Transition to IFRS

Sondex PLC 23 November 2005 Sondex plc Transition to International Financial Reporting Standards November 2005 Introduction Sondex plc has adopted International Financial Reporting Standards ("IFRS") from 1 March 2004 and the first full financial statements to be prepared under IFRS will therefore be for the year ending 28 February 2006. The interim financial statements for the six months ended 31 August 2005 will be prepared under the IFRS accounting policies expected to be adopted in the financial statements for the year ending 28 February 2006, but the company has taken advantage of the available exemption not to apply IAS 34 (Interim Financial Statements), to these interim financial statements, with the result that they will be presented under the requirements of the Listing Rules. This statement presents the accounting policies and financial information used in the transition of financial statements previously prepared and published under UK GAAP to compliance with IFRS. Key exceptions and exemptions permitted by IFRS 1 First Time Adoption of International Financial Reporting Standards and applied by Sondex plc are set out in the Note of Accounting Policies in this statement. The accounting policies and financial information in this statement have not been audited but have been reviewed by the company's auditors, Ernst & Young. Sondex plc's adoption of IFRS changes some accounting policies and the manner in which some financial information is calculated and presented, but it has no impact on the company's corporate strategy, its operating decisions or the underlying value of its business. Sondex plc is holding a briefing for analysts at 10am on Wednesday 23 November 2005 at College Hill, 5th Floor, 78 Cannon Street, London EC4N 6HH, to explain the changes brought about by the transition to IFRS and which are presented in this statement. This briefing will contain no new trading information, and its associated presentation will be made available on the company's website, www.sondex.com. Overview of impact The impact of the transition to IFRS on the reported profits of the company can be seen in the following summarised results for the year ended 28 February 2005, shown here as previously published under UK GAAP and as restated under IFRS: Comparison of results under UK GAAP and IFRS UK GAAP £'000 IFRS £'000 Year ended 28 February 2005 Revenue 31,713 31,713 Gross profit 17,723 17,555 Operating profit before amortisation of intangible assets 7,400 7,529 Amortisation of intangible assets (2,348) (2,026) Net finance charges (854) (854) Taxation charge (1,876) (1,724) Profit attributable to shareholders 2,323 2,924 Basic earnings per share 4.7 pence 5.9 pence Diluted earnings per share 4.5 pence 5.1 pence Reconciliation of results from UK GAAP to IFRS £'000 Year ended 28 February 2005 Profit attributable to shareholders under UK GAAP 2,323 IFRS 2 additional charge for share based payments (245) IFRS 3 removal of amortisation of goodwill 2,247 IFRS 3 amortisation of intangible assets (1,926) IAS 38 capitalisation and amortisation of development costs 445 IAS 12 decrease in deferred tax recognised 151 IAS 19 recognition of employee benefits (71) ------ Profit attributable to shareholders under IFRS 2,924 ------ The principal factors contributing to the change in the presented results for the year ended 28 February 2005 are: IFRS 2 Share-Based Payment IFRS 2 introduces a new mechanism for the calculation of charges in respect of share-based payments. This includes charges in respect of share option schemes, share-saving schemes and fully-funded share remuneration schemes. The total cost of these under IFRS, before taking account of the benefit of deferred taxation, is £461,920, compared with the charge calculated under UK GAAP of £216,580. The charge in respect of share-based payments under IFRS attracts a deferred tax credit amounting to £331,803, of which £138,110 is recognised within the taxation charge and £193,693 is taken directly to equity and disclosed in the Statement of Recognised Income and Expenditure. IFRS 3 Business Combinations IFRS 3 requires that intangible assets, including brands, technology and the value of customer lists are valued upon a business combination such as an acquisition. The values ascribed to these assets are to be recognised in the consolidated financial statements for the business combination, and their values are to be allocated from the residual value of goodwill, and amortised over the estimated useful lives of the assets. The remaining value attributed to goodwill is no longer amortised. Sondex plc has elected to apply IFRS 3 to business combinations arising after 1 March 2004, which therefore includes the acquisition of Geolink in June 2004, but not the previous acquisition of Computer Sonic Systems in December 2003. The result of the application of IFRS 3 is to remove the previous charge for the amortisation of goodwill, amounting to £2,247,000, and to introduce a charge for the amortisation of intangible assets, amounting to £1,925,769. A deferred tax credit of £577,731 is recognised on the amortisation of intangible assets recognised under IFRS 3, and is included within the taxation charge under IFRS. IAS 38 Intangible Assets IAS 38 requires that qualifying development costs are capitalised and amortised over their estimated useful lives. Under UK GAAP, the accounting treatment adopted by the company had been to write off all such costs to the income statement as incurred. The impact of this change is to credit the income statement with an amount capitalised of £1,171,173 and charge the income statement with an amortisation charge of £725,494. Both the credit and the charge are taken through the research and development account within the income statement. IAS 12 Income Taxes IAS 12 changes the method of calculating deferred taxes in particular. This effectively widens the scope of the calculation to include factors not previously accounted for under UK GAAP. These include the charges arising under IFRS 2 and IFRS 3 as noted above. The impact is to reduce the charge for deferred tax from £533,068 under UK GAAP to £382,127 under IFRS, with an additional credit of £193,693 recognised in the Statement of Recognised Income and Expenditure. SONDEX PLC BALANCE SHEET 1 MARCH 2004 IAS 10 IAS 12 IAS 19 IAS 21 IAS 38 UK GAAP PBSE - Income Employee FOREX Intangibles Balance dividends tax benefits on R&D Sheet in deferred trans. IFRS format tax of subs £ £ £ £ £ £ Non current assets Goodwill 21,526,597 (601,140) Other intangible assets 125,172 2,854,849 Property plant & equipment 1,842,664 Investments in associates 153,897 Deferred tax assets 0 ---------- 23,648,330 ---------- Current assets Inventories 4,196,987 Trade & other receivables 9,987,218 Financial assets - derivatives 0 Cash & cash equivalents 2,044,390 ---------- 16,228,595 ---------- Current liabilities Financial liabilities - borrowings (1,357,271) Financial liabilities - derivatives 0 Trade & other payables (3,063,120) 472,086 (67,825) Current tax (962,144) Provisions 0 ---------- (5,382,535) ---------- Non-current liabilities Financial liabilities - borrowings (10,249,708) Deferred tax liabilities (27,636) (762,696) Provisions (67,000) ---------- (10,344,344) ---------- Net assets 24,150,046 472,086 (762,696) (67,825) 0 2,253,709 ==========-------------------------------------------------------------- Shareholders' equity Share capital 3,934,047 Share premium 22,476,128 Other reserves 275,660 Retained earnings (2,535,789) 472,086 (762,696) (67,825) 2,253,709 ------------------------------------------------------------------------ Total equity 24,150,046 472,086 (762,696) (67,825) 0 2,253,709 ==========-------------------------------------------------------------- SONDEX PLC BALANCE SHEET 1 MARCH 2004 IAS 39 IFRS 2 IFRS 3 IFRS 3 Financial Share Business Business IFRS instruments based combinations combinations Balance payments Geolink Goodwill Sheet £ £ £ £ £ Non current assets Goodwill 20,925,456 Other intangible assets 2,980,021 Property plant & equipment 1,842,664 Investments in associates 153,897 Deferred tax assets 0 ---------- 25,902,039 Current assets ---------- Inventories 4,196,987 Trade & other receivables 9,987,218 Financial assets - derivatives 0 Cash & cash equivalents 2,044,390 ---------- 16,228,595 Current liabilities ---------- Financial liabilities - borrowings (1,357,271) Financial liabilities - derivatives 0 Trade & other payables (2,658,859) Current tax (962,144) Provisions 0 ---------- (4,978,274) ---------- Non-current liabilities Financial liabilities - borrowings (10,249,708) Deferred tax liabilities (790,331) Provisions (67,000) ---------- (11,107,039) ---------- ---------------------------------------------------------------------------- Net assets 0 0 0 0 26,045,320 ===============-------------------------------------------------============ Shareholders' equity Share capital 3,934,047 Share premium 22,476,128 Other reserves 191,667 467,326 Retained earnings (191,667) (832,181) ---------------------------------------------------------------------------- Total equity 0 0 0 0 26,045,320 ===============-------------------------------------------------============ SONDEX PLC BALANCE SHEET 31 AUGUST 2004 IAS 10 IAS 12 IAS 19 IAS 21 IAS 38 UK GAAP Balance PBSE - Income tax - Employee FOREX on Intangibles Sheet in IFRS dividends deferred tax benefits trans. of R&D format subs £ £ £ £ £ £ Non current assets Goodwill 48,943,407 5,017,965 (2,205,875) Other intangible assets 121,026 4,670,752 Property plant & equipment 5,034,003 Investments in associates 180,758 Deferred tax assets 1,068,538 (471,746) ---------- 55,347,732 ---------- Current assets Inventories 6,833,950 Trade & other receivables 14,054,563 Financial assets - derivatives 0 Cash & cash equivalents 2,638,115 ---------- 23,526,627 ---------- Current liabilities Financial liabilities - borrowings (1,357,271) Financial liabilities - derivatives 0 Trade & other payables (6,479,433) 357,522 Current tax (1,519,570) Provisions 0 ---------- (9,356,274) ---------- Non-current liabilities Financial liabilities - borrowings (22,629,211) Deferred tax liabilities (29,027) (5,077,142) Provisions (67,000) ----------- (22,725,238) ----------- Net assets 46,792,848 357,522 (530,922) 0 0 2,464,876 ===========---------------------------------------------------------------------- Shareholders' equity Share capital 5,500,828 Share premium 44,902,982 Other reserves 325,660 6,159 Retained earnings (3,936,621) 357,522 (530,922) 0 (6,159) 2,464,876 ---------- Total equity 46,792,848 357,522 (530,922) 0 0 2,464,876 ==========---------------------------------------------------------------------- SONDEX PLC BALANCE SHEET 31 AUGUST 2004 IAS 39 IFRS 2 IFRS 3 IFRS 3 Financial Share based Business Business IFRS instruments payments combinations combinations Balance Geolink Goodwill Sheet £ £ £ £ £ Non current assets Goodwill (13,920,265) 924,000 38,759,233 Other intangible assets 13,438,823 18,230,600 Property plant & equipment 5,034,003 Investments in associates 180,758 Deferred tax assets 596,792 ---------- 62,801,386 ---------- Current assets Inventories 6,833,950 Trade & other receivables 14,054,563 Financial assets - derivatives 0 Cash & cash equivalents 2,638,115 ---------- 23,526,627 ---------- Current liabilities Financial liabilities - borrowings (1,357,271) Financial liabilities - derivatives 0 Trade & other payables (6,121,911) Current tax (1,519,570) Provisions 0 ---------- (8,998,752) ---------- Non-current liabilities Financial liabilities - borrowings (22,629,211) Deferred tax liabilities (5,106,169) Provisions (67,000) ---------- (27,802,380) ---------- Net assets 0 0 (481,442) 924,000 49,526,882 ---------------------------------------------------------------============ Shareholders' equity Share capital 5,500,828 Share premium 44,902,982 Other reserves 364,210 696,028 Retained earnings (364,210) (481,442) 924,000 (1,572,956) --------------------------------------------------------------------------- Total equity 0 0 (481,442) 924,000 49,526,882 ----------------------------------------------------------------=========== SONDEX PLC INCOME STATEMENT 31 AUGUST 2004 IAS 10 IAS 12 IAS 19 IAS 21 IAS 38 UK GAAP Income PBSE - Income tax Employee FOREX on Intangibles Statement in dividends - deferred benefits trans. of R&D IFRS format tax subs £ £ £ £ £ £ Revenue 9,711,328 Cost of sales (4,758,241) 25,783 ---------- Gross profit 4,953,087 ---------- Other operating income 102,638 Research and development expenses (1,417,302) 16,104 211,168 Sales, Marketing & Customer support expenses (1,353,519) 15,154 Administration expenses (1,953,549) 10,785 Operating profit before financing costs and amortisation 331,355 Amortisation of acquired intangible assets (971,272) Financial income 21,012 Financial costs (724,500) ---------- Profit/(loss) before taxation (1,343,404) Taxation 279,379 160,275 ---------- Profit/(loss) attributable to shareholders (1,064,025) ========== Dividends (357,522) (114,564) --------------------------------------------------------------------------------- Retained profit/(loss) (1,421,547) (114,564) 160,275 67,825 0 211,168 ===============------------------------------------------------------------------ SONDEX PLC INCOME STATEMENT 31 AUGUST 2004 IAS 39 IFRS 2 IFRS 3 IFRS 3 Financial Share based Business Business IFRS Income instruments payments combinations combinations Statement Geolink Goodwill £ £ £ £ £ Revenue 9,711,328 Cost of sales (52,695) (4,785,153) ---------- Gross profit 4,926,176 Other operating income 102,638 Research and development expenses (46,395) (1,236,426) Sales, Marketing & Customer support expenses (32,122) (1,370,487) Administration expenses (41,331) (1,984,095) ---------- Operating profit before financing costs and amortisation 437,805 Amortisation of acquired intangible assets (481,442) 924,000 (528,714) Financial income 21,012 Financial costs (724,500) ---------- Profit/(loss) before taxation (794,397) Taxation 439,654 ---------- Profit/(loss) attributable to shareholders (354,742) ========== Dividends (472,086) ---------- Retained profit/(loss) 0 (172,543) (481,442) 924,000 (826,828) --------------------------------------------------------------------------========== SONDEX PLC IAS 10 IAS 12 IAS 19 IAS 21 IAS 38 BALANCE SHEET 28 FEBRUARY 2005 UK GAAP Balance PBSE - Income tax - Employee FOREX on Intangibles - Sheet in IFRS dividends deferred tax benefits trans. of R&D format subs £ £ £ £ £ £ Non current assets Goodwill 46,826,238 5,017,965 (2,205,875) Other intangible assets 857,000 4,905,264 Property plant & equipment 4,895,395 Investments in associates 136,738 Deferred tax assets 226,335 (226,335) -------------- 52,941,706 -------------- Current assets Inventories 8,014,370 Trade & other receivables 18,954,468 Financial assets - derivatives 0 Cash & cash equivalents (1,410,229) -------------- 25,558,609 -------------- Current liabilities Financial liabilities - borrowings (3,957,195) Financial liabilities - derivatives 0 Trade & other payables (7,202,563) 715,114 (139,057) Current tax (984,226) Provisions 0 -------------- (12,143,983) -------------- Non-current liabilities Financial liabilities - borrowings (16,544,166) Deferred tax liabilities (87,308) (5,209,692) Provisions (67,000) (16,698,474) ---------------------------------------------------------------------------------------- Net assets 49,657,857 715,114 (418,061) (139,057) 0 2,699,388 ==============-------------------------------------------------------------------------- Shareholders' equity Share capital 5,501,360 Share premium 41,019,106 Other reserves 4,376,115 47,597 Retained earnings (1,238,724) 715,114 (418,061) (139,057) (47,597) 2,699,388 ---------------------------------------------------------------------------------------- Total equity 49,657,857 715,114 (418,061) (139,057) 0 2,699,388 ==============-------------------------------------------------------------------------- SONDEX PLC IAS 39 IFRS 2 IFRS 3 IFRS 3 BALANCE SHEET 28 FEBRUARY 2005 Financial Share based Business Business IFRS Balance instruments payments combinations combinations Sheet Geolink Goodwill £ £ £ £ £ Non current assets Goodwill (13,920,265) 2,247,000 37,965,063 Other intangible assets 11,994,496 17,756,760 Property plant & equipment 4,895,395 Investments in associates 136,738 Deferred tax assets 0 -------------- 60,753,956 -------------- Current assets Inventories 8,014,370 Trade & other receivables 18,954,468 Financial assets - derivatives 0 Cash & cash equivalents (1,410,229) -------------- 25,558,609 -------------- Current liabilities Financial liabilities - borrowings (3,957,195) Financial liabilities - derivatives 0 Trade & other payables (6,626,506) Current tax (984,226) Provisions 0 -------------- (11,567,926) -------------- Non-current liabilities Financial liabilities - borrowings (16,544,166) Deferred tax liabilities (5,297,000) Provisions (67,000) -------------- (21,908,166) -------------- ------------------------------------------------------------------------------------- Net assets 0 0 (1,925,769) 2,247,000 52,836,473 -----------------------------------------------------------------------============== Shareholders' equity Share capital 5,501,360 Share premium 41,019,106 Other reserves 437,007 4,860,719 Retained earnings (437,007) (1,925,769) 2,247,000 1,455,288 ------------------------------------------------------------------------------------- Total equity 0 0 (1,925,769) 2,247,000 52,836,473 -----------------------------------------------------------------------============== SONDEX PLC IAS 10 IAS 12 IAS 19 IAS 21 IAS 38 INCOME STATEMENT 28 FEBRUARY 2005 UK GAAP Income PBSE - Income tax - Employee FOREX on Intangibles - Statement in dividends deferred benefits trans. of R&D IFRS format tax subs £ £ £ £ £ £ Revenue 31,713,198 Cost of sales (13,990,380) (27,078) ------------- Gross profit 17,722,817 Other operating income 178,484 Research and development expenses (3,438,774) (16,912) 445,679 Sales, Marketing & Customer support expenses (3,181,514) (15,915) Administration expenses (3,880,756) (11,326) ------------- Operating profit before financing costs and amortisation 7,400,258 Amortisation of acquired intangible assets (2,347,674) Financial income 206,771 Financial costs (1,060,874) ------------- Profit before taxation 4,198,481 Taxation (1,875,505) 150,941 ------------- Profit attributable to shareholders 2,322,976 ============= Dividends (1,072,671) 243,028 -------------------------------------------------------------------------------------- Retained profit 1,250,305 243,028 150,941 (71,231) 0 445,679 =============------------------------------------------------------------------------- SONDEX PLC IAS 39 IFRS 2 IFRS 3 IFRS 3 INCOME STATEMENT 28 FEBRUARY 2005 Financial Share based Business Business IFRS Income instruments payments combinations - combinations - Statement Geolink Goodwill £ £ £ £ £ Revenue 31,713,198 Cost of sales (141,070) (14,158,529) ------------ Gross profit 17,554,669 Other operating income 178,484 Research and development expenses (124,206) (3,134,212) Sales, Marketing & Customer support expenses (85,996) (3,283,425) Administration expenses 105,932 (3,786,150) ------------ Operating profit before financing costs and amortisation 7,529,366 Amortisation of acquired intangible assets (1,925,769) 2,247,000 (2,026,442) Financial income 206,771 Financial costs (1,060,874) ------------ Profit before taxation 4,648,820 Taxation (1,724,564) ------------ Profit attributable to shareholders 2,924,256 ============ Dividends (829,643) ----------------------------------------------------------------------------------- Retained profit 0 (245,340) (1,925,769) 2,247,000 2,094,613 -----------------------------------------------------------------------============ Transition to IFRS: Key income statement and balance sheet adjustments The notes set out below explain the key adjustments to the income statement and balance sheet that have resulted from the transition to IFRS. IAS 10 Events After the Balance Sheet Date IFRS requires dividends payable to be recognised in the period in which they are approved. Under UK GAAP, dividends were accrued and recognised in the period in which they were proposed and to which they were considered to relate. Since approval occurs after the end of the relevant period, the impact of this change is to delay the recognition of dividends payable. IAS 12 Income Taxes UK GAAP required deferred taxation to be recognised on timing differences, whereas IFRS requires that deferred taxation recognised on temporary differences. The impact is the recognition of deferred taxation on a wider range of items, including revaluation reserves and certain foreign exchange differences. IAS 19 Employee Benefits IAS 19 requires the accrual of certain employee benefits, including holiday pay, that were recognised as incurred under UK GAAP. IAS 21 The Effects of Changes in Foreign Exchange Rates Under UK GAAP, foreign exchange differences arising upon the retranslation on consolidation of the net assets of a subsidiary were recognised in the Statement of Total Recognised Gains and Losses, and formed part of the profit and loss reserve. Under IFRS, such differences are not recognised in the results for the period but are taken directly to a separate reserve within equity. Sondex plc has elected not to apply IAS 21 to cumulative translation differences that existed at the date of transition to IFRS (1 March 2004). IAS 38 Intangible Assets IFRS requires the recognition and capitalisation of certain internally-generated intangible assets, notably development costs, if they meet specified criteria. Under UK GAAP, Sondex plc expensed all development costs as they were incurred. The effect of this change is that relevant project development costs have been capitalised from the date that the project qualifies under IAS 38 until the resultant product is released commercially. The costs capitalised are subsequently amortised over the estimated life of the product. The charge to the income statement in respect of research and development costs therefore comprises the immediate write off of research and non-qualifying development projects, and the amortisation charge in respect of development projects previously capitalised. IFRS 2 Share-Based Payment IFRS 2 requires that the fair value of all share-based payments, including the fair value of share options, are recognised as an expense over their vesting periods. In accordance with the IFRS transitional provisions, IFRS 2 has been applied to grants of equity instruments issued after 7 November 2002 that have not vested as of 1 January 2005. The fair value of the share options are estimated at the date of grant using either the Black-Scholes model (where no market-based performance conditions exist) or a stochastical model (where market-based performance criteria exist). The following table gives the assumptions made during the year ended 28 February 2005: All Employee Incentive Save As You Earn Performance Plan Share Plan Dividend yield (%) 1 1 1 Volatility (%) 32.2 29.2 31.3 Risk-free interest rate (%) 4.55 4.92 4.33 Expected life of option (years) 6.5 3.25 3 Weighted average share price (£) 1.58 2.1 1.60 Under UK GAAP, only the intrinsic value of share options issued under the Performance Share Plan was recognised in the profit and loss account, with other grants having a nil intrinsic value. Accordingly, the income statement now contains an incremental charge in respect of the fair value of share-options and share-save schemes. IFRS 3 Business Combinations IFRS 3 requires the identification and recognition at fair value of an acquiree's intangible assets at the date of acquisition, and their subsequent amortisation over their estimated useful lives. Sondex plc has elected not to apply IFRS 3 to acquisitions completed before 1 March 2004, but has applied IFRS 3 to the acquisition of Geolink International Limited on 30 June 2004. The estimated useful lives of the intangible assets identified vary between one and ten years. IFRS 3 prohibits the amortisation of goodwill. Under UK GAAP, Sondex plc amortised goodwill over a period of 20 years. The impact on the income statement of the application of IFRS 3 is to replace the previous amortisation of goodwill with a charge for the amortisation of specific intangible assets recognised upon the acquisition of a subsidiary after the date of transition to IFRS. Sondex plc Accounting policies Accounting convention The financial statements have been prepared in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), subject to the exemptions noted below. The accounting policies applied assume that all existing standards in issue from the IASB will be fully endorsed by the EU. These are subject to ongoing amendment by the IASB and subsequent endorsement by the EU and therefore are subject to possible change. The group's date of transition to IFRS is 1 March 2004 and the financial statements for the year ending 28 February 2006 will be the group's first full financial statements under IFRS. Comparative financial information at 28 February 2005 and for the year then ended has been restated under IFRS. The financial statements have been prepared on a historical cost basis, except for certain items which, as disclosed in the accounting policies below, are measured at fair value. IFRS exemptions IFRS 1 "First-Time Adoption of International Financial Reporting Standards" The group has elected to take advantage of certain exemptions made available by IFRS 1 ("First time Adoption of International Financial Reporting Standards"). These exemptions apply to the preparation of the group's balance sheet on transition to IFRS and to accounting under the following standards: IFRS 2 "Share Based Payment" The group has taken advantage of the transitional provisions of IFRS 2 in respect of equity settled awards and has applied IFRS 2 only to equity settled awards granted after 7 November 2002 that have not vested on or before 31 December 2004. IFRS 3 "Business Combinations" The group has elected not to apply IFRS 3 retrospectively to business combinations that took place before 1 March 2004. As a result, all prior business acquisition accounting has been frozen at the transition date. This includes the net book values for goodwill which had been amortised until that date, and assumes that cumulative exchange differences on the retranslation of the net assets of overseas subsidiaries are zero at that date. IAS 21 "Cumulative Translation Differences" The group has elected not to record cumulative translation differences arising prior to the transition date. All cumulative exchange differences are therefore deemed to be zero as at 1 March 2004. IAS 32 and IAS 39 "Financial Instruments" The group has elected not to present its comparative financial information in accordance with IAS 32 "Financial Instruments: Disclosure and Presentation" and IAS 39 " Financial Instruments: Recognition and Measurement". The comparative financial information presented in the interim financial statements for the six months ended 31 August 2005 and the financial statements for the year ending 28 February 2006 will in this respect therefore be presented in accordance with UK GAAP. IAS 34 "Interim Financial Statements" The group has elected not to apply IAS 34 to the first interim financial statements after the adoption of IFRS. The interim financial statements for the six months ended 31 August 2005 will therefore be prepared under the IFRS accounting policies that the group expects to apply in its next full financial statements, for the year ending 28 February 2006, but with the disclosures compliant with the Listing Rules. Basis of consolidation The consolidated financial statements include those of Sondex plc and all subsidiary undertakings. Subsidiaries are all entities over which the group has the power to govern financial and operating policies. Subsidiaries are consolidated from the date on which such power to control is transferred to the group. They are de- consolidated from the date that such control ceases. Segmental reporting Based on the risks and returns of the group's products and services, and on the basis of the internal management structure and system of reporting, the directors consider that the group's primary reporting format is by business segment and the secondary reporting format is by geographical segment. Revenue recognition Revenue, which excludes Value Added Taxes and intra-group sales, represents the invoiced value of goods and services sold to customers. The group recognises revenue when title to goods passes to the customer or when service delivery has occurred and the right to consideration has been obtained. Intangible assets Goodwill and separable intangible assets arising from acquisitions Goodwill represents the excess of the cost of an acquisition over the fair value of the group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired, and is carried at cost less cumulative impairment losses. Gains and losses arising on the disposal of a subsidiary include the carrying value of the goodwill relating to the subsidiary sold. Separable intangible assets, including technology, trademarks, licences and brands, are recognised separately from goodwill on all acquisitions completed after 1 March 2004, the date of transition to IFRS. Such assets are amortised over their estimated useful lives and carried at cost less accumulated amortisation. Such intangible assets are additionally reviewed for impairment on an annual basis. Research & development Development expenditure is capitalised when a clear, commercially viable future for that development is confirmed and it is amortised on a straight-line basis over the life of the project from commencement of commercial production. Capitalised development expenditure is also reviewed for impairment on an annual basis. All other development expenditure and all research expenditure is written off in the year in which it is incurred. Other Other intangible assets acquired are capitalised and amortised over their estimated useful lives. They are also reviewed for impairment on an annual basis. Property, plant & equipment Property, plant and equipment is stated at historical cost less accumulated depreciation and any impairment provision. Depreciation is charged on all property plant and equipment, except freehold land, at rates designed to write off the cost, less the residual value, of each asset over its expected useful life. The depreciation rates used are as follows: Freehold buildings 50 years Other plant and equipment 3-10 years Depreciation for rental assets (ie finished tools held for demonstration and similar purposes) is considered to be immaterial as they have a residual value at least equal to their book value. The rental assets are fully maintained and any costs incurred during the year are expensed through the income statement during the year. The rental assets are also subject to an annual impairment review. The residual values and useful lives are reviewed annually. Inventories Inventories are stated at the lower of cost, calculated on a first in first out basis, or net realisable value. Cost includes a proportion of production overheads based on normal levels of activity, and provision is made for obsolete and slow moving items as necessary. Cash & cash equivalents Cash and cash equivalents includes cash in hand, deposits at call with banks, other short term highly liquid investments and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. Borrowings Borrowings are recognised net of the associated finance costs, which are amortised to the income statement over the life of the borrowings. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. Leasing Payments in respect of assets held under operating leases are charged to the income statement, net of any incentives received, on a straight-line basis over the period of the lease. Foreign currency The consolidated financial statements are presented in Sterling, which is the company's functional and presentational currency. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting on the settlement of such transactions and from the translation at the year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, using the closing rate on the balance sheet date, and of borrowings and other currency instruments designated as hedges or any other such instruments, are taken to shareholders' equity. Such exchange differences are recognised in the income statement as part of the gain or loss on sale, when a foreign operation is sold. The group has elected to deem the cumulative amount of exchange differences arising on consolidation of the net investment in subsidiaries at 1 March 2004 to be zero. Financial instruments The group's operations result in a number of financial risks that include fluctuations in foreign currencies and interest rates, and credit risks. The group's treasury policy is set by the board and is reviewed regularly. The group operates over a wide geographical area and is therefore exposed to foreign currency transactional risk, particularly with respect to the US dollar. The group applies transactional hedging for highly probable sales receipts and purchase commitments denominated in foreign currencies. The denomination of borrowings in foreign currency also provides a natural hedge against some currency fluctuations. Derivatives and foreign currency hedging instruments are recognised at fair value on the date a contract is entered into and subsequently are remeasured at their fair value. The resulting gain or loss is recognised in the income statement. The group has elected not to present its comparative financial information in accordance with IAS 32 "Financial Instruments: Disclosure and Presentation" and IAS 39 " Financial Instruments: Recognition and Measurement". The comparative financial information presented in the interim financial statements for the six months ended 31 August 2005 and the financial statements for the year ending 28 February 2006 will in this respect therefore be presented in accordance with UK GAAP. Deferred tax Deferred 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. Deferred tax is calculated using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax liability is realised. Deferred 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. Government grants Government grants in respect of capital expenditure are credited to a deferred income account and released through the income statement over the expected useful lives of the relevant assets, by equal annual instalments. Grants of a revenue nature are credited through the income statement in a manner to match them with the expenditure to which they relate. Employee benefits Pensions The group operates a defined contribution pension scheme. Contributions are charged in the income statement as they become payable in accordance with the rules of the scheme. Share-based remuneration The group operates a number of equity settled, share based compensation plans. The fair value of the employee services received in exchange for the grant of the shares or the share options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair market value of the shares and options granted, excluding the impact of any non- market vesting conditions. Non-market vesting conditions taken into account in the assumptions about the number of shares and options that are expected to become exercisable. At each balance sheet date, the group revises its estimates of the number of shares and options that are expected to become exercisable. It recognises the impact of the revision of the original estimate, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. The cost of equity settled transactions with employees is measured by reference to the fair value at the date at which they are granted. The fair value is determined with the assistance of an external valuer using a Black-Scholes model, or a stochastical model if the grant includes a market-based performance condition (see "Transition to IFRS: Key income statement and balance sheet adjustments" for assumptions used). The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share. The proceeds received, net of any directly attributable transaction costs, are credited to the nominal value of share capital and to share premium when the shares vest and options are exercised. The group has taken advantage of the transitional provisions of IFRS 2 in respect of equity settled awards, and had applied IFRS 2 only to equity settled awards granted after 7 November 2002 that have not vested on or before 31 December 2004. Other awards continue to be accounted for under UITF 17. Dividends Dividends are recognised at the date on which they are declared and approved by the shareholders at the annual general meeting, or paid if earlier. This information is provided by RNS The company news service from the London Stock Exchange

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