IFRS Restatement

Intec Telecom Systems PLC 19 May 2006 Intec Telecom Systems PLC Restatement of financial information for 2005 under International Financial Reporting Standards ("IFRS") Introduction London, 19 May 2006... Intec Telecom Systems PLC ("Intec" or "the Group"), a leading supplier of billing software solutions to the global telecoms industry, today announces its restatement of financial information for 2005 under International Financial Reporting Standards ("IFRS"). The Group has previously prepared its financial statements in accordance with UK generally accepted accounting principles ("UK GAAP"). In accordance with European law, the Group is required to report its consolidated financial statements under IFRS, for all accounting periods beginning on or after 1 January 2005 plus comparatives for the previous period. For the Group the date of transition is 1 October 2004. The first financial results to be published under IFRS will be the interim results for the six months to 31 March 2006, which will to be published on Tuesday 30 May 2006. Summary impact of IFRS Whilst the introduction of IFRS has no impact on the underlying cash flows of the business, the areas of accounting where IFRS will have the most significant impact on the Group's financial statements are as follows: â€¢ Business combinations and the associated treatment of Goodwill â€¢ Development expenditure â€¢ Employee share based payment arrangements â€¢ Employee benefits - primarily holiday pay â€¢ Software licences now considered intangible assets â€¢ Deferred Taxation â€¢ No impact on revenue recognition The following table summarises the impact of the adoption of IFRS on the Group's profit for the 6 months ended 31 March 2005 and the year ended 30 September 2005: Note Unaudited Unaudited Six months Year ended ended 30 September 31 March 2005 2005 Reconciliation of profit for the period Â£000 Â£000 Loss after taxation under UK GAAP (6,332) (6,025) Goodwill amortisation (i) 8,052 16,166 Intangible amortisation (ii) (236) (520) Capitalised development costs (iii) 43 649 Share based payments (iv) (234) (1,166) Holiday pay (v) (20) (19) Deferred taxation (vi) 64 (33) --------- --------- 7,669 15,077 --------- --------- Profit after taxation under IFRS 1,337 9,052 --------- --------- See notes (i) to (vi) on pages 12 to 15 for explanation of the transition adjustments to IFRS. Commenting on IFRS, John Arbuthnott, Intec's CFO, stated: "The transition to IFRS does not affect the underlying performance of the business nor the cash flows generated. As such, the transition to IFRS has not affected any of the Group's ongoing strategic plans or any existing financing arrangements." For more information, please contact: Craig Preston, Group Director of Finance, Intec Telecom Systems PLC Tel: +44 (0)1483 745800 Email: craig.preston@intecbilling.com Robert Gibb, Investor Relations Manager, Intec Telecom Systems PLC Tel: +44 (0)1483 745941 or 745800; Mob: +44 (0)7876 656 896 Email: robert.gibb@intecbilling.com Sara Musgrave/John Kiely Smithfield Consultants Tel: +44 (0)20 7360 4900 Email: Intec@smithfieldgroup.com Basis of Preparation The financial information contained within this document has been prepared on the basis of IFRS published by the International Accounting Standards Board and adopted by the EU prior to the date of this document. It is possible that new standards or revisions to existing standards and new interpretations will be issued which may affect the Group between the date of this document and the Group's financial year ending 30 September 2006. The restated accounts and reconciliations are based on the accounting policies set out on pages 16 to 21. Transitional arrangements and transition date IFRS 1 "First time adoption of International Financial Reporting Standards" sets out a number of transitional provisions when applying IFRS for the first time. Since the Group's financial statements for the year to 30 September 2006 will include comparatives for the year to 30 September 2005, the Group's date of transition to IFRS is 1 October 2004. As required by IFRS 1, estimates made in the presentation of this financial information, including but not limited to assessments of provisions and contingent liabilities (and, where applicable, adjusted to comply with IFRS) are consistent with estimates made previously under UK GAAP. In accordance with IFRS 1, the Group must define accounting policies compliant with IFRS at its first reporting date and apply these policies retrospectively to each period presented. IFRS 1 allows a number of optional exemptions and also contains certain mandatory exceptions to this principle in order to ease the transition requirements of first-time adoption. The Group has applied the following exemptions available under IFRS 1: â€¢ Business combinations (IFRS 3): The Group has applied IFRS 3 prospectively and as such Business combinations prior to the transition date have not been restated on an IFRS basis. â€¢ Share based payments (IFRS 2): As permitted under IFRS 1, the Group has made no adjustment for grants of share options that occurred prior to 7 November 2002 or for grants after that date which had vested by 1 January 2005. â€¢ Financial Instruments (IAS 32/39): The Group has applied the exemption to restate its comparative information for the effects of adopting IAS 32 and IAS 39. As such the Group will not restate comparative information at 1 October 2004 or for the year to 30 September 2005 for the effects of these standards. â€¢ Exchange differences arising on consolidation (IAS 21): The Group has elected to deem the cumulative exchange difference arising on consolidation of the net investments in subsidiaries at the transition date to be nil. Restated Consolidated Income Statement Unaudited Unaudited Six months ended Year ended 31 March 2005 30 September 2005 Â£000 Â£000 REVENUE 48,689 116,228 Cost of sales (17,956) (44,597) GROSS PROFIT 30,733 71,631 Distribution costs (8,928) (18,600) Administrative expenses: Development expenditure (7,729) (16,049) Amortisation of intangible assets (671) (1,268) Reorganisation and integration expenses (1,148) (1,132) Other administrative expenses (10,695) (24,347) Total administrative expenses (20,243) (42,796) OPERATING PROFIT 1,562 10,235 Investment income 430 1,026 Finance costs (81) (185) PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 1,911 11,076 Income tax expense (574) (2,024) PROFIT FOR THE PERIOD 1,337 9,052 Earnings per ordinary share - basic 0.45p 3.02p - diluted 0.44p 2.98p Restated Consolidated Balance Sheet Unaudited Unaudited 6 Months Year Ended ended 30 September 31 March 2005 2005 Â£000 Â£000 NON-CURRENT ASSETS Goodwill 101,856 101,486 Intangible assets 4,729 5,425 Property, plant and equipment 6,513 7,781 Trade and other receivables 597 689 Deferred tax asset 281 630 Investments 5 6 --------- --------- 113,981 116,017 CURRENT ASSETS Trade and other receivables 40,720 56,165 Cash and cash equivalents 31,934 23,770 --------- --------- 72,654 79,935 TOTAL ASSETS 186,635 195,952 CURRENT LIABILITIES Trade and other payables (36,719) (37,475) Provisions (874) (684) --------- --------- (37,593) (38,159) NET CURRENT ASSETS 35,061 41,776 NON-CURRENT LIABILITIES Deferred tax liabilities (793) (890) Other payables (2,763) (577) Provisions (2,553) (2,681) --------- --------- (6,109) (4,148) TOTAL LIABILITIES (43,702) (42,307) --------- --------- NET ASSETS 142,933 153,645 ========= ========= EQUITY Share capital 3,007 3,017 Share premium account 160,605 160,745 Merger reserve 6,768 6,768 Own shares (95) (95) Equity reserve 555 1,487 Translation reserve (993) 922 Retained earnings (26,914) (19,199) --------- --------- TOTAL EQUITY 142,933 153,645 ========= ========= Restated Consolidated Cash flow Statement Unaudited Unaudited Six months ended Year ended 31 March 30 September 2005 2005 Â£000 Â£000 Operating profit 1,562 10,235 Adjustments for: Depreciation 1,987 3,690 Amortisation of intangible assets 671 1,268 Loss on disposal of fixed assets 16 1 Shared-based payment expense 234 1,166 --------- --------- Operating cash flows before movements in working capital 4,470 16,360 Increase in receivables (339) (12,711) Decrease in payables (157) (2,417) --------- --------- Cash generated by operations 3,974 1,232 Income taxes paid (net) (606) (1,253) Interest received 429 942 Interest paid (69) (87) Interest element of finance lease rental payments (15) (36) --------- --------- Net cash generated by operating activities 3,713 798 Investing activities Payments to acquire tangible fixed assets (2,554) (6,569) Proceeds on disposal of property, plant and equipment 44 78 Acquisition of subsidiaries (929) (2,004) Net cash acquired with subsidiaries 75 74 Expenditure on capitalised product development (43) (649) --------- --------- Net cash used in investing activities (3,407) (9,070) Financing activities Proceeds on issue of shares 152 302 Repayments of obligations under finance leases (89) (132) --------- --------- Net cash generated from financing activities 63 170 --------- --------- Net increase/(decrease) in cash and cash equivalents 369 (8,102) Cash and cash equivalents at beginning of period 32,182 32,182 Effect of foreign exchange rates (617) (310) --------- --------- Cash and cash equivalents at end of period 31,934 23,770 --------- --------- Reconciliation summary of profit and equity under UK GAAP to IFRS The analyses below summarise the changes to the profit after tax and changes in shareholder equity resulting from the restatement of the accounts for the six months to 31 March 2005 and full year to 30 September 2005 under IFRS. Note Unaudited Unaudited Six months Year ended ended 31 March 30 September 2005 2005 Reconciliation of profit for the period Â£000 Â£000 Loss after taxation under UK GAAP (6,332) (6,025) Goodwill amortisation (i) 8,052 16,166 Intangible amortisation (ii) (236) (520) Capitalised Development costs (iii) 43 649 Share based payments cost (iv) (234) (1,166) Holiday pay (v) (20) (19) Deferred taxation (vi) 64 (33) --------- --------- 7,669 15,077 --------- --------- Profit after taxation under IFRS 1,337 9,052 --------- --------- Note Unaudited Unaudited Unaudited Date of Six months Year ended Transition ended 30 September 1 October 31 March 2005 2004 2005 Reconciliation of equity Â£000 Â£000 Â£000 Equity under UK GAAP 142,230 135,057 137,429 Goodwill amortisation (i) - 8,052 16,166 Intangible amortisation (ii) - (236) (520) Capitalised Development costs (iii) - 43 649 Share based payments cost (iv) (321) (234) (1,166) - charged to income statement - (321) (321) - charged in relation to prior periods Holiday pay (v) (39) (59) (58) Deferred taxation (vi) 12 76 (21) Transfer from foreign exchange (viii) (1,854) (1,854) (1,854) reserves --------- --------- --------- IFRS adjustments on retained (2,202) 5,467 12,875 earnings IFRS adjustment to translation (viii) 1,854 1,854 1,854 reserve IFRS adjustment to equity reserve (iv) 321 555 1,487 --------- --------- --------- Equity under IFRS 142,203 142,933 153,645 --------- --------- --------- Notes (i) to (viii) on pages 12 to 15 explain the impact of IFRS adoption has on the comparative information as at and for the period ended 31 March 2005 and 30 September 2005. Reconciliation of Balance Sheet as at 31 March 2005 Unaudited Unaudited Unaudited UK GAAP IFRS impact IFRS 31 March 31 March 31 March 2005 2005 2005 Â£000 Â£000 Â£000 NON-CURRENT ASSETS Goodwill 95,786 6,070 101,856 Intangible assets 955 3,774 4,729 Property, plant and equipment 7,647 (1,134) 6,513 Trade and other receivables 597 - 597 Deferred tax asset 263 18 281 Investments 5 - 5 --------- --------- --------- 105,253 8,728 113,981 CURRENT ASSETS Trade and other receivables 40,720 - 40,720 Current asset investments 3,322 (3,322) Cash and cash equivalents 28,612 3,322 31,934 --------- --------- --------- 72,654 - 72,654 TOTAL ASSETS 177,907 8,728 186,635 CURRENT LIABILITIES Trade and other payables (36,660) (59) (36,719) Provisions - (874) (874) --------- --------- --------- (36,660) (933) (37,593) NET CURRENT ASSETS 35,994 (933) 35,061 NON-CURRENT LIABILITIES Deferred tax liabilities - (793) (793) Other payables (2,763) - (2,763) Provisions (3,427) 874 (2,553) --------- --------- --------- (6,190) 81 (6,109) TOTAL LIABILITIES (42,850) (852) (43,702) --------- --------- --------- NET ASSETS 135,057 7,876 142,933 ========= ========= ========= EQUITY Share capital 3,007 - 3,007 Share premium account 160,605 - 160,605 Merger reserve 6,768 - 6,768 Own shares (95) - (95) Equity reserve - 555 555 Translation reserve (2,847) 1,854 (993) Retained earnings (32,381) 5,467 (26,914) --------- --------- --------- TOTAL EQUITY 135,057 7,876 142,933 ========= ========= ========= Notes (i) to (viii) on pages 12 to 15 explain the impact of IFRS adoption Reconciliation of profit for the six months ended 31 March 2005 Note Unaudited Unaudited Unaudited UK GAAP IFRS IFRS impact Six Six Six months months months ended ended ended 31 March 31 March 31 March 2005 2005 2005 Â£000 Â£000 Â£000 REVENUE 48,689 - 48,689 Cost of sales (a) (17,864) (92) (17,956) --------- --------- --------- GROSS PROFIT 30,825 (92) 30,733 Distribution costs (b) (8,882) (46) (8,928) Administrative expenses: --------- --------- --------- Development expenditure (7,732) 3 (7,729) Amortisation of intangible assets (8,154) 7,483 (671) Reorganisation and integration expenses (1,148) - (1,148) Other administrative expenses (10,952) 257 (10,695) --------- --------- --------- Total administrative expenses (c) (27,986) 7,743 (20,243) --------- --------- --------- OPERATING (LOSS)/PROFIT (6,043) 7,605 1,562 Investment income 430 - 430 Finance costs (81) - (81) --------- --------- --------- (LOSS)/PROFIT ON ORDINARY ACTIVITIES (5,694) 7,605 1,911 BEFORE TAXATION Income tax expense (638) 64 (574) --------- --------- --------- (LOSS)/PROFIT FOR THE PERIOD (6,332) 7,669 1,337 ========= ========= ========= Earnings per share - basic (2.11)p 2.56p 0.45p ========= ========= ========= Earnings per share - diluted 0.44p ========= Analysis of the impact of IFRS on profit for the period Â£000 (a) Cost of sales - share based payments (92) --------- (b) Distribution costs - share based payments (46) --------- (c) Administrative expenses - share based payments - development (40) - share based payments - administrative (56) - holiday pay (20) - capitalised development costs 43 - goodwill amortisation reversed 8,052 - intangible amortisation (236) - software amortisation reclassification - Intangible amortisation (333) - Other administrative expenses 333 --------- 7,743 --------- Notes (i) to (viii) on pages 12 to 15 explain the impact of IFRS adoption Reconciliation of Balance Sheet as at 30 September 2005 Unaudited Unaudited Unaudited UK GAAP IFRS impact IFRS 30 September 30 September 30 September 2005 2005 2005 Â£000 Â£000 Â£000 NON-CURRENT ASSETS Goodwill 87,305 14,181 101,486 Intangible assets 854 4,571 5,425 Property, plant and equipment 9,387 (1,606) 7,781 Trade and other receivables 689 - 689 Deferred tax asset 612 18 630 Investments 6 - 6 --------- --------- ---------- 98,853 17,164 116,017 CURRENT ASSETS Trade and other receivables 56,165 - 56,165 Cash and cash equivalents 23,770 - 23,770 --------- --------- ---------- 79,935 - 79,935 TOTAL ASSETS 178,788 17,164 195,952 CURRENT LIABILITIES Trade and other payables (37,417) (58) (37,475) Provisions - (684) (684) NET CURRENT ASSETS (37,417) (742) (38,159) 42,518 (742) 41,776 NON-CURRENT LIABILITIES Deferred tax liabilities - (890) (890) Other payables (577) - (577) Provisions (3,365) 684 (2,681) --------- --------- ---------- (3,942) (206) (4,148) TOTAL LIABILITIES (41,359) (948) (42,307) --------- --------- ---------- NET ASSETS 137,429 16,216 153,645 ========= ========= ========== EQUITY Share capital 3,017 - 3,017 Share premium account 160,745 - 160,745 Merger reserve 6,768 - 6,768 Own shares (95) - (95) Equity Reserve - 1,487 1,487 Translation reserves (932) 1,854 922 Retained earnings (32,074) 12,875 (19,199) --------- --------- ---------- TOTAL EQUITY 137,429 16,216 153,645 ========= ========= ========== Notes (i) to (viii) on pages 12 to 15 explain the impact of IFRS adoption Reconciliation of profit for the year ended 30 September 2005 Note Unaudited Unaudited Unaudited UK GAAP Adjustments IFRS Year ended Year ended Year ended 30 30 30 September September September 2005 2005 2005 Â£000 Â£000 Â£000 REVENUE 116,228 - 116,228 Cost of sales (a) (44,101) (496) (44,597) --------- --------- --------- GROSS PROFIT 72,127 (496) 71,631 Distribution costs (b) (18,393) (207) (18,600) Administrative expenses: --------- --------- --------- Development expenditure (16,512) 463 (16,049) Amortisation of intangible assets (16,368) 15,100 (1,268) Reorganisation and integration (1,132) - (1,132) expenses Other administrative expenses (24,597) 250 (24,347) --------- --------- --------- Total administrative expenses (c) (58,609) 15,813 (42,796) --------- --------- --------- OPERATING (LOSS)/PROFIT (4,875) 15,110 10,235 Investment income 1,026 - 1,026 Finance costs (185) - (185) --------- --------- --------- (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION (4,034) 15,110 11,076 Income tax expense (1,991) (33) (2,024) --------- --------- --------- (LOSS)/PROFIT FOR THE PERIOD (6,025) 15,077 9,052 ========= ========= ========= Earnings per share - basic (2.00)p 5.02p 3.02p ========= ========= ========= Earnings per share - diluted 2.98p ========= Â£000 (a) Cost of sales - share based payments (496) --------- (b) Distribution costs - share based payments (207) --------- (c) Administrative expenses - share based payments - development (186) - share based payments - administrative (277) - holiday pay (19) - capitalised development costs 649 - goodwill amortisation reversed 16,166 - intangible amortisation (520) - software amortisation reclassification - Intangible amortisation (546) - Other administrative expenses 546 --------- 15,813 --------- Notes (i) to (viii) on pages 12 to 15 explain the impact of IFRS adoption Explanatory Notes on the impact of transition to IFRS The following notes highlight the main differences between UK GAAP and IFRS that have a material effect on the financial statements of the Group. (i) Goodwill Under UK GAAP, goodwill arising on the acquisition of a business is capitalised and amortised, on a straight line basis, over its useful economic life. Impairment calculations are performed if there is evidence of a reduction in value. The Group has applied the business combination exemption under IFRS 1 not to restate business combinations prior to the date of transition (1 October 2004). As a result, under IFRS the net book value at 30 September 2004 is treated as the deemed cost. Goodwill is no longer subject to amortisation, instead impairment testing will be performed on an annual basis, or more frequently if there is an indication that impairment is required. The impact of adopting IFRS was to increase profit before taxation and net assets by Â£16.2m in the year ended 30 September 2005 (Â£8.1m in the six months ended 31 March 2005) as a result of reversing goodwill previously amortised during the periods under UK GAAP. Goodwill of Â£2.0m was previously recognised on the acquisition of Telmate ApS (acquired in October 2004). Following the adoption of IFRS, this goodwill has been reversed and the underlying Optimal Routing ('OR') software has been valued at Â£2.84m which has been recognised as an intangible asset. A related deferred tax liability of Â£0.9m has also been recognised. (ii) Intangible asset and amortisation Software has been reclassified from property, plant and equipment. Accordingly the underlying depreciation of Â£0.55m has been reclassified as intangible amortisation for the year ended 30 September 2005 (31 March 2005 Â£0.33m). Telmate - In the year ended 30 September 2005, intangible amortisation of Â£0.52m has been charged to the income statement with a corresponding reduction in the deferred tax liability of Â£0.16m. (Â£0.24m and Â£0.07m respectively in the six months ended 31 March 2005). The net charge to the income statement is Â£0.36m and Â£0.17m for the year ended 30 September 2005 and the six months ended 31 March 2005 respectively. (iii) Development Costs Under UK GAAP, the Group expensed all its development expenditure to the income statement as incurred. IFRS (IAS 38) requires that development costs for internally generated intangible assets are capitalised when certain criteria, as set out in the standard, are met. Development costs are capitalised from the point at which the criteria are met up to the point at which the product is commercially available for use. At this point, no further costs are capitalised and the previously capitalised costs are amortised on a straight line basis over their expected useful life (a period of 3 to 5 years). The impact of adopting IFRS was to increase intangible assets and profit by Â£0.65m for the year ended 30 September 2005 (Â£0.04m in the six months ended 31 March 2005) as a result of capitalising development costs previously expensed under UK GAAP. There is no amortisation charge in respect of these capitalised development costs as the assets were not commercially available at 30 September 2005. (iv) Share based payments Under UK GAAP, grants of options under the Intec Share Option scheme were exempt from an accounting charge, as all options awarded under the scheme were made with an option exercise price equal to the market value of Intec shares at the date of the grant. Under IFRS 2, a charge is required for all share-based payments including share options. The charge in the income statement is based on the fair value of the options at the grant date. This fair value amount is spread over the performance period of the award which is from the date of the grant to the date when the options are expected to be exercised, which is typically 5 years. The fair value of the share option grants is measured by using the Black-Scholes model. The impact of adopting IFRS 2 is an expense to the income statement of Â£1.2m for the year ended 30 September 2005 (Â£0.2m in the six months ended 31 March 2005). The corresponding entry is shown as a movement to the Equity reserve. As a result the net impact to shareholders equity is Â£nil in both periods. (v) Holiday pay Under UK GAAP, the Group does not recognise a liability in respect of holiday and associated pay to which employees are entitled but have yet to take. Under IAS 19 a holiday pay accrual is required. The impact of adopting IFRS is an expense to the income statement of Â£0.02m for the year ended 30 September 2005 (Â£0.02m in the six months ended 31 March 2005). (vi) Deferred taxation Under UK GAAP, deferred taxation was provided in full on all timing differences, with a few exceptions, that have originated but not reversed at the balance sheet date. Deferred tax assets were recognised to the extent that it was regarded more likely than not they would be recovered. Timing differences arise when the profit or loss is recognised in a different period in the tax computations from that in the financial statements. IFRS requires a balance sheet focussed approach where temporary differences are identified for each asset and liability rather than accounting for the effects of timing and permanent differences between taxable and accounting profit. Temporary differences are identified by comparing the carrying value of the asset/liability in the balance sheet to its tax base. As a result of adopting IFRS, presentational differences arise including classifying deferred tax liabilities and assets as non-current items and reporting them separately on the face of the balance sheet. Specific deferred tax adjustments arise as a result of adopting IFRS for these items. Six months ended Year ended 31 March 30 September 2005 2005 Â£000 Â£000 Deferred tax asset adjustment at 1 October 2004 12 12 Deferred tax asset - Holiday pay accrual 6 6 Deferred tax liability - capitalised development costs (13) (195) - intangible asset recognised in respect of Telmate ApS acquisition, (net of amortisation) (780) (695) --------- --------- (775) (872) --------- --------- Representing: Deferred taxation recognised in respect of OR intangible asset (851) (851) Deferred taxation - credited / (charged) to the income statement 64 (33) - credited in prior period 12 12 --------- --------- (775) (872) --------- --------- (vii) Software Licences Under UK GAAP software licences were capitalised as tangible fixed assets (as part of computer equipment) and depreciated over their useful economic life. Under IFRS (IAS 38), software licences which are not an integral part of the related hardware are capitalised as an intangible asset and amortised over their useful economic lives. As such for the year ended 30 September 2005 Â£1.6m of computer licences (Â£1.1m in the six months ended 31 March 2005) have been reclassified as intangible fixed assets, with the related depreciation charges being reclassified as an amortisation expense in the income statement. The net impact on the income statement is Â£nil for both periods. (viii) Other Other adjustments, relating to sundry reclassifications, have been made, but have no impact on net assets at 31 March 2005 and 30 September 2005 or profit for the six months ended 31 March 2005 and the year ended 30 September 2005. Statement of accounting policies under IFRS The following accounting policies have been adopted by the Group and its subsidiaries under IFRS. Statement of compliance The transition date for the application of IFRS for the Group was 1 October 2004. The Group is adopting IFRS, as adopted for use in the European Union, for the first time in its consolidated financial statements for the year ended 30 September 2006, which will include comparative financial information for the year ended 30 September 2005. IFRS 1 requires that an entity develop accounting policies based on its standards effective at the reporting date of its first IFRS financial statements. An explanation of how the transition from UK GAAP to IFRS has affected the reported financial position, financial performance and cash flows for the Group is provided above in addition to the disclosures required by IFRS 1. Basis of preparation The financial statements are prepared under the historical cost convention with the exception of certain items which are measured at fair value as disclosed in the accounting policies below. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing an opening IFRS balance sheet at 1 October 2004 for the purpose of the transition to IFRS. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Group and entities controlled by the Group (its subsidiaries). Control is defined as where the Group has the power to govern the financial and operating policies of the acquired business so as to obtain the benefits of its activities. The results of subsidiaries acquired during the year are included in the consolidated income statement from the effective date of acquisition. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those used by the Group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Business combinations The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured at the total of the fair values, at the date of exchange, of assets acquired, liabilities incurred or assumed, and equity instruments issued plus any costs directly attributable to the business combination. 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 of 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. Revenue The Group derives its revenue from the sale of software licences, development projects performed for clients and fees for installation, consultancy, training and maintenance. Revenue is recognised on individual contracts based on the fair value of consideration received or receivable using the following guidelines. Revenues from software licence agreements are recognised where there is persuasive evidence of an agreement with a customer, delivery of the software has taken place, collectability is probable and the fee is fixed and determinable. Such revenue is generally recognised on a percentage completion basis over the period of the installation unless the licence fee and any implementation services are unbundled. Revenue from the sale of unbundled software licences is recognised on the completion of contractual milestones or when milestones are unconditional. These contractual milestone obligations normally include grant of licence on signing of the contract, which coincides with delivery, installation of the software and customer acceptance. Thus such revenue is normally recognised prior to final customer acceptance. Where contracts with customers require significant development to the core software, any applicable licence fees are recognised as income over the life of the development phase of the contract. Fee income from consultancy, training and maintenance is recognised over the period in which the service is provided. Revenue is stated net of any value added tax. Foreign currency translation Foreign currency transactions are converted to sterling at the rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates ruling at the balance sheet date. These translation differences are taken to the income statement. Non-monetary items 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. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in profit or loss for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity. The results of overseas subsidiaries are translated into sterling at the average rates for the year. The net assets or liabilities of overseas subsidiaries are translated at year-end exchange rates. The exchange differences arising on translation of the opening net assets or liabilities and results of overseas operations are taken to equity to the Group's translation reserve. 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 IFRSs as sterling-denominated assets and liabilities. Intangible assets Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the group's interest in the fair value of identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group's cash generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently where there is an indication that goodwill may be impaired. Any impairment is immediately recognised in the income statement and is not subsequently reversed. Goodwill arising prior to the date of transition to IFRS has been retained at the previous UK GAAP amount, subject to testing for impairment at that date. Other intangible assets Separately acquired intangible assets, primarily software licences, patents and trademarks are initially measured at cost. After initial recognition, the intangible asset is carried at cost less accumulated amortisation less any accumulated impairment losses. The amortisation period ranges from three to ten years and amortisation is based on equal annual charges over the useful economic life. Expenditure on research activities is recognised in the income statement as an expense in the period in which it is incurred. Expenditure on development activities is recognised as an internally generated intangible asset only when the following criteria are met: â€¢an asset is created that can be identified (such as software and new processes); â€¢it is probable that the asset created will generate future economic benefits; and â€¢the development cost of the asset can be measured reliably. If all the above tests are not met the expenditure is recognised in the income statement as an expense in the period in which it is incurred. Internally-generated intangible assets are amortised on a straight-line basis over their useful lives, which are normally between 3 and 5 years. Property, Plant and Equipment Property, plant and equipment are stated at cost, net of depreciation and any impairment. Depreciation is provided on cost in equal annual instalments over the estimated useful life of the assets. Asset lives are generally as follows: Leasehold improvements over the lease term Motor vehicles 3 - 4 years Computer equipment 3 - 5 years Furniture and equipment 3 - 5 years 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. Lease and hire purchase contracts Leases are classified under finance leases whenever the terms of the lease transfer substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases and rentals payable charged to the income statement evenly over the term of the relevant lease. Items of property, plant and equipment acquired under finance leases and hire purchase contracts are recognised as assets at their fair value or, if lower, at the present value of the minimum lease payments, at the date of inception of each lease or contract and depreciated over their estimated useful lives. 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 outstanding liability. Impairment of assets At each balance sheet date, the group reviews the carrying amounts of all of its tangible and intangible assets to determine whether any of those assets has suffered an impairment loss. If impairment is indicated, then the recoverable amount is assessed to determine the extent of the impairment. The recoverable amount is the higher of the asset's fair value less disposal costs and its value in use. In assessing value in use future cash flows are discounted to their present value using a pre-tax discount rate that reflects the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. To the extent that the recoverable amount is less than the carrying amount, the shortfall is immediately recognised in the income statement and the carrying amount reduced. With the exception of goodwill, where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, subject to the new recoverable amount not exceeding the carrying value that would have been in use had the initial impairment not been recognised. The reversal is immediately recognised in the income statement. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. Current tax, including UK corporation tax and foreign tax, is provided at the amounts expected to be paid or recovered and is calculated using the tax rates and laws that have been enacted or substantively enacted at the balance sheet date. 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. Deferred tax is the tax expected to be payable or recoverable on the 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. It is accounted for using the balance sheet liability method. Deferred tax is provided in full on temporary differences at the balance sheet date which result in an obligation to pay more tax or the right to pay less tax, calculated at the rates expected to apply when they crystallise based on current tax rates and law. 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 the initial recognition of 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 is not provided on the unremitted earnings of subsidiaries where the group is able to control the reversal of the temporary difference and it is not probable that it will reverse in the foreseeable future. Deferred tax is charged or credited to the income statement unless it relates to items charged or credited directly to equity in which case it is also charged or credited directly to equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Provisions Provisions for onerous contracts, restructuring costs and legal claims are recognised when the group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the best estimate of the expenditure required to settle that obligation at the balance sheet date, and are discounted to present value where the effect is material. Restructuring provisions comprise unexpired future lease payments, removal costs and employee termination payments. Provisions for restructuring costs are recognised when the group has a formal, detailed plan for the restructuring and this has been communicated to affected parties. Onerous lease provisions are established on a property by property basis (or separable proportion thereof) to meet the estimated liabilities, including dilapidations, of all surplus properties. The provision includes all ongoing, unavoidable costs net of any sub-letting income. Provisions are not recognised for future operating losses. Share based payments The group has applied the requirements of IFRS 2 to all grants of equity instruments made after 7 November 2002 those were unvested at 1 January 2005 in accordance with the transitional provisions. The group operates a share option scheme for its employees. The fair value of options determined at the date of grant (excluding the effect of non market-based vesting conditions) is recognised as an expense on a straight-line basis over the period that service conditions apply, based on the group's estimate of share options that will actually vest and adjusted for the effect of non market-based vesting conditions. Grant price is normally equal to the market price of group shares at the date of grant. Service conditions generally apply for between 6 months and three years. If the option remains unexercised after ten years from the date of grant, the option expires. Options are forfeited if the recipient voluntarily leaves the group before the service conditions are met. The fair value of the share option scheme is calculated using the Black-Scholes model. Non-market conditions are included in assumptions around the number of options that are expected become exercisable and these assumptions are reviewed at each balance sheet date. Proceeds received on exercise of the options are credited to equity Retirement benefits Payments to defined contribution retirement benefit schemes are charged as an expense as they become due. Payments made to comparable state managed schemes are treated in the same way. Operating profit Operating profit is stated after charging restructuring costs but before investment income and finance costs. This information is provided by RNS The company news service from the London Stock Exchange

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