Interim Results
Radstone Technology PLC
23 November 2005
For Immediate Release 23 November 2005
Interim Results
Radstone Technology, the world's leading independent supplier of
high-performance, embedded computer products for defence and aerospace
application today announces Interim results for the six months ended 30
September 2005.
Key Points
• Sales up 29% to £21.2m (2004: £16.5m)
• First half orders received by the Group of £27.2m compared to £20.9m
• Order book for future delivery ended the period at a record level of
£94.7m, 9% above the level at the start of the year.
• Increase of 17% in Interim dividend of 1.05p per share (2004: 0.9p)
• Record number of new product introductions
• Major $12.5m multi-year production contract received in the period
Jeff Perrin, Chief Executive commenting on the results said:
"As in previous years, trading will be weighted towards the second half. Our
order book and enquiry levels give us confidence of a strong performance for the
remainder of the year".
For further information:
Radstone Technology 01327-359444
Jeff Perrin, Chief Executive Web: http://www.radstone.co.uk
Kevin Boyd, Group Finance
Director
Buchanan Communications 020 7466 5000
Tim Thompson or Nicola Cronk Email : nicolac@buchanan.uk.com
Interim Financial Report
30 September 2005
Chairman's Statement
for the six months ended 30 September 2005
Results
Sales for the Group for the six months ended 30 September 2005 were £21.2m
compared to £16.5m last year, a growth of 29%. Excluding Octec, acquired at the
beginning of July 2004 and SensorCom, disposed of in March 2005, the increase
was 32%. Revenue in the first half of last year was depressed by production and
supply issues that were resolved in the third quarter.
During the first half of the year the Group received new orders of £27.2m
compared to £20.9m last year, a book to bill ratio of 1.28.
As I indicated in my AGM statement on 7 September 2005, underlying losses for
the six months (see below) were at a similar level to last year, principally due
to increased product development in response to a record level of design-wins
and identified opportunities. Development expenditure at the half-year was £1.4m
above the same period last year and £0.9m excluding Octec and SensorCom. These
increased development costs led to an underlying loss before tax similar to last
year of £1.0m (2004: loss £0.9m).
Excluding acquisitions and disposals, the gross profit margin in the period
decreased from last year's 41.3% to 37.3%. Of this, 2.1% was due to the effect
of a weaker US$ hedged rate and the balance reflected a sales mix of slightly
lower margin products. Operating costs, on a like for like basis (excluding
acquisitions and disposals) increased by 17% compared to last year. Excluding
development costs, the remaining overheads increased by approximately 6%. Basic
loss per share was 2.77p (2004: earnings 5.90p). Underlying loss per share (see
note 7) was 1.57p (2004: loss 2.35p).
The order book for future delivery ended the period at a record level of £94.7m;
this is 9% above the level at the start of this year and 10% above the same time
last year. The amount of the order book scheduled for delivery in the second
half of this year is £25.2m, compared to an equivalent figure of £26.2m twelve
months ago. Last year orders both booked and shipped within the second half of
the year were £7.2m and if the current level of activity continues we would
expect to exceed that this year.
Business Development
Embedded Computing
2005 2004
£'000 £'000
Third party sales 16,910 12,374
Gross profit 7,512 5,965
Contribution 457 622
Excluding acquisitions and disposals, sales on a like for like basis increased
by 44%. The underlying sales growth was 17% after taking into account the
production delays that depressed last year's sales.
Development expenditure was £3.9m and represented 22.8% of sales. In the first
six months of the year we introduced eight new products. These included three
products aimed at high-end software radio and radar applications: AXIS (Advanced
multi-processor Integrated Software), which enables the development of
application software for complex multi-board systems; StarSwitch, which provides
switched fabric connectivity for multi-board systems and finally the ICS-8554
radio frequency data acquisition PMC module.
In November 2004 we opened our US technology centre in Billerica, Massachusetts.
It is now fully operational and was responsible for developing the AXIS software
mentioned above. In June 2005 we transferred our US administrative functions
from New Jersey to this facility. It is our intention to continue to grow our
engineering resource and US customer service and support staff at this location.
Order intake at £23.0m was 30% above the same period last year (2004: £17.7m).
The major order received to date this year was for $12.5m from Raytheon on the
Advanced Targeting Forward Looking Infrared pod programme (ATFLIR) for the F/
A-18 Hornet fighter aircraft. This brings the total value of orders received on
this programme to date to $22.7m.
Chairman's Statement (continued)
for the six months ended 30 September 2005
Electronic Manufacturing Services
2005 2004
£'000 £'000
Total sales 4,635 4,395
Sales to Embedded Computing (320) (284)
External sales 4,315 4,111
Gross profit 1,113 923
Contribution 1,053 818
This was an excellent result from the EMS business, an improved performance over
the good result last year. Order intake for the period was £4.2m, 31% up on last
year (2004: £3.2m), providing an order book for future delivery of £4.3m, with
just over 70% of this amount deliverable in the second half of this year;
providing an unusually high level of visibility for this business.
Financial
The Group is reporting its results for the first time under International
Financial Reporting Standards and has restated the comparative figures as
appropriate. The main changes to the Group's income statement with the adoption
of IFRS have been the write back of previously amortised goodwill arising on the
acquisition of ICS Limited, the re-classification of goodwill arising on the
acquisition of Octec as intellectual property and residual goodwill, the
inclusion of a charge for share based payments and the accounting for pension
costs under IAS 19 as opposed to SSAP 24. The net effect on profit after tax for
the period ended 30 September 2004 is an increase of £0.2m to £1.7m as detailed
in note 14. The major change to the balance sheet is the accounting for the
defined benefit pension deficit under IAS 19. In total, the effect has been to
reduce net assets by £4.5m at 30 September 2004 as detailed in note 14.
To assist with the understanding of earnings trends, underlying loss has been
defined to exclude the impact of the amortisation of intangible assets
recognised on acquisition and those items that under UK GAAP would have been
classified as "exceptional". A reconciliation of (loss)/profit before tax to
underlying loss before tax is given below:
2005 2004
£'000 £'000
(Loss)/profit before tax (1,505) 1,133
Amortisation of intellectual
property arising 524 233
through acquisition
Profit on disposal of freehold land - (2,271)
and buildings
Underlying loss (981) (905)
The US dollar exchange rate has again had a negative effect on the results for
the period amounting to £0.4m. Although the average spot rate for the first half
of the year at 1.81 was identical to that in the corresponding period last year,
the average hedged rate moved from 1.70 last year to 1.80 in the current period.
At £0.8m (2004: £0.6m), operating cash flows were higher than last year. The
movement in working capital was £1.7m (2004: £1.2m), £0.1m of tax was refunded
(2004: £1.0m payment) and interest payments increased to £0.6m (2004: £0.3m) due
to the spend during the prior year on the acquisition of Octec and the ICS
earn-out. As a result net cash from operating activities was higher at £2.1m
(2004: £0.5m). This was used to fund capital expenditure of £0.9m (2004: £3.3m)
and dividend payments of £0.8m (2004: £0.7m). After accounting for interest
received of £0.1m (2004: £0.1m), disposal of fixed assets, issue of shares and
shares bought for the employee trust, the net reduction in debt arising from
cash flows in the period was £0.4m (2004: £6.5m outflow).
Net debt at 30 September 2005 was £16.8m (2004: £19.5m). Gearing was 41% at 30
September 2005 compared to 53% at 30 September 2004.
Dividend
An interim dividend of 1.05 pence per share, a 17% increase over last year
(2004: 0.90p), will be paid on 16 January 2006 to shareholders on the register
on 16 December 2005.
Chairman's Statement (continued)
for the six months ended 30 September 2005
Board Changes
In December 2005 Malcolm Baggott will join the board as a non-executive
director. He will bring extensive management experience and be a considerable
asset to the Group.
Sir Alan Thomas has indicated his intention to retire from the Board with effect
from 1 January 2006; we thank him for his valued contribution and wish him well
in his other business activities.
Outlook
As in previous years, trading will be weighted towards the second half. Our
record order book and continued high enquiry levels give us confidence for the
remainder of the year and beyond.
Rhys Williams
Chairman
Consolidated income statement
for the six months ended 30 September 2005
6 months Restated Restated
to 30/9/05 6 months 12 months
(neither to 30/9/04 to 31/3/05
audited (neither (neither
nor reviewed) audited audited
nor nor
reviewed) reviewed)
Note £'000 £'000 £'000
Continuing operations
Revenue 21,225 16,485 49,887
Cost of sales (12,600) (9,597) (24,338)
Gross profit 8,625 6,888 25,549
Other income and expenses
Profit on disposal of freehold
land and buildings - 2,271 2,271
Gain on disposal of
SensorCom Inc. - - 641
Amortisation of intellectual
property arising through
acquisition (524) (233) (757)
Total other income and expenses (524) 2,038 2,155
Development costs (3,861) (2,437) (6,078)
Distribution costs (3,254) (3,011) (6,346)
Administrative expenses (1,945) (1,792) (3,652)
(Loss)/Profit from operations 3 (959) 1,686 11,628
Investment income 133 144 160
Finance costs 4 (679) (697) (1,496)
(Loss)/Profit before tax (1,505) 1,133 10,292
Tax 5 669 570 (2,045)
(Loss)/profit for the period
from continuing operations
attributable to equity holders
of the parent (836) 1,703 8,247
Ordinary dividends 6 819 681 954
Earnings per share (pence)
From continuing operations
Basic 7 (2.77) 5.90 27.97
Diluted 7 (2.77) 5.87 27.81
Consolidated balance sheet
at six months ended 30 September 2005
at 30/9/05 Restated Restated
(neither at 30/9/04 at 31/3/05
audited (neither (neither
nor reviewed) audited audited
nor nor
reviewed) reviewed)
Note £'000 £'000 £'000
Non-current assets
Goodwill 24,736 24,306 24,649
Intangible assets arising
from acquisitions 6,393 7,442 6,917
Other intangible assets 32 83 46
Property, plant and equipment 16,722 16,524 16,843
Deferred tax assets 2,845 2,438 2,869
50,728 50,793 51,324
Current assets
Inventories 11,975 12,847 11,219
Trade and other receivables 17,193 12,037 17,874
Cash and cash equivalents 1,973 1,256 3,766
31,141 26,140 32,859
Total assets 81,869 76,933 84,183
Current liabilities
Trade and other payables 9,225 8,460 8,562
Tax liabilities 1,482 429 1,161
Obligations under finance
leases 232 272 259
Bank overdrafts and loans 1,785 2,175 2,962
Short-term provisions - 55 -
12,724 11,391 12,944
Non-current liabilities
Bank loans 16,429 17,755 16,693
Retirement benefit
obligation 8 9,483 8,129 9,564
Deferred tax liabilities 2,182 2,604 2,433
Obligations under finance leases 298 534 406
28,392 29,022 29,096
Total liabilities 41,116 40,413 42,040
Net assets 40,753 36,520 42,143
Equity
Share capital 10 3,790 3,786 3,787
Share premium account 25,112 25,761 25,059
Own shares (488) (430) (431)
Other reserve 11 1,388 666 1,388
Hedging and translation reserves 62 26 139
Retained earnings 10,889 6,711 12,201
Total equity attributable to
equity holders of the parent 3 40,753 36,520 42,143
Consolidated cash flow statement
for the six months ended 30 September 2005
6 months Restated Restated
to 30/9/05 6 months 12 months
(neither to 30/9/04 to 31/3/05
audited (neither (neither
nor reviewed) audited audited
nor nor
reviewed) reviewed)
Note £'000 £'000 £'000
Net cash from operating
activities 9 2,051 540 5,234
Investing activities
Interest received 133 76 159
Proceeds on disposal of
SensorCom Inc. - - 832
Proceeds on disposal of
property, plant and
equipment 2 3,905 3,908
Net cash disposed of with
sale of SensorCom Inc. - - (251)
Purchases of property, plant
and equipment (922) (3,312) (4,701)
Purchase of other intangible
assets - (5) (5)
Purchases of trade and assets - - (92)
Deferred consideration on
acquisition of ICS Limited - (2,569) (3,254)
Increase in cost of investment
in ICS Limited - - (28)
Net cash acquired with
Octec Limited - 1,979 1,979
Acquisition of
Octec Limited - (12,514) (12,501)
Net cash used in investing
activities (787) (12,440) (13,954)
Financing activities
Dividends paid (819) (681) (954)
Issue of share capital 44 6,167 6,170
Purchase of own shares under
Employee Incentive Schemes (113) (128) (152)
Repayments of borrowings (1,981) (1,241) (2,493)
Repayments of obligations
under finance leases (127) (143) (289)
New bank loans raised 56 - 1,118
Net cash (used in)/from
financing activities (2,940) 3,974 3,400
Net decrease in cash and
cash equivalents (1,676) (7,926) (5,320)
Cash and cash equivalents at
beginning of period 3,766 9,150 9,150
Effect of foreign exchange rate
changes (117) 32 (64)
Cash and cash equivalents at
end of period 1,973 1,256 3,766
Consolidated statement of recognised income and expense
for the six months ended 30 September 2005
6 months Restated Restated
to 30/9/05 6 months 12 months
(neither audited to 30/9/04 to 31/3/05
nor reviewed) (neither (neither
audited audited
nor nor
reviewed) reviewed)
£'000 £'000 £'000
Losses on cash flow hedges (1,338) - -
Exchange differences on
translation of foreign
operations 431 461 505
Actuarial losses on defined
benefit pension schemes - (1,194) (2,391)
Tax on items taken directly
to equity 426 358 717
Net expense recognised
directly in equity (481) (375) (1,169)
(Loss)/Profit for the period (836) 1,703 8,247
Total recognised income and
expense for the period
attributable to equity
holders of the parent (1,317) 1,328 7,078
The consolidated statement of recognised income and expense reflects the
amendment to IAS 19 "Employment Benefits".
Notes to the interim statement
for the six months ended 30 September 2005
1. Basis of preparation
The attached interim financial statements are the first interim financial
statements following adoption of International Financial Reporting Standards
(IFRS). As the Group has not previously published a full set of financial
statements under IFRS, the content of these statements has been expanded to
include summarised reconciliations of net assets and equity from previously
reported amounts under UK GAAP for the year ended 31 March 2005, together with
detailed explanations of the main UK GAAP - IFRS differences. See Appendix 1 -
Adoption of IFRS.
EU law (IAS regulation EC 1606/2002) requires that the next annual consolidated
financial statements of the Company, for the year ending 31 March 2006 be
prepared in accordance with International Financial Reporting Standards (IFRSs)
adopted for use in the EU ('adopted IFRSs').
This interim financial information has been prepared on the basis of the
recognition and measurement requirements of IFRSs in issue that either are
endorsed by the EU and effective (or available for early adoption) at 31 March
2006 or are expected to be endorsed and effective (or available for early
adoption) at 31 March 2006 the Company's first annual reporting date at which it
is required to use adopted IFRSs. Based on these adopted and unadopted IFRSs,
the directors have made assumptions about the accounting policies expected to be
applied, which are as set out in Appendix 2, when the first annual IFRS
financial statements are prepared for the year ending 31 March 2006.
In particular, the directors have assumed that the following IFRS issued by the
International Accounting Standards Board will be adopted by the EU in sufficient
time that they will be available for use in the annual IFRS financial statements
for the year ending 31 March 2006:
IAS 19 "Employment Benefits" - amendment to allow actuarial gains and losses to
be recognised directly in the statement of recognised income and expenses.
In addition, the adopted IFRSs that will be effective (or available for early
adoption) in the annual financial statements for the year ending 31 March 2006
are still subject to change and to additional interpretations and therefore
cannot be determined with certainty. Accordingly, the accounting policies for
that annual period will be determined finally only when the annual financial
statements are prepared for the year ending 31 March 2006.
2. Section 240 Statement
The information for the year ended 31 March 2005, which is prepared under IFRS,
does not constitute statutory accounts as defined in section 240 of the
Companies Act 1985. A copy of the UK Generally Accepted Accounting Practice
statutory accounts for that year has been delivered to the Registrar of
Companies. The auditors' report on those accounts was unqualified.
3. Business Segments
For management purposes, the Group is organised into two operating divisions -
Embedded Computing and Electronic Manufacturing Services.
Segment information about these businesses is presented below.
Notes to the interim statement (continued)
for the six months ended 30 September 2005
3. Business segments (continued)
Six months ended 30 September 2005
Embedded Electronic Eliminations Consolidated
Computing Manufacturing
Services
£'000 £'000 £'000 £'000
Revenue
External sales 16,910 4,315 - 21,225
Inter-segment sales - 320 (320) -
Total Revenue 16,910 4,635 (320) 21,225
Inter-segment sales are charged at prevailing market prices.
Result
Segment result 457 1,053 - 1,510
Unallocated corporate
expenses (1,945)
Amortisation of acquired
intangible assets (524)
Operating loss (959)
Investment income 133
Finance costs (679)
Loss before tax (1,505)
Tax 669
Loss after tax (836)
Unallocated corporate expenses include a charge of £101,000 in respect of
share-based payment which is classified as administrative expenses.
All results arise from continuing
activities.
External revenue by geographical market £'000
North America 11,161
United Kingdom 6,771
Rest of Europe 2,296
Rest of World 997
21,225
There are no inter-segment sales by geographic market
Segmental net
assets/(liabilities) 22,524 (1,640) - 20,884
Central net assets 38,128
Net non-operating
liabilities (18,259)
Net Assets 40,753
Central net assets have not been allocated between classes of business as to do
so would be impracticable and misleading. Net non-operating liabilities include
the pension scheme deficit, net debt and taxation.
Notes to the interim statement (continued)
for the six months ended 30 September 2005
3. Business segments (continued)
Six months ended 30 September 2004
Embedded Electronic Eliminations Consolidated
Computing Manufacturing
Services
£'000 £'000 £'000 £'000
Revenue
External sales 12,374 4,111 - 16,485
Inter-segment sales - 284 (284) -
Total Revenue 12,374 4,395 (284) 16,485
Inter-segment sales are charged at prevailing
market prices.
Result
Segment result 622 818 - 1,440
Unallocated corporate
expenses (1,792)
Amortisation of acquired
intangible assets (233)
Profit on disposal of
freehold land
and buildings 2,271
Operating profit 1,686
Investment income 144
Finance costs (697)
Profit before tax 1,133
Tax 570
Profit after tax 1,703
Unallocated corporate expenses include a charge of £62,000 in respect of
share-based payment which is classified as administrative expenses.
All results arise from continuing
activities.
External revenue by
geographical market £'000
North America 7,508
United Kingdom 6,268
Rest of Europe 1,409
Rest of World 1,300
16,485
There are no inter-segment sales by
geographic market
Segmental net
assets/(liabilities) 23,503 2,493 - 25,996
Central net assets 35,380
Net non-operating
liabilities (24,856)
Net Assets 36,520
Central net assets have not been allocated between classes of business as to do
so would be impracticable and misleading. Net non-operating liabilities include
the pension scheme deficit, net debt and taxation.
Notes to the interim statement (continued)
for the six months ended 30 September 2005
4. Finance costs
6 months 6 months 12 months
to 30/9/05 to 30/9/04 to 31/3/05
£'000 £'000 £'000
Interest payable on bank loans and
overdrafts 539 467 1,071
Interest payable under SWAP
arrangements - 50 64
Interest payable on finance leases
and other outstanding liabilities 23 30 60
Total borrowing costs 562 547 1,195
Retirement benefit scheme finance
charges 117 150 301
679 697 1,496
5. Tax
6 months 6 months 12 months
to 30/9/05 to 30/9/04 to 31/3/05
£'000 £'000 £'000
Current tax:
United Kingdom (375) (587) 1,381
Overseas (168) 19 908
(543) (568) 2,289
Deferred tax:
United Kingdom (151) (19) (248)
Overseas 25 17 4
Tax
(credit)/expense (669) (570) 2,045
The tax credit for the 6 months to 30 September 2005 includes an amount in
respect of the release of the deferred tax liability of £162,000 (30 September
2004: £71,000) relating to the amortisation of the intangible assets arising
from acquisitions.
6. Ordinary Dividends
6 months 6 months
to 30/9/05 to 30/9/04
£'000 £'000
Amounts recognised as distributions to equity holders in
the period:
Final dividend for the year ended 31
March 2005 of 2.7p (31 March 2004:
2.25p) per ordinary share 819 681
Proposed interim dividend for the
year ended 31 March 2006 of 1.05p
(31 March 2005: 0.90p) per ordinary
share 318 273
The proposed interim dividend was approved by the Board after 30 September
2005 and has not been included as a liability as at 30 September 2005.
Notes to the interim statement (continued)
for the six months ended 30 September 2005
7. Earnings per share
6 months 6 months 12 months
to 30/9/05 to 30/9/04 to 31/3/05
£'000 £'000 £'000
Earnings per share
From continuing operations
Basic (2.77) 5.90 27.97
Diluted (2.77) 5.87 27.81
Underlying (1.57) (2.35) 20.56
The calculation of the basic, diluted and underlying earnings per share is based
on the following data:
6 months 6 months 12 months
to 30/9/05 to 30/9/04 to 31/3/05
£'000 £'000 £'000
Earnings
Earnings for the purposes of basic
earnings per share being (loss)/profit
for the period from continuing
operations (836) 1,703 8,247
(Loss)/profit for the period from
continuing operations (836) 1,703 8,247
Adjustment to exclude amortisation
of intangibles arising from acquisitions
(net of tax) 362 161 525
Adjustment to exclude profit on disposal of
freehold land and buildings (net of tax) - (2,541) (2,334)
Adjustment to exclude gain on disposal of
SensorCom Inc. (net of tax) - - (376)
Earnings for the purposes of underlying
earnings per share (474) (677) 6,062
Number of shares
Weighted average number of ordinary
shares for the purposes of basic and
underlying earnings per share 30,139 28,838 29,488
Effect of dilutive potential ordinary
shares:
Share options - 160 170
Weighted average number of ordinary
shares for the purposes of diluted
earnings per share 30,139 28,998 29,658
Notes to the interim statement (continued)
for the six months ended 30 September 2005
8. Retirement benefit obligations
The Group's defined benefit schemes were valued for IAS 19 purposes at 31 March
2005. The movement in the liability to 30 September 2005 represents operating
service costs and finance costs for the period.
9. Cash flow information
6 months 6 months 12 months
to 30/9/05 to 30/9/04 to 31/3/05
£'000 £'000 £'000
(Loss)/profit from operations (959) 1,686 11,628
Adjustments for:
Profit on disposal of freehold land
and buildings - (2,271) (2,271)
Gain on disposal of SensorCom Inc. - - (641)
Depreciation of property, plant and
equipment 1,061 932 1,972
Impairment loss on
intangibles 4 - -
Amortisation of intangible assets 534 252 798
EBITDA 640 599 11,486
Loss on disposal of property, plant and
equipment 8 3 4
Cost of equity settled employee share
schemes 101 114 187
Increase/(decrease) in post employment
benefit obligation 78 88 (46)
Decrease in provisions - (161) (216)
Operating cash flows before movements in
working capital 827 643 11,415
Increase in inventories (756) (3,069) (1,576)
Decrease/(increase) in receivables 1,235 3,903 (3,132)
Increase in payables 1,244 373 1,707
Cash generated by operations 2,550 1,850 8,414
Income taxes recovered/(paid) 115 (965) (2,136)
Interest paid (614) (345) (1,044)
Net cash from operatingactivities 2,051 540 5,234
Reconciliation of cash and cash equivalents
to net debt
Decrease in cash and cash equivalents (1,676) (7,925) (5,320)
Cash outflow from decrease in debt and
lease financing 2,109 1,385 2,782
Cash inflow from increase in debt and
lease financing (56) - (1,118)
Change in net debt arising from cash flows 377 (6,540) (3,656)
Translation difference (594) (223) (181)
Movement in net debt in the period (217) (6,763) (3,837)
Net debt at start of period (16,554) (12,717) (12,717)
Net debt at end of period (16,771) (19,480) (16,554)
10. Share capital
19,000 shares, with a nominal value of £2,375, have been allotted in the six
month period ended 30 September 2005 under the terms of the Group's various
share option schemes. Aggregate consideration received by the Company was
£44,000.
Notes to the interim statement (continued)
for the six months ended 30 September 2005
11. Other reserve
This reserve arose from s.131 merger relief under the Companies Act 1985. It
represents the fair value of the consideration of issued shares over their
nominal value between the date of issue and the date the acquisitions of ICS
Limited and Octec Limited became unconditional.
12. Related party transactions
Transactions between the company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not disclosed in this
note.
13. Financial Instruments: IAS 32/39
As explained in Appendix 1 - Adoption of IFRS, the Group has applied IAS 32
"Financial Instruments: Disclosure and Presentation" and IAS 39 "Financial
Instruments: Recognition and Measurement" prospectively from 1 April 2005.
Consequently the relevant comparative information does not reflect the impact of
these standards and is accounted for on a UK GAAP basis. The pre-tax effect of
the transitional adjustment on the balance sheet as at 1 April 2005 is to
increase debtors and hedging and translation reserves by £0.9 million. At 30
September 2005 the derivative financial instruments were a net creditor of £0.4
million. The pre-tax loss taken to the hedging and translation reserve for the
period was £1.3 million.
14. Explanation of transition to IFRSs
The reconciliations of equity at 1 April 2004 (date of transition to IFRS) and
at 31 March 2005 (date of last UK GAAP financial statements) and the
reconciliation of profit for the year ended 31 March 2005, as required by IFRS 1
"First-time adoption of International Financial Reporting Standards" in the year
of transition, have been included in Appendix 1 - Adoption of IFRS.
The reconciliation of equity at 30 September 2004 and the reconciliation of
profit for the six months ended 30 September 2004 have been included below to
enable a comparison of the 30 September 2005 interim figures with the
corresponding period of the previous financial year.
The IFRS adjustments to the 30 September 2004 interim results are consistent
with those set out in Appendix 1 - Adoption of IFRS. The most significant
adjustments to net assets and the income statement are as follows:
Business combinations and goodwill
Goodwill is no longer amortised and is instead subject to an annual impairment
review. Goodwill charged under UK GAAP for the six months to 30 September 2004
was £0.6 million and this amount is reversed in the income statement under IFRS.
In accordance with IFRS 3, the Group allocated from the provisional goodwill an
amount of £7.7 million to identifiable intangible assets, being intellectual
property, on the acquisition of Octec Limited in July 2004. Amortisation of the
identifiable intangible assets was £0.2 million for the period. The allocation
to intangible assets at this date resulted in a deferred tax liability being
recognised of £2.3 million to be released over the period the intangible assets
are amortised. £0.1 million of deferred tax was released in the period to 30
September 2004.
Share based payments
Under UK GAAP, the Group recognised no profit and loss charge in respect of
employee share option schemes.
Under IFRS 2, where the cost of employee share options and performance share
scheme awards are based on their fair value at the date of grant an expense is
recognised over the expected vesting period of the award.
As a result of these changes, the impact on the income statement of the employee
option and performance share schemes recognised in the six months to 30
September 2004 has been a net charge of £0.1 million. Reversal of accrued share
scheme awards resulted in an increase in net assets of £0.3 million.
Notes to the interim statement (continued)
for the six months ended 30 September 2005
14. Explanation of transition to IFRSs (continued)
Post-employment benefits
The accounting impact of IFRS for the six months to 30 September 2004 is a
decrease in reported pre-tax profits of £0.2 million and a decrease in
shareholders' funds of £5.5 million after deferred tax, being the elimination of
the net pension accrual under SSAP 24 of £0.2 million and the creation of a net
pension liability (after a deferred tax asset of £2.4 million) of £5.7 million.
Proposed dividends
Under UK GAAP, proposed dividends were recognised as a liability in the period
to which they related. Under IFRS, dividends are recognised as a liability in
the period in which they are declared.
Net assets at 30 September 2004 increased by £0.3 million, representing the
reversal of the accrual for the interim ordinary dividend proposed in respect of
the year ended 31 March 2005.
Deferred tax
The effect of IAS 12 on net assets is a net increase by £0.2 million. The IAS 19
pension liability created a deferred tax asset of £2.4 million and the
intangible asset recognised under IFRS 3 resulted in a deferred tax liability,
after a release of £0.1 million in the period, of £2.2 million.
Cumulative foreign translation difference
Under IAS 21, "The Effects of Changes in Foreign Exchange Rates", the cumulative
foreign currency translation differences arising on the translation and
consolidation of foreign operations income statements and balance sheets
denominated in foreign currencies must be recognised as a separate component of
equity.
Applying the exemption under IFRS 1, the Group has elected to deem cumulative
translation differences to be £nil at 1 April 2004. The effect of exchange rates
in the six months ended 30 September 2004 resulted in a credit to the
translation reserve of £26,000.
Summarised reconciliations from UK GAAP to IFRS:
Income statement
Six months ended 30 September 2004 £'000
Retained profit under UK GAAP 1,184
Goodwill - reversal of amortisation 590
Intangible assets - amortisation (net of deferred tax of (161)
£72,000)
Pensions (including deferred tax credit of £71,000) (167)
Share-based payments (including deferred tax charge of £5,000) (67)
Dividends 324
Profit after tax under IFRS 1,703
Net Assets
At 30 September 2004 £'000
Net assets under UK GAAP 41,032
Goodwill - reversal of amortisation 590
Intangible assets - amortisation (net of deferred tax) (161)
Pensions (net of deferred tax) (5,499)
Share-based payments (including deferred tax) 285
Dividends - not declared at period end 273
Net assets under IFRS 36,520
Cash flow statement
Six months ended 30 September 2004
There are no material adjustments to the cash flow statement for the six
months period to 30 September 2004. All adjustments made are for presentation
only.
Notes to the interim statement (continued)
for the six months ended 30 September 2005
14. Explanation of transition to IFRSs (continued)
Reconciliation of equity at 30 September 2004
UK GAAP Effect of IFRS
IFRS transition to £'000
Format IFRS
£'000 £'000
Non-current assets
Goodwill 29,088 (4,782) 24,306
Intangible assets arising
from acquisitions - 7,442 7,442
Other intangible assets 83 - 83
Property, plant and equipment 16,524 - 16,524
Deferred tax assets - 2,438 2,438
45,695 5,098 50,793
Current assets
Inventories 12,847 - 12,847
Trade and other receivables 12,037 - 12,037
Cash and cash equivalents 1,256 - 1,256
26,140 - 26,140
Total Assets 71,835 5,098 76,933
Current liabilities
Trade and other payables 9,261 (801) 8,460
Tax liabilities 429 - 429
Obligations under finance leases 272 - 272
Bank overdraft and loans 2,175 - 2,175
Short-term provisions 55 - 55
12,192 (801) 11,391
Non-current liabilities
Bank loans 17,755 - 17,755
Retirement benefit obligations - 8,129 8,129
Deferred tax liabilities 322 2,282 2,604
Obligations under finance leases 534 - 534
18,611 10,411 29,022
Total liabilities 30,803 9,610 40,413
Net Assets 41,032 (4,512) 36,520
Equity
Share capital 3,786 - 3,786
Share premium account 25,761 - 25,761
Own shares (430) - (430)
Other reserve 666 - 666
Hedging and translation reserves - 26 26
Retained earnings 11,249 (4,538) 6,711
Equity attributable to equity holders of
the parent 41,032 (4,512) 36,520
Notes to the interim statement (continued)
for the six months ended 30 September 2005
14. Explanation of transition to IFRSs (continued)
Reconciliation of profit for the six months ended 30 September 2004
UK GAAP Effect of IFRS
IFRS transition to £'000
Format IFRS
£'000 £'000
Revenue 16,485 - 16,485
Cost of sales (9,574) (23) (9,597)
Gross profit 6,911 (23) 6,888
Other income and expenses
Profit on disposal of freehold land
and buildings 2,271 - 2,271
Amortisation of intellectual property
arising through acquisition (590) 357 (233)
Total other income and expenses 1,681 357 2,038
Development costs (2,382) (55) (2,437)
Distribution costs (3,000) (11) (3,011)
Administrative expenses (1,730) (62) (1,792)
Profit from operations 1,480 206 1,686
Investment income 144 - 144
Finance costs (548) (149) (697)
Profit before tax 1,076 57 1,133
Tax 432 138 570
Profit for the period from continuing
operations attributable to equity holders
of the parent 1,508 195 1,703
15. Copies of the interim financial report will be sent to shareholders in due
course. Further copies will be available from the registered office of Radstone
Technology PLC, Tove Valley Business Park, Towcester, Northants, NN12 6PF.
APPENDIX 1 - ADOPTION OF IFRS
A summarised analysis of the main aspects of IFRS that impact on the financial
statements and a set of restated financial statements for the year ended 31
March 2005, excluding detailed notes, are set out below.
Restatement of the Group's accounting policies can be found in Appendix 2.
Business combinations and goodwill
IFRS 3 'Business Combinations' requires that goodwill is not amortised. Instead
it is subject to an annual impairment review. As the Group has elected not to
apply IFRS 3 retrospectively to business combinations prior to the opening
balance sheet date under IFRS, the UK GAAP goodwill balance at 1 April 2004
(£20.6 million) has been included in the opening IFRS consolidated balance sheet
and will no longer be amortised.
Goodwill amortisation charged under UK GAAP during the year ended 31 March 2005
was £1.4 million and this amount is reversed in the income statement under IFRS.
Under UK GAAP, the difference between the consideration paid for an acquisition
and the fair value of the net assets acquired is recognised as goodwill. IFRS 3
requires that the intangible assets of an acquired business are recognised
separately from goodwill and then amortised over their useful life. The Group
recognised provisional goodwill of £10.2 million on the acquisition of Octec
Limited in July 2004. Under IFRS the Group has recognised provisional goodwill
of £2.5 million, and has allocated £7.7 million to identifiable intangible
assets, being acquired intellectual property. A deferred tax liability, on the
intangible assets recognised, of £2.3 million resulted in additional goodwill of
an equal amount arising on acquisition accounting of Octec Limited. Under the
transition rules, the Group is not required to identify any acquired intangible
assets for acquisitions prior to 1 April 2004.
IFRS 1 requires that an impairment review of goodwill be conducted in accordance
with IAS 36 "Impairment of Assets" at the date of transition irrespective of
whether an indication exists that goodwill may be impaired. No impairments were
necessary as at 1 April 2004 following the review carried out in accordance with
this standard.
In summary, the adjustments to the carrying value of goodwill were as follows:
£ million
Carrying value of goodwill under UK GAAP as at 31 March 2005 28.6
Reversal of amortisation charge under UK GAAP in period 1.4
Acquisitions - allocated to acquired intangible assets (7.7)
- goodwill arising from deferred tax liability on intangible assets 2.3
Carrying value of goodwill under IFRS as at 31 March 2005 24.6
Amortisation of the identifiable intangible assets was £0.8
million for the period.
Share based payments
Under UK GAAP, the Group recognised no profit and loss charge in respect of
employee share option schemes as the exercise prices for such schemes were set
at the market price prevailing on the date of issue.
Under IFRS 2, the main impact for the Group is that the cost of employee option
and performance share scheme awards are based on their fair value at the date of
grant. IFRS 2 has only been applied to options awarded after 7 November 2002.
The fair value has been calculated by the Group using the Black Scholes option
pricing model. The expense is recognised over the expected vesting period of the
award.
As a result of these changes, and the reversal of accruals for performance share
scheme awards under UK GAAP, the impact on the income statement has been a net
charge of £0.1 million and an increase in net assets of £0.4 million.
Post-employment benefits
Under UK GAAP, the Group accounted for post-employment benefits under SSAP 24
'Accounting for pension costs', whereby the cost of providing defined benefit
pensions was charged against operating profit on a systematic basis with
surpluses and deficits arising being amortised over the expected average
remaining service lives of participating employees.
Under IFRS (as required by IAS 19 revised, but closely in line with the
disclosures already made in the notes to the accounts under FRS 17), current and
past service costs of the Group's pension schemes, the expected return on the
scheme's assets and any interest costs relating to the present value of the
scheme's liabilities are charged to the income statement. Any actuarial gains or
losses are recognised through the statement of recognised income and expense
(SORIE). Any surplus in the fair value of the pension scheme assets over the
present value of the liabilities is recorded as an asset in the balance sheet,
and any deficit as a liability.
APPENDIX 1 - ADOPTION OF IFRS (continued)
The accounting impact of IFRS for the period is a decrease in reported pre-tax
profits of £0.3 million and a decrease in shareholders' funds of £6.3 million
after deferred tax, being the elimination of the net pension accrual under SSAP
24 of £0.3 million and the creation of a net pension liability (after a deferred
tax asset of £2.9 million) of £6.6 million.
Proposed dividends
Under UK GAAP, proposed dividends were recognised as a liability in the period
to which they related. Under IFRS, dividends are recognised as a liability in
the period in which they are declared.
Net assets at 31 March 2005 increase by £0.8 million, representing the reversal
of the accrual for the final ordinary dividend proposed in respect of the year
ended 31 March 2005.
Deferred tax
Under UK GAAP, deferred tax was provided on timing differences between the
accounting and taxable profit (an income statement approach). Under IFRS,
deferred tax is provided on temporary differences between the book carrying
value and the tax base of assets and liabilities (a balance sheet approach).
The effect on net assets is an increase by £0.7 million. As stated above, the
IAS 19 pension liability created a deferred tax asset of £2.9 million (£1.9
million of which represents the deferred tax adjustment at 1 April 2004). The
intangible asset of £7.7 million recognised under IFRS 3 resulted in a deferred
tax liability, after a release of £0.2 million in the period, of £2.1 million.
Cumulative foreign translation difference
Under UK GAAP, cumulative foreign currency translation differences arising on
the retranslation into sterling of the Group's net investment in foreign
operations were recognised in reserves. Under IFRS, cumulative foreign currency
translation differences must be recognised as a separate component of equity and
should be taken into account in calculating the gain or loss on the disposal of
a foreign operation.
Applying the exemption under IFRS 1, the Group has elected to deem cumulative
translation differences to be £nil at 1 April 2004.
The effect of exchange rate differences in the year ended 31 March 2005 resulted
in a credit to the translation reserve of £0.1 million.
Financial Instruments
As permitted under IFRS 1, the Group has elected to apply IAS 32 and IAS 39
prospectively from 1 April 2005. As a result, the relevant comparative
information for the year ended 31 March 2005 does not reflect the impact of
these standards and is accounted for on a UK GAAP basis.
It will not be possible to estimate the effect on the Group's results until the
end of each period when the fair value of the relevant hedging instruments at
the balance sheet date is known. The effect in the six months to 30 September
2005 is shown in note 13 to the interim financial statements
Development costs
Under UK GAAP, company funded development costs could either be capitalised or
written off in the period in which they were incurred. The Group wrote-off these
costs in the period in which they were incurred.
Under IFRS, all research costs and any development costs that do not meet the
criteria specified within IAS 38 "Intangible Assets" will be written off in the
period in which they are incurred.
Development costs associated with new or substantially improved products must be
capitalised from the time at which the development project satisfies the
conditions. At 31 March 2005 no expenditure on internal product development met
all the criteria of IAS 38 and therefore remains written off in the period.
Other adjustments
Smaller adjustments have also been made to reflect IFRS reclassifications
APPENDIX 1 - ADOPTION OF IFRS (continued)
Summarised reconciliations from UK GAAP to IFRS
Income statement
Year ended 31 March 2005
£'000
Retained profit under UK GAAP 6,560
Goodwill - reversal of amortisation 1,359
Intangible assets - amortisation (net of deferred tax of £232,000) (525)
Pensions (including deferred tax credit of £76,000) (179)
Share-based payments (including deferred tax credit of £3,000) (110)
Dividends 1,142
Profit after tax under IFRS 8,247
Net Assets At 31 March 2005
£'000
Net assets under UK GAAP 46,472
Goodwill - reversal of amortisation 1,359
Intangible assets - amortisation (net of deferred tax) (525)
Pensions (net of deferred tax) (6,349)
Share-based payments (including deferred tax) 367
Dividends - not declared at year end 819
Net assets under IFRS 42,143
Net Assets
At 1 April 2004
£'000
Net assets under UK GAAP 32,914
Pensions (net of deferred tax) (4,497)
Share-based payments (including deferred tax) 292
Dividends - not declared at year end 630
Net assets under IFRS 29,339
APPENDIX 1 - ADOPTION OF IFRS (continued)
Reconciliation of equity at 31 March 2005 (date of last UK GAAP financial
statements)
UK GAAP Effect of IFRS
IFRS transition to £'000
Format IFRS
£'000 £'000
Non-current assets
Goodwill 28,662 (4,013) 24,649
Intangible assets arising from
acquisitions - 6,917 6,917
Other intangible assets 46 - 46
Property, plant and equipment 16,843 - 16,843
Deferred tax assets - 2,869 2,869
45,551 5,773 51,324
Current assets
Inventories 11,219 - 11,219
Trade and
other
receivables 17,874 - 17,874
Cash and cash
equivalents 3,766 - 3,766
32,859 - 32,859
Total Assets 78,410 5,773 84,183
Current liabilities
Trade and
other payables 10,205 (1,643) 8,562
Tax
liabilities 1,161 - 1,161
Obligations
under finance
leases 259 - 259
Bank overdraft
and loans 2,962 - 2,962
14,587 (1,643) 12,944
Non-current liabilities
Bank loans 16,693 - 16,693
Retirement
benefit
obligations - 9,564 9,564
Deferred tax
liabilities 252 2,181 2,433
Obligations
under finance
leases 406 - 406
17,351 11,745 29,096
Total
liabilities 31,938 10,102 42,040
Net Assets 46,472 (4,329) 42,143
Equity
Share capital 3,787 - 3,787
Share premium
account 25,059 - 25,059
Own shares (431) - (431)
Other reserve 1,388 - 1,388
Hedging and
translation
reserves - 139 139
Retained
earnings 16,669 (4,468) 12,201
Equity
attributable
to equity
holders of the
parent 46,472 (4,329) 42,143
APPENDIX 1 - ADOPTION OF IFRS (continued)
Reconciliation of profit for the year ended 31 March 2005
UK GAAP Effect of IFRS
IFRS transition to £'000
Format IFRS
£'000 £'000
Revenue 49,887 - 49,887
Cost of sales (24,351) 13 (24,338)
Gross profit 25,536 13 25,549
Other income and expenses
Profit on disposal of
freehold land and buildings 2,271 - 2,271
Gain on disposal of
SensorCom Inc. 641 - 641
Amortisation of intellectual property
arising through acquisition (1,360) 603 (757)
Total other income and expenses 1,552 603 2,155
Development costs (6,106) 28 (6,078)
Distribution costs (6,351) 5 (6,346)
Administrative expenses (3,539) (113) (3,652)
Profit from operations 11,092 536 11,628
Investment income 160 - 160
Finance costs (1,195) (301) (1,496)
Profit before tax 10,057 235 10,292
Tax (2,355) 310 (2,045)
Profit for the period from continuing
operations attributable to equity holders
of the parent 7,702 545 8,247
APPENDIX 1 - ADOPTION OF IFRS (continued)
Reconciliation of equity at 1 April 2004 (date of transition to IFRSs)
UK GAAP Effect of IFRS
IFRS transition to £'000
Format IFRS
£'000 £'000
Non-current assets
Goodwill 20,613 - 20,613
Other intangible assets 76 - 76
Property, plant and equipment 15,350 - 15,350
Deferred tax assets - 2,009 2,009
36,039 2,009 38,048
Current assets
Inventories 9,266 - 9,266
Trade and other receivables 13,870 - 13,870
Cash and cash equivalents 9,150 - 9,150
32,286 - 32,286
Total assets 68,325 2,009 70,334
Current liabilities
Trade and other payables 12,361 (1,159) 11,202
Tax liabilities 817 - 817
Obligations under finance leases 284 - 284
Bank overdraft and loans 2,449 - 2,449
Short-term provisions 216 - 216
16,127 (1,159) 14,968
Non-current liabilities
Bank loans 18,487 - 18,487
Retirement benefit obligations - 6,697 6,697
Deferred tax liabilities 150 46 196
Obligations under finance leases 647 - 647
19,284 6,743 26,027
Total liabilities 35,411 5,584 40,995
Net Assets 32,914 (3,575) 29,339
Equity
Share capital 3,503 - 3,503
Share premium account 19,962 - 19,962
Revaluation reserve 218 - 218
Own shares (354) - (354)
Other reserve 199 - 199
Retained earnings 9,386 (3,575) 5,811
Equity attributable to equity
holders of the parent 32,914 (3,575) 29,339
APPENDIX 2 - ACCOUNTING POLICIES
This appendix provides a summary of Radstone Technology PLC's accounting
policies under IFRS. All accounting policies not detailed below remain
consistent with their application under UK GAAP.
Basis of accounting
The restated financial information for the transition to IFRS at 1 April 2004,
the six months ended 30 September 2004 and the year ended 31 March 2005 has been
prepared in accordance with International Accounting Standards (IAS) and
International Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board and expected to be endorsed by the EU and effective
at 31 March 2006.
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, liabilities, income and
expenses. The estimates and assumptions are based on historical experience and
other factors considered reasonable at the time, but actual results may differ
from these estimates. Revisions to these estimates are made in the period in
which they are recognised.
Basis of consolidation
The consolidated financial statements include the financial statements of
Radstone Technology PLC ('the Company') and its subsidiary undertakings
(together 'the Group').
A subsidiary is a company controlled directly or indirectly by the Group.
Control is achieved where the Company has the power to govern the financial and
operating policies of the investee entity so as to obtain benefits from its
activities.
On acquisition, the assets and liabilities and contingent liabilities of a
subsidiary are measured at their fair values at the date of acquisition. Any
excess of the cost of acquisition over the fair values of the identifiable net
assets acquired is recognised as goodwill. Any deficiency in the cost of
acquisition below the fair values of the identifiable net assets acquired is
credited to the profit and loss account in the period of acquisition. The
results of subsidiary undertakings acquired or disposed of in the year are
included in the consolidated income statement from the date of acquisition or up
to the date of disposal.
All intra-group transactions, balances, income and expenses are eliminated on
consolidation.
Business combinations and goodwill
Goodwill arising on consolidation represents the excess of the cost of
acquisition over the Group's interest in the fair value of the identifiable
assets and liabilities of a subsidiary at the date of acquisition. Goodwill
arising on acquisitions is capitalised and subject to impairment review, both
annually and when there are indications that the carrying value may not be
recoverable. Any impairments are recognised immediately in the income statement
and are not subsequently reversed.
Prior to 1 January 1998 goodwill was written off to reserves in the year of
acquisition. Goodwill arising since 1 January 1998 until 31 March 2004 was
amortised over its estimated useful life. In addition, annual impairment tests
were performed.
On disposal of a subsidiary the attributable amount of goodwill is included in
the determination of the profit or loss on disposal.
Goodwill arising on acquisitions prior to 1 April 2004 has been retained at the
previous UK GAAP amounts subject to being tested for impairment at that date.
Goodwill written off to reserves under UK GAAP prior to 1998 has not been
reinstated and is not included in determining any subsequent profit or loss on
disposal.
Revenue recognition
Revenue is measured at the fair value of the consideration received or
receivable and represents amounts receivable for goods and services provided in
the normal course of business, net of discounts, VAT and other sales-related
taxes.
Sales are recognised when the significant risk and rewards of ownership of goods
are transferred to the customer.
Revenue from long-term contracts is recognised in accordance with the Group's
accounting policy (see below).
Long-term contracts
Where the outcome of a long-term contract can be estimated reliably, revenue and
costs are recognised by reference to the stage of completion of the contract
activity at the balance sheet date. This is normally measured by the proportion
that contract costs incurred for work performed to date bear to the estimated
total contract costs, except where this would not be representative of the stage
of completion. Variations in contract work, claims and incentive payments are
included to the extent that they have been agreed with the customer.
APPENDIX 2 - ACCOUNTING POLICIES (continued)
Long-term contracts (continued)
Where the outcome of a long-term contract cannot be estimated reliably, contract
revenue is recognised to the extent of contract costs incurred that it is
probable will be recoverable. Contract costs are recognised as expenses in the
period in which they are incurred.
When it is probable that total contract costs will exceed total contract
revenue, the expected loss is recognised as an expense immediately
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at their
fair value or, if lower, at the present value of the minimum lease payments,
each determined at the inception of the lease. The corresponding liability to
the lessor is included in the balance sheet as a finance lease obligation. Lease
payments are apportioned between finance charges and reduction of the lease
obligation so as to achieve a constant rate of interest on the remaining balance
of the liability. Finance charges are charged directly against income in
proportion to the reducing capital element outstanding.
Operating lease rentals are charged to income on a straight-line basis over the
term of the relevant lease.
Foreign currencies
Transactions in currencies other than pounds sterling are recorded at the rates
of exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies
are retranslated at the rates prevailing on the balance sheet date. Non-monetary
assets and liabilities carried at fair value that are denominated in foreign
currencies are translated at the rates prevailing at the date when the fair
value was determined. Gains and losses arising on retranslation are included in
net profit or loss for the period, except for exchange differences arising on
non-monetary assets and liabilities where the changes in fair value are
recognised directly in equity.
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, the assets and liabilities of the Group's overseas operations
are translated at exchange rates prevailing on the balance sheet date. Income
and expense items are translated at the average exchange rates for the period
unless exchange rates fluctuate significantly. Exchange differences arising from
the re-translation of the opening balance sheets and results are classified as
equity and transferred to the Group's translation reserve. Such translation
differences are recognised as income or 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.
Retirement benefit costs
Payments to defined contribution retirement benefit schemes are charged as an
expense as they fall due. Payments made to state-managed retirement benefit
schemes are dealt with as payments to defined contribution schemes where the
Group's obligations under the schemes are equivalent to those arising in a
defined contribution retirement benefit scheme.
For defined benefit retirement benefit schemes, the cost of providing benefits
is determined using the Projected Unit Credit Method, with actuarial valuations
being carried out at each balance sheet date. Actuarial gains and losses are
recognised outside the income statement and presented in the statement of
recognised income and expense.
Past service cost is recognised immediately to the extent that the benefits are
already vested, and otherwise is amortised on a straight-line basis over the
average period until the benefits become vested.
The retirement benefit obligation recognised in the balance sheet represents the
present value of the defined benefit obligation as adjusted for unrecognised
past service cost, and as reduced by the fair value of scheme assets.
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.
APPENDIX 2 - ACCOUNTING POLICIES (continued)
Taxation (continued)
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 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.
Property, plant and equipment
Property, plant and equipment are stated at original historical cost, net of
depreciation and any provision for impairment.
Depreciation is charged so as to write off the cost of assets, less estimated
residual value, on a straight-line basis over their estimated useful lives in
accordance with the table below:
Estimated useful
economic life
Freehold buildings 45 - 50 years
Plant and machinery 3 - 10 years
Fixtures, fittings and 3 - 10 years
equipment
Freehold land is not depreciated.
Assets held under finance leases are depreciated over their expected useful
lives on the same basis as owned assets or, where shorter, over the term of the
relevant lease.
The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sales proceeds and the carrying amount of the
asset and is recognised in income.
Research and development
Expenditure on research activities is recognised as an expense in the period in
which it is incurred.
An internally-generated intangible asset arising from development activities is
recognised only if the criteria specified within IAS 38 "Intangible Assets" are
met.
Internally-generated intangible assets are amortised on a straight-line basis
over their useful lives. Where no internally-generated intangible asset can be
recognised, development expenditure is recognised as an expense in the period in
which it is incurred.
APPENDIX 2 - ACCOUNTING POLICIES (continued)
Other intangible assets
Intangible assets, representing manufacturing licences, are amortised over 3
years, estimated to be the period in which the individual products to which they
relate are to be sold. Where, in the directors' opinion, there has been an
impairment in the value of intangible assets, this is charged to the income
statement in the period in which the impairment occurs.
Intangible assets arising from a business combination whose fair value can be
reliably measured are separated from goodwill and amortised on a straight-line
basis over their remaining useful lives.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is any indication that
those assets have suffered an impairment loss. If any such indication exists,
the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss. Where the asset does not generate cash flows that
are independent from other assets, the Group estimates the recoverable amount of
the cash-generating unit to which the asset belongs. An intangible asset with an
indefinite useful life is tested for impairment annually and whenever there is
an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in
use. In assessing value in use, the estimated future cash flows are discounted
to their present value.
If the recoverable amount of an asset is estimated to be less than its carrying
amount, the carrying amount of the asset is reduced to its recoverable amount.
An impairment loss is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the asset
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 in prior
years. A reversal of an impairment loss is recognised as income immediately.
Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis and includes transport and handling costs) and net realisable value, less
payments on account. Net realisable value represents the estimated selling price
after allowing for the costs of realisation and, where appropriate, the cost of
conversion from their existing state into a finished condition. Provision is
made where necessary for obsolete, slow moving or defective inventories.
Derivative financial instruments and hedge accounting
As permitted by IFRS 1, the Group has elected to apply IAS 32 "Financial
Instruments: Disclosure and Presentation" and IAS 39 "Financial Instruments:
Recognition and Measurement" prospectively from 1 April 2005. As a result, the
relative comparative information for the year ended 31 March 2005 does not
reflect the impact of these standards and is accounted for in accordance with UK
GAAP.
The Group's activities expose it primarily to the financial risks of changes in
foreign currency exchange rates and interest rates. The Group uses foreign
exchange forward contracts and interest rate swaps 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 as assets and liabilities
measured at fair values at the balance sheet date. Changes in the fair values of
derivative financial instruments that are designated and effective as hedges of
future cash flows are recognised directly in equity and any ineffective portion
is recognised immediately in the income statement. If the cash flow hedge of a
firm commitment or forecasted transaction results in the recognition of an asset
or a liability, then, at the time the asset or liability is recognised, the
associated gains or losses on the derivative that had previously been recognised
in equity are included in the initial measurement of the asset or liability. For
hedges that do not result in the recognition of an asset or a liability, amounts
deferred in equity are recognised in the income statement in the same period in
which the hedged item affects net profit or loss.
APPENDIX 2 - ACCOUNTING POLICIES (continued)
Derivative financial instruments and hedge accounting (continued)
For an effective hedge of an exposure to changes in the fair value, the hedged
item is adjusted for changes in fair value attributable to the risk being hedged
with the corresponding entry in profit or loss. Gains or losses from
re-measuring the derivative, or for non-derivatives the foreign currency
component of its carrying amount, are recognised in profit or loss.
Changes in the fair value of derivative financial instruments that do not
qualify for hedge accounting are recognised in the income statement as they
arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated, or exercised, or no longer qualifies for hedge accounting. At that
time, any cumulative gain or loss on the hedging instrument recognised in equity
is retained in equity until the forecasted transaction occurs. If a hedged
transaction is no longer expected to occur, the net cumulative gain or loss
recognised in equity is transferred to net profit or loss for the period.
Provisions
Provisions for warranty costs are recognised at the date of sale of the relevant
products, at the directors' best estimate of the expenditure required to settle
the Group's liability.
Share-based payments
The Group has applied the requirements of IFRS 2 'Share-based Payments'. In
accordance with the transitional provisions, IFRS 2 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested as of 1
April 2005.
The Group issues equity-settled share-based payments to certain employees.
Equity-settled share-based payments are measured at fair value at the date of
grant. 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
shares that will eventually vest.
Fair value is measured by use of the Black-Scholes option pricing model.
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