IFRS

RNS Number : 2254V

Gooch & Housego PLC

27 May 2008

 



For immediate release

27 May 2008

Gooch & Housego PLC

TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS

Gooch & Housego PLC ('the Group'), a manufacturer of specialist optoelectronic components,

materials and systems and specialist instrumentation and life sciences devices will be reporting its financial results in accordance with International Financial Reporting Standards ('IFRS') with effect from 1 October 2007.  

On 17 June 2008 the Group will report its interim results for the six months ended 31 March 2008 under IFRS.

This statement presents and explains the conversion of the Group's results as previously reported under UK Generally Accepted Accounting Principles ('UK GAAP') onto an IFRS basis for the year ended 30 September 2007 and the six months to 31 March 2007.

The key changes for the Group are:

• Accounting for the acquisition of SIFAM Fibre Optics Limited ('SIFAM') in May 2007 has been revised to separately recognise intangible assets that formed part of Goodwill under UK GAAP.

• Increased levels of deferred tax assets/liabilities have been recognised relating to property, plant and equipment, the acquisition of SIFAM and share based payments.

• Borrowing costs incurred in the construction of property, plant and equipment is capitalised.

• Goodwill has ceased to be amortised and other intangible assets recognised on the acquisition of SIFAM have been amortised.

The net impact of these changes for the year ended 30 September 2007 is a £315,000 decrease in the Group's profit after taxation as previously reported and a corresponding decrease in the Group's earnings per share as previously reported, as follows:

• Basic earnings per share ('EPS')      from 24.3p to 22.6p, and 

• Diluted earnings per share ('DEPS')    from 23.3p to 21.6p.

Full details are set out in this announcement.

For further information:

Gooch & Housego PLC                                     01460 256440

Peter J. Quinn / Gareth Jones

Buchanan Communications                               020 7466 5000

Tim Thompson / Susanna Gale

Oriel Securities                                                020 7710 7600

Andrew Edwards / Scott Richardson Brown

Gooch & Housego PLC

Restatement of financial information for International Financial Reporting Standards

1     Introduction

Following a European Union Regulation (IAS Regulation EC 1606/2002) issued in June 2002, and Alternative Investment Market ('AIM') Notice 22, Gooch & Housego PLC is required to prepare its consolidated financial statements under IFRS with effect for the year ending 30 September 2008.

The financial statements for the year ended 30 September 2007 have been restated under IFRS, adopting a 1 October 2006 transition date. 

This announcement presents and explains the Group's results for the year ended 30 September 2007 as converted from UK GAAP to IFRS.

The first results to be published under IFRS will be for the half year to 31 March 2008, which will be reported, in an announcement to be issued on 17 June 2008.

The financial information contained in this report does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985.

The Income Statement for the year ended 30 September 2007 and the period ended 31 March 2007 together with the Balance Sheets at 30 September 2006, 31 March 2007 and 30 September 2007 which are shown in this report, are prepared under IFRS and unaudited. 

The consolidated statutory financial statements of Gooch & Housego PLC for the year ended 30 September 2007 prepared under UK GAAP have been filed with the Registrar of Companies. The Auditors' Report on those financial statements was unqualified and did not contain any statement under Section 237 (2) or (3) of the Companies Act 1985.

2     Basis of preparation

European Union ('EU') law (IAS Regulation EC 1606/2002) requires that the annual consolidated financial statements of the Group for the year ending 30 September 2008 be prepared in accordance with IFRSs adopted for use in the EU ('adopted IFRSs').

The financial information, presented here within, has been prepared on the basis of the recognition and measurement requirements of IFRSs in issue at the date of presentation that are either endorsed by the EU and effective (or available for early adoption) or expected to be endorsed and effective (or available for early adoption) at 30 September 2008, the Group's first annual reporting date at which it is required to use adopted IFRSs.  

Based on these adopted and unadopted IFRSs, the Directors have made assumptions about the accounting policies expected to be applied, which are as set out in Note 7, when the first annual IFRS financial statements are prepared for the year ending 30 September 2008.

In addition, the IFRSs that will be effective (or available for early adoption) in the annual financial statements for the year ending 30 September 2008 are still subject to change and to additional interpretations and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period will be determined finally only when the annual financial statements are prepared for the year ending 30 September 2008.

3     Transition to IFRS - first time adoption

IFRS 1 'First Time Adoption of International Financial Reporting Standards' sets out the procedures that the Group must follow when it adopts IFRS for the first time as the basis for preparing its consolidated financial statements.

The Group is required to establish its accounting policies for the year ending 30 September 2008 and, in general, apply these retrospectively to determine the IFRS opening balance sheet as at its date of transition, 1 October 2006.

This standard permits companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS during the transition period. 

As permitted under the transitional provisions of IFRS 1, the exemptions adopted by the Group are set out below.

• Business combinations

  
  The Group has chosen not to restate business combinations completed prior to the transition date on an IFRS basis.
  

• Cumulative translation differences

Cumulative translation differences in respect of foreign operations have been deemed to be nil at the date of transition.

4      Restatement of financial information under IFRS

Group Income Statement for the year ended 30 September 2007

	As previously reported under UK GAAP	IFRS 3 - 'Business combinations'	IAS 38 - 'Intangible assets'	IAS 23 - 'Borrowing costs'	IFRS 2 -  'Share based payment'	IAS 12 - 'Income tax'	IAS 16 - 'Property, plant & equipment'	IAS 8 - 'Accounting polices, estimates and errors'	IFRS 1- Exemptions	As restated under IFRS
		Note 1	Note 2	Note 3	Note 4	Note 5	Note 6	Note 7	Note 8
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Revenue	30,675	-	-	-	-	-	-	-	-	30,675
Cost of revenue	(14,584)	-	-	-	-	-	-	(67)	-	(14,651)
Gross profit	16,091	-	-	-	-	-	-	(67)	-	16,024
Research & Development	(1,898)	-	-	-	-	-	-	-	-	(1,898)
Sales & Marketing	(1,383)	-	-	-	-	-	-	-	-	(1,383)
Administration	(5,758)	-	-	-	(118)	-	2	-	-	(5,874)
Other income	132	-	-	-	-	-	-	-	-	132
Operating profit before amortisation of goodwill and acquired intangibles	7,184	-	-	-	(118)	-	2	(67)	-	7,001
Goodwill amortisation	(466)	-	466	-	-	-	-	-	-	-
Acquired intangibles amortisation	-	-	(551)	-	-	-	-	-	-	(551)
Operating profit	6,718	-	(85)	-	(118)	-	2	(67)	-	6,450
Finance income	181	-	-	-	-	-	-	-	-	181
Finance costs	(258)	-	-	134	-	-	-	-	-	(124)
Profit before income tax	6,641	-	(85)	134	(118)	-	2	(67)	-	6,507
Income tax expense	(2,179)	-	154	(37)	31	(346)	-	17	-	(2,360)
Profit for the year	4,462	-	69	97	(87)	(346)	2	(50)	-	4,147
Earnings per share	24.3p	-	0.4p	0.5p	(0.5p)	(1.8p)	-	(0.3p)	-	22.6p
Diluted earnings per share	23.3p	-	0.4p	0.5p	(0.5p)	(1.8p)	-	(0.3p)	-	21.6p

  Group Balance Sheet as at 30 September 2007

	As previously reported under  UK GAAP	IFRS 3 - 'Business combinations'	IAS 38 - 'Intangible assets'	IAS 23 - 'Borrowing costs'	IFRS 2 -  'Share based payment'	IAS 12 - 'Income tax'	IAS 16 - 'Property, plant & equipment'	IAS 8 - 'Accounting polices, estimates and errors'	IFRS 1-  Exemptions	As restated under  IFRS
		Note 1	Note 2	Note 3	Note 4	Note 5	Note 6	Note 7	Note 8
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Non-current assets
Property, plant & equipment	12,134	-	(88)	134	-	-	12	-	-	12,192
Intangible assets	6,679	440	3	-	-	-	-	-	-	7,122
Deferred income tax assets	-	(440)	154	(37)	62	2,112	36	81	-	1,968
	18,813	-	69	97	62	2,112	48	81	-	21,282
Current assets
Inventories	5,081	-	-	-	-	-	-	-	-	5,081
Trade and other receivables	7,237	-	-	-	-	(610)	-	-	-	6,627
Income tax receivable	167	-	-	-	-	60	-	-	-	227
Cash and cash equivalents	5,428	-	-	-	-	-	-	-	-	5,428
	17,913	-	-	-	-	(550)	-	-	-	17,363
Non-current assets held for resale	548	-	-	-	-	-	(191)	-	-	357
	18,461	-	-	-	-	(550)	(191)	-	-	17,720
Current liabilities
Trade and other payables	(5,081)	-	-	-	(222)	-	-	-	-	(5,303)
Borrowings	(5,195)	-	-	-	-	-	-	-	-	(5,195)
Income tax liabilities	(255)	-	-	-	-	-	-	-	-	(255)
Provision for other liabilities and charges	-	-	-	-	-	-	-	(280)	-	(280)
	(10,531)	-	-	-	(222)	-	-	(280)	-	(11,033)
Liabilities directly associated with non-current assets held for resale	-	-	-	-	-	-	(75)	-	-	(75)
	(10,531)	-	-	-	(222)	-	(75)	(280)	-	(11,108)
Net current assets	7,930	-	-	-	(222)	(550)	(266)	(280)	-	6,612

  Group Balance Sheet as at 30 September 2007 (continued)

	As previously reported under  UK GAAP	IFRS 3 - 'Business combinations'	IAS 38 - 'Intangible assets'	IAS 23 - 'Borrowing costs'	IFRS 2 -  'Share based payment'	IAS 12 - 'Income tax'	IAS16 - 'Property, plant & equipment'	IAS 8 - 'Accounting polices, estimates and errors'	IFRS 1-  Exemptions	As restated under  IFRS
		Note 1	Note 2	Note 3	Note 4	Note 5	Note 6	Note 7	Note 8
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Non-current liabilities
Borrowings	(1,213)	-	-	-	-	-	-	-	-	(1,213)
Deferred income tax liabilities	-	-	-	-	-	(686)	-	-	-	(686)
Provision for other liabilities and charges	-	-	-	-	-	-	-	-	-	-
	(1,213)	-	-	-	-	(686)	-	-	-	(1,899)
Net assets	25,530	-	69	97	(160)	876	(218)	(199)	-	25,995
Capital and reserves  attributable to equity shareholders
Called up share capital	3,785	-	-	-	-	-	-	-	-	3,785
Share premium account	3,719	-	-	-	-	-	-	-	-	3,719
Merger reserve	2,671	-	-	-	-	-	-	-	-	2,671
Revaluation reserve	308	-	-	-	-	-	(308)	-	-	-
Retained earnings	15,047	-	69	97	(160)	876	90	(199)	(567)	15,253
Cumulative translation reserve	-	-	-	-	-	-	-	-	567	567
Total equity	25,530	-	69	97	(160)	876	(218)	(199)	-	25,995

  Group Income Statement for the 6 months to 31 March 2007

	As previously reported under  UK GAAP	IFRS 3 - 'Business combinations'	IAS 38 - 'Intangible assets'	IAS 23 - 'Borrowing costs'	IFRS 2 -  'Share based payment'	IAS 12 - 'Income tax'	IAS 16 - 'Property, plant & equipment'	IAS 8 - 'Accounting polices, estimates and errors'	IFRS 1-  Exemptions	As restated under  IFRS
		Note 1	Note 2	Note 3	Note 4	Note 5	Note 6	Note 7	Note 8
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Revenue	13,629	-	-	-	-	-	-	-	-	13,629
Cost of revenue	(6,435)	-	-	-	-	-	-	(35)	-	(6,470)
Gross profit	7,194	-	-	-	-	-	-	(35)	-	7,159
Research & Development	(747)	-	-	-	-	-	-	-	-	(747)
Sales & Marketing	(534)	-	-	-	-	-	-	-	-	(534)
Administration	(2,705)	-	-	-	(51)	-	2	-	-	(2,754)
Other income	111	-	-	-	-	-	-	-	-	111
Operating profit before amortisation of goodwill and acquired intangibles	3,319	-	-	-	(51)	-	2	(35)	-	3,235
Goodwill amortisation	(201)	-	201	-	-	-	-	-	-	-
Acquired intangibles amortisation	-	-	-	-	-	-	-	-	-	-
Operating profit	3,118	-	201	-	(51)	-	2	(35)	-	3,235
Finance income	84	-	-	-	-	-	-	-	-	84
Finance costs	(79)	-	-	24	-	-	-	-	-	(55)
Profit before income tax	3,123	-	201	24	(51)	-	2	(35)	-	3,264
Income tax expense	(1,195)	-	-	(7)	15	63	-	10	-	(1,114)
Profit for the year	1,928	-	201	17	(36)	63	2	(25)	-	2,150
Earnings per share	10.7p	-	1.1p	0.1p	(0.2p)	0.3p	-	(0.1p)	-	11.9p
Diluted earnings per share	10.4p	-	1.1p	0.1p	(0.2p)	0.3p	-	(0.1p)	-	11.6p

  Group Balance Sheet as at 31 March 2007

	As previously reported under  UK GAAP	IFRS 3 - 'Business combinations'	IAS 38 - 'Intangible assets'	IAS 23 - 'Borrowing costs'	IFRS 2 -  'Share based payment'	IAS 12 - 'Income tax'	IAS 16 - 'Property, plant & equipment'	IAS 8 - 'Accounting polices, estimates and errors'	IFRS 1-  Exemptions	As restated under  IFRS
		Note 1	Note 2	Note 3	Note 4	Note 5	Note 6	Note 7	Note 8
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Non-current assets
Property, plant & equipment	6,793	-	(83)	24	-	-	12	-	-	6,746
Intangible assets	5,019	-	284	-	-	-	-	-	-	5,303
Deferred income tax assets	-	-	-	-	47	1,402	36	74	-	1,559
	11,812	-	201	24	47	1,402	48	74	-	13,608
Current assets
Inventories	4,006	-	-	-	-	-	-	-	-	4,006
Trade and other receivables	4,771	-	-	-	-	(242)	-	-	-	4,529
Income tax receivable	-	-	-	-	-	-	-	-	-	-
Cash and cash equivalents	4,560	-	-	-	-	-	-	-	-	4,560
	13,337	-	-	-	-	(242)	-	-	-	13,095
Non-current assets held for resale	548	-	-	-	-	-	(191)	-	-	357
	13,885	-	-	-	-	(242)	(191)	-	-	13,452
Current liabilities
Trade and other payables	(3,952)	-	-	-	(156)	-	-	-	-	(4,108)
Borrowings	(161)	-	-	-	-	-	-	-	-	(161)
Current income tax liabilities	(705)	-	-	-	-	53	-	-	-	(652)
Provisions for other liabilities and charges	-	-	-	-	-	-	-	(247)	-	(247)
	(4,818)	-	-	-	(156)	53	-	(247)	-	(5,168)
Liabilities directly associated with non-current assets held for resale	-	-	-	-	-	-	(75)	-	-	(75)
	(4,818)	-	-	-	(156)	53	(75)	(247)	-	(5,243)
Net current assets	9,067	-	-	-	(156)	(189)	(266)	(247)	-	8,209

  Group Balance Sheet as at 31 March 2007 (continued)

	As previously reported under  UK GAAP	IFRS 3 - 'Business combinations'	IAS 38 - 'Intangible assets'	IAS 23 - 'Borrowing costs'	IFRS 2 -  'Share based payment'	IAS 12 - 'Income tax'	IAS 16 - 'Property, plant & equipment'	IAS 8 - 'Accounting polices, estimates and errors'	IFRS 1-  Exemptions	As restated under  IFRS
		Note 1	Note 2	Note 3	Note 4	Note 5	Note 6	Note 7	Note 8
	£000	£000	£000	£000	£000	£000	£000	£000	£000	£000
Non-current liabilities
Borrowings	(581)	-	-	-	-	-	-	-	-	(581)
Deferred income tax liabilities	(202)	-	-	(7)	-	-	-	-	-	(209)
Provisions for other liabilities and charges	-	-	-	-	-	-	-	-	-	-
	(783)	-	-	(7)	-	-	-	-	-	(790)
Net assets	20,096	-	201	17	(109)	1,213	(218)	(173)	-	21,027
Capital and reserves  attributable to equity shareholders
Called up share capital	3,613	-	-	-	-	-	-	-	-	3,613
Share premium account	3,476	-	-	-	-	-	-	-	-	3,476
Revaluation reserve	308	-	-	-	-	-	(308)	-	-	-
Retained earnings	12,699	-	201	17	(109)	1,213	90	(173)	397	14,335
Cumulative translation reserve	-	-	-	-	-	-	-	-	(397)	(397)
Total equity	20,096	-	201	17	(109)	1,213	(218)	(173)	-	21,027

  Group Balance Sheet as at 30 September 2006

	As previously reported under  UK GAAP	IFRS 3 - 'Business combinations'	IAS 38 - 'Intangible assets'	IAS 23 - 'Borrowing costs'	IFRS 2 -  'Share based payment'	IAS 12 - 'Income  tax'	IAS 16 - 'Property, plant & equipment'	IAS 8 - 'Accounting polices, estimates and errors'	IFRS 1-  Exemptions	As restated under  IFRS
		Note 1	Note 2	Note 3	Note 4	Note 5	Note 6	Note 7	Note 8
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Non-current assets
Property, plant & equipment	6,516	-	(83)	-	-	-	(256)	-	-	6,177
Intangible assets	5,225	-	83	-	-	-	-	-	-	5,308
Deferred income tax assets	-	-	-	-	32	1,044	36	63	-	1,175
	11,741	-	-	-	32	1,044	(220)	63	-	12,660
Current assets
Inventories	3,875	-	-	-	-	-	-	-	-	3,875
Trade and other receivables	4,473	-	-	-	-	(203)	-	-	-	4,270
Cash and cash equivalents	4,060	-	-	-	-	-	-	-	-	4,060
	12,408	-	-	-	-	(203)	-	-	-	12,205
Current liabilities
Trade and other payables	(3,213)	-	-	-	(105)	-	-	-	-	(3,318)
Borrowings	(480)	-	-	-	-	-	-	-	-	(480)
Current income tax liabilities	(703)	-	-	-	-	-	-	-	-	(703)
Provision for other liabilities and charges	-	-	-	-	-	-	-	(212)	-	(212)
	(4,396)	-	-	-	(105)	-	-	(212)	-	(4,713)
Net current assets	8,012	-	-	-	(105)	(203)	-	(212)	-	7,492
Non-current liabilities
Borrowings	(679)	-	-	-	-	-	-	-	-	(679)
Deferred income tax liabilities	(24)	-	-	-	-	(336)	-	-	-	(360)
Provision for other liabilities and charges	-	-	-	-	-	-	-	-	-	-
	(703)	-	-	-	-	(336)	-	-	-	(1,039)
Net assets	19,050	-	-	-	(73)	505	(220)	(149)	-	19,113

Group Balance Sheet as at 30 September 2006 (continued)

	As previously reported under  UK GAAP	IFRS 3 - 'Business combinations'	IAS 38 - 'Intangible assets'	IAS 23 - 'Borrowing costs'	IFRS 2 -  'Share based payment'	IAS 12 - 'Income  tax'	IAS 16 - 'Property, plant & equipment'	IAS 8 - 'Accounting polices, estimates and errors'	IFRS 1-  Exemptions	As restated under  IFRS
		Note 1	Note 2	Note 3	Note 4	Note 5	Note 6	Note 7	Note 8
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Capital and reserves  attributable to equity shareholders
Called up share capital	3,600	-	-	-	-	-	-	-	-	3,600
Share premium account	3,404	-	-	-	-	-	-	-	-	3,404
Revaluation reserve	308	-	-	-	-	-	(308)	-	-	-
Retained earnings	11,738	-	-	-	(73)	505	88	(149)	-	12,109
Cumulative translation reserve	-	-	-	-	-	-	-	-	-	-
Total equity	19,050	-	-	-	(73)	505	(220)	(149)	-	19,113

5     Principal differences to UK GAAP

• Note 1 - Business combinations

Resulting from the Group's move to reporting under IFRS business combinations undertaken by the Group since 30 September 2006 are required to be restated in accordance with the requirements of IFRS 3. This has necessitated a comprehensive review of the assets and liabilities acquired in respect of the business combination of SIFAM in May 2007 and consequent restatement of Goodwill.

The main impact of IFRS 3 on the Group's previously reported accounting in respect of the SIFAM business combination is the requirement to separately identify certain intangible assets previously included within Goodwill under UK GAAP. 

The intangible assets identified, valued and recognised in accordance with the requirements of IFRS 3, as it relates to the SIFAM acquisition, are as follows:

                        1. SIFAM brand and trademarks, 
2. Customer relationships; and 
3. Senior management non-compete agreements. 
.

. 

The table shows the restatement of the business combination in accordance with IFRS 3.  

£'000	note	As restated under  IFRS	As previously reported under  UK GAAP
Net tangible assets acquired		3,243	3,243
Deferred income tax liability	(a)	(150)	-
Sub total		3,093	3,243
Brand and trademarks		247	-
Customer relationships		471	-
Senior management non-compete agreements		321	-
Deferred income tax liabilities arising on intangible assets		(290)	-
Net assets acquired		3,842	3,243
Goodwill		1,308	1,907
Cost of acquisition		5,150	5,150

(a) The deferred income tax arose on the property held by SIFAM Limited.

As a result of the restatement of the SIFAM business combination above, 'Intangible assets' increased by £1,039,000, 'Deferred income tax liabilities' increased by £440,000 and 'Goodwill' reduced by £599,000. 

• Note 2 - Intangible assets

International Accounting Standard ('IAS') 38 'Intangible assets' requires Goodwill acquired in a business combination to be recognised as an asset and carried in the Group's Balance Sheet at cost.

IAS 36 'Impairment of assets' requires an annual impairment review of Goodwill to be undertaken, or more frequently if events or changes in circumstances indicate that it might be impaired to ensure that the carrying value is not impaired. If such a review determines that goodwill arising from a business combination is impaired then the carrying value of the goodwill is required to be reduced by the impaired amount. 

Effective from the date of transition to IFRS the Group will no longer amortise Goodwill on an annual basis. 

The Goodwill amortisation of £466,000 in the Group's Income Statement for the year to 30 September 2007 and £201,000 in the 6 months to 31 March 2007 has been reversed. 

The 'Intangible assets' recognised as a result of the restatement of the SIFAM acquisition (see Note 1 above) are required to be amortised over their useful economic lives in accordance with the Group's accounting policy. 

The amortisation of these intangible assets results in an amortisation expense of £551,000 and a tax credit of £154,000 for the reversal of associated deferred income tax. 

The net effect of the above changes results in a £69,000 credit to the Income Statement in the year to 30 September 2007 and a £201,000 credit to the Income Statement in the 6 months to 31 March 2007.

IAS 38 also requires computer software to be classified as an 'Intangible asset'.

This results in a Balance Sheet reclassification from 'Property, plant and equipment' to 'Intangible assets' at 1 October 2006 of £82,000, at 31 March 2007 of £83,000 and at 30 September 2007 of £88,000.

There is no impact of the reclassification on the Group's Income Statement.

• Note 3 - Borrowing costs

Borrowing costs associated with qualifying assets were previously expensed under UK GAAP. 

The construction of the Company's new UK manufacturing plant at Dowlish Ford, Ilminster, Somerset, England ('Dowlish Ford') resulted in the Company incurring financing costs which under IAS 23 'Borrowing costs' (revised) are capitalised and included in the cost of the asset.

As a result, interest of £134,000 in the Group's Income Statement for the year to 30 September 2007 has been capitalised and included in the cost of the asset under 'Property, plant and equipment' within the Group's Balance Sheet at 30 September 2007. In the 6 months to 31 March 2007, £24,000 has been capitalised and included in the cost of the asset under 'Property, plant and equipment' within the Group's Balance Sheet.

On completion of the construction of Dowlish Ford interest costs associated with the financing of the construction will cease to be capitalised.

• Note 4 - Share-based payments

IFRS 2 'Share based payment' requires that a liability is recognised in respect of Employer National Insurance ('NI') contributions payable in connection with a grant of share options which will be payable in the future when the share options are exercised. 

Accordingly, an expense is required to be recognised and provided for over the period from the date of grant of the share option to the end of the vesting period.  This expense is based on the fair value of share options outstanding and likely to vest at the Balance Sheet date. 

Based on the requirements of IFRS 2, the effect on the Group's Balance Sheet at 30 September 2006 is to reduce 'Retained earnings' by £73,000 comprising an increase in liabilities of £105,000 off-set by an increase in 'Deferred income tax assets' of £32,000. 

  The impact on the Group's Income Statement for the year to 30 September 2007 results in an expense of £118,000 off-set by a 'Deferred income tax' credit of £31,000. At 31 March 2007, the impact on the Income Statement was an additional expense of £51,000 off-set by a 'Deferred income tax' credit of £15,000.

At 30 September 2007 the Balance Sheet implications comprise an increase in liabilities of £222,000 off-set by an increase in 'Deferred income tax assets' of £62,000.

At 31 March 2007 the Balance Sheet liabilities increased by £156,000 off-set by an increase in 'Deferred income tax assets' of £47,000.

• Note 5 - Income tax

In accordance with IAS 12 'Income taxes' deferred income tax is required to be recognised on all temporary differences between the accounting book value and the tax book value of assets and liabilities. 

In addition to deferred income tax arising on other adjustments, a comprehensive evaluation of the Group's tax position resulted in an increase in net 'Deferred income tax assets' by £876,000.

The additional tax charge of £346,000 in the year to 30 September 2007 occurred as a result of the change in tax legislation which affected deferred income tax and the requirement by IFRS to recognise the majority of current tax benefits from the exercise of employee share options directly in equity. 

The Group's net 'Deferred income tax asset' has been restated to £1,282,000 at 30 September 2007 and the detail is set out below:

£000		As restated under IFRS		As previously reported under UK GAAP
Share-based payments		1,233		167
Acquired intangible assets		(137)		-
Accruals		172		135
Provisions		81		-
Property, plant & equipment		(301)		213
Inventory		234		95
Total deferred income tax		1,282		610
Split as:
Deferred income tax asset		1,968		610
Deferred income tax liability		(686)		-
		1,282		610

As a result of the changes referred to above a tax credit of £63,000 was recognised in the Income Statement in the 6 month period to 31 March 2007 and the net 'Deferred income tax asset' in the Balance Sheet increased by £1,310,000 to £1,350,000.

• Note 6 - Property, plant & equipment

All property and land which had previously been the subject of revaluation have been restated at historic cost.

As a result, at the 30 September 2006 the Balance Sheet 'Revaluation reserve' of £308,000 has been reduced to zero with a corresponding reduction in the carrying value of 'Property, plant and equipment'. Accumulated depreciation of £52,000 which arose as a result of the upward revaluation which was previously expensed through the Income Statement has been written back to retained earnings and property, plant and equipment.

The 'Deferred income tax liabilities' of £36,000 associated with the revaluation have also been written back to retained earnings.

At 31 March 2007 and 30 September 2007, the impact of the elimination of the 'Revaluation reserve' have been reflected in the Balance Sheet item 'Assets held for resale' rather than 'Property, plant and equipment' as the revalued property was offered for sale in the 6 months to 31 March 2007.

Liabilities associated with the 'Assets held for resale' have been reclassified as a current liability.

• Note 7 - Accounting policies, accounting estimates and errors

The Group offers a one year warranty on product sales and previously did not hold a reserve for prospective warranty claims. Consequently, all claims against the Group's product warranty policy were expensed as incurred in the Group's Income Statement. 

As part of the Group's IFRS review a 'Warranty reserve' has been established to reflect the estimated cost to the Group of future warranty claims calculated based on historical statistical data of claim costs.

The 'Warranty reserve' at the date of transition on 30 September 2006 amounted to £212,000 with a related 'Deferred income tax asset' of £63,000.

At 31 March 2007, the 'Warranty reserve' amounted to £247,000 with a related 'Deferred income tax asset' of £74,000. The impact on the Group's Income Statement in the 6 months to 31 March 2007 is an increase in cost of revenue of £35,000 and a reduction in the tax expense by £10,000.

At 30 September 2007, the 'Warranty reserve' amounted to £280,000 with a related 'Deferred income tax asset' of £81,000. The impact on the Group's Income Statement for the year to 31 March 2007 is an increase in cost of revenue of £67,000 and a reduction in the tax expense by £17,000.

• Note 8 - First time adoption of IFRS

In applying IFRS1 'First time adoption of IFRS' foreign exchange differences which arose prior to the transition date have been reset to zero in accordance with the exemption provided by IFRS 1.

At 31 March 2007 and 30 September 2007, £397,000 and £567,000 respectively, which arose on the retranslation of overseas subsidiaries has been reclassified from 'Retained earnings' to the 'Cumulative translation reserve'.

6  Cash flow Statement

The adjustments to IFRS are all non-cash adjustments.

7    IFRS Accounting Policies

The Group's principle accounting policies under IFRS are set out below.

Consolidation

Subsidiaries are entities that are directly or indirectly controlled by the Group. Control exists where the group has the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the group. The cost of a business combination is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the business combination. The excess of the costs of a business combination over the fair value of the identifiable net assets acquired is recorded as goodwill. If the cost of a business combination is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

Transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Segment reporting

A business segment is a grouping of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns which are different from those of segments operating in other economic environments.

Foreign currency translation

a.     Functional and presentation currency

The consolidated financial statements are presented in Pounds Sterling, which is the Group's functional and presentational currency.

Items included in the financial statements of each of the group's subsidiaries are measured using the currency of the primary economic environment in which the entity operates (the 'functional currency'). 

b.     Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at balance sheet exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.

c.     Subsidiaries

The results and financial position of subsidiaries (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

• assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet

• income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions), and

• all resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders' equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Property, plant & equipment

Property, plant & equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Land is not depreciated. Certain plant used in the manufacturing process which is constructed from precious metals is not depreciated but is reviewed annually for impairment.

Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts to their residual values over their estimated useful lives, as follows:

• Freehold buildings                                    2-3%                        Straight line

• Short leasehold improvements                  over term of lease       Straight line

• Plant & machinery                                  10-20%                      Straight line

• Fixtures, fittings & computer hardware      10-33%                     Straight line

• Motor vehicles                                         25%                         Reducing balance

No depreciation is charged on freehold land or capital work in progress.

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

Intangible assets

a.     Goodwill

Goodwill represents the excess of the cost of a business combination over the fair value of the net identifiable assets of the acquired business and costs directly attributable to the business combination at the date of acquisition. Goodwill arising from business combinations is included in 'intangible assets'. 

Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. The impairment testing requires an estimation of the 'value in use' of the Cash-Generating Unit ('CGU') to which goodwill is allocated using appropriately discounted cash flow projections. .

For the purpose of impairment testing a CGU is defined as either a business segment or an operating entity, as appropriate. 

Impairment losses on goodwill are not reversed.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

b.     Patents, Trademarks and Licenses

Internally incurred costs associated with the filing and perfection of patents and trademarks are capitalised and carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost over their useful economic lives. 

Acquired patents, trademarks and licences are shown at historical cost. Patents, trademarks and licences have a finite useful life and are carried at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost over their useful economic lives.

c.     Computer software

Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. 

Costs that are directly associated with the development of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are capitalised and recognised as intangible assets. Costs include the software development employee costs and an appropriate portion of relevant overheads.

Computer system development costs capitalised and recognised as assets are amortised using the straight line method over their estimated useful lives of up to 7 years.

Acquired computer software and licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised using the straight line method over their estimated useful lives of up to 5 years.

d.     Research and development

Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised as an expense as incurred.

Development costs incurred after the point at which the commercial and technical feasibility of the product have been proven, and the decision to complete the development has been taken and resources made available, are capitalised. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. Development costs are amortised using the straight line method over their estimated useful.

e.     Other intangibles

Other acquired intangible assets are stated at cost less accumulated amortisation and impairment losses. 

The useful life of each of these assets is assessed based on the differing natures of each of the intangible assets acquired. Amortisation is charged on a straight-line basis over the estimated useful life of the assets acquired.

• Customer relationships    up to 3 years

• Brand names                  up to 3 years

• Non-compete clauses      up to 2 years

Impairment of non-financial assets

The Group assesses at each balance sheet date whether an asset may be impaired. If any such indicator exists the Group tests for impairment by estimating the recoverable amount. If the recoverable amount is less than the carrying value of the asset, the asset is impaired and the carrying value is reduced to its recoverable amount. In addition to this, assets with indefinite lives are tested for impairment annually.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months from the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet.

Non-current assets held for sale

Assets are classified as held for sale if their carrying amount will be recovered by sale rather than by continuing use in the business. Such assets are available for immediate sale in their present condition, management are committed to and have initiated a plan to sell the asset which, when initiated, is expected to result in a completed sale within 12 months.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. The cost of finished goods and work in progress comprises design costs, raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). It excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. 

Long-term contract balances included in work in progress comprise costs incurred on long-term contracts, net of any amounts transferred to trading expenditure, after deducting foreseeable losses and related payments on account. Costs include all direct material and labour costs incurred in bringing a contract to its state of completion at the year end, including an appropriate proportion of indirect expenses. Provisions for estimated losses on contracts are made in the period in which such losses are foreseen. Long-term contract balances do not included attributable profit. The amount by which customer billings exceed the turnover recognised on a contract is shown as a payment on account.

Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. 

A provision for impairment of trade receivables is established when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable may be impaired. 

The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within 'selling and marketing costs'. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against 'selling and marketing costs' in the income statement. 

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.

Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised 

in the income statement over the period of the borrowings using the effective interest method.

Borrowing costs which are directly attributable to the acquisition, construction or production of a qualifying asset the borrowing costs are capitalised as part of the cost of that asset.

Borrowing costs are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Taxation

Income tax on the profit or loss for the year comprises current and deferred tax.

Current tax is the expected tax payable on the taxable income for the year using rates enacted at the balance sheet date, and any adjustments to tax payable in respect of prior years.

  Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for, if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. 

Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax is recognised in the Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

In the UK and US, the Company is entitled to a tax deduction for amounts treated as compensation on exercise of certain employee share options under each juristiction's tax rules. As explained under 'Share-based compensation' below, a compensation expense is recorded in the Company's income statement over the period from the grant date to the vesting date of the relevant options. As there is a temporary difference between the accounting and tax bases, a deferred income tax asset is recorded. The deferred income tax asset arising is calculated by comparing the estimated amount of tax deduction to be obtained in the future ( based on the Company's share price at the balance sheet date) with the cumulative amount of the compensation amount recorded in the income statement. If the amount of estimated future tax deduction exceeds the cumulative amount of the remuneration expense at the statutory rate, the excess is recorded directly in equity, against retained earnings.

Employee benefits

• Pension obligations

The Group operates money purchase pension schemes for UK employees and Section 401(k) plans for US employees. The Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense in the income statement when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. 

b.     Profit share and bonus plans

The Group recognises a liability and an expense for bonuses and profit-sharing, based on a formula that takes into consideration the profit attributable to the Group's shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

c.     Share-based payment

The group operates a number of equity-settled, share-based compensation plans.

In accordance with IFRS 2 the fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. 

At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. The fair value is determined using the Black-Scholes option pricing model.

Employer's National Insurance in the United Kingdom and equivalent taxes in other jurisdictions are payable on the exercise of certain share options. In accordance with IFRS 2, this is treated as a cash-settled transaction. A provision is made, calculated using the fair value of the Company's shares at the balance sheet date, pro-rated over the vesting period of the options.  

The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

Provisions

Provisions are recognised when the group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense.

Leases

Leases which transfer substantially all the risks and rewards of ownership of an asset are treated as a finance lease. Assets held under a finance lease are capitalised at their fair value at the inception of the lease and depreciated over the estimated useful economic life of the asset or lease term if shorter.

Finance charges are associated with the finance lease are expensed in proportion to the capital amount outstanding.

All other leases are classified as operating leases. Operating lease rentals are expensed in equal annual amounts over the lease term.

Share capital

Ordinary shares are classified as equity. 

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group's activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group.

The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group's activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

a.     Sale of goods 

Revenue is recognised when the risks and rewards of the underlying sale have been transferred to the customer, and when collectability of the related receivable is reasonably assured, which is usually on the dispatch/delivery of the goods or services supplied and accepted by the customer.

b.     Long term contracts

Revenue recognised reflect costs incurred to date plus an estimate of profits attributable to work performed to date. For this purpose the estimate of attributable profits will include a proportion of the total profits anticipated to be made on the contract.

c.     Interest income

Interest income is recognised on a time-proportion basis using the effective interest method. 

Dividend distribution

Dividend distributions to the Company's shareholders is recognised as a liability in the Group's financial statements in the period in which the dividends are approved by the Company's shareholders.

 

END

 

 

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