CML Microcircuits Regulatory News (CML)

15 Nov 2005 07:01

CML Microsystems PLC15 November 2005 CML Microsystems Plc Transition to International Financial Reporting Standards Introduction CML Microsystems Plc ("CML" or "the Group") has historically prepared itsconsolidated financial statements under UK Generally Accepted AccountingPractice (UK GAAP). Following the adoption by the United Kingdom of a EuropeanUnion (EU) Regulation issued on 19th July 2002, the Group is required to prepareits financial statements in accordance with International Accounting Standards(IAS) and International Financial Reporting Standards (IFRS) from 1st April2005. Accordingly the interim results for the period ended 30th September 2005will be the Group's first results to be prepared and reported under IFRS.The Group's financial performance and position is altered by the adoption ofIFRS, however, there is no change to the cash flows of the Group. This documentexplains how the Group's reported UK GAAP financial results for the year ended31st March 2005 and its financial position as at that date would have beenreported under IFRS. Although this document has been prepared in accordance withour current understanding of IFRS the accounting policies applied assume thatall existing standards in issue from the International Accounting StandardsBoard ("IASB") will be fully endorsed by the EU. Since these standards aresubject to ongoing amendment by the IASB and subsequent endorsement by the EUthese first IFRS statements are subject to possible change. This documentincludes: • the Group's consolidated Income statements for the period ended 30th September 2004 and year ended 31st March 2005; • the Group's consolidated balance sheets at 30th September 2004 and 31st March 2005 ; • the Group's consolidated cash flow statements for the period ended 30th September 2004 and the year ended 31st March 2005; • the Group's consolidated statement of changes in equity for the year ended 31st March 2005 and the period ended 30th September 2004; • a reconciliation of the Group's consolidated Income statements for the period ended 30th September 2004 and year ended 31st March 2005, from those prepared under UK GAAP to IFRS; • a reconciliation of the Group's consolidated balance sheets at 31st March 2004, 30th September 2004 and 31st March 2005, from those prepared under UK GAAP to IFRS; • the Group's accounting policies applied in the preparation of this financial information. In conjunction with our auditors, the Group has reviewed the changes necessaryto comply with IFRS. The financial information presented in this document isunaudited. The auditors, Baker Tilly, have reviewed this announcement and thefinancial information and accounting policies contained therein. Financial Impact SummaryThe full effect of the financial impact of IFRS in respect of the Group's yearended 31st March 2005 reported results is set out in detail later in thisdocument. A summary of the effect on the income statement for the year ended31st March 2005 is: Reconciliation of profit for the year ended 31st March 2005 2005 £'000UK GAAP profit for year (before dividend) 419Exchange differences (net of tax) (7)Share based payments (net of tax) (56)Removal of amortisation of goodwill 1,561Employee benefits - pension charge (net of tax) 57Capitalised research and development expenditure in excess of amortisation (net of tax) 512 ------------IFRS underlying profit on ordinary activities before tax 2,486 ------------ The key areas which will affect the financial statements and accountingpolicies as reported under UK GAAP are goodwill, share-based payments, employeebenefits, dividends and accounting for research and development costs. Thereporting under IFRS will change the Group's financial performance and position;however, there is no change to the cash flows of the Group. CML Microsystems Plc IFRS ResultsIFRS 1 "First-time Adoption of International Financial Reporting Standards" lays out the procedures that the Group must follow when it adopts IFRS for thefirst time as the basis for preparing its consolidated financial statements.Although in general the Group is required to apply the new accounting standardsretrospectively to determine its opening balance sheet this standard allowscompanies adopting IFRS for the first time to take certain exemptions from thefull requirements of IFRS in the year of transition. The group has elected totake the following exemptions: IFRS 2 - Share-based paymentsThe Group has elected to apply the exemption that allows entities to apply IFRS 2 to share based payment awards granted after November 2002. IFRS 3 - Business combinationsThe Group has elected not to apply IFRS 3 retrospectively to acquisitions thattook place prior to the date of transition. As a result, the carrying amount ofgoodwill in the UK GAAP balance sheet at 31st March 2004 is brought forward tothe IFRS opening balance sheet without adjustment. IAS 19 - Employee benefits - actuarial gains and lossesThe Group has elected to recognise all cumulative actuarial gains and losses atthe date of transition. IAS 21 - Foreign currenciesThe Group has elected to deem the cumulative amount of exchange differencesarising on consolidation of the net investments in subsidiaries at 1st April2004 to be zero. Key financial impactsThe most significant adjustments arising from the transition to IFRS werehighlighted in the 2005 Report and Accounts. These are set out in more detailbelow: Presentation of financial statementsThe presentation of the Groups primary financial statements has been presentedin accordance with IAS 1 "Presentation of Financial Statements". GoodwillUnder UK GAAP the Group was amortising the goodwill arising on the acquisitionof Hyperstone AG over a 36-month period. Under IAS 38 intangible assets with anindefinite life shall not be amortised, but tested for impairment annually.Though the Board considered the approach taken under UK GAAP to be the moreprudent, it has complied, as it is required to do, with the accounting approachunder IAS 38. Share-based paymentsIn accordance with IFRS2 the Group has recognised the cost of outstanding shareoptions granted. The fair value has been calculated using the Black-Scholesmodel. Deferred tax is provided based upon expected future deductions relatingto share based payments and is recognised over the vesting period of the schemeconcerned. Employee benefitsUnder IAS 19 the Group is required to separately recognise the operating andfinancing costs of defined benefit pension schemes. The group has adopted theamendment to IAS 19 issued on 16th December 2004 that allows all actuarial gainsand losses to be charged or credited to equity rather than in the incomestatement. Actuarial gains and losses will be recognised in full immediately inthe statement of recognised income and expenditure. Deferred tax is providedbased upon the expected future deductions or additions as appropriate. DividendsIFRS requires that dividends declared after the balance sheet date should not berecognised as a liability until approved by shareholders. Accordingly thedividend for the year ended 31st March 2005 and 31st March 2004 is not accruedin the balance sheet as at those dates. Accounting for research and developmentThe Group is continually engaged in significant research and development inrespect of new products and has concluded that the majority of this meets thecriteria as set out in IAS 19 for capitalisation. Though the Board considersthat the previous method of accounting under UK GAAP to be a more prudentapproach it has, as it is required to do, adopted accounting for thisexpenditure under IAS 19.Accordingly the Group has retrospectively reviewed all research and developmentexpenditure previously charged to the profit and loss account under UK GAAP todetermine its opening balance for this new asset class, amortising the assetover the appropriate period that has been decided to be between 2 and 4 years.This change in accounting policy has had the most significant impact on theGroups results when restated under IFRS since over the last four years theGroups overall research and development expenditure has significantly increased(2002-£1,942k; 2003-£2,276k; 2004-£2,817k; 2005-£3,578k) which when capitalisedand amortised must result in an increase in profits when restated. Cash flow statementAlthough there is no effect on the underlying cash receipts and expenditure ofthe Group, there are significant presentational changes. Under IAS 7 "Cash FlowStatements", the movement in cash and cash equivalents includes short -terminvestments with maturity of less than three months.The format of the of the cash flow statement shows cash flows analysed betweenoperating, investment and financing activities. Cash flows relating to tax areclassified within operating cash flows whereas under UK GAAP these items wereclassified separately from operating activities. George W Gurry 15th November 2005Chairman For further information contact:Nigel G ClarkFinancial Director and Company Secretary 01621 875500 CML Microsystems Plc Consolidated Income Statement (under IFRS) Year ended Six months ended 31st March 30th September 2005 2004 £'000 £'000Revenue 23,457 11,440Cost of sales (8,597) (4,435) -------------- -------------Gross profit 14,860 7,005 Distribution and administration costs (12,507) (5,819) -------------- ------------- 2,353 1,186 Other operating income 581 276 -------------- -------------Operating profit before adjustments 2,934 1,462 Restructuring costs (420) -Share based payment (79) (39) -------------- -------------Operating profit after adjustments 2,435 1,423 Finance cost (249) (118)Finance income 119 47 -------------- -------------Profit before tax 2,305 1,352 Taxation 181 (381) -------------- -------------Profit for the period attributable to equityshareholders 2,486 971 ============== ============= Earnings per shareBasic 16.77p 6.66p -------------- -------------Diluted 16.64p 6.56p -------------- ------------- Statement of Recognised Income and Expenditure (under IFRS) Year ended Six months ended 31st March 30th September 2005 2004 £'000 £'000Profit for the period attributable to equityshareholders 2,486 971 Foreign exchange differences (40) 77Actuarial losses (493) -Deferred tax 148 - -------------- -------------Recognised gains and losses relating to theperiod 2,101 1,048 ============== ============= CML Microsystems Plc Consolidated Balance Sheet (under IFRS) 31st March 30th September 2005 2004 £'000 £'000AssetsNon current assetsProperty, plant and equipment 7,193 6,828Investment properties 3,150 3,150Intangible assets - Research & development 5,089 4,629Intangible assets - Goodwill on consolidation 3,512 3,512Deferred tax asset 1,573 1,066 -------------- ------------- 20,517 19,185 -------------- -------------Current assetsInventories 1,723 1,991Trade receivables and prepayments 4,093 3,837Cash and cash equivalents 8,449 8,471 -------------- ------------- 14,265 14,299 -------------- ------------- Total assets 34,782 33,484 -------------- ------------- LiabilitiesCurrent liabilitiesBank loans and overdrafts 4,378 4,378Trade and other liabilities 4,086 4,788Current tax liabilities 272 418 -------------- ------------- 8,736 9,584 -------------- ------------- Non current liabilitiesDeferred tax liabilities 2,624 2,408Provisions 420 -Long term liabilities 3,504 3,093 -------------- ------------- 6,548 5,501 -------------- ------------- Total liabilities 15,284 15,085 -------------- ------------- Net Assets 19,498 18,399 ============== ============= EquityShare capital 744 741Convertible warrants 120 240Share premium 3,752 3,630Share based payments 83 42Capital Redemption Reserve 255 255Foreign exchange differences (40) 77Retained earnings 14,584 13,414 -------------- -------------Shareholders' equity 19,498 18,399 ============== ============= CML Microsystems Plc Consolidated Cash Flow Statement (under IFRS) Year ended Six months ended 31st March 30th September 2005 2004 £'000 £'000Operating activitiesNet profit for the period before income taxes 2,305 1,352Adjustments for:Depreciation 663 289Movement in pension deficit (82) -Amortisation of research and development 3,354 1,301Share based payments 79 39Exceptional restructuring costs 420 -Interest expense 235 118Interest income (119) (47)Increase in working capital 243 385 -------------- -------------Cash flows from operating activities 7,098 3,437Income tax refunded 142 284 -------------- -------------Net cash flows from operating activities 7,240 3,721 -------------- ------------- Investing activitiesPurchase of tangible fixed assets (1,351) (593)Investment in intangible assets (4,093) (1,579)Disposals of tangible fixed assets 99 53Interest income 119 47 -------------- -------------Net cash flows from investing activities (5,226) (2,072) -------------- ------------- Financing activitiesIssue of ordinary shares 47 41Dividends paid to group shareholders (1,556) (1,556)Interest expense (235) (118) -------------- -------------Net cash flows from financing activities (1,744) (1,633) -------------- ------------- Increase in cash and cash equivalents 270 16 ============== ============= Movement in cash and cash equivalents:At start of period 8,245 8,245Increase 270 16Effects of exchange rate changes (66) 210 -------------- -------------At end of period 8,449 8,471 ============== ============= CML Microsystems Plc Consolidated Statement of Changes in Equity Share Capital Convertible Share Premium Share based Capital Foreign Retained Total Warrants payments redemption Exchange earnings reserve differences £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1stApril 740 240 3,590 3 255 - 13,999 18,8272004 Shares 4 163 167issuedWarrantsconverted (120) (120)ForeignExchangedifferences (40) (40)Netactuariallossesrecogniseddirectly to (493) (493)equityDividends (1,556) (1556)paidProfit forperiod 2,486 2,486Share basedpayments 79 79Deferred 148 148tax ------- -------- ------- ------- -------- -------- ------- -------At 31stMarch 744 120 3,753 82 255 (40) 14,584 19,4982005 ======= ======== ======= ======= ======== ======== ======= ======= Share Capital Convertible Share Premium Share based Capital Foreign Retained Total Warrants payments redemption Exchange earnings reserve differences £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 At 1stApril 740 240 3,590 3 255 - 13,999 18,8272004 Shares 1 40 41issuedForeignExchangedifferences 77 77Netactuariallossesrecogniseddirectly toequityDividends (1,556) (1,556)paidProfit forperiod 971 971Share basedpayments 39 39 ------- -------- ------- ------- -------- -------- ------- -------At 30thSeptember 741 240 3,630 42 255 77 13,414 18,3992004 ======= ======== ======= ======= ======== ======== ======= ======= CML Microsystems PlcReconciliation of the group's consolidated income statement for the year ended31st March 2005 ------- ------- ------ ------- ------- Year ended IAS10 IAS19 IAS38 Foreign IFRS2 Year ended 31st March 2005 Dividend Employee Intangible Exchange Share based 31st March 2005 Under UK GAAP Benefits Assets Differences Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 23,459 (2) 23,457 Cost of (9,685) 1,071 17 (8,597)sales --------- ---------Gross 13,774 14,860profit Distribution& (12,256) 96 (332) (15) (12,507)admin costs --------- --------- 1,518 2,353 Otheroperatingincome 583 (2) 581 --------- ---------Operatingprofit beforeadjustment 2,101 2,934 Amortisationof goodwill (1,561) 1,561 -Restructuringcosts (420) (420)Share Basedpayment - (79) (79) --------- ---------Operatingprofit afteradjustments 120 2.435 Finance (235) (14) (249)costFinance 118 1 119income --------- ---------Profit beforetax 3 2,305 Taxation 416 (25) (227) (6) 23 181 --------- ---------Profit forthe 419 2,486period Dividendproposed/paid (1,564) 1,564 - --------- ---------Profit fortheperiodattributableto equity (1,145) 2,486shareholders --------- --------- Reconciliation of statement of recognised income and expenditure Profit for the period attributable to equityshareholders (1,145) 2,486 Foreign exchange differences (63) 23 (40) Actuarial losses - (493) (493) Deferred tax - 148 148 --------- ---------Recognised gains and losses relating to the (1,208) 2,101period --------- ------- ------- --------- CML Microsystems PlcReconciliation of the group's consolidated income statement for the 6 monthsended 30th September 2004 ------- ------ ------- ------- 6 months ended IAS10 IAS38 Foreign IFRS2 6 months ended 30th September Dividend Intangible Exchange Share based 30th September 2004 2004 Under UK GAAP Assets Differences Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 Revenue 11,559 (119) 11,440 Cost of (4,500) 65 (4,435)sales --------- ---------Gross 7,059 7,005profit Distribution& (6,139) 278 42 (5,819)admin costs --------- --------- 920 1,186 Otheroperatingincome 278 (2) 276 --------- ---------Operatingprofitbefore 1,198 1,462adjustments Amortisationof goodwill (781) 781 -Share Basedpayment - (39) (39) --------- ---------Operatingprofit afteradjustments 417 1,423 Finance (118) (118)costFinance 47 47income --------- ---------Profitbefore 346 1,352tax Taxation (305) (89) 1 12 (381) --------- ---------Profit fortheperiodattributableto equity 41 971shareholders --------- --------- Reconciliation of statement of recognised income and expenditure Profit for the period attributable to equity 41 971shareholders Foreign exchange differences 48 29 77 Actuarial losses - - --------- ---------Recognised gains and losses relating to the period 89 1,048 --------- ------- --------- CML Microsystems PlcReconciliation of the group's consolidated balance sheet as at 31st March 2004(the "opening " IFRS balance sheet) ------- ------- ------ ------- ------- IAS10 IAS19 IAS38 IAS12 IFRS2 31st March 2004 Dividend Employee Intangible Investment Share based 31st March 2004 Under UK GAAP Benefits Assets Property Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000Assets Non currentassetsProperty,plant andequipment 6,522 6,522Investmentproperties 3,150 3,150Intangibleassets - R & - 4,333 4,333DIntangibleassets -Goodwill 3,512 3,512Deferred taxasset 153 928 1 1,082 --------- --------- 13,337 18,599 --------- ---------CurrentassetsInventories 1,784 1,784Tradereceivablesandprepayments 3,388 3,388Cash and cashequivalents 8,413 8,413 --------- --------- 13,585 13,585 --------- --------- Total 26,922 32,184assets --------- --------- Liabilities CurrentliabilitiesBank loansand 4,546 4,546overdraftsTrade andotherliabilities 4,687 (1,554) 3,133Current taxliabilities 252 252 --------- --------- 9,485 7,931 --------- ---------Non currentliabilitiesDeferred taxliabilities 737 1,300 296 2,333Long termliabilities - 3,093 3,093 --------- --------- 737 5,426 --------- --------- Totalliabilities 10,222 13,357 --------- --------- Net assets 16,700 18,827 --------- --------- Equity Share 740 740capitalConvertiblewarrants 240 240Share 3,590 3,590premiumShare basedpayments - 3 3Capitalredemptionreserve 255 255Revaluationreserve 986 (986) -Retainedearnings 10,889 1,554 (2,165) 3,033 690 (2) 13,999 --------- ---------Shareholders'equity 16,700 18,827 --------- --------- CML Microsystems PlcReconciliation of the group's consolidated balance sheet as at 31st March 2005 ------- ------- ------ ------- ------- ------- IAS10 IAS19 IAS38 Foreign IAS12 IFRS2 31st March 2005 Dividend Employee Intangible Exchange Investment Share based 31st March 2005 Under UK GAAP Benefits Assets Differences Property Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000Assets Non currentassetsProperty,plant andequipment 7,195 (2) 7,193Investmentproperties 3,150 3,150Intangibleassets - R & - 5,089 5,089DIntangibleassets -Goodwill 1,951 1,561 3,512Deferred taxasset 497 1,051 25 1,573 -------- --------- 12,793 20,517 -------- ---------CurrentassetsInventories 1,723 1,723Tradereceivablesandprepayments 4,093 4,093Cash and cashequivalents 8,449 8,449 -------- --------- 14,265 14,265 -------- --------- Total 27,058 34,782assets -------- --------- Liabilities CurrentliabilitiesBank loansand 4,378 4,378overdraftsTrade andotherliabilities 5,649 (1,563) 4,086Current taxliabilities 272 272 -------- --------- 10,299 8,736 -------- ---------Non currentliabilitiesDeferred taxliabilities 801 1,527 296 2,624Provisions 420 420Long termliabilities - 3,504 3,504 -------- --------- 1,221 6,548 -------- --------- Totalliabilities 11,520 15,284 -------- --------- Net assets 15,538 19,498 -------- --------- Equity Share 744 744capitalConvertiblewarrants 120 120Share 3,752 3,752premiumShare basedpayments - 83 83Capitalredemptionreserve 255 255Revaluationreserve 986 (986) -Foreignexchangedifferences - (40) (40)Retainedearnings 9,681 1,563 (2,453) 5,121 40 690 (58) 14,584 -------- ---------Shareholders'equity 15,538 19,498 -------- --------- CML Microsystems PlcReconciliation of the group's consolidated balance sheet as at 30th September2004 ------ ------ ------- ------- ------- ------- IAS10 IAS19 IAS38 Foreign IAS12 IFRS2 30th September Dividend Employee Intangible Exchange Investment Share based 30th September 2004 2004 Under UK GAAP Benefits Assets Differences Property Payments Restated Under IFRS £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000Assets Non currentassetsProperty,plant andequipment 6,828 6,828Investmentproperties 3,150 3,150Intangibleassets - R & - 4,629 4,629DIntangibleassets -Goodwill 2,732 780 3,512Deferred taxasset 126 928 12 1,066 ------- ------- 12,836 19,185 ------- -------CurrentassetsInventories 1,991 1,991Tradereceivablesandprepayments 3,837 3,837Cash and cashequivalents 8,471 8,471 ------- ------- 14,299 14,299 ------- ------- Total 27,135 33,484assets ------- ------- Liabilities CurrentliabilitiesBank loansand 4,378 4,378overdraftsTrade andotherliabilities 4,786 2 4,788Current taxliabilities 418 418 ------- ------- 9,582 9,584 ------- -------Non currentliabilitiesDeferred taxliabilities 723 1,389 296 2,408Provisions - -Long termliabilities - 3,093 3,093 ------- ------- 723 5,501 ------- ------- Totalliabilities 10,305 15,085 ------- ------- Net assets 16,830 18,399 ------- ------- Equity Share 741 741capitalConvertiblewarrants 240 240Share 3,630 3,630premiumShare basedpayments - 42 42Capitalredemptionreserve 255 255Revaluationreserve 986 (986) -Foreignexchangedifferences - 77 77Retainedearnings 10,978 (2) (2,165) 4,020 (77) 690 (30) 13,414 ------- -------Shareholders'equity 16,830 18,399 ------- ------- CML Microsystems PlcAccounting Policies Basis of accountingThe financial statements have been prepared in accordance with IAS and IFRSissued by the IASB. The accounting polices applied assume that all existingstandards in issue from the IASB will be fully endorsed by the EU. These aresubject to amendment by the IASB and subsequent endorsement by the EU and aretherefore subject to possible change. The financial statements have been prepared under the historical cost conventionwith the exception of investment properties, which are carried at valuation. The consolidated financial statements for the year ended 31st March 2006 will bethe Group's first full IFRS financial statements. Comparative information at31st March 2005 and for the year then ended has been restated under IFRS. The Group has elected to take certain optional exemptions contained in IFRS 1"First time Adoption of IFRS" in preparing the Group's balance sheet ontransition to IFRS. These exemptions apply to accounting under IFRS 2 "Sharebased payments", IAS 19 "Employee Benefits" and IAS 21 "Cumulative TranslationDifferences". Basis of consolidationThe financial statements incorporate the financial statements of the Company andits subsidiary undertakings using the acquisition method of accounting. Theresults of acquired subsidiary undertakings are included from the date ofacquisition. Segmental reportingThe Group's primary reporting format is in two segments being Semi-conductorComponents and Equipment. These individual segments are engaged in separatebusiness sectors and are subject to different risks and returns. RevenueRevenue represents the total amount receivable by the Group for the sale of itsproduct or services to third parties in respect of deliveries of goods andservices rendered during the year, excluding local sales tax. Foreign CurrenciesAssets and liabilities denominated in foreign currencies are translated at therates of exchange ruling at the balance sheet date. Transactions in foreigncurrencies are recorded at the rates ruling at the date of the transactions. Alldifferences are taken to the profit and loss account. The income statements of overseas subsidiaries are translated into sterling atthe average rate for the period. Translation differences are dealt with throughthe Foreign Exchange differences reserve in shareholders funds. The Group has elected to deem the cumulative amount of exchange differencesarising on consolidation of the net investments in subsidiaries at 1st April2004 to be zero. Tangible Fixed AssetsAll tangible fixed assets, other than investment properties, are stated athistoric cost.Depreciation is provided on all tangible fixed assets other than freehold landand investment properties at rates calculated to write each asset down to itsestimated residual value evenly over its expected useful life as follows: Freehold and long leasehold premises 2% straight lineShort leasehold premises period of leasePlant and equipment: Fixtures and fittings 20% reducing balanceOther equipment 20% & 25% straight lineMotor Vehicles 25% straight line Investment PropertiesInvestment properties comprise freehold and long leasehold land and buildings.Investment properties are carried at fair value in accordance with IAS 40'Investment Properties'. Properties are recognised as investment properties whenheld for long-term rental yields, and after consideration has been given to anumber of factors including length of lease, quality of tenant and covenant,value of lease, management intention for future use of property, planningconsents and percentage of property leased. Investment properties are revaluedannually by the directors and every third year by professional externalsurveyors and included in the balance sheet at their fair value. Gains or lossesarising from changes in the fair values of assets are recognised in theconsolidated income statement. In accordance with IAS 40, investment propertiesare not depreciated. Intangible Assets - GoodwillGoodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets of the acquired subsidiaryat the date of acquisition. Historically the Group's policy for goodwill arisingon acquisition of a subsidiary undertaking was to write it off directly againstreserves but following the introduction of Financial Reporting Standard 10goodwill arising on the acquisition of a subsidiary undertaking was capitalised,classified as an asset and amortised over its economic useful life. Under IFRS 1the Group has elected to adopt the 31st March 2004 balance sheet amortised valueprepared under UK GAAP for goodwill and carry out annual impairment reviews asrequired under IAS 38. Intangible Assets - Research and DevelopmentResearch and development assets that fall within the scope of IAS 19 are shownat historical cost less accumulated amortisation since research and developmenthas a definite useful life. Amortisation is calculated using the straight linemethod to allocate the cost of the research and development over its estimateduseful life of between 2 and 4 years. Research and development expenditure that falls outside the scope of IAS 19 ischarged to the income statement when it is incurred. InventoriesInventories are valued on a first in, first out basis and are stated at thelower of cost and net realisable value. In respect of work in progress andfinished goods, cost comprises direct materials, direct labour and a proportionof overhead expenses appropriate to the business. Cash and Cash EquivalentsCash and cash equivalents include cash in hand, deposits held at call withbanks, other short-term highly liquid investments with original maturities ofthree months or less, and bank overdrafts where there is a set off arrangementwith the bank. Other bank overdrafts are shown within borrowings in currentliabilities on the balance sheet. Income taxThe charge for current income tax is based on the results for the year asadjusted for items which are not taxed or disallowed. It is calculated using taxrates that have been enacted or substantively enacted by the balance sheet date. Deferred income tax is accounted for using the liability method in respect oftemporary differences arising from differences between the tax bases of assetsand liabilities and their carrying amounts in the financial statements. In principle, deferred tax liabilities are recognised for all taxable temporarydifferences and deferred tax assets are recognised to the extent that it isprobable that taxable profits will be available against which deductibletemporary differences can be utilised. Such assets and liabilities are notrecognised if the temporary difference is due to goodwill arising on a businesscombination or from an asset or liability, the initial recognition of which doesnot affect either taxable or accounting income. In respect of the deferred tax on the revaluation surplus, this is calculated onthe basis of the chargeable gains that would crystallise on the sale of theinvestment portfolio as at the reporting date. The calculation takes account ofindexation on the historic cost of the properties and any available capitallosses. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries except where the Group is able to controlthe reversal of the temporary difference and it is probable that the temporarydifference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply to theperiod when the asset is realised or liability is settled. Deferred tax ischarged or credited in the income statement, except when it relates to itemscredited or charged directly to shareholders' equity, in which case the deferredtax is also dealt with in shareholders' equity. InvestmentsFixed asset investments are stated at cost less any provision for diminution onvalue. Investments held as current assets are stated at the lower of cost andnet realisable value. Employee Benefits - Pension ObligationsGroup companies operate both defined benefit and defined contribution pensionschemes. The schemes are funded through payments to funds administered bytrustees and these are determined by periodic actuarial calculations in respectof the defined benefit pension schemes. The Group has elected to recognise all cumulative actuarial gains and losses inrelation to employee defined benefit schemes at the date of transition. The liability recognised in the balance sheet in respect of the defined benefitpension schemes is the present value of the defined benefit obligation at thebalance sheet date less the fair value of the scheme assets. Independentactuaries using the projected unit method calculate the defined benefitobligation annually. Past service costs are included where the benefits have vested, otherwise theyare amortised on a straight line basis over the vesting period. The expectedreturn on assets of the defined benefit pension plan and the imputed interest onthe pension plan liabilities comprise the pension element of the net financecost/income in the income statement. Differences between the actual and expected return on assets, changes to theretirement benefit obligation due to experience and changes in actuarialassumptions are included in the statement of recognised income and expense infull in the period in which they arise. For defined contribution schemes, contributions are recognised as an employeebenefit expense when they are due. Employee Benefits - Share Based PaymentsThe Group has taken advantage of the transitional provisions that allows it toapply IFRS 2 to share option awards granted after 7th November 2002 that had notvested on or before 31st March 2005. Share options are valued using the Black Scholes model. This fair value ischarged to the income statement over the vesting period of the share basedpayment scheme. The value of the charge is adjusted to reflect expected andactual levels of options vesting. EU GrantsEU grants receivable to assist the Group with costs in respect of developmentwork are credited to the income statement so as to match them with theexpenditure to which they relate. LeasesLeases of property, plant and equipment where the Group has substantially allthe risk and rewards of ownership are classified as finance leases. The Grouphas no such leases. Leases in which a significant number of the risks andrewards of ownership are retained by the lessor are classified as operatingleases. Rental payments under operating leases are charged to the incomestatement on a straight-line basis. DividendsFinal dividends proposed by the Board of Directors and unpaid at the year endare not recognised in the financial statements until they have been approved bythe shareholders at the Annual General Meeting. Interim dividends, which do notrequire shareholder approval are recognised when they are approved by the Boardof Directors. This information is provided by RNS The company news service from the London Stock Exchange