
on implementation of ias 32 and ias 39 on january 1 2005 119
at january 1 2005 restated 84
amount charged to income statement 74
amount credited to statement of recognised income and expense 84
amount credited to equity 162
exchange movements 5
at december 31 2005 261
the analysis of the deferred tax position is as follows
2005 2004
£m £m
property plant and equipment 138 131
other temporary differences 219 181
pensions and other postretirement beneﬁts 505 425
foreign exchange and commodity ﬁnancial assets and liabilities 77 —
losses 126 26
advance corporation tax 64 64
261 203
analysed as
deferred tax assets 439 318
deferred tax liabilities 178 115
261 203
deferred tax not recognised on unused tax losses and other items 
1
146 126
1
deferred tax not recognised on the basis that the future economic beneﬁt is uncertain
in addition there are temporary differences of £467m 2004 £380m relating to investments in subsidiaries and joint ventures no deferred tax has been provided in
respect of these differences since the timing of the reversals can be controlled and it is probable that the temporary differences will not reverse in the future
2005 group financialsqxd  15306  0758  page 76 rollsroyce group plc annual report 2005
77
22  provisions
at unused charged to at
december 31 exchange amounts income december  31
2004 adjustments reversed statement utilised 2005
£m £m £m £m £m £m
warrantyguarantees 171 1 10 46 46 162
contract loss 48 — 3 9 11 43
customer ﬁnancing 92 3 1 16 14 90
insurance 38 — — 1 1 38
restructuring 16 — — 5 12 9
other 28 1 3 3 10 19
393 1 17 80
1
94 361
1
includes £5m for amounts discounted
analysed as
at at
december 31 december 31
2005 2004
£m £m
current liabilities 138 173
noncurrent liabilities 223 220
361 393
warranty provisions primarily relate to products sold and generally cover a period of up to three years
provisions for contract loss and restructuring are generally expected to be utilised within one year
customer ﬁnancing provisions cover guarantees provided for asset values andor ﬁnancing as described in note 30timing of utilisation is uncertain
insurance provisions relate to the group’s captive insurance business with timing of utilisation being uncertain
other provisions comprise a number of liabilities with varying expected utilisation rates
2005 group financialsqxd  15306  0758  page 77 rollsroyce group plc annual report 2005
78
notes to the ﬁnancial statements continued
23  postretirement beneﬁts
deﬁned beneﬁt schemes
the group operates a number of deﬁned beneﬁt schemes for the uk deﬁned beneﬁt schemes the assets are held in separate trustee administered funds and
employees are entitled to retirement beneﬁts based on their ﬁnal salaries and length of service
overseas deﬁned beneﬁt schemes are a mixture of funded and unfunded plans additionally in the usa and to a lesser extent in some other countries the
group’s employment practices include the provision of healthcare and life insurance beneﬁts for retired employeesthese schemes are unfunded
the valuations of the schemes are based on the most recent funding valuations updated by the scheme actuaries to december 31 2005the most recent
funding valuations of the main uk schemes were
rollsroyce pension fund – march 31 2003
rollsroyce group pension scheme – april 5 2004
vickers group pension scheme – march 31 2004
the principal actuarial assumptions used at the balance sheet date were as follows
2005 2004
uk overseas uk overseas
schemes schemes schemes schemes
 
rate of increase in salaries 44 34 44 24
rate of increase of pensions in payment 26
1
02 26 02
discount rate 47 53 53 57
expected rate of return on scheme assets 62 70 66 73
inﬂation assumption 29 26 29 28
1
beneﬁts accruing after april 5 2005 are assumed to increase in payment at a rate of 21 per cent
the mortality assumptions used for the rollsroyce pension fund the largest scheme in the group are based upon actual recent mortality experiences of members
within the scheme and also allow for future mortality improvements
the future costs of healthcare beneﬁts are based on an assumed healthcare costs trend rate of nine per cent grading down to ﬁve per cent over seven years
amounts recognised in the income statement
2005 2004
uk overseas uk overseas
schemes schemes t otal schemes schemes total
£m £m £m £m £m £m
operating cost
current service cost 79 22 101 75 19 94
past service cost —88 ———
curtailmentsettlement ——— 2 — 2
79 30 109 73 19 92
finance income expense
expected return on assets 298 14 312 303 11 314
interest on liabilities 295 26 321 292 23 315
3 12 9 11 12 1
total income statement charge 76 42 118 62 31 93          
the actual return on scheme assets was £900m 2004 £440m
the operating cost is charged as follows
2005 2004
£m £m
cost of sales 77 65
commercial and administrative costs 25 21
research and development 7 6
actuarial losses of £282m 2004 £7m have been reported in the statement of recognised income and expense cumulative actuarial losses from january 1 2004
reported in the statement of recognised income and expense are £289m 2004 £7m
2005 group financialsqxd  15306  0758  page 78 rollsroyce group plc annual report 2005
79
23  postretirement beneﬁts continued
amounts recognised in the balance sheet
2005 2004
uk overseas uk overseas
schemes schemes t otal schemes schemes total
£m £m £m £m £m £m
present value of funded obligations 6661 296 6957 5688 219 5907
fair value of scheme assets 5343 220 5563 4527 171 4698
1318 76 1394 1161 48 1209
present value of unfunded obligations — 263 263 — 200 200
irrecoverable surplus —2 2 ———
net liability recognised in the balance sheet 1318 341 1659 1161 248 1409
changes in present value of deﬁned beneﬁt obligations
2005 2004
uk overseas uk overseas
schemes schemes t otal schemes schemes total
£m £m £m £m £m £m
at january 1 5688 419 6107 5493 383 5876
exchange adjustments — 49 49 —2020
current service cost 79 22 101 75 19 94
past service cost —8 8 ———
finance cost 295 26 321 292 23 315
contributions 35 1 36 33 2 35
net beneﬁts paid out 253 13 266 270 13 283
actuarial loss 817 53 870 108 25 133
settlementscurtailment —66 43 — 43
at december 31 6661 559 7220 5688 419 6107
the deﬁned beneﬁt obligation relating to postretirement medical beneﬁts would increase by £23m if the healthcare trend rate increases by one per cent and reduce
by £41m if it decreases by one per cent
changes in fair value of scheme assets
2005 2004
uk overseas uk overseas
schemes schemes t otal schemes schemes total
£m £m £m £m £m £m
at january 1 4527 171 4698 4262 148 4410
exchange adjustments —2222 —3 3
expected return on assets 298 14 312 303 11 314
contributions – employer 146 31 177 112 30 142
– employee 35 1 36 33 2 35
beneﬁts paid out 253 13 266 270 13 283
actuarial gainloss 590 2 588 128 2 126
settlementscurtailment —6 6 41 2 43
at december 31 5343 218 5561 4527 171 4698
2005 group financialsqxd  15306  0758  page 79 rollsroyce group plc annual report 2005
80
notes to the ﬁnancial statements continued
23  postretirement beneﬁts continued
the fair value of the scheme assets in the principal schemes and the expected rates of return at december 31 were as follows
uk schemes
2005 2004
expected market expected market
rate of return value rate of return value
£m £m
equities 71 3654 76 2998
sovereign debt 41 565 46 699
corporate bonds 45 978 51 642
other 43 146 53 188
5343 4527
overseas schemes
2005 2004
expected market expected market
rate of return value rate of return value
£m £m
equities 86 131 83 99
corporate bonds 45 72 56 58
other 46 17 68 14
220 171
the scheme assets do not include any of the group’s own ﬁnancial instruments nor any property occupied by or other assets used by the group
the expected rates of return on individual categories of scheme assets are determined by reference to relevant indicesthe overall expected rate of return is
calculated by weighting the individual rates in accordance with the anticipated balance in the schemes’investment portfolios
history of plans
the history of the plans for the current and prior years is as follows
balance sheet
2005 2004
£m £m
present value of deﬁned beneﬁt obligation 7220 6107
fair value of scheme assets 5561 4698
deﬁcit 1659 1409
experience gainslosses
2005 2004
£m £m
actuarial gain on scheme assets 588 126
experience losses on scheme liabilities 870 133
total amount recognised in the statement of recognised income and expense 282 7
in accordance with the transitional provisions for the amendments to ias 19 employee beneﬁts in december 2004 the disclosures above are determined
prospectively from 2004
the group expects to contribute approximately £180m to its deﬁned beneﬁt schemes in 2006
2005 group financialsqxd  15306  0758  page 80 rollsroyce group plc annual report 2005
81
23  postretirement beneﬁts continued
deﬁned contribution schemes
the group operates a number of deﬁned contribution schemes
the total expense recognised in the income statement was £14m 2004 £10m
24  share capital
nonequity equity
nominal preference nominal ordinary nominal
special b shares value shares value shares value
share of £1 of 01p each £m of £1 each £m of 20p each £m
authorised
at january 1 2004  and december 31 2005 1 50000 — 2499999998 500
upon approval of b share scheme at the 2004 agm 1000000000000 1000
issued and fully paid
at january 1 2004 1 ————1666619843 333
issued for b share scheme — 83922435550 84 — — — —
exercise of share options — ———— 2654484 1
in lieu of paying dividends in cash — ———— 10671927 2
b share conversion into ordinary shares 52631193754 52 — — 24826034 5
redemption of b shares — 26690531732 27 — — — —
at january 1 2005 1 4600710064 5 — — 1704772288 341
b shares reclassiﬁed on implementation
of ias 32 and ias 39
1
4600710064 5
at january 1 2005 restated 1 — — 1704772288 341
exercise of share options — — — 19174767 4
b share conversion into ordinary shares — — — 34754246 7
at december 31 2005 1 — — 1758701301 352
1
reclassiﬁed as other ﬁnancial liabilities note 20
certain rights set out in the company’s articles of association attach to the special rights redeemable preference share special share issued to hm government
subject to the provisions of the companies act 1985 the special share may be redeemed by the treasury solicitor at par at any timethe special share confers no
rights to dividends or to vote at general meetings but in the event of a windingup it shall be repaid at its nominal value in priority to any other shares
2005 group financialsqxd  15306  0758  page 81 rollsroyce group plc annual report 2005
82
notes to the ﬁnancial statements continued
25  reserves
2005
capital transition cash ﬂow
share merger redemption hedging hedging translation retained
premium reserve reserve reserve reserve reserve earnings
1
£m £m £m £m £m £m £m
at january 1 2005 4 3 74 — — 38 1053
on implementation of ias 32 and ias 39 — — — 703 3 6 550
at january 1 2005 restated 4 3 74 703 3 32 503
exchange adjustments ————— 49 —
arising on share issues net of expenses 26 ——————
hedging reserve transfers to income statement — — — 462 3 — —
proﬁt for the year —————— 350
actuarial loss —————— 282
deferred tax on actuarial loss —————— 84
other deferred tax movements through reserves ——— 138 —— 24
relating to own shares ———————
issue of b shares —————— 141
redemption of b shares —— 52 ——— 52
conversion of b shares into ordinary shares —— 80 ————
sharebased payment adjustment —————— 26
at december 31 2005 30 3 206 379 — 17 512
2004
capital transition cash ﬂow
share merger redemption hedging hedging translation retained
premium reserve reserve reserve reserve reserve earnings
1
£m £m £m £m £m £m £m
at january 1 2004 1 3 ———— 876
exchange adjustments ————— 38 —
scrip dividend adjustment — 2 ———— 20
arising on share issues net of expenses 3 ——————
other adjustments — 2—————
proﬁt for the year —————— 263
actuarial loss —————— 7
deferred tax on actuarial loss —————— 2
other deferred tax movements through reserves —————— 6
relating to own shares —————— 2
issue of b shares —————— 84
redemption of b shares — — 27 — — — 27
conversion of b shares into ordinary shares —— 47 ————
sharebased payment adjustment —————— 6
at december 31 2004 4 3 74 — — 38 1053
1
at december 31 2005 68536712 shares with a net book value of £132m 2004 847877 shares with a net book value of £2m were held and included in retained earnings
2005 group financialsqxd  15306  0758  page 82 rollsroyce group plc annual report 2005
83
26  minority interest
£m
at january 1 2004 3
total recognised income and expense for the year 1
at january 1 2005 4
total recognised income and expense for the year 3
sale of shares in subsidiary company to a minority interest 5
at december 31 2005 6
27  sharebased payments 
sharebased payment plans in operation during the period
the group had the following sharebased payment plans in operation during the period
performance share plan psp
this plan involves the award of shares to participants subject to performance conditionsvesting of the performance shares is based on the achievement of both 
nonmarket based conditions eps and cash ﬂow per share and a market based performance condition tsr further information regarding the operation of the plan
can be found on pages 40 and 41 of the directors’remuneration report
sharesave share option plan
based on a three or ﬁve year monthly savings contract eligible employees are granted share options with an exercise price of up to 20 per cent below the share price
when the contract is entered intovesting of the options is not subject to the achievement of a performance target in the uk the plan is inland revenue approved
overseas employees in 28 countries participate in sharesave plans through arrangements broadly comparable to the uk plan a small proportion of the sharesave
options are settled in cash further information regarding the operation of the plan can be found on page 41 of the directors’remuneration report
executive share option plan esop
this plan involves the grant of market value share options to participantsthe options are subject to a nonmarket based performance condition growth in eps
the options have a maximum contractual life of ten years further information regarding the operation of the plan can be found on page 41 of the directors’
remuneration reportthere was no grant of executive share options in 2004 or 2005 following the introduction of the psp  it is not intended to grant any further
executive share options
annual performance related award plan apra deferred shares
deferred shares awarded as part of the apra one third of the value of any annual bonus is delivered in the form of a deferred share awardthe release of deferred
share awards is not dependent on the achievement of any further performance conditions other than that participants remain an employee of the group for two
years from the date of the award in order to retain the full number of shares during the two year deferral period participants are entitled to receive dividends on the
deferred shares
share incentive plan sip
the ‘free share’element of the share incentive plan sip eligible employees receive shares with a value of up to one week’s salarythere are no conditions attached to
the shares
in accordance with the transitional provisions of ifrs 2 the group has recognised an expense in respect of all grants under these plans made after november 7 2002
and unvested at january 1 2005
the group recognised a total expense of £26m 2004 £19m
2005 group financialsqxd  15306  0758  page 83 rollsroyce group plc annual report 2005
84
notes to the ﬁnancial statements continued
27  sharebased payments continued
the movement in options to subscribe for shares under the group’s various share plans is shown in the tables below a further breakdown of the options outstanding
at the year end is provided in the table on page 86
number of shares awarded
2005 2004
psp millions millions
outstanding at beginning of the year 6 —
awarded during the year 5 6
forfeited during the year — —
vested during the year — —
outstanding at december 31 11 6
2005 2004
number weighted number weighted
of share average of share average
options exercise price options exercise price
sharesave millions pence millions pence
outstanding at beginning of the year 74 130p 78 130p
granted during the year 12 298p ——
forfeited during the year 1 139p 3 131p
exercised during the year 20 140p 1 122p
outstanding at december 31 65 157p 74 130p
exercisable at december 31 —— ——
2005 2004
number weighted number weighted
of share average of share average
options exercise price options exercise price
esop millions pence millions pence
outstanding at beginning of the year 80 149p 89 150p
granted during the year —— ——
forfeited during the year 3 169p 5 167p
exercised during the year —— 4 162p
outstanding at december 31 77 148p 80 149p
exercisable at december 31 —— ——
number of shares awarded
2005 2004
deferred shares under apra millions millions
outstanding at beginning of the year 12 14
awarded during the year 3 3
forfeited during the year — 1
vested during the year 7 4
outstanding at december 31 8 12
number of shares awarded
2005 2004
free shares under sip millions millions
awarded during the year 1 1
options were exercised on a regular basis during the yearthe average share price during the year was 310p
2005 group financialsqxd  15306  0758  page 84 rollsroyce group plc annual report 2005
85
27  sharebased payments continued
fair values
the weighted average fair values for psp awards sharesave grants apra deferred share awards and sip free share awards made during the year are as follows
2005 2004
pence pence
psp 282p 249p
sharesave – 3 year 131p —
sharesave – 5 year 154p —
apra deferred share awards 260p 220p
sip free share awards 257p 231p
details of the assumptions used in the calculation of these fair values are set out below expected volatility was based on the historical volatility of the company’s share
price over the seven years prior to the grant or award date expected dividends were based on the company’s payments to shareholders over the ﬁve years prior to
the grant or award date
psp awards
the fair value of shares awarded under the psp are calculated using the market value of shares at the time of the award adjusted to take into account nonentitlement
to dividends during the vesting period and the tsr performance conditionthe psp fair values were calculated using the following assumptions
2005 2004
weighted average share price 262p 233p
expected dividends 781p 761p
volatility 34 35
correlation 19 22
expected life 3 years 3 years
risk free interest rate 49 52
as explained on page 41 of the directors’remuneration report the psp has a total shareholder return tsr marketbased performance condition such that the
company’s tsr over the performance period will be compared with the tsr of the companies constituting the ftse 100 index on the date of grant if the company’s
tsr exceeds the median tsr of the ftse 100 the number of shares that vest will be increased by 25 per centthe fair value of an award of shares under the psp has
been adjusted to take into account this marketbased performance condition using a pricing model based on expectations about volatility and the correlation of
share price returns in the group of ftse 100 companies and which incorporates into the valuation the interdependency between share price performance and tsr
vestingthis adjustment increases the fair value relative to the share price at the date of grant
sharesave awards
the fair value of options granted under the sharesave plan are calculated using a binomial pricing model with the following assumptions
2005 2004
weighted average share price 351p —
exercise price 298p —
volatility 40 —
expected dividends 786p —
expected life
1
– 3 year sharesave 3338 years —
– 5 year sharesave 5358 years —
close periods
from january 1 6 weeks 6 weeks
from july 1 1 month 1 month
risk free interest rate 44 —
1
the binomial pricing model assumes that participants will exercise options at the beginning of the six month window if the share price is greater than the exercise price otherwise it assumes that options are 
held until the expiration of their contractual termthis results in an expected life that falls somewhere between the start and end of the exercise window
deferred shares under apra and free shares under sip
the fair value of shares awarded under these plans is calculated as the share price on the date of award
2005 group financialsqxd  15306  0758  page 85 rollsroyce group plc annual report 2005
86
notes to the ﬁnancial statements continued
27  sharebased payments continued
fair values of options granted in 2003
the charge under ifrs 2 for the current period includes a charge for options granted under the esop and sharesave plans during the year ended december 31 2003
with the following grant date fair values
2003
esop 227p
sharesave – 3 year 61p
sharesave – 5 year 71p
these fair values were calculated using the binomial model and the following assumptions
esop sharesave
weighted average share price 79p 173p
weighted average exercise price 78p 142p
volatility 43 43
expected dividends 761p 761p
expected life
1
– 3 year sharesave 315365 years
– 5 year sharesave 515565 years
– esop 45 years
close periods
from january 1 6 weeks 6 weeks
from july 1 1 month 1 month
risk free interest rate 41 46
1
for the sharesave options the binomial pricing model assumes that participants will exercise options at the beginning of the six month window if the share price is greater than the exercise price otherwise it
assumes that options are held until the expiration of their contractual termthis results in an expected life that falls somewhere between the start and end of the exercise window
at december 31 2005 the following ordinary shares were subject to options
date of exercise exercisable
grant number price dates
executive share option scheme 1996 50400 238p 2006
executive share option plan 1999 906416 269p 20062009
1999 206801 216p 20062009
2000 4775649 194p 20062010
2000 1473793 194p 20062010
2000 18404 163p 20062010
2000 86658 163p 20062010
2000 11731 170p 20062010
2001 794363 216p 20062011
2001 7542313 216p 20062011
2001 13516053 216p 20072011
2001 27522 218p 20062011
2001 233141 218p 20062011
2002 12418730 188p 20062012
2002 579537 188p 20062012
2002 581312 216p 20072012
2003 34285557 77p 20062013
2003 11340 170p 20062013
2003 166391 170p 20062013
sharesave plans 1999 1981389 194p 2007
2001 27447270 108p 20072009
2003 23268198 141p 20062009
2005 11990112 298p 20092011
under the terms of the rollsroyce plc executive share option scheme and the rollsroyce 1999 executive share option plan options granted to 504 directors and
senior executives were outstanding at december 31 2005
2005 group financialsqxd  15306  0758  page 86 rollsroyce group plc annual report 2005
87
28  financial instruments
the principal ﬁnancial risks to which the group is exposed are foreign currency exchange rate risk interest rate risk and commodity price riskthe board has approved
policies for the management of these risks
in accordance with the option allowed by ifrs 1 ‘first time adoption of ifrs’  the group has adopted ias 32 and ias 39 ‘financial instruments’prospectively from
january 1 2005 and consequently information for 2005 is provided on this basis for 2004 information has been provided on the previously published basis under 
uk gaap 
risk management policies and hedging activities
foreign currency exchange rate risk – the group has signiﬁcant cash ﬂows most signiﬁcantly us dollars followed by the euro denominated in currencies other than the
functional currency of the relevant trading entityto manage its exposures to changes in values of future foreign currency cash ﬂows so as to maintain relatively stable
longterm foreign exchange rates on settled transactions the group enters into derivative forward foreign currency transactions for accounting purposes these
derivative contracts are not designated as hedging instruments
the group also has exposures to the fair values of nonderivative ﬁnancial instruments denominated in foreign currenciesto manage the risk of changes in these
fair values the group enters into derivative forward foreign exchange contracts which are designated as fair value hedges for accounting purposes
the group regards its interests in overseas subsidiary companies as longterm investmentsthe group aims to match its translational exposures by matching the
currencies of assets and liabilitieswhere appropriate foreign currency ﬁnancial liabilities may be designated as hedges of the net investment
interest rate risk – the group’s interest rate risk is primarily in relation to its ﬁxed rate borrowings fair value risk and ﬂoating rate borrowings cash ﬂow risk interest rate
derivatives are used to manage the overall interest rate proﬁle within the group policy which is to maintain a higher proportion of net debt at ﬁxed rates of interest
having regard to the prevailing interest rate outlookthese are designated as either fair value or cash ﬂow hedges as appropriate
commodity risk – the group has exposures to the price of jet fuel and base metals arising from business operationsto minimise its cash ﬂow exposures to changes in
commodity prices the group enters into derivative commodity transactions for accounting purposes these derivative contracts are not designated as hedging
instruments
other price risk – the group’s cash equivalent balances represent investments in money market instruments with a term of up to one monththe group does not
consider that these are subject to signiﬁcant price risk
liquidity risk – the group’s policy is to hold ﬁnancial investments and maintain undrawn committed facilities at a level sufﬁcient to ensure that the group has available
funds to meet its mediumterm capital and funding obligations and to meet any unforeseen obligations and opportunitiesthe group holds cash and shortterm
investments which together with the undrawn committed facilities enable the group to manage its liquidity risk
credit risk – the group is exposed to credit risk to the extent of nonpayment by either its customers or the counterparties of its ﬁnancial instrumentsthe group has
credit policies covering both trading and ﬁnancial exposures at the balance sheet date there were no signiﬁcant concentrations of credit riskthe maximum exposure
to credit risk at the balance sheet date is represented by the carrying value of each ﬁnancial asset including derivative ﬁnancial instruments
2005 group financialsqxd  15306  0758  page 87 rollsroyce group plc annual report 2005
88
notes to the ﬁnancial statements continued
28  financial instruments continued
derivative ﬁnancial instruments
the nominal amounts and fair values of derivative ﬁnancial instruments are as follows analysed by year of expected maturity
2005
fair value 
expected maturity
notional within between one between two after
amount one year and two years and ﬁve years ﬁve years assets liabilities
£m £m £m £m £m £m £m
december 31 2005
foreign exchange contracts
fair value hedges 280 — — 105 175 5 —
nonhedge accounted 6158 2055 1883 2220 — 359 136
interest rate contracts
fair value hedges 1104 — 313 109 682 69 —
cash ﬂow hedges 124 124 —————
nonhedge accounted 115 —286324 — 7
commodity contracts
nonhedge accounted 102 46 33 23 — 31 —
7323 2225 2257 2310 531 464 143
as described above all derivative ﬁnancial instruments are entered into for risk management purposes although these may not be designated into hedging
relationships for accounting purposes
derivative ﬁnancial instruments related to foreign exchange risks are denominated in the following currencies
2005
currencies purchased forward 
sterling us dollar euro other total
£m £m £m £m £m
currencies sold forward
sterling — 522 — 17 539
us dollar 6534 — 293 289 7116
euro — — — 176 176
other 72531 8 71
other derivative ﬁnancial instruments are denominated in the following currencies
2005
£m
sterling 24
us dollar 558
euro 813
other 50
2005 group financialsqxd  15306  0758  page 88 rollsroyce group plc annual report 2005
89
28  financial instruments continued
fair values of ﬁnancial instruments
the fair value of a ﬁnancial instrument is the price at which an asset could be exchanged or a liability settled between knowledgeable willing parties in an arm’s
length transactionfair values have been determined with reference to available market information at the balance sheet date using the methodologies discussed
below
the carrying amounts and fair values of the group’s ﬁnancial instruments are as follows
2005
book value fair value
£m £m
assets
unlisted noncurrent investments 52 52
cash at bank and in hand 338 338
shortterm deposits and investments 1456 1456
trade receivables 963 963
other ﬁnancial assets
derivative ﬁnancial assets 464 464
other nonderivative ﬁnancial assets 258 258
liabilities
trade payables 1538 1538
borrowings – current 75 74
– noncurrent 1458 1530
other ﬁnancial liabilities
derivative ﬁnancial liabilities 143 143
financial risk and revenue sharing partnerships 423 454
b shares 7 7
other nonderivative ﬁnancial liabilities 246 246
unlisted ﬁxed asset investments –these primarily comprise floating rate convertible loan stockthe conversion conditions are such that fair value approximates to the
book value
trade receivablestrade payablesshortterm investments and cash and cash equivalents – fair values are assumed to approximate to cost either due to the shortterm
maturity of the instruments or because the interest rate of the investments is reset after periods not exceeding six months
borrowingsother ﬁnancial assets and other ﬁnancial liabilities – where available market values have been used to determine fair valueswhere market values are not
available fair values have been estimated by discounting expected future cash ﬂows using prevailing interest rate curves amounts denominated in foreign curencies
are valued at the exchange rate prevailing at the balance sheet date
the currency proﬁle of derivative ﬁnancial instruments is analysed abovethe nonderivative ﬁnancial instruments above are denominated in the following currencies
2005
sterling us dollar euro other total
£m £m £m £m £m
assets
unlisted noncurrent investments 46 — 2 4 52
cash at bank and in hand 111 67 87 73 338
shortterm deposits and investments 986 377 84 9 1456
trade receivables 194 633 74 62 963
other nonderivative ﬁnancial assets 84 122 19 33 258
liabilities
trade payables 731 550 130 127 1538
borrowings – current 8 11 1 55 75
– noncurrent 213 361 882 2 1458
other ﬁnancial liabilities
financial risk and revenue sharing partnerships — 325 98 — 423
b shares 7 — — — 7
other nonderivative ﬁnancial liabilities 178 36 10 22 246
2005 group financialsqxd  15306  0758  page 89 rollsroyce group plc annual report 2005
90
notes to the ﬁnancial statements continued
28  financial instruments continued
the group’s actual currency exposures after taking account of derivative foreign currency contracts which are not designated as hedging instruments for accounting
purposes are as follows
2005
sterling us dollar euro other total
functional currency of group operation £m £m £m £m £m
sterling —21 2 1
us dollar 1 — 416
euro 1— —— 1
other 2 6 51326
interest rate risk
in respect of income earning ﬁnancial assets and interest bearing ﬁnancial liabilities the following table indicates their effective interest rates and the periods in which
they repricethe value shown is the carrying amount
period in which interest rate reprices
effective 6 months more than
interest rate total or less 612 months 12 years 25 years 5 years
 £m £m £m £m £m £m
shortterm investments
1
48700 37 14 7 — 9 7
cash at bank and in hand
2
338 338 — — — —
shortterm deposits
3
1419 1419 — — — —
unsecured bank loans
canadian 100m ﬂoating rate loan cad libor 055 50 50 — — — —
after effect of interest rate swaps 52750 — —— ———
s8m ﬂoating rate loan euribor 1178 6 6 — — — —
overdrafts
4
12 12 — — ——
effect of other interest rate swaps 20933 — 115 — 28 63 24
other unsecured
other loan 2009 interest rate nil 00000 1 — — — 1 —
unsecured bond issues
6
3
8 notes 2007 s500m 63750 354 — — 354 — —
after effect of interest rate swaps gbp libor 0866 — 354 — 354 — —
7
3
8 notes 2016 £200m 73750 200 — — — — 200
584 notes 2010 us187m 58400 107 — — — 107 —
after effect of interest rate swaps usd libor 1159 — 107 — — 107 —
638 notes 2013 us230m 63800 134 — — — — 134
after effect of interest rate swaps usd libor 126 — 134 — — — 134
655 notes 2015 us83m 65500 49 — — — — 49
after effect of interest rate swaps usd libor 124 — 49 — — — 49
4
1
2 notes 2011 s750m 45000 524 — — — — 524
after effect of interest rate swaps gbp libor 0932 — 524 — — — 524
secured bank loans
us ﬂoating rate loan usd libor 098 74 74 — — — —
after effect of interest rate swaps 51540 — 74 74 — — —
other secured
obligations under ﬁnance leases payable 68603 22 4 4 5 8 1
261 646 71 33 63 218
1
interest on the shortterm investments are at ﬁxed ratesthe weighted average interest rate on the sterling securities is 487 per centthe periods in which they reprice is shown in the table above
2
cash at bank and in hand comprises bank balances and demand deposits and earns interest at rates based on daily bank deposit rates
3
shortterm deposits are deposits placed on money markets for periods up to three months and earn interest at the respective shortterm deposit rates
4
floating rate ﬁnancial liabilities comprise borrowings bearing interest at rates ﬁxed in advance for periods ranging from one to six months based on the applicable libor rate
some of the group’s borrowings are subject to the group meeting certain obligations including customary ﬁnancial covenants if the group fails to meet its obligation
these arrangements give rights to the lenders upon agreement to accelerate repayment of the facilitiesthere are no rating triggers contained in any of the group’s
facilities that could require the group to accelerate or repay any facility for a given movement in the group’s credit rating
  rollsroyce group plc annual report 2005
91
28  financial instruments continued
maturity analysis
the maturity analysis of the group’s interest bearing ﬁnancial liabilities is as follows
2005
£m
in one year or less or on demand 75
in more than one year but not more than two years 49
in more than two years but not more than ﬁve years 365
in more than ﬁve years 1044
1533
in addition the group has undrawn committed borrowing facilities available as follows
2005
£m
expiring within one year —
expiring in one to two years —
expiring thereafter 250
250
comparative information for 2004 
this is provided on the previously published basis under uk gaap 
funding and interest rates
2004
sterling us dollar euro other total
£m £m £m £m £m
financial assets
cash at bank and in hand 
1
200 418 45 95 758
shortterm deposits 
2
652 34 3 5 694
government securities and corporate bonds 
3
34 2 — — 36
unlisted ﬁxed asset investments 
4
47 3 2 5 57
debtors – amounts falling due after one year 
4
41 36 13 19 109
974 493 63 124 1654
financial liabilities 
5
floatingrate borrowings 
6
714 180 8 5 907
fixedrate borrowings 508 87 — 65 660
borrowings on which no interest is paid 
7
——— 1 1
other creditors – amounts falling due after one year 
4
42 31 1 12 86
1264 298 9 83 1654
notes
1
cash at bank and in hand comprises bank balances and deposits placed on money markets overnight
2
shortterm deposits are deposits placed on money markets for periods ranging from two nights up to one month
3
interest on the securities and bonds are at ﬁxed ratesthe weighted average interest rate on the sterling securities is 58 per cent
the weighted average time for these securities is 25 years
4
these amounts do not incur or accrue interest
5
financial liabilities are stated after taking into account the various interest rate and currency swaps entered into by the group
6
floatingrate ﬁnancial liabilities comprise borrowings bearing interest at rates ﬁxed in advance for periods ranging from one to six months based on the applicable libor rate
7
the weighted average period for borrowings on which no interest is paid is ﬁve years
2005 group financialsqxd  15306  0758  page 91 rollsroyce group plc annual report 2005
92
notes to the ﬁnancial statements continued
28  financial instruments continued
the analysis of ﬁxedrate borrowings is as follows
2004
weighted weighted
average average
interest rate period for
at which which rate
total ﬁxed is ﬁxed
£m  months
currency
sterling 508 69 15
us dollar 87 65 43
other 65 54 15
the maturity proﬁle of the group’s ﬁnancial liabilities is as follows
2004
£m
in one year or less or on demand 204
in more than one year but not more than two years 117
in more than two years but not more than ﬁve years 372
in more than ﬁve years 961
1654
borrowing facilities
the group has various borrowing facilities available to itthe undrawn committed facilities available at december 31 2004 were as follows
2004
£m
expiring within one year —
expiring in one to two years —
expiring thereafter 250
250
exchange risk management
the table below shows the group’s currency exposures at december 31 2004 on currency transactions that give rise to the net currency gains and losses recognised
in the proﬁt and loss account such exposures comprise the net monetary assets and liabilities of the group at december 31 2004 that are not denominated in the
functional currency of the operating company involvedthe exposures are stated after taking into account the effects of currency swaps and forward foreign
exchange contracts
2004
net foreign currency monetary assetsliabilities
sterling us dollar euro other
functional currency of group operation £m £m £m £m
sterling —— 1—
us dollar ——— 1
euro —1 — —
other 14 1 4
2005 group financialsqxd  15306  0758  page 92 rollsroyce group plc annual report 2005
93
28  financial instruments continued
fair values of ﬁnancial assets and ﬁnancial liabilities
the estimated fair value of the group’s ﬁnancial instruments are summarised below
2004
book value fair value
£m £m
unlisted noncurrent ﬁxed asset investments 57 57
cash at bank and in hand 758 758
shortterm deposits and investments 730 730
shortterm debt 204 211
longterm debt 1364 1569
other creditors – amounts falling due after one year 86 82
debtors – amounts falling due after one year 109 104
derivatives used to hedge the interest currency and commodity exposure of the business
jet fuel swaps —9
interest rate swaps 23 129
forward foreign currency contracts — 986
forward purchase of shares to meet share option commitments — 40
where available market values have been used to determine current valueswhere market values are not available fair values have been calculated by discounting
expected future cash ﬂows at prevailing interest and exchange rates
cash at bank and in hand shortterm deposits and shortterm borrowings
the book value approximates to fair value either due to the shortterm maturity of the instruments or because the interest rate of investments is reset after periods
not greater than six months
derivatives
the fair value of derivatives is the estimated amount based on current market rates which the group would expect to pay or receive were it to terminate the
derivatives at the balance sheet date
hedges of future transactions
as described in the finance director’s review on pages 24 to 29 the group’s policy is to hedge the following exposures
interest rate risk – using interest swaps
currency exposures on future forecast sales – using forward foreign currency contracts currency swaps and currency options
commodity price risk – using jet fuel swaps
gains and losses on instruments used for hedging are dealt with as outlined in the accounting policies on page 59
unrecognised gains and losses on instruments used for hedging and the movements therein are as follows
2004
total net
gains losses gainslosses
£m £m £m
unrecognised gains and losses on hedges at january 1 2004 980 234 746
gains and losses arising in previous year that were recognised in 2004 280 90 190
gains and losses arising in previous year that were not recognised in 2004 700 144 556
gains and losses arising in 2004 that were not recognised in 2004 618 33 585
unrecognised gains and losses on hedges at december 31 2004 of which 1318 177 1141
gains and losses expected to be recognised in 2005 564 123 441
gains and losses expected to be recognised thereafter 754 54 700
2005 group financialsqxd  15306  0758  page 93 rollsroyce group plc annual report 2005
94
notes to the ﬁnancial statements continued
29  operating and ﬁnance leases
operating leases
leases as lessee – noncancellable operating lease rentals are payable as follows
2005 2004
£m £m
within one year 82 67
between one and ﬁve years 270 245
after ﬁve years 134 159
486 471
leases as lessor – noncancellable operating lease rentals are receivable as follows
2005 2004
£m £m
within one year 14 15
between one and ﬁve years 23 36
after ﬁve years 7 14
44 65
the group acts as lessee and lessor for both land and buildings and gas turbine engines and acts as lessee for some plant and machinery
– sublease payments of £16m 2004 £17m and sublease receipts of £15m 2004 £16m were recognised in the income statement in the period
– purchase options exist on aero engines with the period to purchase option date varying between four to eight years
– escalation clauses exist on some leases and are linked to libor
– the total of future minimum sublease payments expected to be made is £16m 2004 £28m and sublease receipts expected to be received £2m 2004 £nil
finance leases
finance lease liabilities are payable as follows
2005 2004
payments interest principal payments interest principal
£m £m £m £m £m £m
within one year 1028 14 2 12
between one and ﬁve years 17 4 13 26 6 20
after ﬁve years 1— 1 11 —
28 6 22 41 9 32
there were no contingent rents recognised as an expense in the period
future minimum sublease receipts of £nil 2004 £nil are expected under noncancellable subleases
2005 group financialsqxd  15306  0758  page 94 rollsroyce group plc annual report 2005
95
30  contingent liabilities
in connection with the sale of its products the group will on some occasions provide ﬁnancing support for its customersthe group’s contingent liabilities relating to
ﬁnancing arrangements are spread over many years and relate to a number of customers and a broad product portfolio
under uk gaap  contingent liabilities were reported a at the full potential exposure regardless of the time at which such exposures may arise and b in sterling
taking account of forward exchange contracts held following the adoption of ifrs the group has reviewed this policy and has concluded that it is more appropriate
to disclose contingent liabilities on a discounted basis as directors consider the likelihood of these contingent liabilities crystallising to be remote this amount does
not represent a present value however the amounts will be discounted at the group’s borrowing rate to reﬂect better the time span over which these exposures
could arise in addition following the decision to cease hedge accounting from january 1 2005 it is no longer appropriate to take account of forward exchange
contracts as the contingent liabilities are denominated in us dollars this amount will be reported together with the sterling equivalent at the reporting date spot rate
applying this revised policy the discounted value of the total gross contingent liabilities relating to ﬁnancing arrangements on all delivered aircraft less insurance
arrangements and relevant provisions at december 31 2005 amounted to 1097m £638m 2004 1143m £595m previously reported £999mtaking into account
the net realisable value of the relevant security including unrestricted cash collateral of 108m £63m 2004 104m £54m the discounted value of the net contingent
liabilities in respect of ﬁnancing arrangements on all delivered aircraft amounted to 259m £150m 2004 294m £153m previously reported £189m sensitivity
calculations are complex but for example if the value of the relevant security was reduced by 20 per cent a net contingent liability with a discounted value of
approximately 363m £211m 2004 403m £210m previously reported £277m would resultthere are also net contingent liabilities in respect of undelivered aircraft
but it is not considered practicable to estimate these as deliveries can be many years in the future and the relevant ﬁnancing will only be put in place at the
appropriate time
contingent liabilities exist in respect of guarantees provided by the group in the ordinary course of business for product delivery performance and reliabilitythe
company and some of its subsidiary undertakings have in the normal course of business entered into arrangements in respect of export ﬁnance performance bonds
countertrade obligations and minor miscellaneous itemsvarious group undertakings are parties to legal actions and claims which arise in the ordinary course of
business some of which are for substantial amounts as a consequence of the insolvency of an insurer as previously reported the group is no longer fully insured
against known and potential claims from employees who worked for certain of the group’s uk based businesses for a period prior to the acquisition of those
businesses by the groupwhile the outcome of some of these matters cannot precisely be foreseen the directors do not expect any of these arrangements legal
actions or claims after allowing for provisions already made to result in signiﬁcant loss to the group or company
31  related party transactions
2005 2004
£m £m
sales of goods and services to joint ventures 986 965
purchases of goods and services from joint ventures 643 437
operating lease payments to joint ventures 38 36
guarantees provided to joint ventures 2 5
dividends received from joint ventures 35 15
rrsp receipts from joint ventures 3 11
other income received from joint ventures 14 15
the aggregated balances with joint ventures are shown in notes 13 14 17 and 19
in the course of normal operations related party transactions entered into by the group have been contracted on an armslength basis
rollsroyce group plc is a nontrading holding company for rollsroyce plc
key management personnel are considered to be the directors and their remuneration is disclosed within the directors’remuneration report on page 43
2005 group financialsqxd  15306  0758  page 95 rollsroyce group plc annual report 2005
96
notes to the ﬁnancial statements continued
32  disposal of businesses
during the year the group disposed of its interests in a number of small businesses as summarised below
total
£m
noncurrent assets 1
inventory 2
trade and other receivables 4
trade and other payables 4
borrowings repaid 1
net assets 2
loss on sale or termination of businesses 2
disposal proceeds less costs —
amounts deferred at december 31 2005 1
net cash inﬂow per cash ﬂow statement 1
33  transition to international financial reporting standards ifrs
as stated in note 1 in accordance with european union regulations the group adopted ifrs from january 1 2004 and restated its ﬁnancial statements for the year
ended december 31 2004 which were previously reported under uk generally accepted accounting practices gaap an analysis of the impact of implementing
ifrs was published in a news release on april 14 2005 available on the investors section of the group’s website wwwrollsroycecom
the major changes required by the introduction of ifrs were
– recognition of intangible assets whereby certain qualifying costs in particular related to research and development and recoverable engine costs which were
written off under uk gaap  are required to be recognised and amortised over a future period of time
– treatment of ﬁnancial instruments whereby the majority of ﬁnancial assets and derivatives employed by the group to provide stability for longterm business
planning for example in respect of foreign exchange rates will be fairvalued on the balance sheet with subsequent changes in fair values recorded in the income
statement unless cash ﬂow hedge accounting is applied
– ﬁnancial risk and revenue sharing partnerships whereby a balance sheet liability is required to be established to reﬂect the expected future value of payments to
partners
– pensions and other postretirement costs whereby pension scheme deﬁcits are required to be recorded on the balance sheet
– the cessation of amortisation of goodwill and
– the recording of sharebased payments at fair value
the group achieved hedge accounting under uk gaap  however the strict methodology to achieve hedge accounting under ias 39 limits its application for use by
the group unless there are signiﬁcant changes to the way in which the group operates its economic hedging policiesthe group has determined that its existing
hedging strategy is in the best interests of the business and its shareholders it has not therefore altered its hedging activities in order to achieve a particular
accounting presentation under the new rules
the group has applied hedge accounting to its interest rate derivative hedge book but has not applied cash ﬂow hedge accounting to its foreign exchange and
commodity derivative hedge books
details of the adjustments made in adopting ifrs are provided below reconciliations for the 2004 restated opening and closing balance sheets income
statement and cash ﬂow are also provided
presentation of ﬁnancial statements
the group’s primary ﬁnancial statements have been presented in accordance with ias 1 presentation of financial statements
the principal impact on the income statement is the presentation of the group’s share of the results of joint ventures which are accounted for using the equity
method as a single line under uk gaap  the group’s shares of operating proﬁt interest and taxation were reported separately as a consequence the group’s share of
joint venture taxation is included in proﬁt before taxthere is no impact on reported proﬁt after tax
the format of the balance sheet has been amended to include the items required by ias 1 to be presented on the face of the balance sheet
transitional arrangements
the rules for the ﬁrsttime adoption of ifrs are set out in ifrs 1 in general a company is required to determine its ifrs policies and apply those retrospectively to
determine its opening balance sheet under ifrs ifrs 1 allows a number of exemptions to this general requirementwhere rollsroyce has applied these exemptions
they are noted in the relevant section below in particular the group has adopted the exemption that ias 32 and ias 39 financial instruments need not be applied to
the comparative period consequently the restated results for the year ended december 31 2004 have been prepared using the accounting policies for ﬁnancial
instruments previously adopted under uk gaap  this has led to a second transition at january 1 2005 details of which are provided below together with a balance
sheet reconciliation
2005 group financialsqxd  15306  0758  page 96 rollsroyce group plc annual report 2005
97
33  transition to international financial reporting standards ifrs continued
research and development
ias 38 requires that all development costs meeting speciﬁed criteria be capitalised as intangible assets
as part of its ifrs transition project rollsroyce reviewed all development projects whether the costs were previously recognised under uk gaap or not to
determine whether the criteria in ias 38 were metthe key eligibility criteria for capitalisation relate to
i identiﬁcation of development costs in general research and development activities are closely interrelated and it is not until the technical feasibility of the
project can be determined with reasonable certainty that development costs can be separately identiﬁed and
ii the generation of future economic beneﬁt intangible assets are not recognised unless the project is expected to generate future economic beneﬁt
exceeding the amount capitalised
certain expenditures on internal product development meet all the criteria of ias 38 and have therefore been capitalised
development costs capitalised are amortised on a straightline basis over a period not exceeding 15 yearsthe impact arising from this change is summarised as
follows
at year ended 
january 1 december 31
2004 2004
£m £m
income statement
capitalisation of internal expenditure 11
amortisation of intangible asset 17
adjustment to proﬁt before taxation 6
net assets
intangible asset – cost 246 257
intangible asset – accumulated amortisation 86 103
160 154
related tax effect 48 46
adjustment to net assets 112 108
recoverable engine costs
on occasions the group may sell original equipment to customers at an amount below its cost of manufacture with the expectation that this deﬁcit will be recovered
from future aftermarket sales to the original customer where the group has a contractual right to supply aftermarket parts to the customer and its intellectual rights
warranty arrangements and statutory airworthiness requirements provide reasonable control over this supply these arrangements are considered to meet the
deﬁnition of an intangible asset under uk gaap  these intangible assets were required to be writtenoff as they arose under ias 38 such intangible assets are required
to be recognisedthe resulting intangible asset will be amortised over the expected utilisation period of the equipment by the initial customer – generally to a
maximum of ten years subject to any speciﬁc contractual circumstances
the impact arising from this change is summarised as follows
at year ended
january 1 december 31
2004 2004
£m £m
income statement
capitalisation of intangible assets previously written off in 2004 21
amortisation of intangible assets 26
elimination of related inventory provision recognised under uk gaap 5
adjustment to proﬁt before taxation 10
net assets
intangible assets – cost 208 229
intangible assets – accumulated amortisation 88 114
120 115
elimination of related inventory provision recognised under uk gaap 14 9
134 124
related tax effect 40 37
adjustment to net assets 94 87
2005 group financialsqxd  15306  0758  page 97 rollsroyce group plc annual report 2005
98
notes to the ﬁnancial statements continued
33  transition to international financial reporting standards ifrs continued
goodwill and business combinations
ifrs 3 business combinations prohibits the amortisation of goodwill instead it requires goodwill to be carried at cost annual impairment tests are required to 
be performed
the group has applied the exemption granted by ifrs 1 to apply ifrs 3 prospectively from the date of transition to ifrsthis has the following impact
– all prior business combination accounting is frozen at the transition date and
– the value of goodwill is frozen at the transition date and amortisation previously reported under uk gaap for the year ended december 31 2004 is reversed for
the ifrs restatement
the impact arising from this change is summarised as follows
at year ended
january 1 december 31
2004 2004
£m £m
income statement
reversal of goodwill amortisation relating to subsidiaries 47
reversal of goodwill amortisation relating to joint ventures 1
adjustment to proﬁt before taxation 48
net assets
reversal of goodwill amortisation —48
—48
related taxation effect —1
adjustment to net asset —47
pensions and other postretirement beneﬁts
ias 19 employee beneﬁts requires separate recognition of the operating and ﬁnancing costs of deﬁned beneﬁt pension schemes and similarly funded employee
beneﬁts in the income statementthe standard permits a number of options for the recognition of actuarial gains and lossesthe group’s policy is to recognise
immediately any variations in full in a statement of recognised income and expense as permitted in the iasb’s amendment to ias 19 entitled actuarial gains and
losses group plans and disclosures
the cash funding of the plans is designed in consultation with independent qualiﬁed actuaries to ensure that present and future contributions should be
sufﬁcient to meet future liabilities
the impact arising from this change is summarised as follows
at year ended
january 1 december 31
2004 2004
£m £m
income statement
adjustments to operating proﬁt 42
adjustments to ﬁnancing costs 1
adjustment to proﬁt before taxation 41
net assets
eliminate amounts recognised under ssap 24
prepaid pension contributions 239 263
provision for pension costs 160 159
include ias 19 pension liability 1466 1409
1545 1513
related taxation effect 447 437
adjustment to net assets 1098 1076
2005 group financialsqxd  15306  0758  page 98 rollsroyce group plc annual report 2005
99
33  transition to international financial reporting standards ifrs continued
sharebased payments
ifrs 2 sharebased payments requires the fair value of share options granted to employees since november 7 2002 the publication date of the exposure draft of 
ifrs 2 to be charged to the income statementthe fair value is calculated using an optionpricing model and is charged to income over the relevant vesting periods
adjusted to reﬂect actual and expected levels of vesting
the basis of calculation for deferred taxation is in respect of all schemes including pre november 7 2002 grants and is the difference between the market price
at the date of the ﬁnancial statements and the option exercise pricethis will not necessarily correlate to the fair value charge
the impact arising from this change is summarised as follows
at year ended
january 1 december 31
2004 2004
£m £m
income statement
fair value of share options charged to operating proﬁt 6
adjustment to proﬁt before taxation 6
net assets
related taxation effect 29
adjustment to net assets 29
scope of consolidation
on transition to ifrs ias 27 consolidated and separate financial statements required the consolidation of all subsidiaries and special purpose entities that the group
controlled at january 1 2004 based on the ias 27 deﬁnitions of control and after taking into account the facts and circumstances relevant at the transition date the
group determined that it controlled one arrangement pembroke 717 holdings limited that was not required to be consolidated under uk gaap  the consolidation
of this company did not have any net impact on the reported results for 2004
the impact arising from this change is summarised as follows
at year ended
january 1 december 31
2004 2004
£m £m
income statement
operating proﬁt 4
finance costs 4
adjustment to proﬁt before taxation —
net assets
property plant and equipment 69 46
current liabilities 1 1
borrowings 77 69
elimination of provision recognised under uk gaap 924
adjustment to net assets ——
2005 group financialsqxd  15306  0758  page 99 rollsroyce group plc annual report 2005
10 0
notes to the ﬁnancial statements continued
33  transition to international financial reporting standards ifrs continued
income taxes
the net deferred tax impact of the changes above is shown as part of the relevant adjustment
in addition under ias 12 income taxes certain temporary differences for example in respect of capital losses and unremitted earnings from joint ventures which
previously were not recognised under uk gaap  will be recognised
the impact arising from this change is summarised as follows
at year ended
january 1 december 31
2004 2004
£m £m
income statement
changes to deferred tax charge resulting from differences in the basis of calculation 1
adjustment to proﬁt after taxation 1
net assets
changes to deferred tax balance resulting from differences in the basis of calculation 45 44
adjustment to net assets 45 44
financial instruments applicable from january 1 2005
ias 32 and ias 39 financial instruments address the accounting for and ﬁnancial reporting of ﬁnancial instruments ias 32 covers disclosure and presentation while ias
39 covers recognition and measurement including detailed rules for hedge accountingthese include the requirements to match the hedged item to the hedging
instrument and to measure hedge effectiveness ias 39 requires certain ﬁnancial assets and certain ﬁnancial liabilities to be recognised at fair value accounting for
movements in fair value is dependent on the designation of the relevant ﬁnancial instrument and whether hedge accounting is adopted
the group has applied the exemption granted by ifrs 1 not to apply ias 32 and ias 39 to its comparative ﬁgures for 2004 on january 1 2005 the fair value of
foreign exchange and commodity derivatives were included in a transition hedging reserve as the group has not adopted cash ﬂow hedge accounting for future
foreign exchange transactions under ias 39 from january 1 2005 the reserve was frozen and will be released to the income statement based on the designated
maturities on that date
the impact on the group’s derivative ﬁnancial instruments is described below
foreign exchange derivatives
a large element of the group’s trading is denominated in us dollars and a signiﬁcant portion of its costs is incurred in sterling and euros in order to protect itself from
the associated currency volatility the group takes signiﬁcant levels of forward cover under uk gaap  gains or losses on this cover are not recognised in the income
statement until realised matching them with the underlying transactions as contracts may be signed several years in advance of delivery delivery dates may change
and meeting the strict criteria for hedge accounting in ias 39 is not considered to be practicable within the current risk management practices rollsroyce considers
that it could amend its risk management practices to achieve hedge accounting however rollsroyce believes that its current risk management practices are in the
best economic interests of shareholders and should not be amended purely to achieve a particular accounting treatment accordingly rollsroyce has decided not to
adopt cash ﬂow hedge accounting for forecast foreign exchange transactions rollsroyce will continue to hedge its future forecast us dollar income on a portfolio
basis which it considers is the most efﬁcient economic basis for doing so
as a result of not hedge accounting for forecast foreign exchange transactions the movements on the fair value of derivative contracts held for the purpose of
hedging these transactions will be recognised in the income statementthe size of this movement in fair values will be largely dependent on movements in spot
exchange rates
under uk gaap  as part of its hedging policy rollsroyce
– recognised revenues and costs at the average exchange rate achieved in the year
– recognised monetary assets and liabilities at the rate expected to be achieved in settling these items taking account of the foreign exchange cover in place
– incorporated rates achieved on forward cover in its assessment of the proﬁtability of service and longterm contracts
under ifrs rollsroyce will
– recognise revenues and costs at the exchange rate at the time of the transaction
– recognise monetary assets and liabilities at the spot exchange rate on the reporting date and
– assess the proﬁtability of service and longterm contracts without including the impact of forward exchange rate contracts
rollsroyce will adopt fair value hedge accounting for foreign exchange derivatives entered into for the purposes of hedging the fair values of borrowings
denominated in a foreign currency under fair value hedge accounting the borrowings being hedged will be measured at fair value in respect of the foreign exchange
risk with movements in fair values of both the derivatives and the borrowings being included in the income statement
rollsroyce will adopt net investment hedge accounting in respect of foreign subsidiaries and foreign currency denominated borrowings under net investment
hedging foreign exchange gains and losses arising on the fair value of the borrowings are included in equity to the extent they offset equivalent losses and gains
arising on the consolidation of the subsidiarythis policy is unchanged from uk gaap 
2005 group financialsqxd  15306  0758  page 100 rollsroyce group plc annual report 2005
10 1
33  transition to international financial reporting standards ifrs continued
interest rate derivatives
rollsroyce will adopt hedge accounting for hedges entered into for the purposes of managing its exposure to movements in interest rates fair value hedge
accounting will be used for the hedging of ﬁxed rate borrowings and cash ﬂow hedge accounting will be used where the underlying borrowing is a ﬂoating rate
instrumentwhere fair value hedge accounting is used the debt being hedged will be measured at fair value in respect of the interest rate risk with movements in the
fair values of both the derivative and the debt being included in the income statementwhere cash ﬂow hedge accounting is used the effective element of the fair
value of the derivative will be included in a hedging reserve in equitythis hedging reserve will be released to the income statement to offset changes in interest rates
on the hedged ﬂoating rate borrowings
risk and revenue sharing partnerships
risk and revenue sharing partnership rrsp agreements are a standard form of cooperation in the civil aeroengine industry in general partners share investment in
the programme market risk as they receive their return from future sales currency risk as their returns are denominated in us dollars sales ﬁnancing obligations
warranty costs and where they are manufacturing or development partners technical and cost risk
as part of the ifrs transition project rrsp arrangements have been reviewed to assess whether they are ﬁnancial instruments as deﬁned by ias 32 following this
review certain partnerships where the arrangement is not part of an overall supplier arrangement will be reclassiﬁed as ﬁnancial instruments on transition to ifrs
reclassiﬁed rrsp arrangements are accounted for using the amortised cost method based on the effective interest rate at the inception of the transaction
government investment
in the past rollsroyce has received investment in certain projects from the uk government under uk gaap  these amounts were recognised as income when they
were received with the levies being recognised as they became due on engine delivery a similar review to that for rrsps concluded that these arrangements were
not ﬁnancial instruments and that no changes are required to the accounting treatment
other ﬁnancial derivatives
the group has an ongoing exposure to the price of jet fuel from business operations for reasons similar to those described for foreign exchange above rollsroyce
will not adopt hedge accounting for its exposures to changes in the price of jet fuelthese are hedged using commodity swaps
the group has entered into forward contracts to purchase its own shares for the purposes of meeting obligations to issue shares under employee share
schemes under uk gaap  these contracts were not recognised until the shares were purchased and issued to employees under ias 32 these contracts are
categorised as ﬁnancial liabilities and accounted for on the amortised cost basis
the company has issued noncumulative redeemable convertible preference shares b shares as an alternative to paying a cash dividend under ias 32 these
shares are categorised as ﬁnancial liabilities
the impact of the transition to ifrs on the net assets in respect of ﬁnancial instruments as at january 1 2005 is summarised as follows
£m £m
net assets
amortised cost value of risk and revenue sharing partnerships 455
related taxation effect 130 325
fair value of foreign exchange derivatives 996
revaluation of monetary assets and liabilities to spot rate 91
foreign exchange within service and other longterm contracts 54
related taxation effect 242 609
fair value of interest rate derivatives 15
related taxation effect 4 11
fair value of commodity derivatives 9
related taxation effect 3 6
amortised cost value of contracts to purchase own shares 115
related taxation effect 8 123
reclassiﬁcation of b shares as a liability 5 5
adjustment to net assets 151
2005 group financialsqxd  15306  0758  page 101 rollsroyce group plc annual report 2005
10 2
notes to the ﬁnancial statements continued
33  transition to international financial reporting standards ifrs continued
contingent liabilities
the group’s customer ﬁnancing arrangements fall into two categories that need to be considered separately for ifrs purposes
credit based guarantees
credit based guarantees are speciﬁcally exempt from being treated as ﬁnancial derivatives under ias 39they are required to be treated as insurance contracts in
accordance with ifrs 4 insurance contracts under ifrs 4 the existing uk gaap treatment frs 12 is ‘grandfathered’until such time as the new insurance contracts
standard comes into effect
asset value guarantees avgs
the treatment of avgs is less well deﬁned under ifrsthe group has treated avgs as insurance contracts in accordance with ifrs 4 as it considers that this treatment
best reﬂects the underlying nature of the arrangements
there are no material changes to the treatment of contingent liabilities upon transitioning from uk gaap to ifrs
other
the group’s banking covenants are not affected by the transition to ifrs as they are based on uk gaap prevailing at the time the relevant borrowing facility was
entered into ‘frozen uk gaap’
the group’s borrowing powers under its articles of association were amended at the 2004 agm to a ﬁxed limit in anticipation of the transition to ifrs
the scheme of arrangement and the reduction in share capital undertaken in 2003 provides rollsroyce group plc with a buffer in respect of distributable
reserves available inter alia for the purposes of making payments to shareholders
2005 group financialsqxd  15306  0758  page 102 rollsroyce group plc annual report 2005
10 3
33  transition to international financial reporting standards ifrs continued
restatement of net assets and equity at january 1 2004 
adjustments
reformatted
uk gaap as development recoverable postretirement scope of sharebased restated in
previously costs engine costs beneﬁts consolidation payments tax accordance 
reported ias 38 ias 38 ias 19 ias 27 ifrs 2 ias 12 other with ifrs
£m £m £m £m £m £m £m £m £m
noncurrent assets
intangible assets 863 160 120 — — — — — 1143 
propertyplant and equipment 1750 — — — 69 — — — 1819  
investments in joint ventures 202 — — — — — — 11 213  
other investments 63 — — — — — — — 63  
deferred tax assets 117 48 40 444 — 2 154 — 321  
2995 112 80 444 69 2 154 11 3559  
current assets
inventory 962 — 14 — — — — — 976  
trade and other receivables 2249 — — — — — — — 2249  
taxation recoverable 1 — — — — — — — 1  
other ﬁnancial assets — — — — ————— 
shortterm investments 39 — — — — — — — 39 
cash and cash equivalents 929 — — — — — — — 929 
4180 — 14 — — — — — 4194  
current liabilities
borrowings 94 — — — 3 — — — 97 
other ﬁnancial liabilities — — — — — — — — — 
trade and other payables 2574 — — — 1 — — — 2575 
current tax liabilities 185 — — — — — — — 185
provisions 159 — — — — — — — 159
3012 — — — 4 — — — 3016
noncurrent liabilities
borrowings 1197 — — — 74 — — — 1271
other ﬁnancial liabilities — — — — — — — — — 
other payables 426 — — — — — — 3 429
deferred tax liabilities 214 — — 3 — — 109 — 102
provisions 262 — — — 9 — — — 253
postretirement beneﬁt obligations 79 — — 1545 — — — — 1466
2020 — — 1542 65 — 109 3 3521
net assets 2143 112 94 1098 — 2 45 8 1216 
equity
calledup share capital 333 — — — — — — — 333 
share premium account 1 — — — — — — — 1  
other reserves 99 — — — — — — 96 3 
retained earnings 1707 112 94 1098 — 2 45 104 876 
equity attributable to equity holders
of the parent 2140 112 94 1098 — 2 45 8 1213 
minority interests 3 —— — —— —— 3 
total equity 2143 112 94 1098 — 2 45 8 1216 
2005 group financialsqxd  15306  0758  page 103 rollsroyce group plc annual report 2005
104
notes to the ﬁnancial statements continued
33  transition to international financial reporting standards ifrs continued
restatement of net assets at december 31 2004
adjustments
reformatted
uk gaap as development recoverable postretirement sharebased scope of restated in
previously costs engine costs beneﬁts payments goodwill consolidation tax accordance
reported ias 38 ias 38 ias 19 ifrs 2 ifrs 3 ias 27 ias 12 other with ifrs
£m £m £m £m £m £m £m £m £m £m
noncurrent assets
intangible assets 911 154 115 — — 47 — — — 1227
property plant and equipment 1626 ————— 46 —— 1672
investments in joint ventures 199 ———— 1—— 11 211
other investments 57———————— 57
deferred tax assets 96 46 37 435 9 1 — 138 — 318
2889 108 78 435 9 47 46 138 11 3485
current assets
inventory 1081 — 9 —————— 1090
trade and other receivables 2049 ———————— 2049
taxation recoverable 2 ———————— 2
other ﬁnancial assets ——————————
shortterm investments 36———————— 36
cash and cash equivalents 1452 ———————— 1452
4620 — 9 —————— 4629
current liabilities
borrowings 204 ————— 3 — — 207
other ﬁnancial liabilities ——————————
trade and other payables 2394 ————— 1 — — 2395
current tax liabilities 176 ———————— 176
provisions 173 ———————— 173
2947 ————— 4 — — 2951
noncurrent liabilities
borrowings 1364 ————— 66 —— 1430
other ﬁnancial liabilities ——————————
other payables 540 ——————— 3 543
deferred tax liabilities 211 — — 2 — — — 94 — 115
provisions 244 ————— 24 —— 220
postretirement beneﬁt obligations 104 — — 1513 ————— 1409
2255 — — 1511 — — 42 94 3 3717
net assets 2307 108 87 1076 9 47 — 44 8 1446
equity
calledup share capital 346 ———————— 346
share premium account 4 ———————— 4
other reserves 166 ——————— 127 39
retained earnings 1787 108 87 1076 9 47 — 44 135 1053
equity attributable to equity holders 
of the parent 2303 108 87 1076 9 47 — 44 8 1442
minority interests 4———————— 4
total equity 2307 108 87 1076 9 47 — 44 8 1446
2005 group financialsqxd  15306  0758  page 104 rollsroyce group plc annual report 2005
10 5
33  transition to international financial reporting standards ifrs continued
restatement of net assets and equity at january 1 2005
adjustments on adoption of ias 32 and ias 39
as at foreign monetary longterm own share risk and
december 31 exchange assets and service interest rate commodity total return other revenue sharing
2004 instruments liabilities arrangements instruments instruments swaps reclassiﬁcations partnerships
under ifrs ias 39 ias 21 ias 18 ias 39 ias 39 ias 39 ias 39 ias 39 restated
£m £m £m £m £m £m £m £m £m £m
noncurrent assets
intangible assets 1227 ———————— 1227
property plant and equipment 1672 ———————— 1672
investments in joint ventures 211 ———————— 211
other investments 57 ———————— 57
deferred tax assets 318 273 19 16 4 3 8 — 130 203
3485 273 19 16 4 3 8 — 130 3370
current assets
inventory 1090 ———————— 1090
trade and other receivables 2049 — 182 53 ———— 39 1775
taxation recoverable 2 ———————— 2
other ﬁnancial assets — 1100 — — 121 9 — — — 1230
shortterm investments 36 ———————— 36
cash and cash equivalents 1452 — 48 —————— 1404
4629 1100 230 53 121 9 — — 39 5537
current liabilities
borrowings 207 — 20 — 7 ———— 234
other ﬁnancial liabilities — 114 — — 15 — 20 5 67 221
trade and other payables 2395 10 156 ————— 52 2177
current tax liabilities 176 ———————— 176
provisions 173 ———————— 173
2951 104 136 — 22 — 20 5 15 2981
noncurrent liabilities
borrowings 1430 — — — 114 ———— 1544
other ﬁnancial liabilities — ————— 95 — 401 496
other payables 543 — 3 1 ————— 541
deferred tax liabilities 115 4 ——————— 119
provisions 220 ———————— 220
postretirement beneﬁt obligations 1409 ———————— 1409
3717 4 3 1 114 — 95 — 401 4329
net assets 1446 719 72 38 11 6 123 5 325 1597
equity
calledup share capital 346 —————— 5 — 341
share premium account 4 ———————— 4
other reserves 39 697 — — 3 6 — 6 — 745
retained earnings 1053 22 72 38 8 — 123 6 325 503
equity attributable to equity holders 
of the parent 1442 719 72 38 11 6 123 5 325 1593
minority interests 4 ———————— 4
total equity 1446 719 72 38 11 6 123 5 325 1597
2005 group financialsqxd  15306  0758  page 105 rollsroyce group plc annual report 2005
10 6
notes to the ﬁnancial statements continued
33  transition to international financial reporting standards ifrs continued
restatement of income statement for the year ended december 31 2004
adjustments
reformatted
uk gaap as development recoverable postretirement sharebased scope of restated in
previously costs engine costs beneﬁts payments goodwill consolidation tax accordance
reported ias 38 ias 38 ias 19 ifrs 2 ifrs 3 ias 27 ias 12 with ifrs
£m £m £m £m £m £m £m £m £m
group revenue 5939 ————— 8— 5947
cost of sales 4814 — 10 42 6 47 3 — 4744
gross proﬁt 1125 — 10 42 6 47 5 — 1203
other operating income 73 ——————— 73
commercial and administrative costs 598 ————— 1 — 599
research and development costs 282 6 —————— 288
share of proﬁt of joint ventures 
1
18 ———— 1—— 19
group operating proﬁt 336 6 10 42 6 48 4 — 408
proﬁt on sale of businesses 9 ——————— 9
proﬁt before ﬁnancing costs 345 6 10 42 6 48 4 — 417
net ﬁnancing costs 48 — — 1 — — 4 — 53
proﬁt before taxation 297 6 10 41 6 48 — — 364
taxation 92 2 3 14 1 1 — 1 100
proﬁt for the period 205 4 7 27 5 47 — 1 264
attributable to
equity holders of the parent 204 4 7 27 5 47 — 1 263
minority interests 1 ——————— 1
205 4 7 27 5 47 — 1 264
1
comprising operating proﬁt £49m interest £22m taxation £9m
2005 group financialsqxd  15306  0758  page 106 rollsroyce group plc annual report 2005
10 7
33  transition to international financial reporting standards ifrs continued
restatement of the cash ﬂow statement for the year ended december 31 2004
adjustments
reformatted
uk gaap as development recoverable postretirement sharebased scope of restated in
previously costs engine costs beneﬁts payments goodwill consolidation tax accordance
reported ias 38 ias 38 ias 19 ifrs 2 ifrs 3 ias 27 ias 12 with ifrs
£m £m £m £m £m £m £m £m £m
proﬁt before taxation 297 6 10 41 6 48 — — 364
share of proﬁt of joint ventures 18 ———— 1 — — 19
gain on sale of business 9 ——————— 9
loss on sale of property plant and equipment 2 ——————— 2
net ﬁnance costs 48 — — 1 — — 4 — 53
sharebased payments ———— 6——— 6
taxation paid 84 ——————— 84
depreciation of intangible assets 62 17 26 — — 47 — — 58
depreciation of property plant and equipment 224 ————— 18 — 242
increase in provisions 7 ————— 15 — 8
postretirement beneﬁts adjustment ——— 42 ———— 42
increase in inventories 121 — 5 ————— 116
decrease in trade and other receivables 179 ——————— 179
decrease in trade and other payables 31 ——————— 31
dividends received from joint ventures 15 ——————— 15
net cash ﬂow from operating activities 571 11 21 — — — 7 — 610
additions to intangible assets 110 11 21 ————— 142
purchases of property plant and equipment 175 ——————— 175
disposals of property plant and equipment 66 ——————— 66
disposals of businesses 16 ——————— 16
investments in joint ventures 2 ——————— 2
cash ﬂows from investing activities 205 11 21 ————— 237
decrease in government securities 
and corporate bonds 3 ——————— 3
borrowings due within one year
– repayment of loans 57 ——————— 57
– increase in loans —————————
borrowings due after one year
– repayment of loans 92 ————— 3 — 95
– increase in loans 500 ——————— 500
capital element of ﬁnance lease payments 52 ——————— 52
interest received 58 ——————— 58
interest paid 103 ————— 4 — 107
interest element of ﬁnance lease payments 3 ——————— 3
equity dividends paid 33 ——————— 33
issue of ordinary shares 4——————— 4
purchase of own shares 2 ——————— 2
redemption of b shares 27 ——————— 27
cash ﬂows from ﬁnancing activities 196 ————— 7 — 189
increase in cash and cash equivalents 562 ——————— 562
2005 group financialsqxd  15306  0758  page 107 rollsroyce group plc annual report 2005
10 8
statement of directors’responsibilities in respect of the annual report and the ﬁnancial statements
the directors are responsible for preparing the annual report and the group and
parent company ﬁnancial statements in accordance with applicable law and
regulations
company law requires the directors to prepare group and parent company
ﬁnancial statements for each ﬁnancial year under that law the directors are
required to prepare the group ﬁnancial statements in accordance with ifrss as
adopted by the eu and have elected to prepare the parent company ﬁnancial
statements in accordance with uk accounting standards
the group ﬁnancial statements are required by law and ifrss as adopted by
the eu to present fairly the ﬁnancial position and performance of the group the
companies act 1985 provides in relation to such ﬁnancial statements that
references in the relevant part of that act to ﬁnancial statements giving a true and
fair view are references to their achieving a fair presentation
the parent company ﬁnancial statements are required by law to give a true
and fair view of the state of affairs of the parent company
in preparing each of the group and parent company ﬁnancial statements
the directors are required to
– select suitable accounting policies and then apply them consistently
– make judgements and estimates that are reasonable and prudent
– for the group ﬁnancial statements state whether they have been prepared
in accordance with ifrss as adopted by the eu
– for the parent company ﬁnancial statements state whether applicable uk
accounting standards have been followed subject to any material
departures disclosed and explained in the parent company ﬁnancial
statements and  
– prepare the ﬁnancial statements on the going concern basis unless it is
inappropriate to presume that the group and the parent company will
continue in business
the directors are responsible for keeping proper accounting records that disclose
with reasonable accuracy at any time the ﬁnancial position of the parent
company and enable them to ensure that its ﬁnancial statements comply with
the companies act 1985they have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets of the group and to prevent
and detect fraud and other irregularities
under applicable law and regulations the directors are also responsible for
preparing a directors’report directors’remuneration report and corporate
governance statement that comply with that law and those regulations
the directors are responsible for the maintenance and integrity of the corporate
and ﬁnancial information included on the company’s website legislation in the
uk governing the preparation and dissemination of ﬁnancial statements may
differ from legislation in other jurisdictions
independent auditors’report to the members of rollsroyce group plc
we have audited the group ﬁnancial statements of rollsroyce group plc for the
year ended december 31 2005 which comprise the group consolidated income
statement the group consolidated balance sheet the group consolidated cash
ﬂow statement the group consolidated statement of recognised income and
expense and the related notesthese group ﬁnancial statements have been
prepared under the accounting policies set out therein
we have reported separately on the parent company ﬁnancial statements of
rollsroyce group plc for the year ended december 31 2005 and on the
information in the directors’remuneration report that is described as having been
audited
this report is made solely to the company’s members as a body in
accordance with section 235 of the companies act 1985 our audit work has
been undertaken so that we might state to the company’s members those
matters we are required to state to them in an auditor’s report and for no other
purposeto the fullest extent permitted by law we do not accept or assume
responsibility to anyone other than the company and the company’s members
as a body for our audit work for this report or for the opinions we have formed
respective responsibilities of directors and auditors  
the directors’responsibilities for preparing the annual report and the group
ﬁnancial statements in accordance with applicable law and international financial
reporting standards ifrss as adopted by the eu are set out in the statement of
directors’responsibilities on this page
our responsibility is to audit the group ﬁnancial statements in accordance
with relevant legal and regulatory requirements and international standards on
auditing uk and ireland
we report to you our opinion as to whether the group ﬁnancial statements
give a true and fair view and whether the group ﬁnancial statements have been
properly prepared in accordance with the companies act 1985 and article 4 of
the ias regulationwe also report to you if in our opinion the directors’report is
not consistent with the group ﬁnancial statements if we have not received all the
information and explanations we require for our audit or if information speciﬁed
by law regarding directors’remuneration and other transactions is not disclosed
we review whether the corporate governance statement reﬂects the company’s
compliance with the nine provisions of the 2003 frc combined code speciﬁed
for our review by the listing rules of the financial services authority and we
report if it does not we are not required to consider whether the board’s
statements on internal control cover all risks and controls or form an opinion on
the effectiveness of the group’s corporate governance procedures or its risk and
control procedures
we read other information contained in the annual report and consider
whether it is consistent with the audited group ﬁnancial statementswe consider
the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the group ﬁnancial statements
our responsibilities do not extend to any other information
basis of audit opinion  
we conducted our audit in accordance with international standards on auditing
uk and ireland issued by the auditing practices board an audit includes
examination on a test basis of evidence relevant to the amounts and disclosures
in the group ﬁnancial statements it also includes an assessment of the signiﬁcant
estimates and judgements made by the directors in the preparation of the group
ﬁnancial statements and of whether the accounting policies are appropriate to
the group’s circumstances consistently applied and adequately disclosed
we planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufﬁcient evidence to give reasonable assurance that the group ﬁnancial
statements are free from material misstatement whether caused by fraud or other
irregularity or error in forming our opinion we also evaluated the overall adequacy
of the presentation of information in the group ﬁnancial statements
opinion  
in our opinion
– the group ﬁnancial statements give a true and fair view in accordance with
ifrss as adopted by the eu of the state of the group’s affairs as at 
december 31 2005 and of its proﬁt for the year then ended and  
– the group ﬁnancial statements have been properly prepared in accordance
with the companies act 1985 and article 4 of the ias regulation
kpmg audit plc
chartered accountants registered auditor
london
february 8 2006
2005 group financialsqxd  15306  0758  page 108 rollsroyce group plc annual report 2005
10 9
company balance sheet at december 31 2005
2005 2004
notes £m £m
fixed assets
investments – subsidiary undertakings 2 2153 2198
current assets
debtors – amounts falling due within one year 3 829 501
cash at bank 1 —
830 501
creditors – amounts falling due within one year
other creditors 4 7 —
net current assets 823 501
total assets less current liabilities 2976 2699
net assets 2976 2699
capital and reserves
calledup share capital 5 352 346
share premium account 6 30 4
merger reserve 6 777 918
capital redemption reserve 6 206 74
proﬁt and loss account 6 1611 1357
shareholders’ funds
1
2976 2699
1
equity shareholders’funds £2976m 2004 £2694m nonequity shareholders’funds £nil 2004 £5m see note 4
the ﬁnancial statements on pages 109 to 112 were approved by the board on february 8 2006 and signed on its behalf by
simon robertson chairman andrew shilston finance director
reconciliation of movements in shareholders’funds for the year ended december 31 2005
2005 2004
£m £m
at january 1 as previously stated 2699 2101
adjustment on adoption of frs 25 and frs 26 5 —
at january 1 restated 2694 2101
retained proﬁt for the year 306 601
scrip dividend adjustment — 20
redemption of b shares 141 27
on issue of ordinary shares 117 4
at december 31 2976 2699
2005 group financialsqxd  15306  0758  page 109 1  accounting policies
basis of accounting
the ﬁnancial statements have been prepared in accordance with applicable united kingdom accounting standards on the historical cost basis
the company has adopted frs 25 financial instruments disclosure and presentation and frs 26 financial instruments measurement from january 1 2005 the
impact of which has been the reclassiﬁcation of b shares with a value of £5m from shareholders funds to other ﬁnancial liabilities
in accordance with these standards comparatives have not been restatedthe effect has been to reclassify b shares from share capital to other creditors
as permitted by the companies act 1985 a separate proﬁt and loss account for the company has not been included in these ﬁnancial statements as permitted
by frs 1 no cash ﬂow statement for the company has been included as permitted by frs 8 no related party disclosures for the company have been included
investments in subsidiary undertakings
investments in subsidiary undertakings are reported at cost less amounts written off
current assets
amounts are shown at their recoverable amount
t axation
provision for taxation is made at the current rate and for deferred taxation at the projected rate on all timing differences which have originated but not reversed at the
balance sheet date
2  investments – subsidiary undertakings
shares
£m
cost
at january 1 2005 2198
disposal 45
at december 31 2005 2153
3  debtors – amounts falling due within one year
2005 2004
£m £m
amounts owed by – subsidiary undertakings 829 501
4  other creditors – amounts falling due within one year
b shares
movements in the b shares during the year were as follows
nominal
b shares value
of 001p £m
authorised
at january 1 and december 31 2005 1000000000000 1000
issued and fully paid
at january 1 2005 
1
4600710064 5
shares issued 141013817330 141
shares converted into ordinary shares 87425228890 87
shares redeemed 51638258304 52
at december 31 2005 6551040200 7
1
the adoption of frs 25 and frs 26 from january 1 2005 has led to the reclassiﬁcation of b shares from equity to other creditors
rollsroyce group plc annual report 2005
11 0
notes to the company ﬁnancial statements
2005 group financialsqxd  15306  0758  page 110 rollsroyce group plc annual report 2005
111
5  share capital
nonequity equity
nominal preference nominal ordinary nominal
special b shares value shares value shares value
share of £1 of 01p each £m of £1 each £m of 20p each £m
authorised
at january 1 2004  and december 31 2005 1 50000 — 2499999998 500
upon approval of b share scheme at the 2004 agm 1000000000000 1000
issued and fully paid
at january 1 2004 1 ————1666619843 333
issued for b share scheme — 83922435550 84 — — — —
exercise of share options — ———— 2654484 1
in lieu of paying dividends in cash — ———— 10671927 2
b share conversion into ordinary shares 52631193754 52 — — 24826034 5
redemption of b shares — 26690531732 27 — — — —
at january 1 2005 1 4600710064 5 — — 1704772288 341
b shares reclassiﬁed on adoption of frs 25 and frs 26 — 4600710064 5
at january 1 2005 restated 1 — — 1704772288 341
exercise of share options — — — 19174767 4
b share conversion into ordinary shares — — — 34754246 7
at december 31 2005 1 — — 1758701301 352
certain rights set out in the company’s articles of association attach to the special rights redeemable preference share special share issued to hm government
subject to the provisions of the companies act 1985 the special share may be redeemed by the treasury solicitor at par at any timethe special share confers no
rights to dividends or to vote at general meetings but in the event of a windingup it shall be repaid at its nominal value in priority to any other shares
6  reserves
nondistributable
capital
share merger redemption proﬁt and
premium reserve reserve loss account
£m £m £m £m
at january 1 2005 4 918 74 1357
scrip dividend ————
arising on share issues net of expenses 26 ———
retained proﬁt for the year ——— 306
issue of b shares — 141 — —
redemption of b shares — — 52 52
conversion of b shares into ordinary shares —— 80 —
at december 31 2005 30 777 206 1611
2005 group financialsqxd  15306  0758  page 111 rollsroyce group plc annual report 2005
112
notes to the company ﬁnancial statements continued
7  contingent liabilities
the company has not adopted amendments to frs 26 in relation to ﬁnancial guarantee contracts which will apply for periods commencing on or after 
january 1 2006
where the company enters into ﬁnancial guarantee contracts to guarantee the indebtedness of other companies within its group the company considers these
to be insurance arrangements and accounts for them as such in this respect the company treats the guarantee contract as a contingent liability until such time as it
becomes probable that the company will be required to make a payment under the guarantee
the company does not expect the amendments to have any impact on the ﬁnancial statements for the period commencing january 1 2006
at december 31 2005 these guarantees amounted to £1344m 2004 £1513m
8  other information
emoluments of directors
the remuneration of the directors of the company is shown in the directors’remuneration report for the group on pages 39 to 49
auditors’ fees
auditors’fees were as follows during the year
audit 2005 £01m 2004 £01m
other 2005 £nil 2004 £nil
employees
the company had no employees in 2005 and 2004
sharebased payment
the company has no employees shares in the company have been granted to employees of the group as part of sharebased payment plans and recharged to the
employing company
2005 group financialsqxd  15306  0758  page 112 rollsroyce group plc annual report 2005
113
independent auditors’report to the members of rollsroyce group plc
we have audited the parent company ﬁnancial statements of rollsroyce 
group plc for the year ended december 31 2005 which comprise the balance
sheet and the related notesthese parent company ﬁnancial statements have
been prepared under the accounting policies set out thereinwe have also
audited the information in the directors’remuneration report that is described as
having been audited 
we have reported separately on the group ﬁnancial statements of 
rollsroyce group plc for the year ended december 31 2005
this report is made solely to the company’s members as a body in
accordance with section 235 of the companies act 1985 our audit work has
been undertaken so that we might state to the company’s members those
matters we are required to state to them in an auditor’s report and for no other
purposeto the fullest extent permitted by law we do not accept or assume
responsibility to anyone other than the company and the company’s members
as a body for our audit work for this report or for the opinions we have formed
respective responsibilities of directors and auditors  
the directors’responsibilities for preparing the annual report the directors’
remuneration report and the parent company ﬁnancial statements in accordance
with applicable law and uk accounting standards uk generally accepted
accounting practice are set out in the statement of directors’responsibilities on
page 108
our responsibility is to audit the parent company ﬁnancial statements and
the part of the directors’remuneration report to be audited in accordance with
relevant legal and regulatory requirements and international standards on
auditing uk and ireland
we report to you our opinion as to whether the parent company ﬁnancial
statements give a true and fair view and whether the parent company ﬁnancial
statements and the part of the directors’remuneration report to be audited have
been properly prepared in accordance with the companies act 1985we also
report to you if in our opinion the directors’report is not consistent with the
parent company ﬁnancial statements if the company has not kept proper
accounting records if we have not received all the information and explanations
we require for our audit or if information speciﬁed by law regarding directors’
remuneration and other transactions is not disclosed
we read other information contained in the annual report and consider
whether it is consistent with the audited parent company ﬁnancial statements
we consider the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the parent company ﬁnancial
statements our responsibilities do not extend to any other information
basis of audit opinion  
we conducted our audit in accordance with international standards on auditing
uk and ireland issued by the auditing practices board an audit includes
examination on a test basis of evidence relevant to the amounts and disclosures
in the parent company ﬁnancial statements and the part of the directors’
remuneration report to be audited it also includes an assessment of the
signiﬁcant estimates and judgements made by the directors in the preparation of
the parent company ﬁnancial statements and of whether the accounting policies
are appropriate to the company’s circumstances consistently applied and
adequately disclosed
we planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufﬁcient evidence to give reasonable assurance that the parent company
ﬁnancial statements and the part of the directors’remuneration report to be
audited are free from material misstatement whether caused by fraud or other
irregularity or error in forming our opinion we also evaluated the overall adequacy
of the presentation of information in the parent company ﬁnancial statements
and the part of the directors’remuneration report to be audited
opinion  
in our opinion
– the parent company ﬁnancial statements give a true and fair view in
accordance with uk generally accepted accounting practice of the state of
the company’s affairs as at 31 december 2005 and  
– the parent company ﬁnancial statements and the part of the directors’
remuneration report to be audited have been properly prepared in
accordance with the companies act 1985
kpmg audit plc
chartered accountants registered auditor
london
february 8 2006
2005 group financialsqxd  15306  0759  page 113 rollsroyce group plc annual report 2005
11 4
incorporated within the uk – held by rollsroyce group plc
rollsroyce plc principal tradingholding company
incorporated within the uk – held by rollsroyce plc unless otherwise stated
civil aerospace
rolls elturbofans limited engine support servicesholding company
rollsroyce general partner limited 
1
management company
rollsroyce total care services limited aftermarket support services
marine
rollsroyce marine electrical systems limited 
2
marine electrical systems
rollsroyce marine power operations limited nuclear submarine propulsion systems
energy
rollsroyce fuel cell systems limited development of fuel cell systems
financial services and corporate
rollsroyce aircraft management limited sales ﬁnance and other ﬁnancial services
rollsroyce capital limited 
3
sales ﬁnance and other ﬁnancial services
rollsroyce international limited international support and commercial information services
rollsroyce leasing limited engine leasing
rollsroyce overseas holdings limited holding company
rollsroyce overseas investments limited 
4
holding company
rollsroyce power engineering plc power generation and marine systems
rollsroyce power ventures limited provision of project development capabilities
vinters engineering plc 
5
holding company
vinters plc holding company
1
the interest is held by rollsroyce supplies limited
2
the interest is held by rollsroyce power engineering plc
3
this subsidiary acts as an agent of rollsroyce plc
4
the interest is held by rollsroyce overseas holdings limited
5
the interest is held by vinters plc
the above companies operate principally in the uk and the effective group interest is 100 per cent other than rollsroyce fuel cell systems limited which is 
75 per cent
principal subsidiary undertakings at december 31 2005
2005 group financialsqxd  15306  0759  page 114 rollsroyce group plc annual report 2005
115
incorporated overseas – held by rollsroyce plc unless otherwise stated
civil aerospace
brazil rollsroyce brasil limitada repair and overhaul
france rollsroyce technical support sarl 
1
project support
germany rollsroyce deutschland ltd  co kg 
2
br700 series engine development and manufacture
italy europea microfusioni aerospaziali spa manufacture of castings
usa rollsroyce corporation 
3
design development and manufacture of gas turbine engines
usa rollsroyce engine services – oakland inc
4
repair and overhaul
defence
usa rollsroyce defense services inc
5
repair and overhaul
marine
china rollsroyce marine shanghai limited
6
manufacture and supply of marine equipment
finland rollsroyce oy ab 
7
manufacture of winches and propeller systems
norway rollsroyce marine as 
7
design and manufacture of ship equipmentholding company
norway ulstein holding as 
8
holding company
sweden kamewa holding ab 
7
holding company
sweden rollsroyce ab 
9
manufacture of propeller systems
usa rollsroyce commercial marine inc
10
aftermarket support services
usa rollsroyce naval marine inc
5
design and manufacture of ship propellers
energy
canada rollsroyce canada limited 
11
industrial gas turbines and aeroengine sales service and overhaul
india rollsroyce energy systems india private limited 
1
project management and customer support
singapore rollsroyce pte limited 
1
engine and turbine compression systems spares
usa rollsroyce energy systems inc
5
turbine generator packages
financial services and corporate
canada rollsroyce holdings canada inc holding company
guernsey nightingale insurance limited 
1
insurance services
india rollsroyce operations india pvt limited
1
provision of support services
usa rollsroyce north america usa holdings co
12
holding company
usa rollsroyce north america holdings inc
13
holding company
1
the interests are held by rollsroyce overseas holdings limited
2
the interest is held as follows 495 per cent rollsroyce erste beteiligungs gmbh 505 per cent rollsroyce zweite beteiligungs gmbh
3
the interest is held by rollsroyce asset management inc
4
the interest is held by rollsroyce defense services inc
5
the interests are held by rollsroyce north america holdings inc
6
the interest is held by rollsroyce marine asia limited
7
the interests are held by vinters international limited
8
the interest is held by rollsroyce marine as
9
the interest is held by kamewa holding ab
10
the interest is held by rollsroyce naval marine inc
11
the interest is held by rollsroyce holdings canada inc
12
the interest is held by rollsroyce overseas investments limited
13
the interest is held by rollsroyce north america usa holdings co
the above companies operate principally in the country of their incorporation
the effective group interest is 100 per cent other than europea microfusioni aerospaziali spa which is 51 per cent
a list of all subsidiary undertakings will be included in the company’s annual return to companies house
2005 group financialsqxd  15306  0759  page 115 rollsroyce group plc annual report 2005
11 6
principal joint ventures at december 31 2005
incorporated within the uk – held by rollsroyce plc 
 of class  of total
class held equity held
civil aerospace
trt limited a ordinary —
turbine blade repair services b ordinary 100
495
turbine surface technologies limited a ordinary —
turbine surface coatings b ordinary 100
50
defence
airtanker holdings limited ordinary 20 20
holding company
rollsroyce snecma limited uk  france a shares —
engine collaboration b shares 100
50
rollsroyce turbomeca limited uk  france a shares —
adour and rtm322 engines collaboration b shares 100
50
turbounion limited uk germany  italy ordinary 40
rb199 engine collaboration a shares 375
40
energy
genistics holdings limited a ordinary 100
holding company of genistics limited b ordinary —
50
rolls wood group repair and overhauls limited a ordinary 100
repair and overhaul b ordinary —
50
financial services and corporate
alpha partners leasing limited a ordinary 100
engine leasing b ordinary —
50
incorporated overseas – held by rollsroyce plc unless otherwise stated
 of class  of total
class held equity held
civil aerospace
china xian xr aero components co limited ordinary 49 49
manufacturing facility for aeroengine parts
germany n3 engine overhaul services gmbh  co kg
1
partnership 50 50
repair and overhaul
germany n3 engine overhaul services verwaltungsgesellschaft mbh
2
ordinary 50 50
repair and overhaul
hong kong hong kong aero engine services limited 
3
ordinary 45 45
repair and overhaul
israel techjet aerofoils limited 
3
a ordinary 50
manufacture of compressor aerofoils b ordinary 50
50
saudi arabia middle east propulsion company limited 
4
ordinary 167 167
repair and overhaul
singapore international engine component overhaul pte limited 
3
common 50 50
repair and overhaul
singapore singapore aero engine services private limited 
3
effective interest 39 ordinary 30 30
repair and overhaul
spain industria de turbo propulsores sa ordinary 469 469
manufacture and maintenance of aero engines
switzerland iae international aero engines ag uk germany japan  usa a shares 100
v2500 series engine collaboration b shares —
c shares —
325
d shares —
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⎨
⎩
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⎨
⎩
⎧
⎨
⎩
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⎨
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⎧
⎨
⎩
⎧
⎨
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2005 group financialsqxd  15306  0759  page 116 rollsroyce group plc annual report 2005
11 7
incorporated overseas – held by rollsroyce plc unless otherwise stated continued
 of class  of total
class held equity held
civil aerospace continued
usa data systems  solutions llc 
5
partnership 50 —
advanced controls and predictive data management
usa texas aero engine services llc 
6
partnership 50 —
repair and overhaul
usa williamsrolls inc
7
uk  north america common 15 15
small engine collaboration
defence
germany epi europrop international gmbh germany effective interest 355 ordinary 28 28
a400m engine collaboration
germany eurojet turbo gmbh uk germany italy  spain effective interest 39 ordinary 33 33
ej200 engine collaboration
germany mtuturbomeca rollsroyce gmbh uk france  germany ordinary 333 333
mtr390 engine collaboration
usa ge rollsroyce fighter engine team llc
8
partnership 40 40
f136 development engine for the joint strike fighter jsf programme
financial services and corporate
isle of man pembroke group limited 
9
eire ordinary 50 50
aircraft leasing
usa alpha leasing us llc 
10
partnership 50 —
engine leasing
usa alpha leasing us no 2 llc 
10
partnership 50 —
engine leasing
usa exostar llc 
11
partnership 176 —
b2b exchange
usa rollsroyce  partners finance us llc 
9
partnership 50 —
engine leasing
unincorporated overseas – held by subsidiary undertakings
civil aerospace
usa light helicopter turbine engine company lhtec
rollsroyce corporation has a 50 interest in this unincorporated partnership which was formed to develop and market jointly the t800 engine
1
the partner is rollsroyce zweite beteiligungs gmbh
2
the interest is held by rollsroyce zweite beteiligungs gmbh
3
the interests are held by rollsroyce overseas holdings limited
4
the interest is held by middle east equity partners limited
5
the partner is rollsroyce control systems holdings co
6
the partner is rollsroyce engine services holdings co
7
the interest is held by rolls elturbofans limited
8
the partner is rollsroyce jsf holdings inc
9
the interest is held by larten limited
10
the partner is rollsroyce finance holdings co
11
the partner is rollsroyce investment co
the countries of principal operations are stated in brackets after the name of the company
2005 group financialsqxd  15306  0759  page 117 rollsroyce group plc annual report 2005
11 8
group ﬁveyear review for the years ended december 31
2005 2004 2003
1
2002
1
2001
1
income statementproﬁt and loss account notes £m £m £m £m £m
revenuegroup turnover 6603 5947 5645 5788 6328
proﬁt before net research and development and share of joint venture proﬁt 1113 686 499 443 587
research and development net 1 282 288 281 297 358
share of proﬁt of joint ventures 2 46 19 52 66 82
proﬁt before ﬁnancing costsproﬁt on ordinary activities before interest 877 417 270 212 311
net ﬁnancing costsinterest payable 3 400 53 90 107 119
proﬁt before taxation 477 364 180 105 192
taxation 4 130 100 64 52 86
proﬁt for the period 347 264 116 53 106
attributable to
equity holders of the parent 350 263 116 53 106
minority interest 3 1———
347 264 116 53 106
1
amounts as previously reported under uk gaap the impact of the transition from uk gaap to ifrs is included in note 33 to the ﬁnancial statements
notes
1 research and development gross 663 601 619 590 636
2 under ifrs share of proﬁt of joint ventures is net of share of interest 
and taxation charges of 34 31 — — —
3 under uk gaap  interest payable includes the joint ventures share of — — 24 35 42
4 under uk gaap  taxation includes the joint ventures share of — — 10 9 9
earnings per ordinary share
basic – ifrs 2011p 1556p — — —
diluted – ifrs 1931p 1505p — — —
underlying – uk gaap — — 1220p 1110p 2020p
basic – uk gaap — — 704p 329p 667p
payments to shareholders per ordinary share 872p 818p 818p 818p 818p
2005 2004 2003
1
2002
1
2001
1
balance sheet £m £m £m £m £m
assets 9319 8114 7414 7296 7334
liabilities 7814 6668 5271 5262 5270
1505 1446 2143 2034 2064
calledup share capital 352 346 333 323 320
reserves 1147 1096 1807 1709 1742
equity attributable to equity holders of the parent 1499 1442 2140 2032 2062
minority interest 6 4322
1505 1446 2143 2034 2064
1
amounts as previously reported under uk gaap 
2005 2004 2003
1
2002
1
2001
1
cash ﬂow £m £m £m £m £m
cash inﬂow from operating activities 1060 610 673 611 418
cash outﬂow from investing activities – ifrs 289 237 — — —
capital expenditure and ﬁnancial investment – uk gaap — — 198 381 181
aquisitions and disposals – uk gaap — — 16 20 79
cash outﬂowinﬂow from ﬁnancing activities – ifrs 443 189 — — —
interest dividends and taxation – uk gaap — — 176 222 147
management of liquid resources – uk gaap — — 90 217 162
financing – uk gaap — — 17 81 113
increase in cash and cash equivalents ifrsincrease in cash uk gaap 328 562 176 124 120
1
amounts as previously reported under uk gaap 
2005 group financialsqxd  15306  0759  page 118 rollsroyce group plc annual report 2005
11 9
shareholder information
internet
the annual report company announcements and other information are available on the group’s website at wwwrollsroycecom
financial calendar
ex entitlement to b shares march 8 2006
calculation period for conversion share value for b shares march 814 2006
record qualifying date for entitlement to b shares march 10 2006
annual general meeting platinum conference suite excel 1 western gateway royal victoria dock london e16 1xl 1130am may 3 2006
latest time and date for receipt of completed evergreen mandates for b shares 5pm june 2 2006
record qualifying date for b share dividend june 9 2006
despatch of chequesordinary share certiﬁcatesb share certiﬁcates following redemptionconversion of b shares july 3 2006
press advertisement of 2006 interim results
1
july 28 2006
ex entitlement to b shares october 11 2006
calculation period for conversion share value for b shares october 1117 2006
record qualifying date for entitlement to b shares october 13 2006
record qualifying date for b share dividend november 24 2006
latest time and date for receipt of completed evergreen mandates for b shares 5pm december 1 2006
financial year end december 31 2006
despatch of chequesordinary share certiﬁcatesb share certiﬁcates following redemptionconversion of b shares january 3 2007
2006 annual report published march 2007
1
interim results are notiﬁed by press advertisements only
shareholder information 
if you have any queries on the following
i transfer of shares
ii change of name or address
iii lost share certiﬁcates
iv lost or out of date dividend cheques
v death of a registered holder of shares
vi b share distributions
or any other query relating to rollsroyce group plc shares please write or telephone the registrar at the following address
computershare investor services plc
po box 82the pavilions bridgwater road bristol bs99 7nh
general helpline 0870 702 0111  b share helpline 0870 703 0162
the company operates a freeofcharge service for consolidating the individual shareholdings of immediate members of a family
please ask the registrar for details if you are interested
low cost share dealing
details of the low cost dealing service in the company’s shares may be obtained from hoare govett corporate finance limited tel 020 7678 8000
hoare govett corporate finance limited is a member of the securities and futures authority
you can obtain the current market price of the company’s shares on the group’s website at wwwrollsroycecom or by viewing teletext or similar services
electronic communicationsproxy voting
if you would like to receive future shareholder documentation electronically or wish to appoint a proxy electronically for this year’s annual general meeting
please log onto the investors section on the group’s website at wwwrollsroycecom to register
2005 group financialsqxd  15306  0759  page 119 rollsroyce group plc annual report 2005
12 0
shareholder information continued
analysis of ordinary shareholders at december 31 2005
number of  of total  of total
number of shares shareholders shareholders shares
1 – 150 77823 2990 051
151 – 500 138053 5305 199
501 – 10000 42260 1624 398
10001 – 100000 1400 054 220
100001 – 1000000 509 020 978
1000001 and over 194 007 8154
260239 10000 10000
sharegift
in the uk rollsroyce group plc supports sharegift which is administered by the orr mackintosh foundation registered charity number 1052686 and which
operates a charity share donation scheme for shareholders with small holdings of shares which may prove uneconomical to sell
if you would like to use sharegift or receive more information about the scheme they can be contacted by visiting their website at wwwsharegiftorguk 
or by writing to the orr mackintosh foundation 46 grosvenor street london w1k 3hn
the company wishes to thank those b shareholders who elected to donate their b share dividends to sharegift
b share information
share price on ﬁrst day of trading cgt apportionment
b shares per conversion ordinary ordinary
b share issues ordinary share share value first day of trading shares b shares shares b shares
january 3 2006 334 356p january 3 2006 433045p 01015p 9922 078
july 1 2005 500 253p july 1 2005 291000p 00995p 9832 168
january 4 2005 318 250p january 4 2005 244625p 00955p 9877 123
june 25 2004 500 212p july 5 2004 241875p 01130p 9772 228
record date for
b share dividends calculation period dividend rate b share dividend payment date
january 1 2006 to june 30 2006 17205487 june 9 2006 july 3 2006
july 1 2005 to december 31 2005 17353125 november 25 2005 january 3 2006
january 1 2005 to june 30 2005 18433613 june 10 2005 july 1 2005
july 1 2004 to december 31 2004 18890625 november 26 2004 january 4 2005
copies of the scheme circular and summary of terms of b share issue which contain more detailed information on b shares are available in the investors section
on the group’s website at wwwrollsroycecom or on request from the company or the registrar’s b share helpline 0870 703 0162
2005 group financialsqxd  15306  0759  page 120 all images © rollsroyce plc 2006
typeset by charnwood technic art limited
designed by radley yeldar london
printed by st ives financial
this report is printed on revive special silk 
®
10885 ra 2005  cover  15306  0759  page 2 annual repo
©rollsroyce plc 2006
rollsroyce group plc
65 buckingham gate 
london 
sw1e 6at
wwwrollsroycecom
® ®
rollsroyce group plc annual report 2005
10885 ra 2005  cover  15306  0800  page 1


Summary:
 04
chairman’ s statement
rollsroyce group plc annual report 2005
we have continued to demonstrate the
strength of our business model and to create
value for shareholders
simon robertson chairman
10885 ra 2005 actual  15306  0755  page 04 having completed my ﬁrst 12 months as
chairman i am delighted to be able to report
another year of strong progress for the group
we have continued to demonstrate the
strength of our business model and to create
value for shareholders
our ﬁnancial results for 2005 reﬂect the
value of past investment and of the group’s
consistent strategy underlying proﬁts rose by 
49 per cent earnings per share by 55 per cent
and debt levels were signiﬁcantly reduced
we are therefore proposing an increase in the
payment to shareholders
rollsroyce is continuing to invest in 
new technologies products and programmes
the longterm nature of these investments 
and the increasing numbers of our engines in
service should enable the group to generate
growth and improving returns over many years
the group attaches a particular priority to
the environment by investing in technologies
which minimise the environmental impact of
our operations and products
we also take seriously our obligations to all
our stakeholders as we believe that excellence
in corporate responsibility delivers competitive
advantage and longterm success
there have been a number of board
changes over the year after nearly 40 years 
with the group mike howse retired from the
board in june as director of engineering and
technology and has been succeeded by 
colin smith i would like to thank mike for 
the outstanding contribution he has made
colin smith has been with the group for over
30 years and brings to the board a similar
wealth of engineering expertise
we announced in january of this year that 
colin green is to retire from the group and 
the board in april again i would like to thank
colin for the huge contribution he has made 
to the company and to the aerospace industry
which was publicly recognised last year when
he received a well deserved cbe
as foreshadowed in last year’s report iain
conn has joined the board as a nonexecutive
director and has brought to our discussions 
his extensive international business experience
i would like to thank the management 
and all our employees very much for another
successful yeartheir commitment has been
outstanding i should also pay tribute to my
fellow directors for the considerable contribution
they have made in support of the group
our past investments have enabled us to
build strong positions in markets which offer
longterm growthlooking forward we continue
to lay the foundations for longterm success
and value creation in a demanding international
business environment i expect the group 
to continue to make progress in 2006 as the
returns from past investments grow while 
we continue to invest in new technologies 
and products
simon robertson chairman
february 8 2006
05
rollsroyce group plc annual report 2005
10885 ra 2005 actual  15306  0755  page 05