Aptitude Regulatory News (APTD)

15 Sep 2005 07:04

Microgen PLC15 September 2005 microgen Information Management Solutions www.microgen.co.uk 15 September 2005 Adoption of International Financial Reporting Standards ("IFRS") Restatement of 2004 Financial Information Microgen plc, the Information Management Solutions company which providessoftware, services and consultancy, today announces the impact of the transitionto IFRS on its 2004 financial results previously prepared in accordance withgenerally accepted accounting principles in the UK ("UK GAAP"). The impact onthe key financial data for the year ended 31 December 2004 is summarised below: UK GAAP IFRS Year ended 31 Dec Year ended 31 Dec Comment on the impact and 2004 2004 £'000 £'000 adjustments of adopting IFRS Revenue 42,444 42,444 Profit before tax and goodwill 3,892 3,753 Share based payments and Amortisationamortisation of intangibles. Goodwill amortisation (2,774) - Goodwill no longer amortised but subject to annual impairment review Profit before tax 1,118 3,753 Share based payments, Amortisation of intangibles and goodwill no longer amortised. Profit after tax 173 2,840 Earnings per shareBasic and diluted 0.2p 3.1pAdjusted Earnings per shareBasic 4.3p 4.2pDiluted 4.2p 4.2p Total Equity 62,287 65,061 Net funds 14,600 14,600 Contact: Mike PhillipsGroup Finance Director Tel: 01252 772312 MICROGEN PLC Restatement of financial information under International Financial Reporting Standards ("IFRS") 15 September 2005 CONTENTS IntroductionSummary of impact in 2004Restated consolidated income statementsRestated consolidated balance sheetsExplanation of impact of adopting IFRS Appendices Appendix 1 Reconciliation of consolidated income statements for the six months ended 30 June 2004 and the year ended 31 December 2004 Appendix 2 Reconciliation of consolidated balance sheets as at 30 June 2004 and as at 31 December 2004 Appendix 3 Reconciliation of Net Assets/Total Equity as at 1 January 2004 Appendix 4 Significant accounting policies under IFRS Microgen plc Introduction Microgen plc is required to report its consolidated financial statements underIFRS, as adopted by the European Union, for all accounting periods beginning onor after 1 January 2005. Comparative information for 2004, previously reportedunder UK GAAP, must therefore be restated under IFRS. The first publicly available results to be prepared under IFRS are the interimresults for the six months ended 30 June 2005 which are issued separately today. The purpose of this document is to explain the differences on the Group'sconsolidated results under IFRS, restate the comparative numbers accordingly andset out the significant accounting policies to be adopted under IFRS. The financial statements presented in this document are unaudited. Basis of preparation This document has been prepared on the basis of IFRS as issued by theInternational Accounting Standards Board (IASB), prior to the date of thisdocument. IFRS are subject to amendment and therefore the restated financialinformation included in this document may be subject to change before itsinclusion in the Group's 2005 Report and Accounts, which will contain theGroup's first complete financial statements prepared in accordance with IFRS. IFRS 1 "First-Time Adoption of International Financial Reporting standards"details the rules for first time adoption of IFRS and the optional exemptionswhich may be used in applying the standards retrospectively to comparativeperiods. Microgen has used the following optional exemptions in adopting IFRS: 1. Financial Instruments - Implementation of IAS 32 "Financial Instruments: Disclosure and presentation" and IAS 39 "Financial Instruments: Recognition and measurement" has been deferred to the financial year ending 31 December 2005 therefore financial instruments will continue to be accounted for and presented in accordance with UK GAAP for the year ended 31 December 2004. 2. Business Combinations - IFRS 3 "Business Combinations" has only been applied to acquisitions completed after 1 January 2004. 3. Cumulative Translation Differences - The cumulative translation differences are deemed to be zero as at 1 January 2004. 4. Share based payments - Microgen has applied IFRS2 "Share Based Payments" only to share options issued after 7 November 2002 which had not vested by 31 December 2004. Summary of impact in 2004 The following table summarises the impact of the adoption of IFRS on the Group'soperating profit for the six months ended 30 June 2004 and the year ended 31December 2004. Reconciliation of operating profit Six months ended Year Ended 30 June 2004 31 Dec 2004 £'000 £'000 Operating profit - UK GAAP 1,187 86Goodwill adjustment 1,317 2,774Staff costs - holiday pay (147) -Staff costs - share based payments (44) (107)Amortisation of other intangible assets - (32)Reclassification of profit on sale of investment in another - 606company Operating profit - IFRS 2,313 3,327 Restated consolidated income statements Unaudited for the six months ended 30 June 2004 Unaudited for the year ended 31 December 2004 Before Intangibles Total Before Intangibles Total intangibles amortisation intangibles amortisation and amortisation and and amortisation exceptional exceptional exceptional and exceptional items items items items £'000 £'000 £'000 £'000 £'000 £'000 Revenue 21,130 - 21,130 42,444 - 42,444 Operating costs (18,817) - (18,817) (37,452) (1,665) (39,117) Operating profit 2,313 - 2,313 4,992 (1,665) 3,327 Interest payable and similarcharges (25) - (25) (53) - (53)Interest receivable 163 - 163 479 - 479 Profit on ordinaryactivities before tax 2,451 - 2,451 5,418 (1,665) 3,753 Tax on profit on ordinaryactivities (471) (913) Profit for the period 1,980 2,840 Profit attributableto equity shareholders 1,980 2,815 Profit attributableto minority interest - 25 1,980 2,840 Restated consolidated balance sheets Unaudited Unaudited as at as at 30 June 2004 31 Dec 2004ASSETS £000 £000Non-current assetsProperty, plant and equipment 3,762 3,774Goodwill 44,775 53,272Other intangible assets - 512Deferred tax asset 1,185 1,972Investments 2,678 - 52,400 59,530Current assetsInventories 127 100Trade and other receivables 7,456 8,164Cash and cash equivalents 9,083 14,600 16,666 22,864Non-current assets classified as held for sale 535 - 17,201 22,864LIABILITIESCurrent liabilitiesTrade and other payables (11,111) (14,769)Current tax liabilities - (120)Provisions (701) (1,244) (11,812) (16,133) Net current assets 4,854 6,731 Non-current liabilitiesProvisions (1,683) (1,200)NET ASSETS 56,106 65,061 SHAREHOLDERS' EQUITYOrdinary shares 4,347 5,079Share premium account 8,943 11,143Merger reserve 31,075 36,389Other reserves 334 334Retained earnings 11,218 12,116 EQUITY SHAREHOLDERS' FUNDS 55,917 65,061 Minority interest 189 -TOTAL EQUITY 56,106 65,061 Explanation of impact of adopting IFRS The impact of adopting IFRS on the financial results of Microgen plc in 2004 isexplained below: 1. Goodwill Under UK GAAP goodwill was capitalised and amortised over its useful economiclife, which under Microgen's accounting policies was up to 20 years. Microgen has taken the exemption under IFRS 1 in respect of goodwill, andtherefore the net book value of goodwill under UK GAAP at 31 December 2003became the deemed cost of goodwill as at the date of transition (1 January2004). Under IFRS this goodwill balance is no longer amortised but insteadsubject to an annual impairment review. The impact of adopting IFRS is to reverse the goodwill amortisation charged in2004 and to increase the carrying value of goodwill in the balance sheets dated30 June 2004 and 31 December 2004. 2. Other intangible assets Under UK GAAP research and development costs were expensed in the period theywere incurred. IAS 38 requires that when activity is undertaken for a new or asubstantially different product then this would be deemed to be developmentexpenditure. This development expenditure is to be capitalised from the pointin time that ALL of the following criteria are met: 1. the technical feasibility of completing an intangible asset so that it will be available for use or sale; 2. the intention to complete an intangible asset and use it or sell it 3. the ability to use or sell the intangible asset 4. how the intangible asset will generate probable future economic benefit. Among other things, the company can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally the usefulness of the intangible asset. 5. the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset 6. the ability to measure reliably the expenditure attributable to the intangible asset during its development Once ALL of the criteria 1 - 6 above are satisfied then the applicableexpenditure from that date until the date the new or substantially differentproduct goes into maintenance and support mode would be capitalised andamortised over the useful life of the asset. Microgen has reviewed the Group's development expenditure against the IAS 38capitalisation criteria and also reviewed best practice of internationalsoftware and solutions companies and has determined that the amount to becapitalised is nil and so all costs have been expensed. 3. Employee benefits Holiday pay IAS 19 requires that a liability for holiday pay is recorded for all accruedentitlement at each balance sheet date; this was not a requirement under UKGAAP. It is not company policy to allow staff to carry forward annual leave or to payany untaken annual leave; instead all staff are encouraged to take their fullentitlement. Therefore, IAS 19 only impacts interim results in ensuring thecorrect cost has been allocated to each half year. 4. Share based payments The Group has applied IFRS 2 to all share options awarded after 7 November 2002that had not vested before 31 December 2004. The standard requires that a costis recognised in the income statement based on the fair value of the options andthat this cost is spread over the vesting period of the scheme. The fair valueis measured using an option pricing model. Microgen has used the Black Scholes model to determine the value of optionsawarded under the SAYE Scheme and the Monte Carlo pricing model for sharesawarded under the executive share option schemes. Under UK GAAP no charge was recorded in the income statement for the award ofshare options as all awards were issued at market price. The impact of adoptingIFRS is to expense a new cost in the income statement. The deferred tax impact of the IFRS 2 change has also been incorporated into therestatement under IFRS. 5. Business combinations Under UK GAAP the cost of an acquisition over and above the value of the netassets was deemed to be goodwill. IFRS 3 requires that each acquisition isconsidered separately and a value attributed to any identifiable otherintangible assets such as software; customer lists and relationships; brandnames and in progress research and development. The goodwill cost is thereforethe difference between the consideration for the investment after deducting thevalue of net assets including other intangible assets. Microgen has considered the acquisition of AFA Systems plc in September 2004 anda value of £544,000 was attributed to customer contracts and relatedrelationships. This intangible asset will be amortised over the useful life ofthe asset which in this case is deemed to be 5 years. 6. Presentational changes The primary financial statements contained in this document have been presentedin accordance with IAS1 "Presentation of Financial Statements", IAS 7 "Cash FlowStatements" and IFRS 5 "Non-Current Assets Held for Sale and DiscontinuedOperations" a) Cash flows The Group has adopted IAS 7 "Cash Flow Statement". None of the adjustmentsarising from IFRS restatement relate to cash and therefore there is no impact onthe reported cash flows. Although there is no change to the cash flows of theGroup, the format of the cash flow statement has changed and cash flows are nowanalysed between Operating, Investing and Financing activities. b) Non-current assets held for sale Under UK GAAP there is no requirement to separate tangible assets to be usedwithin the business from those where the intention is to dispose of the assets.Microgen acquired two freehold properties as part of the MMT Computing plcacquisition in November 2003 which fall into this category as at 30 June 2004.IFRS 5 stipulates that such items are identified separately on the face of thebalance sheet. The impact for Microgen is to separate out these items on theface of the balance sheet and to revise the Tangible Fixed Assets note. c) Provisions Under UK GAAP there is no requirement to separate provisions between currentliabilities and non current liabilities. In adopting IFRS, Microgen has dividedthe provision for vacant properties between amounts due within one year, shownunder current liabilities, and those due after more than one year which areshown in non-current liabilities on the face of the balance sheet. d) Reclassification of profit on investment in other company Under UK GAAP the profit on disposal of an investment in other company was anexceptional item in the income statement shown after Operating profit. UnderIFRS this has been reclassified and although still an exceptional item it isincluded when arriving at operating profit. Appendix 1 Reconciliation of consolidated income statement for the six months ended 30 June 2004 UK GAAP IFRS Adjustments IFRS £'000 £'000 £'000Revenue 21,130 - 21,130Net operating expenses (19,943) 1,126 (18,817)Operating profit 1,187 1,126 2,313Interest receivable 163 - 163Interest payable (25) - (25)Profit before tax 1,325 1,126 2,451Tax (484) 13 (471)Profit for the period 841 1,139 1,980 Reconciliation of consolidated income statement for the year ended 31 December 2004 UK GAAP IFRS Adjustments IFRS £'000 £'000 £'000Revenue 42,444 - 42,444Net operating expenses (42,358) 3,241 (39,117)Operating profit 86 3,241 3,327Exceptional profit on disposal of investment in other 606 (606) -companyInterest receivable 479 - 479Interest payable (53) - (53)Profit before tax 1,118 2,635 3,753Tax (945) 32 (913)Profit after tax 173 2,667 2,840Minority Interest (25) - (25)Retained Profit 148 2,667 2,815 Appendix 1 - continued Analysis of IFRS income statement adjustments for the six months ended 30 June 2004 Share based Amortisation Amortisation Staff costs - Total IFRS impact payments of goodwill of intangibles holiday pay £'000 £'000 £'000 £'000 £'000Revenue - - - - -Net operating expenses (44) 1,317 - (147) 1,126Operating profit (44) 1,317 - (147) 1,126Interest receivable - - - - -Interest payable - - - - -Profit before tax (44) 1,317 - (147) 1,126Taxation 13 - - - 13Profit for the period (31) 1,317 - (147) 1,139 Analysis of IFRS income statement adjustments for the year ended 31 December 2004 Share based Amortisation Amortisation Reclassification of Total IFRS impact payments of goodwill of intangibles profit on disposal of investment in other company £'000 £'000 £'000 £'000 £'000Revenue - - - - -Net operating expenses (107) 2,774 (32) 606 3,241Operating profit (107) 2,774 (32) 606 3,241Exceptional profit on disposal - - - (606) (606)of investment in other company Interest receivable - - - - -Interest payable - - - - -Profit before tax (107) 2,774 (32) - 2,635Taxation 32 - - - 32Profit for the period (75) 2,774 (32) - 2,667 Appendix 2 Reconciliation of consolidated balance sheet as at 30 June 2004 UK GAAP IFRS impact IFRS £'000 £'000 £'000ASSETSNon-current assetsProperty, plant & equipment 4,297 (535) 3,762Goodwill 43,458 1,317 44,775Other intangible assets - - -Deferred tax asset 1,172 13 1,185Investments in other companies 2,678 - 2,678 51,605 795 52,400Current assetsInventories 127 - 127Trade and other receivables 7,456 - 7,456Cash and cash equivalents 9,083 - 9,083 16,666 - 16,666Non-current assets classified as held for sale - 535 535 16,666 535 17,201LIABILITIESCurrent liabilitiesTrade and other payables (10,964) (147) (11,111)Current tax liabilities - - -Provisions (2,384) 1,683 (701) (13,348) 1,536 (11,812) Net current assets 3,318 2,071 5,389 Non-current liabilitiesProvisions - (1,683) (1,683) NET ASSETS 54,923 1,183 56,106 SHAREHOLDERS' EQUITYOrdinary shares 4,347 - 4,347Share premium account 8,943 - 8,943Merger reserve 31,075 - 31,075Other reserves 334 - 334Retained earnings 10,035 1,183 11,218 EQUITY SHAREHOLDERS' FUNDS 54,734 1,183 55,917Minority interest 189 - 189TOTAL EQUITY 54,923 1,183 56,106 Appendix 2 - continued Reconciliation of consolidated balance sheet as at 31 December 2004 UK GAAP IFRS Impact IFRS £'000 £'000 £'000ASSETSNon-current assetsProperty, plant & equipment 3,774 - 3,774Goodwill 51,042 2,230 53,272Other intangible assets - 512 512Deferred tax asset 1,940 32 1,972Investments in other companies - - - 56,756 2,774 59,530Current assetsInventories 100 - 100Trade and other receivables 8,164 - 8,164Cash and cash equivalents 14,600 - 14,600 22,864 - 22,864Non-current assets classified as held for sale - - - 22,864 - 22,864LIABILITIESCurrent LiabilitiesTrade and other payables (14,769) - (14,769)Current tax liabilities (120) - (120)Provisions (2,444) 1,200 (1,244) (17,333) 1,200 (16,133) Net current assets 5,531 1,200 6,731 Non-current liabilitiesProvisions - (1,200) (1,200) NET ASSETS 62,287 2,774 65,061 SHAREHOLDERS' EQUITYOrdinary shares 5,079 - 5,079Share premium account 11,143 - 11,143Merger reserve 36,389 - 36,389Other reserves 334 - 334Retained earnings 9,342 2,774 12,116 EQUITY SHAREHOLDERS' FUNDS 62,287 2,774 65,061Minority Interest - - -TOTAL EQUITY 62,287 2,774 65,061 Appendix 2 - continued Analysis of IFRS balance sheet adjustments as at 30 June 2004 Amortisation Reclassification Staff Reclassification Deferred tax Total IFRS of goodwill of assets costs - of provision adjustment in impact holiday respect of pay Share based paymentsASSETS £'000 £'000 £'000 £'000 £'000 £'000Non-current assetsProperty, plant &equipment - (535) - - - (535)Goodwill 1,317 - - - - 1,317Other intangible assets - - - - - -Deferred tax asset - - - - 13 13Investments in other companies - - - - - - 1,317 (535) - - 13 795Current assetsInventories - - - - - -Trade and other receivables - - - - - -Cash and cash equivalents - - - - - - - - - - - -Non-current assets classified asheld for sale - 535 - - - 535 - 535 - - - 535LIABILITIESCurrent LiabilitiesTrade and other payables - - (147) - - (147)Current tax liabilities - - - - - -Provisions - - - (1,683) - (1,683) - - (147) (1,683) - (1,830)Net current assets/(liabilities) - - (147) (1,683) - (1,830) Non-current liabilitiesProvisions - - - 1 ,683 - 1,683NET ASSETS 1,317 - (147) - 13 1,183 SHAREHOLDERS' EQUITYOrdinary shares - - - - - -Share premium account - - - - - -Merger reserve - - - - - -Other reserves - - - - - -Retainedearnings 1,317 - (147) - 13 1,183EQUITY SHAREHOLDERS' FUNDS 1,317 - (147) - 13 1,183Minority interest - - - - - -TOTAL EQUITY 1,317 - (147) - 13 1,183 Appendix 2 - continued Analysis of IFRS balance sheet adjustments as at 31 December 2004 Amortisation Reclassification Amortisation Deferred tax Reclassification Total IFRS of goodwill of intangibles of intangibles adjustment in of provision impact respect of share based paymentsASSETS £'000 £'000 £'000 £'000 £'000 £'000Non-current assetsProperty, plant & equipment - - - - - -Goodwill 2,774 (544) - - - 2,230Other intangible assets - 544 (32) - - 512Deferred tax asset - - - 32 - 32Investments in other companies - - - - - - 2,774 - (32) 32 - 2,774Current assetsInventories - - - - - -Trade and other receivables - - - - - -Cash and cash equivalents - - - - - - - - - - - -Non-current assets classified as - - - - - -held for sale - - - - - -LIABILITIESCurrent LiabilitiesTrade and other payables - - - - - -Current tax liabilities - - - - - -Provisions - - - - (1,200) (1,200) - - - - (1,200) (1,200)Net current assets/ (liabilities) - - - - (1,200) (1,200)Non-current liabilitiesProvisions - - - - 1,200 1,200 NET ASSETS 2,774 - (32) 32 - 2,774 SHAREHOLDERS' EQUITYOrdinary shares - - - - - -Share premium account - - - - - -Merger reserve - - - - - -Other reserves - - - - - -Retained earnings 2,774 - (32) 32 - 2,774EQUITY SHAREHOLDERS' FUNDS 2,774 - - -Minority Interest - - - - - -TOTAL EQUITY 2,774 - (32) 32 - 2,774 Appendix 3 Reconciliation of Net Assets/Total Equity as at 1 January 2004 £'000 Total Net Equity/Total Assets under UK GAAP 54,081IFRS adjustments - ---------Total Net Equity/Total Assets under IFRS 54,081 ===== Appendix 4 Significant accounting policies under IFRS Basis of preparation European law requires that the Group's financial statements for the year ended31 December 2005 are prepared on the basis of IFRS as endorsed for use in theEuropean Union. IFRS are subject to amendment or interpretation by the IASB andthere is an ongoing process of review and endorsement by the EuropeanCommission. The financial information contained in this document has beenprepared on the basis of IFRS and International Financial ReportingInterpretations Committee "IFRIC" interpretations and with those parts of theCompanies Act 1985 applicable to companies reporting under IFRS that theDirectors expect to be applicable as at 31 December 2005. For the reasonsoutlined above, it is possible that the restated information for 2004 presentedin this document may be subject to change before its inclusion in the Group's2005 Report and Accounts, which will contain the Group's first completefinancial statements prepared in accordance with IFRS. The policies set out below have been consistently applied to all the periodspresented except for those relating to classification and measurement offinancial instruments. The Group has made use of the exemption available underIFRS 1 to only apply IAS 32 and IAS 39 from 1 January 2005. Basis of consolidation The financial statements consolidate the results of Microgen plc and itssubsidiary undertakings (subsidiaries). The results of the subsidiariesacquired are included within the consolidated income statement from the datethat control passes to the Group. They are de-consolidated from the date onwhich control ceases. Acquisitions are accounted for under the purchase methodof accounting. Subsidiaries are all entities over which the Group has the power to govern thefinancial and operating policies generally accompanying a shareholding of morethan one half of the voting rights. The purchase method of accounting is used to account for the acquisition ofsubsidiaries by the Group. The cost of an acquisition is measured as the fairvalue of the assets given, equity instruments issued and liabilities incurred orassumed at the date of exchange, plus costs directly attributable to theacquisition. Identifiable assets and liabilities and contingent liabilitiesassumed in a business combination are measured initially at their fair values atacquisition date, irrespective of the extent of any minority interest. Theexcess of cost of acquisition over the fair value of the Group's share of theidentifiable net assets is recorded as goodwill. Inter-company transactions, balances and unrealised gains on transactionsbetween group companies are eliminated on consolidation. Revenue Recognition Software revenues are recognised in accordance with the principles of US GAAPSOP 97 -2 which also complies with IAS 18 "Revenue". Software licences arerecognised as revenue when the software has been delivered, provided a signedagreement is in place, the licence fee is fixed and determinable, no specificvendor obligations remain and the collection of the fee is probable. Where thelicence fee relates to a specific term, this is recognised on a straight linebasis over the term of the licence. Revenue from consulting and other monthly services is recognised at the time theservice is performed. Revenue from maintenance and support contracts arerecognised over the term of the contract on a straight line basis. Segmental reporting A business segment is a group of assets and operations engaged in providingproducts and services that are subject to risks and returns that are differentto those from other segments. A geographical segment is engaged in providingproducts and services within a particular economic environment that is subjectto risks and returns that are different from those of segments in other economicenvironments. The primary segmental reporting is by business sector being Financial Servicesand Commercial. Leasing Leases where the lessor retains substantially all the risks and rewards areclassified as operating leases. Operating lease rentals are charged to theprofit and loss account on a straight line basis over the life of the lease. The Group has no finance leases. Inventories Inventories, which comprise raw materials and consumables have been valued atlower of cost and net realisable value. Property, plant and equipment Property, plant and equipment is shown at cost less subsequent depreciation andadjusted for any impairment or revaluation. Land is not depreciated. Costsinclude expenditure that is directly attributable to the acquisition of theitems. Depreciation is provided on assets so as to write off the cost of tangible fixedassets over their estimated useful lives by equal annual instalments at thefollowing rates. Freehold and long leasehold buildings 2 per centLeasehold improvements 20 per cent (or the life of the lease if shorter)Plant and Machinery 20 - 50 per centFixtures and Fittings 20 per cent Estimation of the useful economic life includes an assessment of the expectedrate of technological developments and the intensity at which the assets areexpected to be used. Goodwill Goodwill arising on consolidation represents the excess of the fair value of theconsideration given over the fair value of the identifiable net assets acquired.Goodwill is capitalised on the balance sheet and subject to an annualimpairment test. The carrying value of goodwill is cost less accumulatedimpairment losses. Other intangibles assets Research and development Research expenditure is expensed to the profit and loss account as incurred.Costs incurred on development projects relating to new or substantially improvedproducts are recognised as other intangible assets when there is evidence as tothe commercial and technical feasibility of the project. Technical feasibilityof software products is generally reached shortly before the product isreleased, costs incurred after technical feasibility is achieved are notmaterial and accordingly development costs are expensed when occurred. Identification of other intangibles Other intangible assets that are acquired by the Group as part of an acquisitionare stated at cost less accumulated amortisation and impairment losses. Theuseful life of each of these assets is assessed on an individual basis and canrange from 1 to 20 years. Amortisation is charged on a straight line basis overthe estimated useful life of the assets. Impairment of assets Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment and whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. Assetsthat are subject to amortisation are tested for impairment whenever events orchanges in circumstances indicate that the carrying amount may not berecoverable. An impairment loss is recognised for the amount by which theasset's carrying amount exceeds its recoverable amount. The recoverable amountis the higher of an asset's fair value less costs to sell and value in use. Forthe purposes of assessing impairment, assets are grouped at the lowest levelsfor which there are separately identifiable cash flows. Investments Financial fixed assets include investments in companies other than subsidiaries,which are recorded at cost, including additional direct charges. Cash and cash equivalents Cash is defined as cash in hand and on demand deposits. Cash equivalents aredefined as short term, highly liquid investments with original maturities ofthree months or less. Share options The cost of issuing share options is recognised in the income statement based onthe fair value of the options and this cost is spread over the period of theoptions. The fair value is measured using an option pricing model. The option pricing models used are the Black Scholes pricing model for the saveas you earn schemes and the Monte Carlo pricing model for the executive shareoption schemes. Foreign currency Items included within the financial statements of each of the Group's entitiesare measured using the currency of the primary economic environment in which theentity operates. The consolidated financial statements are presented insterling, which is the Group's functional and presentational currency. Foreign transactions are translated into the functional currency at the exchangerate ruling when the transaction is entered into. Foreign exchange gains andlosses resulting from the settlement of such transactions and from thetranslation at year-end exchange rates of monetary assets and liabilitiesdenominated in foreign currencies are recognised in the income statement. On consolidation, the balance sheet of each overseas subsidiary is translated atthe closing rate at the date of the balance sheet, and the income and expensesfor each income statement are translated at the average exchange rate for theperiod. Exchange gains and losses arising thereon are recognised in thecumulative translation adjustment within reserves. Exchange differences arising from the translation of the net investment inforeign subsidiaries and are taken to shareholders' equity on consolidation.When a foreign operation is sold, such exchange differences are recognised inthe income statement as part of the gain or loss on sale. Financial instruments 1 January 2004 to 31 December 2004 The Group did not use derivatives to manage its exposure to interest rates.Financial instruments were recognised in the balance sheet at their historicalcost with long term liabilities discounted to their present value. From 1 January 2005 onwards In order to manage exchange rate risk the company operates a policy of enteringinto forward contracts in respect of transactions with the group's overseasdevelopment operations. Outstanding forward contracts are recognised at theirfair value at each reporting date with any movement in the fair value taken tothe income statement. Pensions The Group operates money purchase pension schemes in respect of its UKemployees. The schemes are defined contribution schemes and employee andemployer contributions are based on basic earnings for the current year. Theschemes are funded by payments to a trustee-administered fund completelyindependent of the Group's finances. The expense is recognised on a monthlybasis as incurred Taxation Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the financial statements. Currently enacted taxrates are used in the determination of deferred income tax. Deferred tax assets are recognised to the extent that it is probable that futuretaxable profit will be available against which the temporary differences can beutilised. Trade receivables Trade receivables are recognised initially at fair value and subsequentlymeasured at amortised cost using the effective interest method, less provisionfor impairment. A provision for impairment of trade receivables is establishedwhen there is objective evidence that the Group will not be able to collect allamounts due according to the original terms of the receivables. The amount ofthe provision is the difference between the asset's carrying amount and thepresent value of estimated future cash flows, discounted at the effectiveinterest rate. The amount of the provision is recognised in the incomestatement. Provisions Provisions are created for vacant properties when the Group has a legalobligation for future expenditure. The provision is measured at the presentvalue of management's best estimate of the expenditure required to settle thepresent obligation at the balance sheet date. The discount rate used todetermine the present value reflects current market assessments of the timevalue of money and the increases specific to the liability. This information is provided by RNS The company news service from the London Stock Exchange