K3 Business Technology Group Regulatory News (KBT)

6 Sep 2007 16:09

K3 Business Technology Group PLC06 September 2007 KBT.L 6 September 2007 K3 BUSINESS TECHNOLOGY GROUP PLC ("K3" or "The Group") IT solutions supplier to the supply chain industry Announces International Financial Reporting Standards K3 Business Technology Group plc is presenting a summary of its accounts for theyear ended 31 December 2006 and half year financial statements for the periodended 30 June 2006, restated under International Financial Reporting Standards('IFRS') as adopted by the European Union. The change to accounting basis arisesfrom legislation requiring all AIM listed companies to apply IFRS in theirfinancial statements. The disclosures include guidance as to the effect of IFRS on the Group'sreported results and balance sheets and comparative figures expected to be usedin the half year financial statements for the period to 30 June 2007 and fullyear financial statements to 31 December 2007. Enquiries: K3 David Bolton (CFO) T: 01282 864 111 Biddicks Katie Tzouliadis T: 020 7448 1000 Daniel Stewart (NOMAD) Paul Shackleton T: 020 7776 6550 Adoption of International Financial Reporting Standards ('IFRS') Summary of results presented under IFRS Introduction On 12 March 2007 K3 reported its financial results for the year ended 31December 2006, prepared for the last time under UK Generally Accepted AccountingPractice ('UK GAAP'). Going forward the Group will prepare its consolidatedfinancial statements in accordance with IFRS as required for all AIM listedcompanies. K3's first reported IFRS results will be for the six months to 30June 2007 and the Group's first annual report under IFRS will be for the year to31 December 2007. The impact on the reporting of our results is not significant and the underlyingperformance of the business and its cash flows remain unaffected. Dividendpolicy and distributable profits are unaffected. This announcement describes for investors the key impacts of the conversion fromUK GAAP to IFRS on the Group's results for the year to 31 December 2006 and thekey judgements in making the transition to IFRS which are expected to form thecomparative figures for both the half year financial statements for the sixmonths to 30 June 2007 and those for the year to 31 December 2007. Key financial highlights The key financial highlights of adopting IFRS for the 31 December 2006 financialstatements are: UK GAAP Adjustment IFRS £000 £000 £000 Profit from operations 763 2,070 2,833Adjusted profit from operations (*1) 2,928 (10) (*2) 2,918Profit before tax 501 2,070 2,571Taxation (810) (36) (846)Retained (loss) profit (309) 2,034 1,725Basic EPS (pence) (1.7) 11.2 9.5Adjusted EPS (pence) (*3) 11.5 (1.0) (*4) 10.5Goodwill 13,604 2,080 15,684Total equity 12,371 2,057 14,428 *1 Calculated before amortisation of goodwill under UK GAAP of £2.08m and cost of share-based payments of £0.09m *2 Calculated before cost of share-based payments of £0.09m *3 Calculated before amortisation of goodwill under UK GAAP of £2.08m, cost of share-based payments of £0.09m and profit on sale of disposal group (net of tax) of £0.11m. *4 Calculated before cost of share-based payments (net of tax) of £0.06m and profit on sale of disposal group (net of tax) of £0.11m The key financial highlights of adopting IFRS for the 30 June 2006 half yearfinancial statements are: UK GAAP Adjustment IFRS £000 £000 £000 Profit from operations 190 935 1,125Adjusted profit from operations (*5) 1,269 (105) (*6) 1,164Profit before tax 50 935 985Taxation (354) 12 (342)Retained (loss) profit (304) 947 643Basic EPS (pence) (1.7) 5.3 3.6Adjusted EPS (pence) (*7) 4.5 (0.7) (*8) 3.8Goodwill 14,656 1,040 15,696Total equity 10,534 942 11,476 The Group's date of transition to IFRS is 1 January 2006, being the start of theprevious period that will be presented as comparative information. This document sets out the changes in accounting policies arising from theadoption of IFRS and presents restated information for the opening balance sheetat 1 January 2006, the six months ended 30 June 2006 and the year ended 31December 2006 which were previously published under UK GAAP. *5 Calculated before amortisation of goodwill under UK GAAP of £1.04m and cost of share-based payments of £0.04m *6 Calculated before cost of share-based payments of £0.04m *7 Calculated before amortisation of goodwill under UK GAAP of £1.04m and cost of share-based payments (net of tax) of £0.03m *8 Calculated before cost of share-based payments (net of tax) of £0.03m 1. Explanation of transition to IFRS The Group's financial statements for the year ending 31 December 2007 will bethe first annual financial statements that comply with IFRS. The Group willapply IFRS 1 in preparing the half year financial statements. The last financialstatements under UK GAAP were for the year ended 31 December 2006 and the dateof transition was therefore 1 January 2006. Presented below is thereconciliation of profit for the year ended 31 December 2006 and thereconciliations of equity at 1 January 2006, being the start of that period("Transition Date") and at 31 December 2006 (date of last UK GAAP financialstatements) as required by IFRS 1. In addition, the reconciliation of equity at30 June 2006 and the reconciliation of profit for the six months ended 30 June2006 have been included below as required by IFRS 1 to enable a comparison ofthe 2006 half year figures with those published in the corresponding period ofthe previous financial year. For explanations of the nature and effect of thechanges in accounting policies as a consequence of the transition to IFRS, referto note 2 of this document. (i) Reconciliation of UK GAAP consolidated profit and loss account to IFRS income statement for the six months ended 30 June 2006 Six months ended 30 June 2006 Notes UK GAAP Effect of IFRS Unaudited transition to Unaudited £000 IFRS Unaudited £000 £000 Revenue 12,733 - 12,733Cost of sales (4,999) - (4,999)Gross profit 7,734 - 7,734Administrative expenses:Amortisation of goodwill and a (1,106) 1,040 (66)intangiblesShare based payments (39) - (39)Other administrative expenses b (6,399) (105) (6,504)Total administrative expenses (7,544) 935 (6,609)Profit from operations 190 935 1,125Finance income - 2 2Finance costs (140) (2) (142)Profit before taxation 50 935 985Taxation d (354) 12 (342)(Loss) profit after taxation (304) 947 643 (ii) Reconciliations of UK GAAP consolidated profit and loss account to IFRS income statement for the year ended 31 December 2006 Year ended 31 December 2006 Notes UK GAAP Effect of IFRS (unaudited) transition to (unaudited) £000 IFRS £000 (unaudited) £000 Revenue 27,346 - 27,346Cost of sales (10,641) - (10,641)Gross profit 16,705 - 16,705Administrative expenses:Amortisation of goodwill and a (2,198) 2,080 (118)intangiblesShare based payments (85) - (85)Other administrative expenses b (13,659) (10) (13,669)Total administrative expenses (15,942) 2,070 (13,872)Profit from operations 763 2,070 2,833Finance income - 21 21Finance costs (262) (21) (283)Profit before taxation 501 2,070 2,571Taxation d (810) (36) (846)(Loss) profit after taxation (309) 2,034 1,725 (iii) Reconciliation of UK GAAP consolidated profit to IFRS consolidated profit Notes Six months Year ended ended 31 December 30 June 2006 2006 £000 £000 Loss after tax as reported under UK GAAP (304) (309) Adjustments for:Short-term employee benefits b (105) (10)Goodwill a 1,040 2,080Deferred tax d 12 (36) Profit after tax as reported under IFRS 643 1,725 (iv) Reconciliations of consolidated balance sheet at 1 January 2006 from UK GAAP to IFRS Notes UK GAAP Effect of IFRS (audited) transition to (unaudited) £000 IFRS £000 (unaudited) £000ASSETSNon Current AssetsProperty, plant and equipment 508 - 508Goodwill a 15,682 - 15,682Other intangible assets 162 - 162Deferred tax d - 237 237Total Non Current Assets 16,352 237 16,589Current AssetsTrade receivables 5,210 - 5,210Other current assets 1,174 - 1,174Cash and cash equivalents 874 - 874Deferred tax d 212 (212) -Total Current Assets 7,470 (212) 7,258Total Assets 23,822 25 23,847EQUITYShare capital 4,435 - 4,435Share premium account 7,813 - 7,813Other reserves 6,070 - 6,070Retained earnings a ,b, c (7,518) (23) (7,541)Translation reserve c - - -Total equity attributable to 10,800 (23) 10,777equity holders of the parentLIABILITIESNon Current LiabilitiesLong-term borrowings 2,439 - 2,439Total Non Current Liabilities 2,439 - 2,439Current LiabilitiesTrade and other payables b 9,571 48 9,619Current tax liabilities 223 - 223Short-term borrowings 789 - 789Total Current Liabilities 10,583 48 10,631Total Liabilities 13,022 48 13,070Total Equity and Liabilities 23,822 25 23,847 (v) Reconciliation of consolidated balance sheet at 31 December 2006 from UK GAAP to IFRS Notes UK GAAP Effect of IFRS (unaudited) transition to (unaudited) £000 IFRS £000 (unaudited) £000ASSETSNon Current AssetsProperty, plant and equipment 416 - 416Goodwill a 13,604 2,080 15,684Other intangible assets 273 - 273Investments in other companies 1,398 - 1,398Deferred tax assets d - 191 191Total Non Current Assets 15,691 2,271 17,962Current AssetsTrade receivables 7,129 - 7,129Other current assets 1,493 - 1,493Cash and cash equivalents 2,267 - 2,267Deferred tax assets d 156 (156) -Total Current Assets 11,045 (156) 10,889Total Assets 26,736 2,115 28,851 EQUITYShare capital 4,872 - 4,872Share premium account 1,388 - 1,388Other reserves 6,070 - 6,070Retained earnings a ,b, c 41 2,072 2,113Translation reserve c - (15) (15)Total equity attributable to 12,371 2,057 14,428equity holders of the parentLIABILITIESNon Current LiabilitiesLong-term borrowings 711 - 711Provisions - - -Total Non Current Liabilities 711 - 711Current LiabilitiesTrade and other payables b 11,790 58 11,848Current tax liabilities 1,003 - 1,003Short-term borrowings 861 - 861Provisions - - -Total Current Liabilities 13,654 58 13,712Total Liabilities 14,365 58 14,423Total Equity and Liabilities 26,736 2,115 28,851 (vi) Reconciliation of consolidated balance sheet as at 30 June 2006 from UK GAAP to IFRS Notes UK GAAP Effect of IFRS (unaudited) transition to (unaudited) £000 IFRS £000 (unaudited) £000ASSETSNon Current AssetsProperty, plant and equipment 484 - 484Goodwill a 14,656 1,040 15,696Other intangible assets 239 - 239Deferred tax d - 267 267Total Non Current Assets 15,379 1,307 16,686Current AssetsTrade receivables 5,934 - 5,934Other current assets 1,579 - 1,579Cash and cash equivalents 64 - 64Deferred tax d 212 (212) -Total Current Assets 7,789 (212) 7,577Total Assets 23,168 1,095 24,263 EQUITYShare capital 4,435 - 4,435Share premium account 7,813 - 7,813Other reserves 6,070 - 6,070Retained earnings a ,b, c (7,784) 942 (6,842)Translation reserve c - - -Total equity attributable to 10,534 942 11,476equity holders of the parentLIABILITIESNon Current LiabilitiesLong-term borrowings 2,186 - 2,186Total Non Current Liabilities 2,186 - 2,186Current LiabilitiesTrade and other payables b 9,044 153 9,197Current tax liabilities 622 - 622Short-term borrowings 782 - 782Total Current Liabilities 10,448 153 10,601Total Liabilities 12,634 153 12,787Total Equity and Liabilities 23,168 1,095 24,263 (vii) Reconciliation of consolidated equity from UK GAAP to IFRS Notes 1 January 30 June 31 December 2006 2006 2006 £000 £000 £000 Total equity as reported under 10,800 10,534 12,371UK GAAP Adjustments for: Short-term employee benefits b (48) (153) (58)Goodwill a - 1,040 2,080Deferred tax d 25 55 35 Total equity as reported under 10,777 11,476 14,428IFRS 2. Explanation of adjustments to equity at 31 December 2006, 30 June 2006and 1 January 2006 and to profit for the year ended 31 December 2006 and for thesix months ended 30 June 2006 The transition to IFRS resulted in the following changes: a. Goodwill Goodwill is not amortised under IFRS but is measured at cost less impairmentlosses. Under UK GAAP, goodwill was amortised on a straight-line basis over thetime that the Group was estimated to benefit from it. The change does not affectequity at 1 January 2006 because, as permitted by IFRS 1, goodwill arising onacquisitions before 1 January 2006 (date of transition to IFRS) has been frozenat the UK GAAP amounts subject to being tested for impairment at that date, theresults of which assessment indicated no such impairment. The adjustmentsincrease profits for the six months to 30 June 2006 by £1,040,000 and for theyear to 31 December 2006 by £2,080,000 with corresponding increases in retainedearnings. b. Short-term employee benefits IAS 19 Employee benefits requires the expense of services rendered that increaseemployees' entitlement to future compensated absence (i.e. paid holiday) to berecognised in the period. Therefore, the cost of holidays earned but not takenat the balance sheet date has been accrued for. The adjustments decrease profitsfor the six months to 30 June 2006 by £105,000 and for the year to 31 December2006 by £10,000; retained earnings are reduced by £48,000 at 1 January 2006,£153,000 at 30 June 2006 and £58,000 at 31 December 2006. c. Other reserves As permitted by IFRS 1, the cumulative translation differences arising onconsolidation of overseas subsidiaries has been set to zero as at 1 January2006. The foreign exchange differences arising after that date on consolidationhave been credited to the translation reserve within equity rather than toretained earnings. The adjustments are £nil for the six months to 30 June 2006and £15,000 for the year to 31 December 2006. d. Deferred tax Deferred tax assets have been reclassified as Non Current Assets. The amountsreclassified are £212,000 at 1 January 2006 and 30 June 2006 and £156,000 at 31December 2006. Differences in timing between the recognition of accounting for tax chargesunder IAS and the deduction of amounts in the corporation tax computations nowcreate temporary differences resulting in deferred tax rather than permanentdifferences under UK GAAP on which no deferred tax balances were recognised. The capitalisation of development costs has resulted in the creation of adeferred tax liability and the recognition of holiday pay accruals under IAS hasresulted in a deferred tax asset. IAS 12 applies to all share based payments and is not time restricted to thoseissued post 7 November 2002. Under IAS 12 the deferred tax recognised throughthe profit and loss account cannot exceed 30% of the share-based payment chargeon a cumulative basis; the balance is therefore adjusted to equity. The net effect of the above adjustments is an increase in the deferred tax assetat 1 January 2006 of £25,000, £55,000 at 30 June 2006 and £35,000 at 31 December2006. The cumulative amounts credited directly to equity in respect ofshare-based payments are £8,000 at 1 January 2006, £26,000 at 30 June 2006 and£54,000 at 31 December 2006. e. Exemptions IFRS 1 First-time Adoption of International Financial Reporting Standards setsout the transition rules, which must be applied, when IFRS is adopted for thefirst time. The standard sets out certain mandatory exemptions to retrospectiveapplication and certain optional exemptions. The most significant optionalexemptions available and taken by the Group are as follows: (i) Business combinations: the Group has adopted the exemption under IFRS1 relating to business combinations which occurred before the date oftransition, 1 January 2006. The goodwill arising from combinations before thatdate therefore remains at the amount shown under UK GAAP at 1 January 2006,subject to any subsequent impairment. (ii) Share-based transactions: The Group adopted the exemption in IFRS 1which allows a first-time adopter to apply the standard only to share optionsand equity instruments granted after 7 November 2002 that have not vested by 1January 2006. (iii) Cumulative translation differences: Under IAS 21, the effects ofchanges in foreign exchange rates, and cumulative translation differences aretracked within reserves and are recycled from equity to the income statement ondisposal of a foreign operation. In order to eliminate the need toretrospectively apply this requirement, the Group took the exemption to setcumulative translation differences to zero at the date of transition. 3. Basis of preparation Basis of preparation The half year financial statements to be announced on 7 September 2007, will beprepared in accordance with the accounting policies the Group expects to adoptin its 2007 annual report. These accounting policies are based on the IAS, IFRSand IFRIC interpretations that the Group expects to be applicable at that time.The IFRS and IFRIC interpretations that will be applicable at 31 December 2007,including those that will be applicable on an optional basis, are not known withcertainty at the time of preparing the half year financial statements, althoughthe International Accounting Standards Board has stated that it will not issueany further statements during 2007. The Group's consolidated financial statements were prepared in accordance withUK GAAP until 31 December 2006. The Group has applied those IAS, IFRS and IFRICinterpretations expected to be applicable in the 31 December 2007 financialstatements to the half year financial statements. Reconciliations betweenpreviously reported financial statements prepared under UK GAAP and the IFRSequivalents are presented for profit for the year ended 31 December 2006 and thesix months ended 30 June 2006 and total equity as at 31 December 2006, 30 June2006 and 1 January 2006 in note 2 of this document. IFRS 1 provides certain optional exemptions from full retrospective applicationof all accounting standards effective at the Group's reporting date. Asdiscussed in more detail in the relevant sections above, the Group has takenadvantage of the exemptions relating to: business combinations, cumulativetranslation differences and share-based payment transactions. The Group has nottaken advantage of the available optional exemption relating to fair valuemeasurement of financial assets and financial liabilities at initialrecognition. The comparatives for the full year ended 31 December 2006 are not the Group'sstatutory accounts for that year. A copy of the statutory accounts for thatyear, which were prepared under UK GAAP, have been delivered to the Registrar ofCompanies. The auditors' report on those accounts was unqualified, did notinclude references to any matters to which the auditors drew attention by way ofemphasis without qualifying their report and did not contain a statement underSection 237(2)-(3) of the Companies Act 1985. This document is unaudited. 4. Summary of significant accounting policies The significant accounting policies which the Group will be applying to its halfyear financial statements for the six months to 30 June 2007 and which itexpects to apply in its full financial statements for the year ending 31December 2007 are set out below. Principles of consolidation The consolidated half year financial statements incorporate the half yearfinancial statements of the Group and all its subsidiaries. Intra-grouptransactions, including sales, profits, receivables and payables, have beeneliminated on the Group consolidation. Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Grouphas the power, directly or indirectly, to govern the financial and operatingpolicies of an entity so as to obtain benefits from its activities. In assessingcontrol, potential voting rights that presently are exercisable or convertibleare taken into account. The financial statements of subsidiaries are includedfrom the date that control commences until the date that control ceases. Business combinations The results of subsidiaries acquired in the period are included in the incomestatement from the date they are acquired. On acquisition, all of thesubsidiaries' assets and liabilities that exist at the date of acquisition arerecorded at their fair values reflecting their condition at that date. Goodwill All business combinations are accounted for by applying the purchase method.Goodwill represents the excess of the fair value of the consideration paid onacquisition of a business over the fair value of the assets, including anyintangible assets identified, liabilities and contingent liabilities acquired.Goodwill is not amortised but is measured at cost less impairment losses. Indetermining the fair value of consideration, the fair value of equity issued isthe market value of equity at the date of completion, and the fair value ofcontingent consideration is based upon the extent to which the directors believeperformance conditions will be met and thus whether any further considerationwill be payable. As permitted by IFRS 1, goodwill arising on acquisitions before 1 January 2006(date of transition to IFRS) has been frozen at the UK GAAP amounts subject tobeing tested for impairment at that date. Goodwill is tested for impairment atleast annually. The Group performs its impairment reviews at the cash-generatingunit level. Any impairment is recognised immediately in profit and loss and isnot subsequently reversed. On disposal of a subsidiary, the attributable net book value of goodwill isincluded in the determination of the profit or loss on disposal. Research and development expenditure Expenditure on research activities is recognised as an expense in the period inwhich it is incurred. An internally-generated intangible asset arising from theGroup's software development is recognised only if all of the followingconditions 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 measured reliably. The expenditure capitalised represents the cost of direct labour incurred indeveloping the software product. Internally-generated intangible assets are amortised on a straight-line basisover their useful lives commencing from the date of first income recognition.Where no internally-generated intangible asset can be recognised, developmentexpenditure is recognised as an expense in the period in which it is incurred. Capitalised development expenditure is stated at cost less accumulatedamortisation (see below) and impairment losses. Amortisation Amortisation is charged to the income statement on a systematic basis over theestimated useful lives of intangible assets unless such lives are indefinite.Goodwill and intangible assets with an indefinite life are systematically testedfor impairment at each balance sheet date. Other intangible assets are amortisedfrom the date they are available for use. The estimated useful lives fordevelopment expenditure are estimated to be in a range of between two and fiveyears. Impairment charges The Group considers at each reporting date whether there is any indication thatnon-current assets are impaired. If there is such an indication, the Groupcarries out an impairment test by measuring an asset's recoverable amount, whichis the higher of its fair value less costs to sell and its value in use(effectively the expected cash to be generated from using the asset in thebusiness). The estimated future cash flows are discounted to their present valueusing a pre-tax discount rate that reflects current market assessments of thetime value of money and the risks specific to the asset for which the estimatesof future cash flows have not been adjusted. If the recoverable amount is lessthan the carrying amount an impairment loss is recognised, and the asset iswritten down to its recoverable amount. Where an impairment loss subsequently reverses, the carrying amount of the asset(cash-generating unit) is increased to the revised estimate of its recoverableamount, but so that the increased carrying amount does not exceed the carryingamount that would have been determined had no impairment loss been recognisedfor the asset (cash-generating unit) in prior years. A reversal of an impairmentloss is recognised as income immediately. Revenue recognition Revenue is recognised to the extent that it is probable that the economicbenefits associated with the transaction will flow into the Group. Revenue comprises the value of sales to third party customers of softwarelicences, customised software, hardware and fees derived from installation,consultancy, training and support. It is stated exclusive of value added tax andnet of trade discounts and rebates. Revenue on the sale of software licences, customised software, hardware andinstallation is recognised on delivery to a customer or on completion ofcontractual milestones. Revenue from training and consultancy is recognised on performance. Revenue from support is generally invoiced in advance, termed "deferred income",and taken to revenue in equal monthly instalments over the relevant period. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. The Groupconsiders all highly liquid investments with original maturity dates of threemonths or less to be cash equivalents. Bank overdrafts that are repayable ondemand and form an integral part of the Group's cash management system areincluded as a component of cash and cash equivalents for the purpose of thestatement of cash flows. Property, plant and equipment The cost of items of property, plant and equipment is its purchase cost,together with any incidental costs of acquisition. Depreciation is calculated so as to write off, on a straight-line basis over theexpected useful economic lives of the asset concerned, the cost of property,plant and equipment, less estimated residual values, which are adjusted, ifappropriate, at each balance sheet date. The principal economic lives used forthis purpose are: • Long leasehold properties Period of lease • Short leasehold properties Period of lease • Plant and machinery Three to five years • Motor vehicles Four years Provision is made against the carrying value of items of property, plant andequipment where impairment in value is deemed to have occurred. Leased assets Leases in terms of which the Group assumes substantially all the risks andrewards of ownership are classified as finance leases. Assets held under financeleases and hire purchase contracts are capitalised in the balance sheet anddepreciated over their expected useful lives. The interest element of leasingpayments represents a constant proportion of the capital balance outstanding andis charged to the income statement over the period of the lease. All other leases are regarded as operating leases and the payments made underthem are charged to the income statement on a straight-line basis over the leaseterm. Foreign currency translation Transactions denominated in foreign currencies are translated into sterling atthe rates ruling at the dates of transactions. Monetary assets and liabilitiesdenominated in foreign currencies at the balance sheet date are translated atthe rates ruling at that date. Translation differences are taken to the profitand loss account. In order to hedge its exposure to certain foreign exchange risks, the Groupenters into forward contracts and options (see below for details of the Group'saccounting policies in respect of such derivative financial instruments). On consolidation, results of overseas subsidiaries are translated using theaverage exchange rate for the period, unless exchange rates fluctuatesignificantly. The balance sheets of overseas subsidiaries are translated usingthe closing year end rate. Exchange differences arising, if any, are taken toequity. Such translation differences are recognised as income or as expenses inthe period in which the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreignentity are treated as assets and liabilities of the foreign entity andtranslated at the closing rate. The Group has elected to treat goodwill and fairvalue adjustments arising on acquisitions before the date of transition to IFRSas sterling denominated assets and liabilities. Financial instruments Financial assets and financial liabilities are recognised at fair value on theGroup's balance sheet when the Group becomes a party to the contractualprovisions of the instrument. Trade receivables Trade receivables do not carry any interest and are stated at their nominalvalue as reduced by appropriate allowances for estimated irrecoverable amounts. Financial liabilities and equity Financial liabilities and equity instruments are classified according to thesubstance of the contractual arrangements entered into. An equity instrument isany contract that evidences a residual interest in the assets of the Group afterdeducting all of its liabilities. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceedsreceived, net of direct issue costs. Finance charges are accounted for on an accrual basis to the income statementusing effective interest method and are added to the carrying amount of theinstrument to the extent that they are not settled in the period in which theyarise. Trade payables Trade payables are not interest bearing and are stated at their nominal value. Equity instruments Equity instruments issued by the Group are recorded at the proceeds received,net of direct issue costs. Derivative financial instruments and hedge accounting The Group's activities expose it to the financial risks of changes in foreigncurrency exchange rates. The Group uses foreign exchange forward contracts tohedge these exposures. The Group does not use derivative financial instrumentsfor speculative purposes. The use of financial derivatives is governed by the Group's policies approved bythe board of directors, which provide written principles on the use of financialderivatives. Derivative financial instruments are recognised on the Group balance sheet atfair value. The Group has not applied hedge accounting and changes in the fairvalue of derivative financial instruments are recognised in the income statementas they arise. However, where derivatives qualify for hedge accounting,recognition of any resultant gain or loss depends on the nature of the itembeing hedged. Taxation The tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the year. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income or expense that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. TheGroup's liability for current tax is calculated using tax rates that have beenenacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, except where the Group isable to control the reversal of the temporary difference and it is probable thatthe temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Share-based payments The Group issues equity-settled share-based payments to certain employees, thatis, share options. Equity-settled share-based payments are measured at fairvalue at the date of grant. Fair value is measured by use of a trinomial latticemodel. The expected life used in the model has been adjusted, based on theGroup's best estimate for the effects of non-transferability, exerciserestrictions and behavioural considerations. The fair value determined at the grant date is expensed on a straight-line basisover the vesting period, based on the Group's estimate of the number of sharesthat will eventually vest. Non-market vesting conditions are taken into accountby adjusting the number of equity instruments expected to vest at each balancesheet date so that, ultimately, the cumulative amount recognised over thevesting period is based on the amount that eventually vest. Market vestingconditions are factored into the fair value of the options granted. As long asall other vesting conditions are satisfied, a charge is made irrespective ofwhether the market vesting conditions are satisfied. The cumulative expense isnot adjusted for failure to meet a market vesting condition. The Group has applied the exemption available under IFRS 2, to apply itsprovisions only to those options granted after 7 November 2002 and which wereoutstanding at 1 January 2006. Employee share ownership plans The material assets, liabilities, income and costs of the K3 Business TechnologyGroup plc Share Incentive Plan are included in the financial statements. Untilsuch time as the Group's own shares vest unconditionally with employees, theconsideration paid for the shares is deducted in arriving at equity. Pension contributions Obligations for contributions to defined contribution pension plans arerecognised as an expense in the income statement as incurred. The Group has nodefined benefit arrangements in place. Investment income Investment income relates to interest income, which is accrued on a time basis,by reference to the principal outstanding and at the effective interest rateapplicable. Provisions A provision is recognised in the balance sheet when the Group has a presentlegal or constructive obligation as a result of a past event, and it is probablethat an outflow of economic benefits will be required to settle the obligation.Provisions are measured at the Directors' best estimate of the expenditurerequired to settle the obligation at the balance sheet date, and are discountedto present value where the effect is material. Provisions are reviewed on a regular basis and released to profit and lossaccount where changes in circumstances indicate that a provision is no longerrequired. Profit from operations Profit from operations is stated after charging all operating costs includingthose separately disclosed by virtue of their size or unusual nature or tofacilitate a more helpful understanding of the group's results. It is statedbefore investment income and finance costs. Key sources of estimation uncertainty The preparation of financial statements in conformity with IFRS requiresmanagement to make judgements, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgementsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates. The keysources of estimation that have a significant impact on the carrying value ofassets and liabilities are discussed below: Valuation of intangibles acquired in business combinations Determining the fair value of intangibles acquired in business combinationsrequires estimation of the value of the cashflows related to the identifiedintangibles and a suitable discount rate in order to calculate the presentvalue. Impairment of goodwill and other intangibles Determining whether goodwill is impaired requires an estimation of the value inuse of the cash generating units to which goodwill has been allocated. The valuein use calculation requires an entity to estimate the future cash flows expectedto arise from the cash generating unit and a suitable discount rate in order tocalculate present value. An impairment review has been performed at the adoptiondate and no impairment has been identified. This information is provided by RNS The company news service from the London Stock Exchange