Basis of Presentation

Following the implementation of International Financial Reporting Standards (IFRS), the Group will apply the accounting policies set out below to its consolidated financial statements for the year ending 31 December 2005.  These polices have been consistently applied to the Interim results for the six months ended 30 June 2005 and to the restated results for the year ended 31 December 2004 (as disclosed in the IFRS Transition Report released on 19 May 2005).

Statement of Compliance

The consolidated financial statements have been prepared in accordance with IFRS and its interpretations adopted by the International Accounting Standards Board ("IASB") and its committees and endorsed by the European Commission.  These are subject to ongoing amendment by the IASB and subsequent endorsement by the European Commission and are therefore subject to possible change.

Basis of Preparation

The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments used for currency hedging; share options as part of employee share schemes; financial assets used to fund the Group’s defined benefit pension obligations (this fair value is stated net of the actuarial value of the associated pension obligations).

Accounting Policies

(Reference is made to the IFRS accounting standard that principally governs the policy in question).

Basis of consolidation (IAS 27 "Consolidated & Separate Financial Statements")
Subsidiaries are entities controlled by the Group.  Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.  The results of subsidiaries sold or acquired during the year are included in the accounts up to, or from, the date that control passes, unless otherwise stated.

Intra-Group balances, and any unrealised gains and losses or income and expenses arising from intra-Group transactions, are eliminated in preparing the consolidated financial statements. 

Business Combinations (IFRS 2 "Business Combinations")
All business combinations are accounted for by applying the purchase method.  In respect of business acquisitions that have occurred since 1 January 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired.

In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount previously recorded under UK GAAP.  The classification and accounting treatment of business combinations that occurred prior to 1 January 2004 has not been reconsidered in preparing the Group’s opening IFRS balance sheet at 1 January 2004.

Goodwill is stated at cost less any accumulated impairment losses.  Goodwill is allocated to cash-generating units and is no longer amortized but is tested annually for impairment.    

Negative goodwill arising from an acquisition is recognised directly in the income statement.

Impairment (IAS 36 "Impairment of Assets")
The carrying amounts of the Group’s assets, including goodwill and intangible assets, are reviewed at each balance sheet date.  An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.  Impairment losses are recognised in the income statement.

Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis.

Revenue (IAS 18 "Revenue")
Turnover, which excludes value added tax and sales between Group companies, represents the value of products and services sold.  Other than for long term contracts, the treatment of which is set out separately below, revenue arising from product sales is recognised when the significant risks and rewards of ownership have been transferred to the buyer, which is normally when title passes to the customer

Revenue arising from asset rental is recognised over the duration of the rental contract at the gross amount billed to the customer, where we act as the principal in the rental transaction.

No revenue is recognised if there are significant uncertainties regarding the recovery of the consideration due, associated costs or the possible return of goods and continuing management involvement with the goods.

Long Term Contracts (IAS 11 "Construction Contracts")
Contract revenue and expenses are recognised in the income statement in proportion to the stage of completion of the contract.  The stage of completion is assessed by reference to surveys of work performed.  An expected loss on a contract is recognized immediately in the income statement.

Contract work in progress is stated at costs incurred, less those transferred to the income statement, after deducting forseeable losses and payments on account not matched with turnover.

Amounts recoverable on contracts are included in debtors and represent turnover recognised in excess of payments on account.

Foreign Currency (IAS 21 "The Effects of Changes in Foreign Exchange Rates")
Transactions in foreign currencies with overseas customers and suppliers are converted at the date at which transactions occur. 

Monetary assets and liabilities are translated at the period-end rates and the gains or losses on translation are included in the income statement.  Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.  Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated using exchange rates ruling at the date the fair value was determined.

Foreign trading profits and cash flows are translated at a weighted average rate for the period.  The assets and liabilities of overseas companies, including goodwill and fair value adjustments arising on consolidation, are translated using foreign exchange rates ruling at the balance sheet date.  The revenues and expenses of overseas companies are translated at average rates for the months in which transactions occur.   

Differences on translation of net investments in overseas companies, and of related hedges, are taken directly to translation reserve.  They are released to the income statement on disposal.

Pension Costs (IAS 19 "Employee Benefits")
The costs of providing pensions for employees under defined contribution schemes are expensed as incurred.

The Group’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods.  That benefit is discounted to determine its present value, and the fair value of any plan assets is deducted.  The calculation is performed by a qualified actuary using the projected unit credit method.  The Group recognises the ongoing service cost in the income statement as part of operating profit.  The Group recognises the net of the unwinding of the discount (above) and the return on plan assets in the income statement as part of net financial expense.  All actuarial gains and losses, both as at 1 January 2004 and those that arose subsequent to this date, are recognised in the Statement of Recognised Income and Expense.

Past-service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

Research and Development (IAS 38 "Intangible Assets")
The Group has expenditure on research projects and on projects to apply research findings to develop new or substantially improved products or processes.  This expenditure is recognised in the income statement as an expense as incurred. 

Once detailed criteria have been met that confirm that the product or process is both technically and commercially feasible, any further expenditure incurred on the project is capitalised if the expenditure is expected to be material (greater than £150,000).  The capitalised expenditure includes the cost of materials. 

Capitalised expenditure is amortised over the life of the project and is stated at cost less accumulated amortization and impairment losses.

Investments (IAS 40 "Investment Property")
Fixed asset investments are stated individually at fair value.  The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction.  Any impairment arising from a change in fair value is recognised in the income statement.

Property, plant and equipment (IAS 16 "Property, Plant & Equipment")
Depreciation is provided at rates estimated to write off the cost or valuation of the relevant assets less their estimated residual values by equal annual amounts over their expected useful lives.  Residual values and expected useful lives are reassessed annually.  No depreciation is provided on freehold land.  Other fixed assets are depreciated at the rates indicated below:

Freehold and long leasehold buildings 2½% – 5% on cost or valuation
Short leasehold property over the remaining period of the lease
Plant and machinery   12½% – 25% on cost  
Motor vehicles   25% – 33 1/3% on cost  
Equipment, fixtures & fittings 10% – 33 1/3% on cost  
Rental equipment   20% – on cost  

Items of property, plant and equipment are stated at cost less accumulated depreciation and impairment losses.  Certain land and buildings that had been revalued to fair value prior to 1 January 2004 are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation.

Intangible Assets (IAS 38 "Intangible Assets")
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software.  These costs are amortised using the straight line method over their estimated useful lives (5 years).

Costs associated with maintaining computer software programmes are recognised as an expense as incurred.  Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets.

Computer software development costs recognised as assets are amortised using the straight line method over their estimated useful lives not exceeding five years.

Inventories (IAS 2 "Inventories")
Inventories are valued at the lower of cost and net realisable value, less progress payments.  Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.  Cost is based on the first-in first-out principle and includes the cost of materials, direct labour and production overheads (based on normal operating capacity) incurred in bringing stocks and work in progress to their present location and condition.  Provisions for inventories are recognised when the book value exceeds its net realisable value.

Derivatives and Hedge Accounting (IAS 39 "Financial Instruments: Recognition & Measurement")
The Group uses derivative financial instruments ("derivatives") to hedge its exposure to foreign exchange risks arising from operational activities.  The Group does not hold or issue derivatives for trading purposes.  However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. 

Derivatives are recognised initially at cost.  Subsequent to initial recognition, derivatives are stated at fair value.  The fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price.  The fair value of "simple" option contracts is their quoted market price at the balance sheet date.

The gain or loss on re-measurement to fair value is recognised immediately in the income statement unless the derivatives qualify for hedge accounting.  Hedge accounting is permissible when a derivative is designated as a hedge of the variability in cash flows of a highly probable forecast transaction ("a hedging instrument").  The effective part of any gain or loss on the hedging instrument is recognised directly in equity.  This gain or loss is removed from equity and recognised in the income statement in the same period during which the hedged forecast transaction affects profit or loss.  The ineffective part of any gain or loss is recognised immediately in the income statement.

If a hedging instrument expires or is sold but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs.  If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised immediately in the income statement.

Capital Instruments (IAS 39 "Financial Instruments: Recognition & Measurement")
Interest bearing borrowings ("capital instruments") are stated in the balance sheet at cost, being the fair value of consideration, after the deduction of issue costs that are recognised in the income statement over the term of the debt

Income Tax (IAS 12 "Income Taxes")
The tax expense in the income statement represents the sum of tax currently payable and deferred tax.  Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity or items for which there is no corresponding income statement charge, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.  The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted at the balance sheet date.

Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised except:

  • Where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit or taxable profit or loss; and
  • In respect of deductible temporary differences associated with investments in subsidiaries in which case deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit would be available to allow all or part of the deferred income tax asset to be utilised.

Deferred tax liabilities are not recognised for the following temporary differences;

  • Goodwill not deductible for tax purposes or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor the taxable profit or loss; and
  • Differences relating to investments in subsidiaries to the extent that the timing of the reversal is controlled by the company and they will probably not reverse in the foreseeable future.

IAS 12 requires deferred tax to be provided in respect of undistributed profits of overseas subsidiaries unless the parent is able to control the timing of remittances and it is probable that such remittances will not be made in the foreseeable future. As the Group is able to control the timing of remittances from overseas subsidiaries and no such remittances are anticipated in the foreseeable future, no provision has been made for any tax on undistributed profits of overseas subsidiaries. Similarly, no deferred tax assets or liabilities have been recognised in respect of temporary differences associated with investments in subsidiaries.

Employee Share Schemes (IFRS 2 "Share-based Payment")
The Group operates a number of share based incentive schemes, some of which entitle the beneficiary to shares (equity-settled) and others that entitle the beneficiary to cash (cash-settled).  The schemes in place prior to 2005 were based on share price movements.  A new equity-settled scheme was set up in 2005 that is based on Total Shareholder Returns (TSR). 

Options’ fair values are calculated using Black-Scholes or Monte Carlo simulation models. 

At the date of the grant of equity-settled options, a charge to the income statement is made based on their fair value at that date and on the estimated number options expected to vest after adjusting for lapses due to leavers during the life of the scheme and achievement of any non-market based vesting conditions (for example, profitability and sales growth targets).  Subsequently, at each balance sheet date prior to vesting of the relevant awards, the Group revises the estimates of the number of options that are expected to vest after adjusting for expected leavers and estimated achievement of non-market based vesting conditions.  The Group recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity.

At the date of grant of cash-settled options, a charge to the income statement is made based on their fair value at that date.  Changes in the fair value of cash-settled options are recognised as charges to the income statement over the life of the scheme, and a corresponding adjustment to liabilities.

Leases (IAS 17 "Leases")
Payments made under operating leases are charged to the income statement on a straight-line basis.  The Group does not have any finance leases.

Assets held for short-term rental are recorded as plant and machinery within property, plant and equipment and depreciated over their estimated useful lives.  Rental income from these assets is recognised as earned on a straight-line basis over the rental period.

Trade and Other Receivables (IAS 32 "Financial Instruments: Disclosure & Presentation")
Trade and other receivables are stated at their cost less provision for doubtful debts.

Dividends (IAS 10 "Events after the Balance Sheet Date")
Dividends are recognised as a liability in the period in which they are declared.

Provisions (IAS 37 "Provisions, Contingent Liabilities & Contingent Assets")
Provisions are recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. 

Provisions for warranties, based on historical warranty data, are recognised when the underlying products or services are sold.  Provisions for restructuring are recognised when the Group has approved a detailed and formal restructuring plan and the restructuring has either commenced or has been announced.  Provisions for onerous contracts are recognised when the expected benefits from a contract are lower than the unavoidable costs of meeting the contract’s obligations. 

Segmental Reporting (IAS 14 "Segment Reporting")
A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products and services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.  The Group reports separate information on its material operations for each of the Group’s segments.  The Group’s primary segment is the business sector and its secondary segment is geographical area.

Net Finance Expenses (IAS 23 "Borrowing Costs")
Net finance expenses comprise interest payable on borrowings, interest receivable on funds invested, the amortization of loan costs, foreign exchange gains and losses on external or inter-company loans or investments to the extent that they are recognised in the income statement, the finance element of the charge or credit relating to defined benefit pension schemes and gains and losses on derivatives to the extent that they are recognised in the income statement.