IFRS Transition Statement
Spice PLC
15 October 2007
15 October 2007
Spice plc
Information on the adoption of International Financial Reporting Standards
Spice plc ("Spice" or "the Group"), the provider of outsourced infrastructure
support services to the Commercial, Public and Utility Sectors, will report its
results for the year ending 27 April 2008 under International Financial
Reporting Standards ("IFRS").
The Group's first published results under IFRS will be for the six month period
ending 28 October 2007, which will include comparative numbers for the six month
period ended 29 October 2006 and also for the year ended 29 April 2007 restated
from UK Generally Accepted Accounting Principles ("UK GAAP") to IFRS. Spice's
effective date of transition to IFRS is 1 May 2006.
The adoption of IFRS does not materially affect the Group's turnover, EBITA or
profit before tax and amortisation for either the year ended 29 April 2007 or
period ended 29 October 2006. IFRS has no effect on the Group's strategy,
cashflows or net debt position.
Under IFRS, the Group's adjusted diluted earnings per share are reduced mainly
as a consequence of the tax relief arising on the exercise of share options
being accounted for within equity rather than the income statement. The Group
will continue to receive the cash benefit of this tax relief under IFRS, in the
same way that it has done under UK GAAP.
The impact of IFRS on the Group's key results can be summarised as follows:
Year ended 29 April 2007 Period ended 29 October 2006
IFRS IFRS
UK GAAP unaudited UK GAAP unaudited
£'m £'m £'m £'m
Revenue 228.6 228.6 102.6 102.6
EBITA* 16.3 16.2 7.2 7.1
Operating profit 12.5 15.0 5.5 6.7
Profit before tax and amortisation of
intangible fixed assets 13.8 13.5 6.4 6.1
Profit before tax 10.1 12.2 4.7 5.8
Diluted earnings per share (pence per share) 15.1 18.1 6.5 8.8
Adjusted** diluted earnings per share (pence per share) 22.7 20.6 9.9 9.5
Net assets 67.3 75.2 43.6 47.3
Cash inflow from operating activities 16.3 16.3 5.3 5.3
Net debt 34.3 34.3 31.6 31.6
* EBITA comprises profit on ordinary activities before interest,
tax and amortisation of intangible fixed assets
** Adjusted to exclude the effect of the amortisation of intangible fixed assets
- Ends -
For further information, please contact:
Spice Tel: 0113 384 3838
Simon Rigby, Chief Executive Officer
Oliver Lightowlers, Group Finance Director
Carl Chambers, Corporate Development Director
Financial Dynamics Tel: 020 7831 3113
Billy Clegg
Caroline Stewart
KBC Peel Hunt Tel: 0207 4188900
Julian Blunt
Information on the adoption of International Financial Reporting Standards
Contents
1 Introduction
2 Basis of preparation and first time adoption of IFRS
3 Impact of transition from UK GAAP to IFRS
4 Restated primary financial statements
5 Accounting policies
1 Introduction
Historically Spice has prepared its consolidated financial statements in
accordance with UK GAAP. As a result of changes in EU legislation and the Aim
rules, Spice will prepare consolidated financial statements in accordance with
IFRS for all accounting periods beginning on or after 30 April 2007.
The Group's first Interim Report published under IFRS will be for the six months
ending 28 October 2007 and its first Annual Report published under IFRS will be
for the year ending 27 April 2008. Prior period comparatives numbers have been
restated to comply with IFRS.
This report explains how the Group's UK GAAP balance sheets at 30 April 2006, 29
October 2006 and 29 April 2007 would have been reported under IFRS. The report
also explains how the Group's UK GAAP results for the period ended 29 October
2006 and year ended 29 April 2007 would have been reported under IFRS.
The Group's accounting policies, updated for IFRS, are set out in Section 5.
The main impacts of the adoption of IFRS for the Group are as follows:
• Purchased goodwill arising on acquisitions completed before 1 May
2006 is no longer amortised;
• Intangible fixed assets acquired through business combinations since
1 May 2006 are separately reported and amortised over their useful economic
lives;
• Provisions for holiday pay have been established from 1 May 2006;
• Provisions for contingent consideration, where material, are now
discounted to present value and a non-cash interest charge recognised for
the period until that contingent consideration has been satisfied;
• The benefits of tax relief arising on the exercise of share options
are no longer recognised in the income statement but as a component of
equity
2 Basis of Preparation and first time adoption of IFRS
The IFRS financial information and adjustments contained in this document are
provisional and unaudited. The UK GAAP information used in this report has been
extracted from the Group's financial statements for the year ended 29 April
2007, which contained an unqualified audit report and from the Group's Interim
Report for the period ended 29 October 2006, which was unaudited.
The IFRS financial information and adjustments presented in this report have
been prepared on the basis of all IFRS and International Financial Reporting
Interpretations Committee interpretations ("IFRICs") issued, effective and
adopted for use in the European Union at the date of preparing this report.
These IFRS and IFRICs are subject to ongoing review and possible amendment.
Further standards and/or interpretations may be issued that could apply to the
Group's financial statements for the year ending 27 April 2008. If any such
amendments, new standards or interpretations are issued then these may require
the financial information provided in this report to be changed.
The Group will also continue to review its accounting policies in the light of
emerging industry consensus on the practical application of IFRS. This could
also mean that the financial information provided in this report may require
modification until the first set of audited IFRS financial statements
are completed for the year ending 27 April 2008.
The rules for first time adoption of IFRS are set out in IFRS 1 - First time
Adoption of IFRS. In general a company is required to define its IFRS policies
and apply them retrospectively. However, IFRS 1 does allow a company to take
advantage of a number of exemptions from restating historical data. Where
material to the financial information presented, the choices made by the Group
in respect of these optional exemptions have been described in Section 3 below.
The Directors are responsible for the preparation of the restated IFRS financial
information. This report was approved by the Directors on 15 October 2007.
3 Impact of transition from UK GAAP to IFRS
An explanation of the major adjustments arising from the transition to IFRS are
set out below.
3.1 IAS 1 - Presentation of financial statements
The format of primary financial statements under UK GAAP is governed by the
Companies Act 1985. IAS 1 is less prescriptive in terms of the items that are
required to be disclosed. The transition to IFRS has resulted in the Group
changing the format of both its income statement and balance sheet.
The format of the cash flow statement will change and the IFRS cash flow
statement will explain the change in cash and cash equivalents rather than just
cash as under UK GAAP. Currently the Group has no short term investments that
would fall into the IFRS definition of cash and cash equivalents. Although the
format of the cash flow statement will change, net cash flows are not impacted
and therefore, no revised statement has been provided. A reconciliation of the
net debt position will continue to be provided as additional information.
The Group has sought to interpret the IFRS requirements in a manner that
provides users of its financial statements with clear and concise information.
These formats may however require modification as industry consensus develops.
3.2 IFRS 3 - Business Combinations
In line with IFRS 1, the Group has chosen not to apply IFRS 3 retrospectively
and has not restated any business combinations prior to 1 May 2006. Goodwill
arising in respect of acquisitions completed prior to the transition date will
remain as stated under UK GAAP with the net book value of goodwill becoming the
deemed cost as at the transition date with impairment reviews carried out
annually or at other times if there are indications that the carrying value is
not recoverable.
As a result, purchased goodwill at 1 May 2006 of £41.0 million will no longer be
amortised. The results for the year ended 29 April 2007 and period ended 29
October 2006 have been restated to reverse the goodwill amortisation charge
recorded under UK GAAP of £3.5 million and £1.6 million respectively. The
reversal of the goodwill amortisation charge does not affect the Group's tax
charge, because goodwill amortisation is mainly not a deductible expense for tax
purposes. Impairment reviews were carried out at 29 April 2007 and 29 October
2006 in accordance with IAS 36 "Impairment of assets" and no impairments were
identified.
3.3 IAS 38 - Intangible assets
In relation to acquisitions completed after 1 May 2006, under IFRS 3 there is a
requirement to separately identify intangible fixed assets acquired as part of a
business combination rather than include these as part of purchased goodwill.
Intangible fixed assets, such as brands, customer contracts and customer
relationships have been separately identified, valued and are now being
amortised over their useful economic lives. The acquisitions during the year
ended 29 April 2007 of Breval, Inenco, Apollo, Pargas, Atlanta and Optimal
resulted in the recognition of separately identifiable intangible fixed assets
of £11.7 million. The amortisation charge in relation to these assets was £1.0
million for the year ended 29 April 2007 and £0.2 million for the period ended
29 October 2006.
In accordance with IAS 12 Income taxes, a deferred tax liability has been
recognised in relation to separately identifiable intangible fixed assets.
3.4 IAS 21 - The Effects of Changes in Foreign Exchange Rates
Under IAS 21 cumulative exchange rate variances on the net investment in foreign
operations are recognised in a separate equity reserve. Whilst the quantum of
these differences is not material, the Group has elected to set these exchange
differences to zero at the transition date, as permitted by IFRS 1.
3.5 Fixed Assets - Revaluation of property, plant and equipment
Under UK GAAP, Spice adopted a policy of periodic revaluation with regard to
freehold land and buildings. These assets were last valued by independent
valuers in February 2006. IFRS1 permits previous UK GAAP revaluations of
property, plant and equipment, at or before the date of transition to IFRS, to
be treated as the deemed cost at the date of transition. Accordingly, property,
plant and equipment will not be revalued in future.
3.6 IAS 19 - Employee benefits
In accordance with IAS 19, Spice has recorded a provision for holiday pay of
£0.3 million at the date of transition to IFRS. An additional provision of £0.1
million was also recorded during the year ended 29 April 2007 such that the
total provision for holiday pay recorded on the Group balance sheet at 29 April
2007 was £0.4 million.
3.7 IAS 37 - Effective interest on contingent consideration
Under UK GAAP, the Group did not discount contingent consideration to present
value in determining the cost of a business combination as the financial impact
on the Group was not material. Under IFRS, the Group has decided that contingent
consideration, where material, should be discounted to present value in
accordance with IAS 37. Accordingly, at the date of transition provisions
recorded for future contingent consideration payments have been discounted by
£0.4 million. Consequently the interest charge in the income statement for the
year ended 29 April 2007 and for the period ended 29 October 2006 has increased
by £0.3 million and £0.1 million respectively. In each case this is a non-cash
cost.
3.8 IFRS reclassification differences
In accordance with IFRS 5, Spice has reclassified property, plant and equipment
held for resale at 1 May 2006 totalling £0.6 million to non-current assets held
for resale within current assets.
In accordance with IAS 16, Spice has reclassified long leasehold property, plant
and equipment at 1 May 2006 totalling £0.3 million to non-current trade and
other receivables.
3.9 IAS 12 - Deferred tax on share options
The Group receives tax relief on the exercise of share options and, under UK
GAAP, this tax relief was recognised in the income statement at the date of
exercise. Under IFRS, the Group will continue to receive tax relief on the
exercise of share options (to the extent that the market value of the share
option exceeds the option price). However, under IFRS, this tax relief is now
accounted for within equity. The Group will continue to receive the cash benefit
of this tax relief under IFRS, in the same way that it has done under UK GAAP.
Deferred tax assets, in relation to the expected tax relief to be received on
the future exercise of share options, totalling £1.7 million, £2.8 million and
£5.7 million have been recognised at 1 April 2006, 29 October 2006 and 29 April
2007 respectively.
4 Restated primary financial statements
4.1 Consolidated income statement for the period ended 29 October 2006
3.6
UK GAAP 3.7 3.2 & 3.3 Holiday
Interest Goodwill pay IFRS
£'000 £'000 £'000 £'000 £'000
Revenue 102,633 102,633
Operating expenses (97,106) 1,318 (100) (95,888)
EBITA* 7,209 7,109
Amortisation of intangible
fixed assets (1,682) 1,318 (364)
Operating profit 5,527 6,745
Finance costs (847) (148) (995)
PBTA** 6,362 6,114
Amortisation of intangible
fixed assets (1,682) 1,318 (364)
Profit before tax 4,680 5,750
Tax on profit on ordinary activities (1,404) 71 (1,333)
Retained profit for the period 3,276 (148) 1,389 (100) 4,417
Basic EPS 7.3 9.8
Diluted EPS 6.5 8.8
* EBITA is earnings before interest, tax, exceptional items and amortisation of
intangible fixed assets.
** PBTA is profit before tax and amortisation of intangible fixed assets.
4.2 Consolidated income statement for the year ended 29 April 2007
3.6 3.9
3.7 3.2 & 3.3 Holiday Share
UK GAAP Interest Goodwill pay options IFRS
£'000 £'000 £'000 £'000 £'000 £'000
Revenue 228,560 228,560
Operating expense (216,030) 2,541 (100) (213,589)
EBITA* 16,296 16,196
Amortisation of intangible
fixed assets (3,766) 2,541 (1,225)
Operating profit 12,530 14,971
Finance costs (2,444) (283) (2,727)
PBTA** 13,852 13,469
Amortisation of intangible
fixed assets (3,766) 2,541 (1,225)
Profit before tax 10,086 12,244
Tax on profit on ordinary activities (2,561) 296 (982) (3,247)
Retained profit for the year 7,525 (283) 2,837 (100) (982) 8,997
Basic EPS 16.5 19.7
Diluted EPS 15.1 18.1
* EBITA is earnings before interest, tax, exceptional items and amortisation of
intangible fixed assets.
** PBTA is profit before tax and amortisation of intangible fixed assets.
4.3 Consolidated balance sheet at 30 April 2006
3.6 3.9
3.8 3.7 Holiday Share
UK GAAP Reclassifications Interest pay options IFRS
£'000 £'000 £'000 £'000 £'000 £'000
Assets
Non-current assets
Purchased goodwill 41,458 (439) 41,019
Intangible fixed assets 825 825
Property, plant and equipment 13,623 (943) 12,680
Investment in associates 212 212
Trade and other receivables - 341 341
Deferred tax assets 65 1,679 1,744
56,183 56,821
Current assets
Inventories 4,264 4,264
Trade receivables and other receivables 32,607 32,607
Cash and cash equivalents - -
Non current assets held for resale - 602 602
Current tax recoverable - -
36,871 37,473
Liabilities
Current liabilities
Trade and other payables (28,710) (300) (29,010)
Current tax payable (3,274) (3,274)
Financial liabilities (1,310) (1,310)
(33,294) (33,594)
Non-current liabilities
Financial liabilities (12,237) (12,237)
Deferred tax liabilities - -
Provisions for other liabilities and charges (7,677) 439 (7,238)
Other non-current liabilities - -
(19,914) (19,475)
Net assets 39,846 (300) 1,679 41,225
Shareholders equity
Share capital 4,947 4,947
Share premium account 27,462 27,462
Other reserves 100 100
Retained Earnings 7,337 (300) 1,679 8,716
Equity shareholders funds 39,846 (300) 1,679 41,225
4.4 Consolidated balance sheet at 29 October 2006
3.6 3.9
3.8 3.7 Holiday 3.2 & 3.3 Share
UK GAAP Reclassifications Interest pay Goodwill options IFRS
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Assets
Non-current assets
Purchased goodwill 59,675 (439) (2,080) 57,156
Intangible fixed assets 782 4,957 5,739
Property, plant and
equipment 14,799 (934) 13,865
Investment in associates 212 212
Trade and other receivables - 339 339
Deferred tax assets 65 (1,488) 2,828 1,405
75,533 78,716
Current assets
Inventories 6,649 6,649
Trade receivables and
other receivables 43,229 43,229
Cash and cash
equivalents - -
Non current assets
held for resale - 595 595
Current tax recoverable - -
49,878 50,473
Liabilities
Current Liabilities
Trade and other payables (47,654) (400) (48,054)
Current tax payable (4,677) (4,677)
Financial liabilities (3,327) (3,327)
(55,658) (56,058)
Non-Current Liabilities
Financial liabilities (17,576) (17,576)
Deferred tax liabilities - -
Provisions for other
liabilities and charges (8,571) 291 (8,280)
Other non-current
liabilities - -
(26,147) (25,856)
Net assets 43,606 (148) (400) 1,389 2,828 47,275
Shareholders equity
Share capital 4,947 4,947
Share premium account 27,462 27,462
Other reserves 100 100
Retained Earnings 11,097 (148) (400) 1,389 2,828 14,766
Equity shareholders funds 43,606 (148) (400) 1,389 2,828 47,275
4.5 Consolidated balance sheet at 29 April 2007
3.6 3.9
3.8 3.7 Holiday 3.2 & 3.3 Share
UK GAAP Reclassifications Interest pay Goodwill options IFRS
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Assets
Non-current assets
Purchased goodwill 77,272 (439) (4,674) 72,159
Intangible fixed assets 832 10,734 11,566
Property, plant and
equipment 18,330 (924) 17,406
Investment in associates 212 212
Trade and other receivables - 335 335
Deferred tax assets 961 (3,223) 5,742 3,480
97,607 105,158
Current assets
Inventories 6,688 6,688
Trade receivables and other
receivables 55,323 55,323
Cash and cash equivalents - -
Non current assets held for
resale - 589 589
Current tax recoverable - -
62,011 62,600
Liabilities
Current Liabilities
Trade and other payables (47,784) (400) (48,184)
Current tax payable (4,889) (4,889)
Financial liabilities (5,023) (5,023)
(57,696) (58,096)
Non-Current Liabilities
Financial liabilities (29,238) (29,238)
Deferred tax liabilities - -
Provisions for other
liabilities and charges (5,376) 156 (5,220)
Other non-current liabilities - -
(34,614) (34,458)
Net assets 67,308 (283) (400) 2,837 5,742 75,204
Shareholders equity
Share capital 5,347 5,347
Share premium account 46,523 46,523
Other reserves 100 100
Retained Earnings 15,338 (283) (400) 2,837 5,742 23,234
Equity shareholders funds 67,308 (283) (400) 2,837 5,742 75,204
5 Accounting policies
The principal accounting policies applied in the preparation of this
consolidated financial information are set out below.
Basis of consolidation
The Group financial statements consolidate the financial statements of Spice and
its subsidiary undertakings drawn up to the year end using the acquisition
method of accounting. Subsidiaries are entities that are directly or indirectly
controlled by the Group. Control exists where the Company has the power to
govern the financial and operating policies of the entity so as to obtain
benefits from its activities. In assessing control, potential voting rights that
are currently exercisable or convertible are taken into account. The results of
acquired companies are included from the date of acquisition. Where necessary,
adjustments are made to the accounting policies of subsidiary undertakings to
bring these accounting policies into line with those used by the Group.
All transactions and balances between Group companies have been eliminated from
the consolidated financial statements.
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, value added tax and other sales
related taxes.
Revenue is recognised in the income statement at the point that a service is
provided or products are supplied and title has passed for each of the following
activities:
• facilities management and maintenance services;
• consultancy, infrastructure design and asset maintenance services;
• private mobile radio products;
• drain care, maintenance, repair and cleaning services;
• water meter installation and meter reading;
• services for the development and support of telecommunications networks;
• gas maintenance and safety inspections;
• energy, water and telecommunications cost control; and
• information technology installation, commissioning and maintenance
activities.
Where the Group receives revenue from service agreements, where the substance of
a contract is that the Group's contractual obligations are performed over time,
this revenue is recognised over the period of the agreement to reflect the
Group's performance of its contractual obligations.
Where the Group operates as principal to the transaction, revenue is recognised
at gross values. Where the Group acts as agent in the transaction, with the
franchisee being the principal, the Group recognises within revenue the net
commission earned on the transaction.
Long term contracts
Revenue arising from long term contracts is recognised in the income statement
over the term of the related long term contract so as to match revenue and
profits arising with related costs incurred to date. The amount of long term
contracts, at cost incurred, net of amounts transferred to cost of sales, after
deducting foreseeable losses and payments on account not matched with revenue,
is included in work in progress.
In certain circumstances, such as the construction of a substation or other
related asset, the related customer contracts include both a design and
construction element. These activities are not capable of separate
identification due to the design and construction activities being intrinsically
linked.
Purchased goodwill
Purchased goodwill represents the excess of the cost of acquisition over the
Group's interest in the fair value of the identifiable assets (including
intangible fixed assets) and liabilities of a subsidiary at the date of
acquisition. Purchased goodwill is initially recognised as an asset at cost and
is subsequently measured at cost less any accumulated impairment losses.
Purchased goodwill which is recognised as an asset is reviewed for impairment at
least annually. Any impairment is recognised immediately in income statement and
is not subsequently reversed. For the purpose of impairment testing, purchased
goodwill is allocated to each of the Group's cash-generating units expected to
benefit from the synergies of the business combination. Cash-generating units
are tested for impairment annually, or more frequently when there is an
indication that the unit may be impaired. If the recoverable amount of the
cash-generating unit is less than the carrying amount of the unit, the
impairment loss is allocated first to reduce the carrying value of any purchased
goodwill allocated to the unit and then to the other assets of the unit pro-rata
on the basis of the carrying amount of each asset in the unit.
Purchased goodwill arising on acquisitions before the date of transition to IFRS
has been retained at the UK GAAP net book value as at 1 May 2006. Such purchased
goodwill has not been amortised in the period since transition.
Other intangible assets
Other separately identifiable intangible assets arising on business combinations
are recognised at their fair value at the date of acquisition. Each asset is
assessed on acquisition and amortisation is charged so as to write off the cost
of the identifiable assets over their estimated useful economic lives, using the
straight line method as follows:
Brand 10 years
Customer relationships and contracts 2 to 10 years
Customer order books 3 years
Patents 4 years
Property, plant and equipment
Property, plant and equipment, excluding freehold land and buildings, are stated
at historic cost together with any incremental expenses of acquisition less any
provision for depreciation. Historic cost includes the expenditure that is
directly attributable to the acquisition of the related assets. Freehold land
and buildings are stated at deemed cost less depreciation. Deemed cost includes
surpluses arising on the revaluation of freehold land and buildings to their
fair values prior to the date of transition.
Depreciation of property, plant and equipment is calculated to write off their
cost less any residual value over their estimated useful economic lives on a
reducing balance basis as follows:
Freehold buildings 50 years
Leasehold property shorter of lease term and 50 years
Plant and machinery 5 to 10 years
Fixtures, fittings and vehicles 2 to 6 years
Reviews are performed annually of the estimated remaining lives and residual
values of individual productive assets and adjustments are made where
appropriate.
Depreciation is calculated from the date of purchase. Freehold land is not
depreciated.
Assets held under finance leases or hire purchase contracts are depreciated over
their expected useful economic lives on the same basis as owned assets or, where
shorter, over the term of the relevant lease or hire purchase contract.
The gain or loss arising on the disposal or retirement of an asset is recognised
in the income statements and is determined as the difference between the net
sales proceeds, less any related taxes, and the carrying amount of the net
asset.
Employee benefits
The Group operates a number of defined contribution pension schemes.
Contributions to defined contribution pension schemes are charged to the income
statement in the financial year to which the contributions relate. The
contributions paid by the Group and the employees are invested within the
individual pension funds in the month following the month of deduction.
Share based payments
The Group issues share options to certain employees which are measured at fair
value, calculated using the either the Black Scholes or Monte Carlo models, and
are recognised as an expense in the income statement with a corresponding
increase in retained earnings. The fair value of the employee services received
in exchange for the grant of the options is recognised as an expense. The total
amount to be expensed over the vesting period is determined by reference to the
fair value of the options granted.
The fair values of these payments are measured at the dates of grant and is
recognised over the period during which employees become unconditionally
entitled to the awards. At each balance sheet date, the Group revises its
estimates of the number of options that are expected to vest. It recognises the
impact of the revision to original estimates, if any, in the income statement,
with a corresponding adjustment to retained earnings.
Employee share ownership plan (ESOP)
The Company operates an ESOP which is designed to facilitate employee
shareholdings and distribute shares to employees under remuneration schemes.
Under IFRS, an entity that controls an employee benefit trust is required by SIC
12 to consolidate that trust and, in doing so, apply the requirements of IAS32
to the entity's own shares held by the trust. Shares acquired by the ESOP,
funded by the Company, and held for the continuing benefit of the Company, are
shown as a reduction in the shareholders' funds. Movements in the year arising
from additional purchases, by the ESOP, of shares or the receipt of funds due to
the exercise of options by employees are accounted for within reserves and shown
as a movement in shareholders' funds in the year. Administration expenses of the
Trust are charged to the Company's income statement as incurred.
Foreign currencies
Functional and presentation currency
The financial statements of each Group company are measured using the currency
of the primary economic environment in which that company operates (the
functional currency). The consolidated financial statements record the results
and financial position of each Group company in pounds sterling, which is the
functional currency of the company and the presentation currency for the
consolidated financial statements.
Transactions and balances
Transactions in foreign currencies are recorded at the exchange rates prevailing
on the dates of the transactions. Assets and liabilities denominated in foreign
currencies are translated into pounds sterling at the relevant exchange rates
prevailing at the balance sheet date. Exchange gains and losses are taken to
the income statement.
Group companies
The results and financial position of all the Group entities (none of which has
the currency of a hyperinflationary economy) that have a functional currency
different from the presentation currency are translated into the presentation
currency as follows:
- assets and liabilities for each balance sheet are translated at the
closing rate at the balance sheet date; and
- income and expenses are translated at average exchange rates.
All resulting exchange differences are recognised as a separate component of
equity.
Goodwill and fair value adjustments arising on foreign entity acquisitions are
treated as assets and liabilities of the foreign entity and translated at the
closing rate. Translation differences previously recognised in equity are taken
to the income statement upon disposal of that entity.
Leases
Leases are classified as finance leases if the terms of the lease involve the
transfer of substantially all the risks and rewards of ownership to the lessee.
All other leases are classified as operating leases.
Tangible fixed assets acquired under finance leases and hire purchase contracts
are capitalised at the lower of their estimated fair value or the present value
of the minimum lease payments at the date of inception of each lease or
contract. Leases consist of capital and interest elements. The capital element
is shown as an obligation under finance leases and reduced to reflect the
outstanding obligation. The interest element is allocated over the period of
the lease in such a way as to give a reasonably constant charge on the
outstanding liability.
Rentals paid under operating leases are charged to the income statement as
incurred. Benefits received and receivable as an incentive to enter into an
operating lease are spread on a straight line basis over the lease term.
Stock
Stock is stated at the lower of cost and net realisable value. Cost comprises
all expenditure incurred in the normal course of business in bringing the stock
to its location and condition at the balance sheet date including, where
appropriate, direct labour and other direct costs but excluding borrowing costs.
Cost is computed on a first in first out basis. Net realisable value is
based on estimated selling price less the estimated cost of disposal. Provision
is made for any obsolete or slow moving stock where appropriate.
Investments in subsidiary undertakings
The Company's investment in subsidiary undertakings is stated at cost, less any
provision for impairment.
Investments in associated undertakings
The Company's investment in its associated undertaking, TMC Pty Ltd, is
accounted for using the equity method of accounting and is initially recognised
at cost. Spice's share of the associate's results is not material and has
therefore not been disclosed separately on the face of the income statement in
this report.
Tax
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on the taxable profit for the year. Taxable
profit differs from profit before tax 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 of income or expense 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 as at the balance
sheet date.
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying value 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 timing differences and deferred tax
assets are recognised to the extent that it is probable that taxable profits
will be available against which deductible timing differences can be utilised.
Such assets and liabilities are not recognised if the timing difference arises
from the initial recognition of purchased goodwill or from the initial
recognition (other than in a business combination) of other assets and
liabilities in a transaction that affects neither the taxable profit nor the
profit before tax as reported in the income statement.
Deferred tax liabilities are recognised on business combinations for timing
differences arising on investments in subsidiaries and associates and interests
in joint ventures, except where the Group is able to control the reversal of the
timing difference and it is probable that the timing 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 related deferred tax
is also dealt with as an addition or reduction in 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.
Warranty provision
Warranty provisions are calculated based on the expected future cost of
servicing warranty obligations existing at the balance sheet date. This
estimate includes assumptions relating to the expected profile of claims over
the remaining life of warranty obligations and also as to the expected cost per
claim. The provisions are discounted where the effect of discounting is
material.
Internally generated intangible fixed assets - research and development
expenditure
Expenditure on research activities which does not meet the criteria of IAS38,
Intangible assets is recognised as an expense in the period in which it is
incurred.
An internally generated intangible fixed asset arising from the Group's
activities is recognised only if all of the following conditions are met:
• an asset is created that can be identified;
• it is probable that the asset created will generate future economic benefits;
and
• the development cost of the asset can be reliably measured.
Internally generated intangible fixed assets are amortised on a straight line
basis over their useful economic lives.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying values of its
tangible and intangible fixed 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 (if any). Where the asset does not
generate cash flows that are independent from the other assets, the Group
estimates the recoverable amount of the cash-generating unit to which the asset
belongs.
The 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 using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to
the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of the asset (or cash-generating unit) is estimated to
be less than its carrying value, the carrying value of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment loss
is recognised immediately in the income statement.
When an impairment loss subsequently reverses, the carrying value of the asset
(cash-generating unit) is increased to the revised estimate of its recoverable
amount, but so that the increased carrying value does not exceed the carrying
value that would have been determined had no impairment loss been recognised for
the asset (cash-generating unit) in prior years. A reversal of an impairment
loss is recognised immediately in the income statement.
Trade receivables
Trade receivables are recognised and measured at their original invoiced amount
less provision for any uncollectible amounts. An estimate for doubtful debts is
made when the collection of the full amount is no longer probable. Bad debts are
written off to the income statement when they are identified.
Provisions
Provisions are measured at the present value of the expenditures expected to be
required to settle the obligation. Present values are calculated using a pre-tax
discount rate that reflects current market assessments of the time value of
money and the risks specific to the obligation. The increase in the provision
due to passage of time is recognised as interest expense.
Contingent and deferred consideration
The amount of contingent and deferred consideration is determined by discounting
the amounts payable to their present value at the date of exchange, taking into
account any premium or discount likely to be incurred in settlement. Contingent
consideration is determined by reference to the appropriate factors that
influence the possible payment of that consideration.
Bank borrowings
Interest bearing bank loans and overdrafts are recorded at the proceeds received
net of direct issue costs.
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