Re. Transition to IFRS

CML Microsystems PLC 15 November 2005 CML Microsystems Plc Transition to International Financial Reporting Standards Introduction CML Microsystems Plc ('CML' or 'the Group') has historically prepared its consolidated financial statements under UK Generally Accepted Accounting Practice (UK GAAP). Following the adoption by the United Kingdom of a European Union (EU) Regulation issued on 19th July 2002, the Group is required to prepare its financial statements in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) from 1st April 2005. Accordingly the interim results for the period ended 30th September 2005 will be the Group's first results to be prepared and reported under IFRS. The Group's financial performance and position is altered by the adoption of IFRS, however, there is no change to the cash flows of the Group. This document explains how the Group's reported UK GAAP financial results for the year ended 31st March 2005 and its financial position as at that date would have been reported under IFRS. Although this document has been prepared in accordance with our current understanding of IFRS the accounting policies applied assume that all existing standards in issue from the International Accounting Standards Board ('IASB') will be fully endorsed by the EU. Since these standards are subject to ongoing amendment by the IASB and subsequent endorsement by the EU these first IFRS statements are subject to possible change. This document includes: • the Group's consolidated Income statements for the period ended 30th September 2004 and year ended 31st March 2005; • the Group's consolidated balance sheets at 30th September 2004 and 31st March 2005 ; • the Group's consolidated cash flow statements for the period ended 30th September 2004 and the year ended 31st March 2005; • the Group's consolidated statement of changes in equity for the year ended 31st March 2005 and the period ended 30th September 2004; • a reconciliation of the Group's consolidated Income statements for the period ended 30th September 2004 and year ended 31st March 2005, from those prepared under UK GAAP to IFRS; • a reconciliation of the Group's consolidated balance sheets at 31st March 2004, 30th September 2004 and 31st March 2005, from those prepared under UK GAAP to IFRS; • the Group's accounting policies applied in the preparation of this financial information. In conjunction with our auditors, the Group has reviewed the changes necessary to comply with IFRS. The financial information presented in this document is unaudited. The auditors, Baker Tilly, have reviewed this announcement and the financial information and accounting policies contained therein. Financial Impact Summary The full effect of the financial impact of IFRS in respect of the Group's year ended 31st March 2005 reported results is set out in detail later in this document. A summary of the effect on the income statement for the year ended 31st March 2005 is: Reconciliation of profit for the year ended 31st March 2005 2005 £'000 UK GAAP profit for year (before dividend) 419 Exchange differences (net of tax) (7) Share based payments (net of tax) (56) Removal of amortisation of goodwill 1,561 Employee benefits - pension charge (net of tax) 57 Capitalised research and development expenditure in excess of amortisation (net of tax) 512 ------------ IFRS underlying profit on ordinary activities before tax 2,486 ------------ The key areas which will affect the financial statements and accounting policies as reported under UK GAAP are goodwill, share-based payments, employee benefits, dividends and accounting for research and development costs. The reporting under IFRS will change the Group's financial performance and position; however, there is no change to the cash flows of the Group. CML Microsystems Plc IFRS Results IFRS 1 'First-time Adoption of International Financial Reporting Standards' lays 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. Although in general the Group is required to apply the new accounting standards retrospectively to determine its opening balance sheet this standard allows companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS in the year of transition. The group has elected to take the following exemptions: IFRS 2 - Share-based payments The Group has elected to apply the exemption that allows entities to apply IFRS 2 to share based payment awards granted after November 2002. IFRS 3 - Business combinations The Group has elected not to apply IFRS 3 retrospectively to acquisitions that took place prior to the date of transition. As a result, the carrying amount of goodwill in the UK GAAP balance sheet at 31st March 2004 is brought forward to the IFRS opening balance sheet without adjustment. IAS 19 - Employee benefits - actuarial gains and losses The Group has elected to recognise all cumulative actuarial gains and losses at the date of transition. IAS 21 - Foreign currencies The Group has elected to deem the cumulative amount of exchange differences arising on consolidation of the net investments in subsidiaries at 1st April 2004 to be zero. Key financial impacts The most significant adjustments arising from the transition to IFRS were highlighted in the 2005 Report and Accounts. These are set out in more detail below: Presentation of financial statements The presentation of the Groups primary financial statements has been presented in accordance with IAS 1 'Presentation of Financial Statements'. Goodwill Under UK GAAP the Group was amortising the goodwill arising on the acquisition of Hyperstone AG over a 36-month period. Under IAS 38 intangible assets with an indefinite life shall not be amortised, but tested for impairment annually. Though the Board considered the approach taken under UK GAAP to be the more prudent, it has complied, as it is required to do, with the accounting approach under IAS 38. Share-based payments In accordance with IFRS2 the Group has recognised the cost of outstanding share options granted. The fair value has been calculated using the Black-Scholes model. Deferred tax is provided based upon expected future deductions relating to share based payments and is recognised over the vesting period of the scheme concerned. Employee benefits Under IAS 19 the Group is required to separately recognise the operating and financing costs of defined benefit pension schemes. The group has adopted the amendment to IAS 19 issued on 16th December 2004 that allows all actuarial gains and losses to be charged or credited to equity rather than in the income statement. Actuarial gains and losses will be recognised in full immediately in the statement of recognised income and expenditure. Deferred tax is provided based upon the expected future deductions or additions as appropriate. Dividends IFRS requires that dividends declared after the balance sheet date should not be recognised as a liability until approved by shareholders. Accordingly the dividend for the year ended 31st March 2005 and 31st March 2004 is not accrued in the balance sheet as at those dates. Accounting for research and development The Group is continually engaged in significant research and development in respect of new products and has concluded that the majority of this meets the criteria as set out in IAS 19 for capitalisation. Though the Board considers that the previous method of accounting under UK GAAP to be a more prudent approach it has, as it is required to do, adopted accounting for this expenditure under IAS 19. Accordingly the Group has retrospectively reviewed all research and development expenditure previously charged to the profit and loss account under UK GAAP to determine its opening balance for this new asset class, amortising the asset over the appropriate period that has been decided to be between 2 and 4 years. This change in accounting policy has had the most significant impact on the Groups results when restated under IFRS since over the last four years the Groups overall research and development expenditure has significantly increased (2002-£1,942k; 2003-£2,276k; 2004-£2,817k; 2005-£3,578k) which when capitalised and amortised must result in an increase in profits when restated. Cash flow statement Although there is no effect on the underlying cash receipts and expenditure of the Group, there are significant presentational changes. Under IAS 7 'Cash Flow Statements', the movement in cash and cash equivalents includes short -term investments with maturity of less than three months. The format of the of the cash flow statement shows cash flows analysed between operating, investment and financing activities. Cash flows relating to tax are classified within operating cash flows whereas under UK GAAP these items were classified separately from operating activities. George W Gurry 15th November 2005 Chairman For further information contact: Nigel G Clark Financial Director and Company Secretary 01621 875500 CML Microsystems Plc Consolidated Income Statement (under IFRS) Year ended Six months ended 31st March 30th September 2005 2004 £'000 £'000 Revenue 23,457 11,440 Cost of sales (8,597) (4,435) -------------- ------------- Gross profit 14,860 7,005 Distribution and administration costs (12,507) (5,819) -------------- ------------- 2,353 1,186 Other operating income 581 276 -------------- ------------- Operating profit before adjustments 2,934 1,462 Restructuring costs (420) - Share based payment (79) (39) -------------- ------------- Operating profit after adjustments 2,435 1,423 Finance cost (249) (118) Finance income 119 47 -------------- ------------- Profit before tax 2,305 1,352 Taxation 181 (381) -------------- ------------- Profit for the period attributable to equity shareholders 2,486 971 ============== ============= Earnings per share Basic 16.77p 6.66p -------------- ------------- Diluted 16.64p 6.56p -------------- ------------- Statement of Recognised Income and Expenditure (under IFRS) Year ended Six months ended 31st March 30th September 2005 2004 £'000 £'000 Profit for the period attributable to equity shareholders 2,486 971 Foreign exchange differences (40) 77 Actuarial losses (493) - Deferred tax 148 - -------------- ------------- Recognised gains and losses relating to the period 2,101 1,048 ============== ============= CML Microsystems Plc Consolidated Balance Sheet (under IFRS) 31st March 30th September 2005 2004 £'000 £'000 Assets Non current assets Property, plant and equipment 7,193 6,828 Investment properties 3,150 3,150 Intangible assets - Research & development 5,089 4,629 Intangible assets - Goodwill on consolidation 3,512 3,512 Deferred tax asset 1,573 1,066 -------------- ------------- 20,517 19,185 -------------- ------------- Current assets Inventories 1,723 1,991 Trade receivables and prepayments 4,093 3,837 Cash and cash equivalents 8,449 8,471 -------------- ------------- 14,265 14,299 -------------- ------------- Total assets 34,782 33,484 -------------- ------------- Liabilities Current liabilities Bank loans and overdrafts 4,378 4,378 Trade and other liabilities 4,086 4,788 Current tax liabilities 272 418 -------------- ------------- 8,736 9,584 -------------- ------------- Non current liabilities Deferred tax liabilities 2,624 2,408 Provisions 420 - Long term liabilities 3,504 3,093 -------------- ------------- 6,548 5,501 -------------- ------------- Total liabilities 15,284 15,085 -------------- ------------- Net Assets 19,498 18,399 ============== ============= Equity Share capital 744 741 Convertible warrants 120 240 Share premium 3,752 3,630 Share based payments 83 42 Capital Redemption Reserve 255 255 Foreign exchange differences (40) 77 Retained earnings 14,584 13,414 -------------- ------------- Shareholders' equity 19,498 18,399 ============== ============= CML Microsystems Plc Consolidated Cash Flow Statement (under IFRS) Year ended Six months ended 31st March 30th September 2005 2004 £'000 £'000 Operating activities Net profit for the period before income taxes 2,305 1,352 Adjustments for: Depreciation 663 289 Movement in pension deficit (82) - Amortisation of research and development 3,354 1,301 Share based payments 79 39 Exceptional restructuring costs 420 - Interest expense 235 118 Interest income (119) (47) Increase in working capital 243 385 -------------- ------------- Cash flows from operating activities 7,098 3,437 Income tax refunded 142 284 -------------- ------------- Net cash flows from operating activities 7,240 3,721 -------------- ------------- Investing activities Purchase of tangible fixed assets (1,351) (593) Investment in intangible assets (4,093) (1,579) Disposals of tangible fixed assets 99 53 Interest income 119 47 -------------- ------------- Net cash flows from investing activities (5,226) (2,072) -------------- ------------- Financing activities Issue of ordinary shares 47 41 Dividends paid to group shareholders (1,556) (1,556) Interest expense (235) (118) -------------- ------------- Net cash flows from financing activities (1,744) (1,633) -------------- ------------- Increase in cash and cash equivalents 270 16 ============== ============= Movement in cash and cash equivalents: At start of period 8,245 8,245 Increase 270 16 Effects of exchange rate changes (66) 210 -------------- ------------- At end of period 8,449 8,471 ============== ============= CML Microsystems Plc Consolidated Statement of Changes in Equity Share Capital Convertible Share Premium Share based Capital Foreign Retained Total Warrants payments redemption Exchange earnings reserve differences £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1st April 740 240 3,590 3 255 - 13,999 18,827 2004 Shares 4 163 167 issued Warrants converted (120) (120) Foreign Exchange differences (40) (40) Net actuarial losses recognised directly to (493) (493) equity Dividends (1,556) (1556) paid Profit for period 2,486 2,486 Share based payments 79 79 Deferred 148 148 tax ------- -------- ------- ------- -------- -------- ------- ------- At 31st March 744 120 3,753 82 255 (40) 14,584 19,498 2005 ======= ======== ======= ======= ======== ======== ======= ======= Share Capital Convertible Share Premium Share based Capital Foreign Retained Total Warrants payments redemption Exchange earnings reserve differences £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1st April 740 240 3,590 3 255 - 13,999 18,827 2004 Shares 1 40 41 issued Foreign Exchange differences 77 77 Net actuarial losses recognised directly to equity Dividends (1,556) (1,556) paid Profit for period 971 971 Share based payments 39 39 ------- -------- ------- ------- -------- -------- ------- ------- At 30th September 741 240 3,630 42 255 77 13,414 18,399 2004 ======= ======== ======= ======= ======== ======== ======= ======= CML Microsystems Plc Reconciliation of the group's consolidated income statement for the year ended 31st March 2005 ------- ------- ------ ------- ------- Year ended IAS10 IAS19 IAS38 Foreign IFRS2 Year ended 31st March 2005 Dividend Employee Intangible Exchange Share based 31st March 2005 Under UK GAAP Benefits Assets Differences Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 23,459 (2) 23,457 Cost of (9,685) 1,071 17 (8,597) sales --------- --------- Gross 13,774 14,860 profit Distribution & (12,256) 96 (332) (15) (12,507) admin costs --------- --------- 1,518 2,353 Other operating income 583 (2) 581 --------- --------- Operating profit before adjustment 2,101 2,934 Amortisation of goodwill (1,561) 1,561 - Restructuring costs (420) (420) Share Based payment - (79) (79) --------- --------- Operating profit after adjustments 120 2.435 Finance (235) (14) (249) cost Finance 118 1 119 income --------- --------- Profit before tax 3 2,305 Taxation 416 (25) (227) (6) 23 181 --------- --------- Profit for the 419 2,486 period Dividend proposed/paid (1,564) 1,564 - --------- --------- Profit for the period attributable to equity (1,145) 2,486 shareholders --------- --------- Reconciliation of statement of recognised income and expenditure Profit for the period attributable to equity shareholders (1,145) 2,486 Foreign exchange differences (63) 23 (40) Actuarial losses - (493) (493) Deferred tax - 148 148 --------- --------- Recognised gains and losses relating to the (1,208) 2,101 period --------- ------- ------- --------- CML Microsystems Plc Reconciliation of the group's consolidated income statement for the 6 months ended 30th September 2004 ------- ------ ------- ------- 6 months ended IAS10 IAS38 Foreign IFRS2 6 months ended 30th September Dividend Intangible Exchange Share based 30th September 2004 2004 Under UK GAAP Assets Differences Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 Revenue 11,559 (119) 11,440 Cost of (4,500) 65 (4,435) sales --------- --------- Gross 7,059 7,005 profit Distribution & (6,139) 278 42 (5,819) admin costs --------- --------- 920 1,186 Other operating income 278 (2) 276 --------- --------- Operating profit before 1,198 1,462 adjustments Amortisation of goodwill (781) 781 - Share Based payment - (39) (39) --------- --------- Operating profit after adjustments 417 1,423 Finance (118) (118) cost Finance 47 47 income --------- --------- Profit before 346 1,352 tax Taxation (305) (89) 1 12 (381) --------- --------- Profit for the period attributable to equity 41 971 shareholders --------- --------- Reconciliation of statement of recognised income and expenditure Profit for the period attributable to equity 41 971 shareholders Foreign exchange differences 48 29 77 Actuarial losses - - --------- --------- Recognised gains and losses relating to the period 89 1,048 --------- ------- --------- CML Microsystems Plc Reconciliation of the group's consolidated balance sheet as at 31st March 2004 (the 'opening ' IFRS balance sheet) ------- ------- ------ ------- ------- IAS10 IAS19 IAS38 IAS12 IFRS2 31st March 2004 Dividend Employee Intangible Investment Share based 31st March 2004 Under UK GAAP Benefits Assets Property Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 Assets Non current assets Property, plant and equipment 6,522 6,522 Investment properties 3,150 3,150 Intangible assets - R & - 4,333 4,333 D Intangible assets - Goodwill 3,512 3,512 Deferred tax asset 153 928 1 1,082 --------- --------- 13,337 18,599 --------- --------- Current assets Inventories 1,784 1,784 Trade receivables and prepayments 3,388 3,388 Cash and cash equivalents 8,413 8,413 --------- --------- 13,585 13,585 --------- --------- Total 26,922 32,184 assets --------- --------- Liabilities Current liabilities Bank loans and 4,546 4,546 overdrafts Trade and other liabilities 4,687 (1,554) 3,133 Current tax liabilities 252 252 --------- --------- 9,485 7,931 --------- --------- Non current liabilities Deferred tax liabilities 737 1,300 296 2,333 Long term liabilities - 3,093 3,093 --------- --------- 737 5,426 --------- --------- Total liabilities 10,222 13,357 --------- --------- Net assets 16,700 18,827 --------- --------- Equity Share 740 740 capital Convertible warrants 240 240 Share 3,590 3,590 premium Share based payments - 3 3 Capital redemption reserve 255 255 Revaluation reserve 986 (986) - Retained earnings 10,889 1,554 (2,165) 3,033 690 (2) 13,999 --------- --------- Shareholders' equity 16,700 18,827 --------- --------- CML Microsystems Plc Reconciliation of the group's consolidated balance sheet as at 31st March 2005 ------- ------- ------ ------- ------- ------- IAS10 IAS19 IAS38 Foreign IAS12 IFRS2 31st March 2005 Dividend Employee Intangible Exchange Investment Share based 31st March 2005 Under UK GAAP Benefits Assets Differences Property Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Assets Non current assets Property, plant and equipment 7,195 (2) 7,193 Investment properties 3,150 3,150 Intangible assets - R & - 5,089 5,089 D Intangible assets - Goodwill 1,951 1,561 3,512 Deferred tax asset 497 1,051 25 1,573 -------- --------- 12,793 20,517 -------- --------- Current assets Inventories 1,723 1,723 Trade receivables and prepayments 4,093 4,093 Cash and cash equivalents 8,449 8,449 -------- --------- 14,265 14,265 -------- --------- Total 27,058 34,782 assets -------- --------- Liabilities Current liabilities Bank loans and 4,378 4,378 overdrafts Trade and other liabilities 5,649 (1,563) 4,086 Current tax liabilities 272 272 -------- --------- 10,299 8,736 -------- --------- Non current liabilities Deferred tax liabilities 801 1,527 296 2,624 Provisions 420 420 Long term liabilities - 3,504 3,504 -------- --------- 1,221 6,548 -------- --------- Total liabilities 11,520 15,284 -------- --------- Net assets 15,538 19,498 -------- --------- Equity Share 744 744 capital Convertible warrants 120 120 Share 3,752 3,752 premium Share based payments - 83 83 Capital redemption reserve 255 255 Revaluation reserve 986 (986) - Foreign exchange differences - (40) (40) Retained earnings 9,681 1,563 (2,453) 5,121 40 690 (58) 14,584 -------- --------- Shareholders' equity 15,538 19,498 -------- --------- CML Microsystems Plc Reconciliation of the group's consolidated balance sheet as at 30th September 2004 ------ ------ ------- ------- ------- ------- IAS10 IAS19 IAS38 Foreign IAS12 IFRS2 30th September Dividend Employee Intangible Exchange Investment Share based 30th September 2004 2004 Under UK GAAP Benefits Assets Differences Property Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Assets Non current assets Property, plant and equipment 6,828 6,828 Investment properties 3,150 3,150 Intangible assets - R & - 4,629 4,629 D Intangible assets - Goodwill 2,732 780 3,512 Deferred tax asset 126 928 12 1,066 ------- ------- 12,836 19,185 ------- ------- Current assets Inventories 1,991 1,991 Trade receivables and prepayments 3,837 3,837 Cash and cash equivalents 8,471 8,471 ------- ------- 14,299 14,299 ------- ------- Total 27,135 33,484 assets ------- ------- Liabilities Current liabilities Bank loans and 4,378 4,378 overdrafts Trade and other liabilities 4,786 2 4,788 Current tax liabilities 418 418 ------- ------- 9,582 9,584 ------- ------- Non current liabilities Deferred tax liabilities 723 1,389 296 2,408 Provisions - - Long term liabilities - 3,093 3,093 ------- ------- 723 5,501 ------- ------- Total liabilities 10,305 15,085 ------- ------- Net assets 16,830 18,399 ------- ------- Equity Share 741 741 capital Convertible warrants 240 240 Share 3,630 3,630 premium Share based payments - 42 42 Capital redemption reserve 255 255 Revaluation reserve 986 (986) - Foreign exchange differences - 77 77 Retained earnings 10,978 (2) (2,165) 4,020 (77) 690 (30) 13,414 ------- ------- Shareholders' equity 16,830 18,399 ------- ------- CML Microsystems Plc Accounting Policies Basis of accounting The financial statements have been prepared in accordance with IAS and IFRS issued by the IASB. The accounting polices applied assume that all existing standards in issue from the IASB will be fully endorsed by the EU. These are subject to amendment by the IASB and subsequent endorsement by the EU and are therefore subject to possible change. The financial statements have been prepared under the historical cost convention with the exception of investment properties, which are carried at valuation. The consolidated financial statements for the year ended 31st March 2006 will be the Group's first full IFRS financial statements. Comparative information at 31st March 2005 and for the year then ended has been restated under IFRS. The Group has elected to take certain optional exemptions contained in IFRS 1 'First time Adoption of IFRS' in preparing the Group's balance sheet on transition to IFRS. These exemptions apply to accounting under IFRS 2 'Share based payments', IAS 19 'Employee Benefits' and IAS 21 'Cumulative Translation Differences'. Basis of consolidation The financial statements incorporate the financial statements of the Company and its subsidiary undertakings using the acquisition method of accounting. The results of acquired subsidiary undertakings are included from the date of acquisition. Segmental reporting The Group's primary reporting format is in two segments being Semi-conductor Components and Equipment. These individual segments are engaged in separate business sectors and are subject to different risks and returns. Revenue Revenue represents the total amount receivable by the Group for the sale of its product or services to third parties in respect of deliveries of goods and services rendered during the year, excluding local sales tax. Foreign Currencies Assets and liabilities denominated in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. Transactions in foreign currencies are recorded at the rates ruling at the date of the transactions. All differences are taken to the profit and loss account. The income statements of overseas subsidiaries are translated into sterling at the average rate for the period. Translation differences are dealt with through the Foreign Exchange differences reserve in shareholders funds. The Group has elected to deem the cumulative amount of exchange differences arising on consolidation of the net investments in subsidiaries at 1st April 2004 to be zero. Tangible Fixed Assets All tangible fixed assets, other than investment properties, are stated at historic cost. Depreciation is provided on all tangible fixed assets other than freehold land and investment properties at rates calculated to write each asset down to its estimated residual value evenly over its expected useful life as follows: Freehold and long leasehold premises 2% straight line Short leasehold premises period of lease Plant and equipment: Fixtures and fittings 20% reducing balance Other equipment 20% & 25% straight line Motor Vehicles 25% straight line Investment Properties Investment properties comprise freehold and long leasehold land and buildings. Investment properties are carried at fair value in accordance with IAS 40 'Investment Properties'. Properties are recognised as investment properties when held for long-term rental yields, and after consideration has been given to a number of factors including length of lease, quality of tenant and covenant, value of lease, management intention for future use of property, planning consents and percentage of property leased. Investment properties are revalued annually by the directors and every third year by professional external surveyors and included in the balance sheet at their fair value. Gains or losses arising from changes in the fair values of assets are recognised in the consolidated income statement. In accordance with IAS 40, investment properties are not depreciated. Intangible Assets - Goodwill 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. Historically the Group's policy for goodwill arising on acquisition of a subsidiary undertaking was to write it off directly against reserves but following the introduction of Financial Reporting Standard 10 goodwill arising on the acquisition of a subsidiary undertaking was capitalised, classified as an asset and amortised over its economic useful life. Under IFRS 1 the Group has elected to adopt the 31st March 2004 balance sheet amortised value prepared under UK GAAP for goodwill and carry out annual impairment reviews as required under IAS 38. Intangible Assets - Research and Development Research and development assets that fall within the scope of IAS 19 are shown at historical cost less accumulated amortisation since research and development has a definite useful life. Amortisation is calculated using the straight line method to allocate the cost of the research and development over its estimated useful life of between 2 and 4 years. Research and development expenditure that falls outside the scope of IAS 19 is charged to the income statement when it is incurred. Inventories Inventories are valued on a first in, first out basis and are stated at the lower of cost and net realisable value. In respect of work in progress and finished goods, cost comprises direct materials, direct labour and a proportion of overhead expenses appropriate to the business. Cash and Cash Equivalents Cash and cash equivalents include 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 where there is a set off arrangement with the bank. Other bank overdrafts are shown within borrowings in current liabilities on the balance sheet. Income tax The charge for current income tax is based on the results for the year as adjusted for items which are not taxed or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred income tax is accounted for using the liability method in respect of temporary differences arising from differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. In principle, deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference is due to goodwill arising on a business combination or from an asset or liability, the initial recognition of which does not affect either taxable or accounting income. In respect of the deferred tax on the revaluation surplus, this is calculated on the basis of the chargeable gains that would crystallise on the sale of the investment portfolio as at the reporting date. The calculation takes account of indexation on the historic cost of the properties and any available capital losses. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries 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 at the tax rates that are expected to apply to the period when the asset is realised 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 shareholders' equity, in which case the deferred tax is also dealt with in shareholders' equity. Investments Fixed asset investments are stated at cost less any provision for diminution on value. Investments held as current assets are stated at the lower of cost and net realisable value. Employee Benefits - Pension Obligations Group companies operate both defined benefit and defined contribution pension schemes. The schemes are funded through payments to funds administered by trustees and these are determined by periodic actuarial calculations in respect of the defined benefit pension schemes. The Group has elected to recognise all cumulative actuarial gains and losses in relation to employee defined benefit schemes at the date of transition. The liability recognised in the balance sheet in respect of the defined benefit pension schemes is the present value of the defined benefit obligation at the balance sheet date less the fair value of the scheme assets. Independent actuaries using the projected unit method calculate the defined benefit obligation annually. Past service costs are included where the benefits have vested, otherwise they are amortised on a straight line basis over the vesting period. The expected return on assets of the defined benefit pension plan and the imputed interest on the pension plan liabilities comprise the pension element of the net finance cost/income in the income statement. Differences between the actual and expected return on assets, changes to the retirement benefit obligation due to experience and changes in actuarial assumptions are included in the statement of recognised income and expense in full in the period in which they arise. For defined contribution schemes, contributions are recognised as an employee benefit expense when they are due. Employee Benefits - Share Based Payments The Group has taken advantage of the transitional provisions that allows it to apply IFRS 2 to share option awards granted after 7th November 2002 that had not vested on or before 31st March 2005. Share options are valued using the Black Scholes model. This fair value is charged to the income statement over the vesting period of the share based payment scheme. The value of the charge is adjusted to reflect expected and actual levels of options vesting. EU Grants EU grants receivable to assist the Group with costs in respect of development work are credited to the income statement so as to match them with the expenditure to which they relate. Leases Leases of property, plant and equipment where the Group has substantially all the risk and rewards of ownership are classified as finance leases. The Group has no such leases. Leases in which a significant number of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Rental payments under operating leases are charged to the income statement on a straight-line basis. Dividends Final dividends proposed by the Board of Directors and unpaid at the year end are not recognised in the financial statements until they have been approved by the shareholders at the Annual General Meeting. Interim dividends, which do not require shareholder approval are recognised when they are approved by the Board of Directors. This information is provided by RNS The company news service from the London Stock Exchange

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