IFRS Restatement
K3 Business Technology Group PLC
06 September 2007
KBT.L
6 September 2007
K3 BUSINESS TECHNOLOGY GROUP PLC
('K3' or 'The Group')
IT solutions supplier to the supply chain industry
Announces
International Financial Reporting Standards
K3 Business Technology Group plc is presenting a summary of its accounts for the
year ended 31 December 2006 and half year financial statements for the period
ended 30 June 2006, restated under International Financial Reporting Standards
('IFRS') as adopted by the European Union. The change to accounting basis arises
from legislation requiring all AIM listed companies to apply IFRS in their
financial statements.
The disclosures include guidance as to the effect of IFRS on the Group's
reported results and balance sheets and comparative figures expected to be used
in the half year financial statements for the period to 30 June 2007 and full
year financial statements to 31 December 2007.
Enquiries:
K3 David Bolton (CFO) T: 01282 864 111
Biddicks Katie Tzouliadis T: 020 7448 1000
Daniel Stewart (NOMAD) Paul Shackleton T: 020 7776 6550
Adoption of International Financial Reporting Standards ('IFRS')
Summary of results presented under IFRS
Introduction
On 12 March 2007 K3 reported its financial results for the year ended 31
December 2006, prepared for the last time under UK Generally Accepted Accounting
Practice ('UK GAAP'). Going forward the Group will prepare its consolidated
financial statements in accordance with IFRS as required for all AIM listed
companies. K3's first reported IFRS results will be for the six months to 30
June 2007 and the Group's first annual report under IFRS will be for the year to
31 December 2007.
The impact on the reporting of our results is not significant and the underlying
performance of the business and its cash flows remain unaffected. Dividend
policy and distributable profits are unaffected.
This announcement describes for investors the key impacts of the conversion from
UK GAAP to IFRS on the Group's results for the year to 31 December 2006 and the
key judgements in making the transition to IFRS which are expected to form the
comparative figures for both the half year financial statements for the six
months to 30 June 2007 and those for the year to 31 December 2007.
Key financial highlights
The key financial highlights of adopting IFRS for the 31 December 2006 financial
statements are:
UK GAAP Adjustment IFRS
£000 £000 £000
Profit from operations 763 2,070 2,833
Adjusted profit from operations (*1) 2,928 (10) (*2) 2,918
Profit before tax 501 2,070 2,571
Taxation (810) (36) (846)
Retained (loss) profit (309) 2,034 1,725
Basic EPS (pence) (1.7) 11.2 9.5
Adjusted EPS (pence) (*3) 11.5 (1.0) (*4) 10.5
Goodwill 13,604 2,080 15,684
Total equity 12,371 2,057 14,428
*1 Calculated before amortisation of goodwill under UK GAAP of £2.08m and cost
of share-based payments of £0.09m
*2 Calculated before cost of share-based payments of £0.09m
*3 Calculated before amortisation of goodwill under UK GAAP of £2.08m, cost of
share-based payments of £0.09m and profit on sale of disposal group (net of
tax) of £0.11m.
*4 Calculated before cost of share-based payments (net of tax) of £0.06m and
profit on sale of disposal group (net of tax) of £0.11m
The key financial highlights of adopting IFRS for the 30 June 2006 half year
financial statements are:
UK GAAP Adjustment IFRS
£000 £000 £000
Profit from operations 190 935 1,125
Adjusted profit from operations (*5) 1,269 (105) (*6) 1,164
Profit before tax 50 935 985
Taxation (354) 12 (342)
Retained (loss) profit (304) 947 643
Basic EPS (pence) (1.7) 5.3 3.6
Adjusted EPS (pence) (*7) 4.5 (0.7) (*8) 3.8
Goodwill 14,656 1,040 15,696
Total equity 10,534 942 11,476
The Group's date of transition to IFRS is 1 January 2006, being the start of the
previous period that will be presented as comparative information.
This document sets out the changes in accounting policies arising from the
adoption of IFRS and presents restated information for the opening balance sheet
at 1 January 2006, the six months ended 30 June 2006 and the year ended 31
December 2006 which were previously published under UK GAAP.
*5 Calculated before amortisation of goodwill under UK GAAP of £1.04m and cost
of share-based payments of £0.04m
*6 Calculated before cost of share-based payments of £0.04m
*7 Calculated before amortisation of goodwill under UK GAAP of £1.04m and cost
of share-based payments (net of tax) of £0.03m
*8 Calculated before cost of share-based payments (net of tax) of £0.03m
1. Explanation of transition to IFRS
The Group's financial statements for the year ending 31 December 2007 will be
the first annual financial statements that comply with IFRS. The Group will
apply IFRS 1 in preparing the half year financial statements. The last financial
statements under UK GAAP were for the year ended 31 December 2006 and the date
of transition was therefore 1 January 2006. Presented below is the
reconciliation of profit for the year ended 31 December 2006 and the
reconciliations of equity at 1 January 2006, being the start of that period
('Transition Date') and at 31 December 2006 (date of last UK GAAP financial
statements) as required by IFRS 1. In addition, the reconciliation of equity at
30 June 2006 and the reconciliation of profit for the six months ended 30 June
2006 have been included below as required by IFRS 1 to enable a comparison of
the 2006 half year figures with those published in the corresponding period of
the previous financial year. For explanations of the nature and effect of the
changes in accounting policies as a consequence of the transition to IFRS, refer
to note 2 of this document.
(i) Reconciliation of UK GAAP consolidated profit and loss account to IFRS
income statement for the six months ended 30 June 2006
Six months ended 30 June 2006
Notes UK GAAP Effect of IFRS
Unaudited transition to Unaudited
£000 IFRS Unaudited £000
£000
Revenue 12,733 - 12,733
Cost of sales (4,999) - (4,999)
Gross profit 7,734 - 7,734
Administrative expenses:
Amortisation of goodwill and a (1,106) 1,040 (66)
intangibles
Share based payments (39) - (39)
Other administrative expenses b (6,399) (105) (6,504)
Total administrative expenses (7,544) 935 (6,609)
Profit from operations 190 935 1,125
Finance income - 2 2
Finance costs (140) (2) (142)
Profit before taxation 50 935 985
Taxation d (354) 12 (342)
(Loss) profit after taxation (304) 947 643
(ii) Reconciliations of UK GAAP consolidated profit and loss account to IFRS
income statement for the year ended 31 December 2006
Year ended 31 December 2006
Notes UK GAAP Effect of IFRS
(unaudited) transition to (unaudited)
£000 IFRS £000
(unaudited)
£000
Revenue 27,346 - 27,346
Cost of sales (10,641) - (10,641)
Gross profit 16,705 - 16,705
Administrative expenses:
Amortisation of goodwill and a (2,198) 2,080 (118)
intangibles
Share based payments (85) - (85)
Other administrative expenses b (13,659) (10) (13,669)
Total administrative expenses (15,942) 2,070 (13,872)
Profit from operations 763 2,070 2,833
Finance income - 21 21
Finance costs (262) (21) (283)
Profit before taxation 501 2,070 2,571
Taxation d (810) (36) (846)
(Loss) profit after taxation (309) 2,034 1,725
(iii) Reconciliation of UK GAAP consolidated profit to IFRS consolidated
profit
Notes Six months Year ended
ended 31 December
30 June 2006 2006
£000 £000
Loss after tax as reported under UK GAAP (304) (309)
Adjustments for:
Short-term employee benefits b (105) (10)
Goodwill a 1,040 2,080
Deferred tax d 12 (36)
Profit after tax as reported under IFRS 643 1,725
(iv) Reconciliations of consolidated balance sheet at 1 January 2006 from UK
GAAP to IFRS
Notes UK GAAP Effect of IFRS
(audited) transition to (unaudited)
£000 IFRS £000
(unaudited)
£000
ASSETS
Non Current Assets
Property, plant and equipment 508 - 508
Goodwill a 15,682 - 15,682
Other intangible assets 162 - 162
Deferred tax d - 237 237
Total Non Current Assets 16,352 237 16,589
Current Assets
Trade receivables 5,210 - 5,210
Other current assets 1,174 - 1,174
Cash and cash equivalents 874 - 874
Deferred tax d 212 (212) -
Total Current Assets 7,470 (212) 7,258
Total Assets 23,822 25 23,847
EQUITY
Share capital 4,435 - 4,435
Share premium account 7,813 - 7,813
Other reserves 6,070 - 6,070
Retained earnings a ,b, c (7,518) (23) (7,541)
Translation reserve c - - -
Total equity attributable to 10,800 (23) 10,777
equity holders of the parent
LIABILITIES
Non Current Liabilities
Long-term borrowings 2,439 - 2,439
Total Non Current Liabilities 2,439 - 2,439
Current Liabilities
Trade and other payables b 9,571 48 9,619
Current tax liabilities 223 - 223
Short-term borrowings 789 - 789
Total Current Liabilities 10,583 48 10,631
Total Liabilities 13,022 48 13,070
Total Equity and Liabilities 23,822 25 23,847
(v) Reconciliation of consolidated balance sheet at 31 December 2006 from
UK GAAP to IFRS
Notes UK GAAP Effect of IFRS
(unaudited) transition to (unaudited)
£000 IFRS £000
(unaudited)
£000
ASSETS
Non Current Assets
Property, plant and equipment 416 - 416
Goodwill a 13,604 2,080 15,684
Other intangible assets 273 - 273
Investments in other companies 1,398 - 1,398
Deferred tax assets d - 191 191
Total Non Current Assets 15,691 2,271 17,962
Current Assets
Trade receivables 7,129 - 7,129
Other current assets 1,493 - 1,493
Cash and cash equivalents 2,267 - 2,267
Deferred tax assets d 156 (156) -
Total Current Assets 11,045 (156) 10,889
Total Assets 26,736 2,115 28,851
EQUITY
Share capital 4,872 - 4,872
Share premium account 1,388 - 1,388
Other reserves 6,070 - 6,070
Retained earnings a ,b, c 41 2,072 2,113
Translation reserve c - (15) (15)
Total equity attributable to 12,371 2,057 14,428
equity holders of the parent
LIABILITIES
Non Current Liabilities
Long-term borrowings 711 - 711
Provisions - - -
Total Non Current Liabilities 711 - 711
Current Liabilities
Trade and other payables b 11,790 58 11,848
Current tax liabilities 1,003 - 1,003
Short-term borrowings 861 - 861
Provisions - - -
Total Current Liabilities 13,654 58 13,712
Total Liabilities 14,365 58 14,423
Total Equity and Liabilities 26,736 2,115 28,851
(vi) Reconciliation of consolidated balance sheet as at 30 June 2006 from UK
GAAP to IFRS
Notes UK GAAP Effect of IFRS
(unaudited) transition to (unaudited)
£000 IFRS £000
(unaudited)
£000
ASSETS
Non Current Assets
Property, plant and equipment 484 - 484
Goodwill a 14,656 1,040 15,696
Other intangible assets 239 - 239
Deferred tax d - 267 267
Total Non Current Assets 15,379 1,307 16,686
Current Assets
Trade receivables 5,934 - 5,934
Other current assets 1,579 - 1,579
Cash and cash equivalents 64 - 64
Deferred tax d 212 (212) -
Total Current Assets 7,789 (212) 7,577
Total Assets 23,168 1,095 24,263
EQUITY
Share capital 4,435 - 4,435
Share premium account 7,813 - 7,813
Other reserves 6,070 - 6,070
Retained earnings a ,b, c (7,784) 942 (6,842)
Translation reserve c - - -
Total equity attributable to 10,534 942 11,476
equity holders of the parent
LIABILITIES
Non Current Liabilities
Long-term borrowings 2,186 - 2,186
Total Non Current Liabilities 2,186 - 2,186
Current Liabilities
Trade and other payables b 9,044 153 9,197
Current tax liabilities 622 - 622
Short-term borrowings 782 - 782
Total Current Liabilities 10,448 153 10,601
Total Liabilities 12,634 153 12,787
Total Equity and Liabilities 23,168 1,095 24,263
(vii) Reconciliation of consolidated equity from UK GAAP to IFRS
Notes 1 January 30 June 31 December
2006 2006 2006
£000 £000 £000
Total equity as reported under 10,800 10,534 12,371
UK GAAP
Adjustments for:
Short-term employee benefits b (48) (153) (58)
Goodwill a - 1,040 2,080
Deferred tax d 25 55 35
Total equity as reported under 10,777 11,476 14,428
IFRS
2. Explanation of adjustments to equity at 31 December 2006, 30 June 2006
and 1 January 2006 and to profit for the year ended 31 December 2006 and for the
six months ended 30 June 2006
The transition to IFRS resulted in the following changes:
a. Goodwill
Goodwill is not amortised under IFRS but is measured at cost less impairment
losses. Under UK GAAP, goodwill was amortised on a straight-line basis over the
time that the Group was estimated to benefit from it. The change does not affect
equity at 1 January 2006 because, as permitted by IFRS 1, goodwill arising on
acquisitions before 1 January 2006 (date of transition to IFRS) has been frozen
at the UK GAAP amounts subject to being tested for impairment at that date, the
results of which assessment indicated no such impairment. The adjustments
increase profits for the six months to 30 June 2006 by £1,040,000 and for the
year to 31 December 2006 by £2,080,000 with corresponding increases in retained
earnings.
b. Short-term employee benefits
IAS 19 Employee benefits requires the expense of services rendered that increase
employees' entitlement to future compensated absence (i.e. paid holiday) to be
recognised in the period. Therefore, the cost of holidays earned but not taken
at the balance sheet date has been accrued for. The adjustments decrease profits
for the six months to 30 June 2006 by £105,000 and for the year to 31 December
2006 by £10,000; retained earnings are reduced by £48,000 at 1 January 2006,
£153,000 at 30 June 2006 and £58,000 at 31 December 2006.
c. Other reserves
As permitted by IFRS 1, the cumulative translation differences arising on
consolidation of overseas subsidiaries has been set to zero as at 1 January
2006. The foreign exchange differences arising after that date on consolidation
have been credited to the translation reserve within equity rather than to
retained earnings. The adjustments are £nil for the six months to 30 June 2006
and £15,000 for the year to 31 December 2006.
d. Deferred tax
Deferred tax assets have been reclassified as Non Current Assets. The amounts
reclassified are £212,000 at 1 January 2006 and 30 June 2006 and £156,000 at 31
December 2006.
Differences in timing between the recognition of accounting for tax charges
under IAS and the deduction of amounts in the corporation tax computations now
create temporary differences resulting in deferred tax rather than permanent
differences under UK GAAP on which no deferred tax balances were recognised.
The capitalisation of development costs has resulted in the creation of a
deferred tax liability and the recognition of holiday pay accruals under IAS has
resulted in a deferred tax asset.
IAS 12 applies to all share based payments and is not time restricted to those
issued post 7 November 2002. Under IAS 12 the deferred tax recognised through
the profit and loss account cannot exceed 30% of the share-based payment charge
on a cumulative basis; the balance is therefore adjusted to equity.
The net effect of the above adjustments is an increase in the deferred tax asset
at 1 January 2006 of £25,000, £55,000 at 30 June 2006 and £35,000 at 31 December
2006. The cumulative amounts credited directly to equity in respect of
share-based payments are £8,000 at 1 January 2006, £26,000 at 30 June 2006 and
£54,000 at 31 December 2006.
e. Exemptions
IFRS 1 First-time Adoption of International Financial Reporting Standards sets
out the transition rules, which must be applied, when IFRS is adopted for the
first time. The standard sets out certain mandatory exemptions to retrospective
application and certain optional exemptions. The most significant optional
exemptions available and taken by the Group are as follows:
(i) Business combinations: the Group has adopted the exemption under IFRS
1 relating to business combinations which occurred before the date of
transition, 1 January 2006. The goodwill arising from combinations before that
date therefore remains at the amount shown under UK GAAP at 1 January 2006,
subject to any subsequent impairment.
(ii) Share-based transactions: The Group adopted the exemption in IFRS 1
which allows a first-time adopter to apply the standard only to share options
and equity instruments granted after 7 November 2002 that have not vested by 1
January 2006.
(iii) Cumulative translation differences: Under IAS 21, the effects of
changes in foreign exchange rates, and cumulative translation differences are
tracked within reserves and are recycled from equity to the income statement on
disposal of a foreign operation. In order to eliminate the need to
retrospectively apply this requirement, the Group took the exemption to set
cumulative translation differences to zero at the date of transition.
3. Basis of preparation
Basis of preparation
The half year financial statements to be announced on 7 September 2007, will be
prepared in accordance with the accounting policies the Group expects to adopt
in its 2007 annual report. These accounting policies are based on the IAS, IFRS
and IFRIC interpretations that the Group expects to be applicable at that time.
The IFRS and IFRIC interpretations that will be applicable at 31 December 2007,
including those that will be applicable on an optional basis, are not known with
certainty at the time of preparing the half year financial statements, although
the International Accounting Standards Board has stated that it will not issue
any further statements during 2007.
The Group's consolidated financial statements were prepared in accordance with
UK GAAP until 31 December 2006. The Group has applied those IAS, IFRS and IFRIC
interpretations expected to be applicable in the 31 December 2007 financial
statements to the half year financial statements. Reconciliations between
previously reported financial statements prepared under UK GAAP and the IFRS
equivalents are presented for profit for the year ended 31 December 2006 and the
six months ended 30 June 2006 and total equity as at 31 December 2006, 30 June
2006 and 1 January 2006 in note 2 of this document.
IFRS 1 provides certain optional exemptions from full retrospective application
of all accounting standards effective at the Group's reporting date. As
discussed in more detail in the relevant sections above, the Group has taken
advantage of the exemptions relating to: business combinations, cumulative
translation differences and share-based payment transactions. The Group has not
taken advantage of the available optional exemption relating to fair value
measurement of financial assets and financial liabilities at initial
recognition.
The comparatives for the full year ended 31 December 2006 are not the Group's
statutory accounts for that year. A copy of the statutory accounts for that
year, which were prepared under UK GAAP, have been delivered to the Registrar of
Companies. The auditors' report on those accounts was unqualified, did not
include references to any matters to which the auditors drew attention by way of
emphasis without qualifying their report and did not contain a statement under
Section 237(2)-(3) of the Companies Act 1985.
This document is unaudited.
4. Summary of significant accounting policies
The significant accounting policies which the Group will be applying to its half
year financial statements for the six months to 30 June 2007 and which it
expects to apply in its full financial statements for the year ending 31
December 2007 are set out below.
Principles of consolidation
The consolidated half year financial statements incorporate the half year
financial statements of the Group and all its subsidiaries. Intra-group
transactions, including sales, profits, receivables and payables, have been
eliminated on the Group consolidation.
Subsidiaries
Subsidiaries are entities controlled by the Group. Control exists when the Group
has the power, directly or indirectly, to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. In assessing
control, potential voting rights that presently are exercisable or convertible
are taken into account. The financial statements of subsidiaries are included
from the date that control commences until the date that control ceases.
Business combinations
The results of subsidiaries acquired in the period are included in the income
statement from the date they are acquired. On acquisition, all of the
subsidiaries' assets and liabilities that exist at the date of acquisition are
recorded at their fair values reflecting their condition at that date.
Goodwill
All business combinations are accounted for by applying the purchase method.
Goodwill represents the excess of the fair value of the consideration paid on
acquisition of a business over the fair value of the assets, including any
intangible assets identified, liabilities and contingent liabilities acquired.
Goodwill is not amortised but is measured at cost less impairment losses. In
determining the fair value of consideration, the fair value of equity issued is
the market value of equity at the date of completion, and the fair value of
contingent consideration is based upon the extent to which the directors believe
performance conditions will be met and thus whether any further consideration
will be payable.
As permitted by IFRS 1, goodwill arising on acquisitions before 1 January 2006
(date of transition to IFRS) has been frozen at the UK GAAP amounts subject to
being tested for impairment at that date. Goodwill is tested for impairment at
least annually. The Group performs its impairment reviews at the cash-generating
unit level. Any impairment is recognised immediately in profit and loss and is
not subsequently reversed.
On disposal of a subsidiary, the attributable net book value of goodwill is
included in the determination of the profit or loss on disposal.
Research and development expenditure
Expenditure on research activities is recognised as an expense in the period in
which it is incurred. An internally-generated intangible asset arising from the
Group's software development is recognised only if all of the following
conditions are met:
•an asset is created that can be identified
•it is probable that the asset created will generate future economic
benefits; and
•the development cost of the asset can be measured reliably.
The expenditure capitalised represents the cost of direct labour incurred in
developing the software product.
Internally-generated intangible assets are amortised on a straight-line basis
over their useful lives commencing from the date of first income recognition.
Where no internally-generated intangible asset can be recognised, development
expenditure is recognised as an expense in the period in which it is incurred.
Capitalised development expenditure is stated at cost less accumulated
amortisation (see below) and impairment losses.
Amortisation
Amortisation is charged to the income statement on a systematic basis over the
estimated useful lives of intangible assets unless such lives are indefinite.
Goodwill and intangible assets with an indefinite life are systematically tested
for impairment at each balance sheet date. Other intangible assets are amortised
from the date they are available for use. The estimated useful lives for
development expenditure are estimated to be in a range of between two and five
years.
Impairment charges
The Group considers at each reporting date whether there is any indication that
non-current assets are impaired. If there is such an indication, the Group
carries out an impairment test by measuring an asset's recoverable amount, which
is the higher of its fair value less costs to sell and its value in use
(effectively the expected cash to be generated from using the asset in the
business). The estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset for which the estimates
of future cash flows have not been adjusted. If the recoverable amount is less
than the carrying amount an impairment loss is recognised, and the asset is
written down to its recoverable amount.
Where an impairment loss subsequently reverses, the carrying amount of the asset
(cash-generating unit) is increased to the revised estimate of its recoverable
amount, but so that the increased carrying amount does not exceed the carrying
amount that would have been determined had no impairment loss been recognised
for the asset (cash-generating unit) in prior years. A reversal of an impairment
loss is recognised as income immediately.
Revenue recognition
Revenue is recognised to the extent that it is probable that the economic
benefits associated with the transaction will flow into the Group.
Revenue comprises the value of sales to third party customers of software
licences, customised software, hardware and fees derived from installation,
consultancy, training and support. It is stated exclusive of value added tax and
net of trade discounts and rebates.
Revenue on the sale of software licences, customised software, hardware and
installation is recognised on delivery to a customer or on completion of
contractual milestones.
Revenue from training and consultancy is recognised on performance.
Revenue from support is generally invoiced in advance, termed 'deferred income',
and taken to revenue in equal monthly instalments over the relevant period.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits. The Group
considers all highly liquid investments with original maturity dates of three
months or less to be cash equivalents. Bank overdrafts that are repayable on
demand and form an integral part of the Group's cash management system are
included as a component of cash and cash equivalents for the purpose of the
statement of cash flows.
Property, plant and equipment
The cost of items of property, plant and equipment is its purchase cost,
together with any incidental costs of acquisition.
Depreciation is calculated so as to write off, on a straight-line basis over the
expected useful economic lives of the asset concerned, the cost of property,
plant and equipment, less estimated residual values, which are adjusted, if
appropriate, at each balance sheet date. The principal economic lives used for
this purpose are:
• Long leasehold properties Period of lease
• Short leasehold properties Period of lease
• Plant and machinery Three to five years
• Motor vehicles Four years
Provision is made against the carrying value of items of property, plant and
equipment where impairment in value is deemed to have occurred.
Leased assets
Leases in terms of which the Group assumes substantially all the risks and
rewards of ownership are classified as finance leases. Assets held under finance
leases and hire purchase contracts are capitalised in the balance sheet and
depreciated over their expected useful lives. The interest element of leasing
payments represents a constant proportion of the capital balance outstanding and
is charged to the income statement over the period of the lease.
All other leases are regarded as operating leases and the payments made under
them are charged to the income statement on a straight-line basis over the lease
term.
Foreign currency translation
Transactions denominated in foreign currencies are translated into sterling at
the rates ruling at the dates of transactions. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated at
the rates ruling at that date. Translation differences are taken to the profit
and loss account.
In order to hedge its exposure to certain foreign exchange risks, the Group
enters into forward contracts and options (see below for details of the Group's
accounting policies in respect of such derivative financial instruments).
On consolidation, results of overseas subsidiaries are translated using the
average exchange rate for the period, unless exchange rates fluctuate
significantly. The balance sheets of overseas subsidiaries are translated using
the closing year end rate. Exchange differences arising, if any, are taken to
equity. Such translation differences are recognised as income or as expenses in
the period in which the operation is disposed of.
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. The Group has elected to treat goodwill and fair
value adjustments arising on acquisitions before the date of transition to IFRS
as sterling denominated assets and liabilities.
Financial instruments
Financial assets and financial liabilities are recognised at fair value on the
Group's balance sheet when the Group becomes a party to the contractual
provisions of the instrument.
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal
value as reduced by appropriate allowances for estimated irrecoverable amounts.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into. An equity instrument is
any contract that evidences a residual interest in the assets of the Group after
deducting all of its liabilities.
Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs.
Finance charges are accounted for on an accrual basis to the income statement
using effective interest method and are added to the carrying amount of the
instrument to the extent that they are not settled in the period in which they
arise.
Trade payables
Trade payables are not interest bearing and are stated at their nominal value.
Equity instruments
Equity instruments issued by the Group are recorded at the proceeds received,
net of direct issue costs.
Derivative financial instruments and hedge accounting
The Group's activities expose it to the financial risks of changes in foreign
currency exchange rates. The Group uses foreign exchange forward contracts to
hedge these exposures. The Group does not use derivative financial instruments
for speculative purposes.
The use of financial derivatives is governed by the Group's policies approved by
the board of directors, which provide written principles on the use of financial
derivatives.
Derivative financial instruments are recognised on the Group balance sheet at
fair value. The Group has not applied hedge accounting and changes in the fair
value of derivative financial instruments are recognised in the income statement
as they arise. However, where derivatives qualify for hedge accounting,
recognition of any resultant gain or loss depends on the nature of the item
being hedged.
Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally 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 arises from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a transaction that
affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, 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.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited in the income statement, except when it relates to items
charged or credited directly to equity, in which case the deferred tax is also
dealt with in equity.
Share-based payments
The Group issues equity-settled share-based payments to certain employees, that
is, share options. Equity-settled share-based payments are measured at fair
value at the date of grant. Fair value is measured by use of a trinomial lattice
model. The expected life used in the model has been adjusted, based on the
Group's best estimate for the effects of non-transferability, exercise
restrictions and behavioural considerations.
The fair value determined at the grant date is expensed on a straight-line basis
over the vesting period, based on the Group's estimate of the number of shares
that will eventually vest. Non-market vesting conditions are taken into account
by adjusting the number of equity instruments expected to vest at each balance
sheet date so that, ultimately, the cumulative amount recognised over the
vesting period is based on the amount that eventually vest. Market vesting
conditions are factored into the fair value of the options granted. As long as
all other vesting conditions are satisfied, a charge is made irrespective of
whether the market vesting conditions are satisfied. The cumulative expense is
not adjusted for failure to meet a market vesting condition.
The Group has applied the exemption available under IFRS 2, to apply its
provisions only to those options granted after 7 November 2002 and which were
outstanding at 1 January 2006.
Employee share ownership plans
The material assets, liabilities, income and costs of the K3 Business Technology
Group plc Share Incentive Plan are included in the financial statements. Until
such time as the Group's own shares vest unconditionally with employees, the
consideration paid for the shares is deducted in arriving at equity.
Pension contributions
Obligations for contributions to defined contribution pension plans are
recognised as an expense in the income statement as incurred. The Group has no
defined benefit arrangements in place.
Investment income
Investment income relates to interest income, which is accrued on a time basis,
by reference to the principal outstanding and at the effective interest rate
applicable.
Provisions
A provision is recognised in the balance sheet when the Group has a present
legal or constructive obligation as a result of a past event, and it is probable
that an outflow of economic benefits will be required to settle the obligation.
Provisions are measured at the Directors' best estimate of the expenditure
required to settle the obligation at the balance sheet date, and are discounted
to present value where the effect is material.
Provisions are reviewed on a regular basis and released to profit and loss
account where changes in circumstances indicate that a provision is no longer
required.
Profit from operations
Profit from operations is stated after charging all operating costs including
those separately disclosed by virtue of their size or unusual nature or to
facilitate a more helpful understanding of the group's results. It is stated
before investment income and finance costs.
Key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and reported amounts of assets and liabilities, income
and expenses. The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis of making the judgements
about carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates. The key
sources of estimation that have a significant impact on the carrying value of
assets and liabilities are discussed below:
Valuation of intangibles acquired in business combinations
Determining the fair value of intangibles acquired in business combinations
requires estimation of the value of the cashflows related to the identified
intangibles and a suitable discount rate in order to calculate the present
value.
Impairment of goodwill and other intangibles
Determining whether goodwill is impaired requires an estimation of the value in
use of the cash generating units to which goodwill has been allocated. The value
in use calculation requires an entity to estimate the future cash flows expected
to arise from the cash generating unit and a suitable discount rate in order to
calculate present value. An impairment review has been performed at the adoption
date and no impairment has been identified.
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