Last checked at 16 May 2008 07:00
Renew Holdings plc
("Renew" or the "Group")
International Financial Reporting Standards
In prior years, Renew Holdings plc ("Renew" or "the Group") prepared its financial statements under UK Generally Accepted Accounting Practice ("UK GAAP"). The Group has prepared for the adoption of International Financial Reporting Standards("IFRS"), following the adoption of a European Union Regulation issued on 19 July 2002. The date of transition to IFRS for Renew was 1 October 2006 and from that date the Group is required to prepare its consolidated financial statements in accordance with IFRS. Consequently the Group's first results to be reported under IFRS will be the interim results for the period ended 31 March 2008 which will be issued on Tuesday 20 May 2008. These interim results will include comparative results for the period ended 31 March 2007 and for the year ended 30 September 2007 which will be restated to IFRS from UK GAAP.
Overview of impact
The effect of adoption of IFRS in respect of the Group's 2007 financial statements is set out in detail later in this announcement. The following table summarises the impact of IFRS on key elements of the Group's results. There will be other differences principally in disclosures of various financial information.
| Key Results Comparison | Year Ended | Period Ended |
| 30 Sept | 31 March | |
| 2007 | 2007 | |
| Consolidated Income Statement | £000 | £000 |
| Revenue - both IFRS and UK GAAP | 348,149 | 172,971 |
| Operating profit - IFRS | 5,218 | 2,242 |
| Operating profit - UK GAAP | 5,017 | 2,071 |
| Profit for the year - IFRS | 7,320 | 3,248 |
| Profit for the year - UK GAAP | 7,098 | 3,077 |
| Earnings per share - IFRS | 12.22p | 5.42p |
| Earnings per share - UK GAAP | 11.85p | 5.14p |
| Diluted earnings per share - IFRS | 11.99p | 5.35p |
| Diluted earnings per share - UK GAAP | 11.63p | 5.07p |
| Reconciliation on transition to IFRS | 30 Sept | 31 March | 01 Oct |
| 2007 | 2007 | 2006 | |
| £000 | £000 | £000 | |
| Total equity under UK GAAP | 10,145 | 6,977 | 5,316 |
| Employee benefits | (626) | (500) | (512) |
| Amortisation of goodwill | 356 | 159 | - |
| Amortisation of intangible asset | (41) | - | - |
| Income taxes | 175 | 154 | 154 |
| Equity under IFRS | 10,009 | 6,790 | 4,958 |
| Profit under UK GAAP | 7,098 | 3,077 | |
| Amortisation of goodwill | 356 | 159 | |
| Amortisation of intangible asset | (41) | - | |
| Employee benefits | (114) | 12 | |
| Income taxes | 21 | - | |
| Profit under IFRS | 7,320 | 3,248 |
The principal elements contributing to changes in the reported financial results and position for the year ended 30 September 2007 are:
The recognition of holiday pay liabilities in respect of employee benefits and the related deferred tax liability.
The recognition of certain intangible assets arising from the acquisition of Seymour (C.E.C.) Holdings Limited ("Seymour"), their amortisation and the related deferred tax liability.
The reduction in goodwill amortisation charges.
The measurement and presentation of the Group's financial performance and position is altered by the adoption of IFRS, however, there is no change to cash flows of the Group. The Group's strategy is unaltered by the adoption of IFRS.
To explain how Renew's reported performance and financial position have been affected by these changes, information previously published under UK GAAP has been restated under IFRS. This includes:
Preliminary consolidated income statements for the period ended 31 March 2007 and for the year ended 30 September 2007.
Preliminary consolidated statement of recognised income and expenditure for the period ended 31 March 2007 and for the year ended 30 September 2007.
Preliminary consolidated balance sheets at 31 March 2007 and 30 September 2007.
Preliminary consolidated cash flow statements for the period ended 31 March 2007 and for the year ended 30 September 2007.
Preliminary statement of changes in equity at 31 March 2007 and 30 September 2007.
Reconciliations of equity under UK GAAP to equity under IFRS at 1 October 2006, 31 March 2007 and 30 September 2007.
Reconciliations of profit for the period ended 31 March 2007 and for the year ended 30 September 2007.
Accounting policies adopted by Renew Holdings plc under IFRS.
Basis of preparation
The financial information presented in this document has been prepared in accordance with IFRS as adopted for use in the EU. The Group has applied all accounting standards and interpretations issued by the International Accounting Standards Board ("IASB") and International Financial Reporting Interpretations Committee ("IFRIC") relevant to its operations and expected to be effective for the date of the Group's first IFRS financial statements (30 September 2008). These are set out in the basis of preparation in the accounting policies below and include using estimates consistent with those made in the UK GAAP financial statements after adjustments to reflect differences in accounting policies.
In conjunction with our auditors, KPMG Audit Plc, the Group has reviewed the accounting changes necessary to comply with IFRS. The financial information and accounting policies related to the year ended 30 September 2007 contained in this Regulatory News Statement is extracted from the preliminary financial statements for the year ended 30 September 2007 which have been audited. The financial information relating to the period ended 31 March 2007 is unaudited.
Transitional arrangements
IFRS 1 "First-time Adoption of International Financial Reporting Standards" sets out the procedures that the Group must follow when it adopts IFRS for the first time as the basis for preparing its consolidated financial statements. In general, the Group is required to determine its IFRS accounting policies and apply these retrospectively to determine its opening balance sheet at the transition date under IFRS. The standard allows a number of exceptions to this general principle to assist groups in the transition to reporting under IFRS. Where Renew has taken advantage of these exemptions they are noted below.
Business Combinations that occurred before the opening IFRS balance sheet date (IFRS 3 "Business Combinations").
Renew has elected not to apply IFRS 3 retrospectively to business combinations that took place before the date of 1 October 2006. As a result, all prior business combination accounting has been frozen at the transition date. This includes any goodwill that was previously recognised as a deduction from equity.
Exchange differences arising on consolidation (IAS 21 "Foreign Currencies")
Renew has elected to deem the cumulative amount of exchange differences arising on consolidation of the net investments in subsidiaries at 1 October 2006 to be zero.
Key impact analysis
The analysis below sets out the most significant adjustments arising from the transition to IFRS.
Presentation of financial statements
The format of the Group's primary financial statements has been presented in accordance with IAS 1 "Presentation of Financial Statements".
Intangible assets and business combinations
IFRS 3 requires the separate identification and determination of the fair value of assets acquired in a business combination. Where such intangible assets have a finite useful life, amortisation of the fair value is charged to the income statement over that useful life. Intangible assets which have an indefinite life are not amortised but are reviewed annually for impairment. In respect of the acquisition of Seymour, Renew has identified one of Seymour's contractual relationships with a customer as an intangible asset with a finite life and is amortising that asset over its useful life of approximately four years. The goodwill arising on the Seymour acquisition is no longer amortised.
Employee benefits
IAS 19 requires that a liability be recorded for any short term and long term employee benefits accrued. Renew operates holiday pay arrangements for certain employees and an appropriate accrual has been recorded to reflect this liability.
Cash flow statement
Although there is no effect on the underlying cash receipts and expenditure of the Group, there are some presentational changes. The format of the cash flow statement shows cash flows analysed between operating, investing and financing activities. Cash flows relating to tax are classified within operating cash flows whereas under UK GAAP these items were classified separately from operating activities.
Board approval
The financial information related to the year ended 30 September 2007 and prepared in accordance with IFRS was approved by the Board on 15 May 2008.
Roy Harrison OBE
Chairman
15 May 2008
For further information contact:
| Renew Holdings plc | |
| John Samuel, Group Finance Director | 0113 281 4200 |
| College Hill | |
| Mark Garraway | 020 7457 2020 |
| Adam Aljewicz | 020 7457 2020 |
| preliminary consolidated income statement | Year ended | 6 months ended |
| 30-Sep | 31-Mar | |
| 2007 | 2007 | |
| £000 | £000 | |
| Group revenue from continuing activities | 348,149 | 172,971 |
| Cost of sales | (311,486) | (153,654) |
| Gross profit | 36,663 | 19,317 |
| Administrative expenses | (31,445) | (17,075) |
| Operating profit | 5,218 | 2,242 |
| Finance income | 2,199 | 895 |
| Finance costs | (768) | (239) |
| Other finance income - IAS 19 pension | 745 | 350 |
| Profit before income tax | 7,394 | 3,248 |
| Income tax expense | (74) | - |
| Profit for the year attributable to equity holders of the parent company | 7,320 | 3,248 |
| Basic earnings per share | 12.22p | 5.42p |
| Diluted earnings per share | 11.99p | 5.35p |
| Year ended | 6 months ended | |
| 30-Sep | 31-Mar | |
| 2007 | 2007 | |
| preliminary consolidated statement of recognised income and expense | £000 | £000 |
| Profit for the year attributable to equity holders of the parent company | 7,320 | 3,248 |
| Exchange movement in reserves | (150) | (96) |
| Movement in actuarial deficit | (1,804) | (890) |
| Movement on deferred tax relating to the defined benefit pension scheme | 427 | - |
| Total recognised income and expense for the year attributable to equity holders of the parent company | 5,793 | 2,262 |
|
|
|
| preliminary consolidated balance sheet | 30 Sept | 31 March | |||||
| 2007 | 2007 | ||||||
| £000 | £000 | ||||||
| Non-current assets | |||||||
| Intangible assets - goodwill | 8,516 | 4,527 | |||||
| - other |
| 868 | - | ||||
| Property, plant and equipment | 5,188 | 3,513 | |||||
| Deferred tax assets | 4,987 | 4,329 | |||||
| 19,559 | 12,369 | ||||||
| Current assets | |||||||
| Inventories | 6,391 | 5,222 | |||||
| Trade and other receivables | 85,319 | 72,989 | |||||
| Cash and cash equivalents | 24,565 | 27,022 | |||||
| 116,275 | 105,233 | ||||||
| Total assets | 135,834 | 117,602 | |||||
| Non-current liabilities | |||||||
| Obligations under finance leases | (118) | (202) | |||||
| Retirement benefit obligations | (3,559) | (3,955) | |||||
| Deferred tax liabilities | (418) | (90) | |||||
| Provisions | (1,172) | (1,277) | |||||
| (5,267) | (5,524) | ||||||
| Current liabilities | |||||||
| Trade and other payables | (116,954) | (102,309) | |||||
| Obligations under finance leases | (429) | (151) | |||||
| Current tax liabilities | (480) | - | |||||
| Borrowings | (165) | (298) | |||||
| Provisions | (2,530) | (2,530) | |||||
| (120,558) | (105,288) | ||||||
| Total liabilities | (125,825) | (110,812) | |||||
| Net assets | 10,009 | 6,790 | |||||
| Share capital | 5,990 | 5,990 | |||||
| Share premium account | 5,893 | 5,893 | |||||
| Capital redemption reserve | 3,896 | 3,896 | |||||
| Cumulative translation adjustment | (150) | (96) | |||||
| Share based payments reserve | 97 | 49 | |||||
| Retained earnings | (5,717) | (8,942) | |||||
| Total equity | 10,009 | 6,790 | |||||
| Approved by the Board and signed on its behalf by: | |||||||
| R Harrison OBE | |||||||
| Chairman | |||||||
| 15 May 2008 | |||||||
| preliminary consolidated cash flow statement | Year ended | 6 months ended | |||||
| 30-Sep | 31-Mar | ||||||
| 2007 | 2007 | ||||||
| £000 | £000 | ||||||
| Profit for period | 7,320 | 3,248 | |||||
| Amortisation of intangible assets | 41 | - | |||||
| Depreciation | 1,326 | 563 | |||||
| Profit on sale of property, plant & equipment | (85) | (37) | |||||
| Decrease in inventories | 11,909 | 12,966 | |||||
| (Increase)/decrease in receivables | (1,766) | 7,205 | |||||
| Increase/(decrease) in payables | 6,360 | (4,827) | |||||
| Current service costs | 79 | 48 | |||||
| Cash contribution to defined benefit scheme | (1,534) | (588) | |||||
| Expense in respect of share options | 97 | 49 | |||||
| Financial income | (2,944) | (1,245) | |||||
| Financial expenses | 768 | 239 | |||||
| Interest paid | (768) | (239) | |||||
| Income taxes paid | (107) | - | |||||
| Income tax expense | 74 | - | |||||
| Net cash inflow from operating activities | 20,770 | 17,382 | |||||
| Investing activities | |||||||
| Interest received | 2,199 | 895 | |||||
| Proceeds on disposal of property, plant and equipment | 309 | 145 | |||||
| Purchases of property, plant and equipment | (1,060) | (365) | |||||
| Acquisition of subsidiary net of cash acquired | (5,932) | - | |||||
| Net cash (outflow)/inflow from investing activities | (4,484) | 675 | |||||
| Financing activities | |||||||
| Dividends paid | (839) | (479) | |||||
| Repayments of obligations under finance leases | (542) | (319) | |||||
| Repayment of development loans | (9,795) | (9,795) | |||||
| Net cash outflow from financing activities | (11,176) | (10,593) | |||||
|
|
| ||||||
| Net increase in cash and cash equivalents | 5,110 | 7,464 | |||||
| Cash and cash equivalents at beginning of period | 19,570 | 19,570 | |||||
| Effect of foreign exchange rate changes | (280) | (310) | |||||
| Cash and cash equivalents at end of period | 24,400 | 26,724 | |||||
| Bank balances and cash | 24,565 | 27,022 | |||||
| Bank overdrafts | (165) | (298) | |||||
| 24,400 | 26,724 | ||||||
| preliminary statement of changes in total equity | Year ended | 6 months ended | ||||
| 30 Sept | 31 March | |||||
| 2007 | 2007 | |||||
| £000 | £000 | |||||
| Profit for the period as previously reported under UK GAAP | 7,098 | 3,077 | ||||
| Adjustments under IFRS | 222 | 171 | ||||
| Profit for the period under IFRS | 7,320 | 3,248 | ||||
| Dividends | (839) | (479) | ||||
| 6,481 | 2,769 | |||||
| Movement in share based payments reserve | 97 | 49 | ||||
| Other recognised gains and losses for the period | (1,527) | (986) | ||||
| Net movement in total equity | 5,051 | 1,832 | ||||
| Opening total equity | 4,958 | 4,958 | ||||
| Closing total equity | 10,009 | 6,790 | ||||
| There are no changes to movements in total equity under IFRS as compared to UK GAAP other than | ||||||
| those resulting from changes to the profit for the period. | ||||||
Explanatory note on adoption of IFRS for the year ended 30 September 2007
A1 Presentation of consolidated financial statements
The preliminary consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted for use in the EU expected to be applied as of the date of the Group's first IFRS statements and the basis of preparation is set out below. The financial statements are presented in sterling since this is the currency in which the majority of the Group's transactions are denominated.
A2 First-time adoption of international financial reporting and accounting standards
The Group has applied IFRS 1 "First Time Adoption of International Financial Reporting Standards" to provide a starting point for reporting under IFRS. The date of transition to IFRS was 1 October 2006. The adoption of IFRS has resulted in the following transition adjustments to the Group's accounting policies:
Intangible assets - goodwill
Under UK GAAP goodwill was amortised over its useful economic life. Under IFRS 3 "Business Combinations" goodwill is not amortised but is carried at cost with impairment reviews being undertaken annually or when there is an indication that the carrying value has been reduced. Under IFRS1 the Group has applied the change from the date of transition as opposed to full application to all business combinations prior to that date. The goodwill in the balance sheet at the date of transition to IFRS was £4,527,000. The impact on the 2007 profit for the financial year is a reversal of the amortisation previously charged under UK GAAP of £356,000.
Intangible assets - other
IFRS 3 "Business Combinations" requires the measurement of intangible assets and their annual amortisation. The Group acquired £909,000 in relation to contractual rights on the acquisition of Seymour, which are being amortised over 44 months giving rise to a charge of £41,000 in 2007. Deferred tax has been provided on these intangible assets.
Employee benefits
IAS 19 "Employee Benefits" requires that liabilities for employee benefits should be recognised in the period in which services are provided by the employee. This includes specific guidance on dealing with short-term employee benefits such as holiday pay for which there is no equivalent under UK GAAP. Consequently the 2007 profit for the year is reduced by £114,000 being the increase in accrual to £626,000 from the opening position at 1 October 2006 of £512,000. Deferred tax has been provided on these employee benefits.
Explanatory note on adoption of IFRS for the year ended 30 September 2007 (continued)
IFRS 1 Transition exemptions
IFRS 1 provides certain exemptions which the Group has decided to utilise. Under IFRS 3 "Business Combinations", the Group has elected not to apply the standard retrospectively to business combinations prior to the date of transition. Accordingly, the classification of such business combinations remains unchanged from that under UK GAAP. Assets and liabilities are recognised at the date of transition if they would be recognised under IFRS and are measured using their UK GAAP carrying amount immediately following acquisition as deemed cost under IFRS, unless IFRS requires fair value measurement. IFRS 1 permits revaluations of property, plant and equipment which had been carried out under UK GAAP to be treated as the deemed cost at the date of transition and the Group has applied this exemption.
Cumulative translation differences
The Group has taken advantage of the exemption whereby the cumulative translation differences are deemed to be zero at the date of transition to IFRS.
Share based payments
The Group has applied IFRS 2 "Share based payment" from the date of transition to IFRS as at 1 October 2006. In preparing its opening IFRS balance sheet, the Group has not adjusted amounts previously reported in financial statements prepared in accordance with its old basis of accounting (UK GAAP).
An explanation of how the transition from UK GAAP to adopted IFRS has effected the Group's financial position, performance and cash flow is set out below.
| Key Results Comparison | Year Ended | Period Ended |
| 30 Sept | 31 March | |
| 2007 | 2007 | |
| Consolidated Income Statement | £000 | £000 |
| Revenue - both IFRS and UK GAAP | 348,149 | 172,971 |
| Operating profit - IFRS | 5,218 | 2,242 |
| Operating profit - UK GAAP | 5,017 | 2,071 |
| Profit for the year - IFRS | 7,320 | 3,248 |
| Profit for the year - UK GAAP | 7,098 | 3,077 |
| Earnings per share - IFRS | 12.22p | 5.42p |
| Earnings per share - UK GAAP | 11.85p | 5.14p |
| Diluted earnings per share - IFRS | 11.99p | 5.35p |
| Diluted earnings per share - UK GAAP | 11.63p | 5.07p |
| Reconciliation on transition to IFRS | 30 Sept | 31 March | 01 Oct |
| 2007 | 2007 | 2006 | |
| £000 | £000 | £000 | |
| Total equity under UK GAAP | 10,145 | 6,977 | 5,316 |
| Employee benefits | (626) | (500) | (512) |
| Amortisation of goodwill | 356 | 159 | - |
| Amortisation of intangible asset | (41) | - | - |
| Income taxes | 175 | 154 | 154 |
| Equity under IFRS | 10,009 | 6,790 | 4,958 |
| Profit under UK GAAP | 7,098 | 3,077 | |
| Amortisation of goodwill | 356 | 159 | |
| Amortisation of intangible asset | (41) | - | |
| Employee benefits | (114) | 12 | |
| Income taxes | 21 | - | |
| Profit under IFRS | 7,320 | 3,248 |
A3 Explanation of material adjustments to the cash flow statement for 2007
Interest paid of £768,000 during 2007 is classified as operating cash flow under IFRS, but was included in a separate category of returns on investments and servicing of finance under previous GAAP.
Accounting policies
Basis of accounting and preparation
The accounts have been prepared on the going concern basis and in accordance with applicable accounting standards under the historical cost convention. The consolidated financial statements have been prepared in accordance with IFRS as adopted for use in the EU. The Group has applied all accounting standards and interpretations issued by the International Accounting Standards Board ("IASB") and International Financial Reporting Interpretations Committee ("IFRIC") relevant to its operations and expected to be effective for the date of the Group's first IFRS financial statements. Certain accounting standards and interpretations had been issued but were not effective. These include IAS 23, IFRS 7, IFRS 8, IFRIC 10, IFRIC 11, IFRIC 12 and IFRIC 14. The Group does not consider that any of these standards will have a significant impact on future financial statements although some will result in additional or different disclosures. The Group has elected not to adopt any of these standards or interpretations early.
The adopted IFRS that will be effective (or available for early adoption) in the annual financial statements for the year ending 30 September 2008 are still subject to change and to additional interpretations and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period will be determined finally only when the annual financial statements are prepared for the year ending 30 September 2008.
The Group has prepared the preliminary IFRS financial statements for the year to 30 September 2007 to establish the financial position, results of operations and cash flows of the Group necessary to provide the comparative financial information expected to be included in the Group's first set of IFRS financial statements for the year to 30 September 2008.
A summary of the more important Group accounting policies, which have been applied consistently, is set out below:
Basis of consolidation
The group accounts consolidate the accounts of the Company and its subsidiary undertakings.
The results and net assets of undertakings acquired are included in the consolidated income statement and balance sheet using the acquisition method of accounting from the effective date of acquisition. The results of undertakings disposed of are included to the effective date of disposal. Subsidiary undertakings have been consolidated using the acquisition method of accounting.
Revenue
Revenue, which excludes intra-group revenue and Value Added Tax, comprises:
- value of work executed during the year on construction contracts based on monthly valuations.
- sales of developments and land which are recorded upon legal completion.
Accounting policies (continued)
Construction contracts
Long-term contracts are stated at cost plus attributable profit after providing for anticipated future losses and contingencies. Progress payments received are deducted from these amounts. Cost includes attributable overheads. Long-term contract work in progress is recorded in revenue on a monthly basis as the contract proceeds and therefore is included in debtors as amounts recoverable on contracts. No profit is recognised until the outcome of the contract can be foreseen with reasonable certainty.
Profit on contracts is calculated in accordance with accounting standards and industry practice. The principal estimation technique used by the Group in attributing profit on contracts to a particular period is the preparation of forecasts on a contract-by-contract basis. These focus on revenues and costs to complete and enable an assessment to be made of the final out-turn on each contract.
Segment reporting
Segment reporting is based on two segment formats, of which the primary format is for business streams in accordance with the Group's internal reporting structure and strategic plan. The secondary format is for geographical areas. Transactions between segments are conducted on an arm's length basis. Segment results show the contribution directly attributable to each segment in arriving at the Group's operating profit. Segment assets and liabilities comprise those assets and liabilities directly attributable to each segment. Group eliminations represents such consolidation adjustments that are necessary to determine the Group's consolidated assets and liabilities.
Accounting estimates and judgments
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year relate to the recognition of revenue and profit, the recoverability of amounts recoverable under contract, the estimation of provisions and the valuation of the assets and liabilities of the defined benefit pension scheme.
(vii) Intangible assets
a) Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group's interest in the fair value of the identifiable assets, liabilities and contingent liabilities of a subsidiary, associate or jointly-controlled entity at the date of acquisition. Goodwill is recognised as an asset and is tested for impairment annually, or on such other occasions that events or changes in circumstances indicate that it might be impaired. On disposal of a subsidiary undertaking, the attributable amount of unamortised goodwill which has not been subject to impairment is included in the determination of the profit or loss on disposal.
b) Other intangible assets are stated at cost less accumulated amortisation and impairment losses. The cost of intangible assets is amortised over their expected useful lives, which is approximately four years.
Accounting policies (continued)
(viii) Property, plant and equipment
Property, plant and equipment are recorded at cost less provision for impairment if required. Depreciation is provided on all property, plant and equipment, other than freehold land. Provision is made at rates calculated to write off the cost of each asset, less estimated residual value, evenly over its expected useful life as follows:
Group occupied property
Freehold land - no depreciation charge
Long leasehold land and buildings - shorter of fifty years and the remainder of the lease
Plant and vehicles - three to ten years
Office equipment - two to seven years
(ix) Impairments
Goodwill arising on acquisitions and other assets that have an indefinite useful life and are not subject to amortisation are reviewed at least annually for impairment. Other intangible assets and property, plant and equipment are reviewed for impairment whenever there is any indication that the carrying amount of the asset may not be recoverable. If the recoverable amount of any asset is less than its carrying amount, a loss on impairment is recognised. Recoverable amount is the higher of the fair value of the asset less any costs which would be incurred in selling the asset and its value in use. Value in use is assessed by discounting the estimated future cash flows that the asset is expected to generate. For this purpose, assets are grouped into cash generating units which represent the lowest level for which there are separately identifiable cash flows. Impairment losses in respect of goodwill are not reversed in future accounting periods. Reversals of other impairment losses are recognised in income when they arise.
(x) Inventories
Inventories comprise developments and land held for development and raw materials and are stated at the lower of cost and net realisable value. Cost includes appropriate attributable overheads and excludes interest. Where necessary, provision is made for obsolete, slow moving and defective inventories.
(xi) Trade receivables
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.
(xii) Trade payables
Trade payables on normal terms are not interest bearing and are stated at their nominal value.
Accounting policies (continued)
(xiii) Cash and cash equivalents
Cash and cash equivalents in the cash flow statement comprise cash at bank and in hand, including bank deposits with original maturities of less than three months, net of bank overdrafts. Bank overdrafts are included within financial liabilities within current liabilities in the balance sheet.
(xiv) Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event and where it is probable that an outflow will be required to settle that obligation and where the amount can be reliably estimated.
(xv) Leasing commitments
Assets held under finance leases, where substantially all the benefits and risks of ownership of an asset have been transferred to the Group, are capitalised and are depreciated in accordance with the depreciation policy for the relevant class of asset or the remaining lease term if shorter. The interest element of the rental obligation is charged to the income statement and represents a constant proportion of the balance of capital repayments outstanding. Rentals under operating leases are charged to the income statement on a straight-line basis over the term of the lease.
(xvi) Defined benefit pension scheme
The Group has adopted the requirements of IAS 19 "Employee Benefits". The pension scheme assets are measured using market values. Pension scheme liabilities are measured using the projected unit actuarial method and are discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. Any increase in the present value of liabilities within the Group's defined benefit scheme expected to arise from employee service in the period is charged to operating profit. The expected return on the scheme's assets and the increase during the period in the present value of the scheme's liabilities arising from the
passage of time are included in other finance income. Actuarial gains and losses are recognised in the consolidated statement of recognised income and expense. Pension scheme surpluses, to the extent they are considered recoverable (under the guidance of IAS 19), or deficits are recognised in full and presented on the face of the balance sheet.
(xvii) Defined contribution pension scheme
Contributions to the defined contribution scheme are charged to the income statement as incurred.
Accounting policies (continued)
(xviii) Taxation
The tax charge is composed of current tax and deferred tax, calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Current tax and deferred tax are charged or credited to the income statement, except when they relate to items charged or credited directly to equity, in which case the relevant tax is also dealt with in equity. Current tax is based on the profit for the year. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax on such assets and liabilities is not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each balance sheet date. Deferred tax is provided on temporary differences arising on investments in subsidiary undertakings, except where the timing of the reversal of the temporary difference can be controlled and it is probable that that the temporary difference will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current assets and liabilities on a net basis.
(xix) Foreign currencies
Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction or at the contracted rate if the transaction is covered by a forward exchange contract. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date or, if appropriate, at the forward contract rate. The accounts of overseas subsidiary undertakings are translated at the rate of exchange ruling at the balance sheet date. The exchange difference arising on the retranslation of the opening net assets is taken directly to reserves. All other exchange differences are taken to the income statement.
Accounting policies (continued)
(xx) Financial instruments
Financial assets are divided into the following categories: trade receivables, financial assets at fair value and financial assets which are available for sale. The Board assigns financial assets to each category on initial recognition dependant on the purpose for which the asset was acquired. The categorisation of these assets is reconsidered at each reporting date at which a choice of categorisation or accounting treatment is available.
All financial assets are recognised whenever the Group becomes party to the contractual provisions of the financial instrument. All such assets are initially recognised at fair value. Derecognition of such assets occurs when the Group's right to receive cash flows from the asset ceases or the rights and rewards of ownership have been transferred. All such assets are reviewed for impairment at least annually. Interest and other cash flows which arise from holding a financial asset is recognised in the income statement in accordance with IAS39.
Financial assets at fair value include assets classified as held for trading, and changes in fair value are recognised through the income statement. Trade receivables are non-derivative financial assets with expected receipts which are not quoted in an active market and they arise when the Group provides goods or services. Any change in their fair value is recognised through the income statement. Provision against trade receivables is made when evidence arises that the Group is not likely to receive the fair value of the amounts due to it. The amount of any write down is determined as the difference between the asset's carrying amount and the present value of estimated cash flows arising from the asset.
Financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument. All interest related charges are recognised as an expense in the income statement. Bank loans and hire purchase liabilities are entered into to provide financing for the Group's operations and are recognised as funds are received. Financial liabilities are measured at amortised cost.
(xxi) Share based payments
IFRS 2 Share Based Payment requires a fair value to be established for any equity settled share based payments. Fair value has been independently measured using a Black Scholes valuation model. The fair value determined at the grant date of the equity settled share based payments is expensed on a straight-line basis over the vesting period based on the Group's estimate of shares that will eventually vest.