30th Aug 2007 09:15
Cello Group plc30 August 2007 30 August 2007 Cello Group plc Adoption of International Financial Reporting Standards Cello Group plc (AIM: CLL, "Cello" or the "Group") is preparing for the adoptionof International Financial Reporting Standards as adopted by the European Union('IFRS') as its primary accounting basis for the year ending 31 December 2007.As part of this transition, Cello is today presenting unaudited financialinformation prepared in accordance with IFRS for the year ended 31 December 2006and for the six months ended 30 June 2006. The purpose of this statement is topresent the effects of IFRS on the Group for 2006 full-year and half-yearcomparative periods. The principal changes to the Group's reported financial information under UKGAAP* arising from the adoption of IFRS are as a result of: the recognition of intangible assets from business combinations;the related amortisation of these intangible assets; andthe recognition of deferred tax assets and liabilities on a different basis. *throughout this statement 'UK GAAP' means the accounting standards andframework in issue at 31 December 2006, which were applied to the financialstatements of the Group for the year ended 31 December 2006. For the year ended 31 December 2006 the expected impact of the adoption of IFRSis to decrease profit attributable to equity shareholders by £0.5 million,comprising principally the amortisation of intangible assets of £0.7 million;partially offset by deferred tax adjustments of £0.2 million and to reduce netassets for the Group at 31 December 2006 from £39.6 million to £39.1 million. Enquiries:Cello Group plc 020 7812 8463Mark Bentley - Finance Director Evolution 020 7071 4300Bobbie Hilliam College Hill 020 7457 2020Adrian Duffield INTRODUCTION Cello is preparing for the adoption of International Financial ReportingStandards as adopted by the European Union ('IFRS') as its primary accountingbasis in its consolidated accounts, following the adoption of Regulation No.1606/2002 by the European Parliament on 19 July 2002. This announcement explains how Cello's previously reported UK GAAP financialperformance and position are reported under IFRS. It provides reconciliationsfrom UK GAAP to IFRS for the following unaudited consolidated information: • balance sheets at 1 January 2006, 30 June 2006 and 31 December 2006; and • income statements for the six month period ended 30 June 2006 and the year ended 31 December 2006. These statements are prepared on the basis set out in 'Basis of Preparation'below. Detailed cash flow statements have not been prepared as there are noadjustments. The preliminary IFRS financial information set out below does not constitute thecompany's statutory accounts for the year ended 31 December 2006. Thoseaccounts, which were prepared under UK GAAP, have been reported on by thecompany's auditors and delivered to the registrar of companies; their report was(i) unqualified, (ii) did not include reference to any matters to which theauditors drew attention by way of emphasis without qualifying their report, and(iii) did not contain a statement under section 237(2) or 237(3) of theCompanies Act 1985. BASIS OF PREPARATION The financial information presented in this document has been prepared on thebasis of the recognition and measurement requirements of adopted IFRS in issuethat either are endorsed by the EU and effective (or available for earlyadoption) at 31 December 2007 or are expected to be endorsed and effective (oravailable for early adoption) at 31 December 2007, the Group's first annualreporting date at which it is required to use IFRS. The directors have madeassumptions about the accounting policies expected to be applied, thesignificant effects of which are set out below, when the first annual IFRSfinancial statements are prepared for the year ending 31 December 2007. In addition, the IFRS that will be effective (or available for early adoption)in the annual financial statements for the year ending 31 December 2007 arestill subject to change and to additional interpretations and therefore cannotbe determined with certainty. Accordingly, the accounting policies for thatannual period will be determined finally only when the annual financialstatements for the Group are prepared for the year ending 31 December 2007. The Group's financial results for the six month period ending 30 June 2007 willbe prepared on the basis of the principles of IFRS, and will be presentedtogether with details of the accounting policies expected to be applied for theyear ending 31 December 2007. IFRS 1 Exemptions IFRS 1 First-time Adoption of International Financial Reporting Standards setsout the procedures that the Group must follow when it adopts IFRS for the firsttime as the basis for preparing its consolidated financial statements. Asexplained above, the Group is required to establish what its IFRS accountingpolicies are expected to be as at 31 December 2007 and, in general, apply theseretrospectively to determine the IFRS opening balance sheet at its date oftransition, 1 January 2006. This standard provides a number of optional exceptions to this generalprinciple. The most significant of these for the Group relates to businesscombinations that occurred before the opening IFRS balance sheet date (IFRS 3Business Combinations). The Group has elected to apply IFRS 3 with effect from 1December 2005, earlier than technically required. The practical effect of thisis that the Group has opted to account under IFRS for the acquisition of ChariosHoldings Limited (which trades as TMI), which was acquired in December 2005.This approach has been taken as the fundamental intangible asset of ChariosHoldings Limited is a licence to sell the TMI brand and range of products in theUK. KEY IMPACT ANALYSIS The analysis below sets out the most significant adjustments arising from thetransition to IFRS for the year ended 31 December 2006. Similar adjustmentsarise from the transition to IFRS for the six months ended 30 June 2006. 1) Presentation of Financial Statements Details on the key presentational differences under IFRS are presented inAppendix A. 2) Intangible Assets (a) Goodwill and acquired intangible asset amortisation IFRS 3 Business Combinations requires that, when businesses are acquired, anyintangible assets acquired with the business are valued separately andcapitalised as an intangible asset. Any residual difference between theconsideration paid or payable and the net fair value of the identifiable assets,liabilities and contingent liabilities acquired is recognised as goodwill. IFRS3 also requires that goodwill is not amortised but is instead subject to anannual impairment review, whereas intangible assets are amortised over theiruseful lives which range from 3 months to 8 years. The Group has recognised intangible assets on acquisition in relation tolicences and customer contracts. The amount in the Group's balance sheet inrespect of all intangible assets is £3.5 million at 30 June 2006 and £3.2million at 31 December 2006. Under IFRS, these intangible assets are amortised over their useful lives.Management has assessed their useful lives and the effect of amortising theseassets is £0.7 million for the year ended 31 December 2006 and £0.2 million forthe six months ended 30 June 2006. 3) Deferred and Current Taxes The scope of IAS 12 Income Taxes is wider than the corresponding UK GAAPstandards, and requires deferred tax to be provided on the majority of temporarydifferences, rather than just on timing differences as under UK GAAP. Inparticular this has resulted in deferred tax assets and liabilities being set upin respect of differences between the net book value and the tax base ofintangible assets. A deferred tax liability has been set up on creation of these intangibles and isreleased over the period over which the assets are amortised. Upon creation ofthis liability, an equal and opposite adjustment is posted to increase goodwillarising on the business in question. This adjustment to goodwill is notamortised. The impact on the income statement of releasing elements of theliability is £0.2 million for the year ended 31 December 2006 and £0.1 millionfor the six months ended 30 June 2006. The deferred tax liability in respect ofintangibles stands at £1.0 million at 30 June 2006 and £1.0 million at 31December 2006. ACCOUNTING POLICIES For the avoidance of doubt and following the transition to IFRS, the Groupexpects to apply the following accounting policies for the year ending 31December 2007. 1) Basis of Accounting The financial statements have been prepared under the historical cost conventionand in accordance with applicable International Financial Reporting Standards(IFRS). 2) Basis of Consolidation The Group's financial statements consolidate the accounts of the Company and allof its subsidiary undertakings. The results of subsidiary undertakings acquiredin the year are included in the consolidated profit and loss account from theeffective date of acquisition. 3) Turnover, Cost of Sales and Revenue Recognition Turnover is recognised as contract activity progresses, in accordance with theterms of the contractual agreement and the stage of completion of the work. Itis in respect of the provision of services including fees, commissions,rechargeable expenses and sales of materials performed subject to specificcontract. Where recorded turnover exceeds amounts invoiced to clients, theexcess is classified as accrued income. Cost of sales include amounts payable to external suppliers where they areretained at the Group's discretion to perform part of a specific client projector service where the Group has full exposure to the benefits and risks of thecontract with the client. 4) Goodwill and Intangible Assets In accordance with IFRS 3 Business Combinations goodwill arising on acquisitionsis capitalised as an intangible fixed asset. Other intangible assets are alsothen identified and amortised over their useful economic lives. Examples ofthese are licences to trade, and client contracts. The useful economic livesvary from 3 months to 8 years. Goodwill is not amortised. Under IAS 36 Impairment of assets, the carrying values of all intangible fixedassets are reviewed annually for impairment on the basis stipulated in IAS 36and adjusted to the recoverable amount. Typically, such a review will entail anassessment of the present value of projected returns from the asset over a 3-5year projection period, and an RPI based growth assumption for future yearsafter that. 5) Tangible Fixed Assets Tangible fixed assets are stated at historical cost. Depreciation is provided atrates calculated to write off the cost, less estimated residual value, of eachasset, over their estimated useful economic lives as follows:- Leasehold improvements Over the remaining term of the leaseMotor vehicles 25% pa. straight lineComputer equipment 33% pa. straight lineFixtures, fittings and office equipment 25% pa. straight line 6) Investments Fixed asset investments are stated at cost less provision for any impairment invalue. 7) Work in Progress Work in progress comprises third party costs incurred on behalf of clients andis stated at the lower of cost and net realisable value. 8) Deferred Taxation Deferred tax is the tax expected to be payable or recoverable ondifferences between the carrying value of assets and liabilities in thefinancial statements and the corresponding tax bases used in the computation oftaxable profit, and is accounted for using the balance sheet liability method.Deferred tax liabilities are generally 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 arises from the initial recognition ofgoodwill or from the initial recognition of other assets and liabilities in atransaction that affects neither the tax profit or the accounting profit. The carrying amount of deferred tax assets is reviewed at eachbalance sheet date and reduced to the extent that it is no longer probable thatsufficient taxable profits will be available to allow all or part of the assetto be recovered. Deferred tax is calculated at the tax rates that are expected toapply in the period when the liability is settled or the asset is realised.Deferred tax is charged or credited in the income statement, except where itrelates to items charged or credited directly to equity, in which case thedeferred tax is also dealt with in equity. 9) Leasing and Hire Purchase Commitments When the Group enters into a lease which entails taking substantially all therisks and rewards of ownership of an asset, the lease is treated as a financelease or similar hire purchase contract. The asset is recorded in the balancesheet as a tangible fixed asset and is depreciated over the estimated usefullife or the term of the lease, whichever is shorter. Future instalments undersuch leases, net of finance charges, are included within creditors. Rentalspayable are apportioned between the finance element, which is charged to theprofit and loss account, and the capital element which reduces the outstandingobligation for future instalments. All other leases are treated as operating leases and rentals payable are chargedto the profit and loss account on a straight line basis over the lease terms. 10) Foreign Currencies Assets and liabilities in foreign currencies are translated into sterling at therates of exchange ruling at the balance sheet date. Transactions in foreigncurrencies are translated into sterling at the rate of exchange ruling at thedate of the transaction. Exchange differences are taken into the profit andloss account for the year. 11) Pension Contributions Subsidiaries operate defined contribution pension schemes and contribute to thepersonal pension schemes of certain employees or to a Group personal pensionplan. The assets of the schemes are held separately from those of the subsidiarycompanies in independently administered funds. The amount charged againstprofits represents the contributions payable to the scheme in respect of theaccounting period. 12) Share-based Payments The Group has applied the requirements of IFRS 2 Share-based payment whichrequires the fair value of share-based payments to be recognised as an expense.In accordance with the transitional provisions, IFRS 2 has been applied to suchequity instruments that were granted after 7 November 2002 and which had notvested by 1 January 2006. This standard has been applied to various types of share-based payments asfollows: i. Share options Certain employees receive remuneration in the form of share options. The fairvalue of the equity instruments granted is measured on the date at which theyare granted by using the Black-Scholes model, and is expensed to the profit andloss account over the appropriate vesting period. ii. Acquisition related employee remuneration expenses Having regard to the basis for conclusions behind IFRS 2 and in accordance withIAS 8 Accounting policies and IFRS 3 Business Combinations, the Group treatscertain payments made to employees in respect of earn out arrangements asremuneration within the profit and loss account. Appendix A Cello Group plcConsolidated Balance Sheet1 January 2006 Previously IFRS 3 IAS 12 Restated under stated UK adopted IFRS GAAP £'000 £'000 £'000 £'000 Goodwill 47,423 (3,223) 967 45,167Intangible assets 0 3,223 3,223Property, plant and equipment 1,951 1,951Investments 15 15 Non-current assets 49,389 0 967 50,356 Work in progress 604 604Trade and other receivables 11,850 11,850Cash and cash equivalents 6,717 6,717 Current Assets 19,171 0 0 19,171 Trade and other payables (18,939) (18,939)Current tax liabilities (946) (946)Obligations under finance leases (121) (121) Creditors < 1 year (20,006) 0 0 (20,006) Net Current Assets (835) 0 0 (835) Total assets less current liabilities 48,554 0 967 49,521 Non current liabilitiesProvisions (14,289) (967) (15,256)Obligations under finance leases (120) (120) Net assets 34,145 0 0 34,145 Capital and reservesShare capital 3,244 3,244Share premium 17,652 17,652Retained earnings 2,694 2,694Other reserves 10,555 10,555 Equity attributable to equity holders of 34,145 0 0 34,145parent Total Equity 34,145 0 0 34,145 Cello Group plcConsolidated Balance Sheet30 June 2006 Previously IFRS 3 IAS 12 Restated under stated UK adopted IFRS GAAP £'000 £'000 £'000 £'000 Goodwill 49,363 (3,694) 1,108 46,777Intangible assets 0 3,466 3,466Property, plant and equipment 1,938 1,938Investments 15 15 Non-current assets 51,316 (228) 1,108 52,196 Work in progress 1,098 1,098Trade and other receivables 13,258 13,258Cash and cash equivalents 7,694 7,694 Current Assets 22,050 0 0 22,050 Trade and other payables (20,220) (20,220)Current tax liabilities (1,196) (1,196)Obligations under finance leases (103) (103) Creditors < 1 year (21,519) 0 0 (21,519) Net Current Assets 531 0 0 531 Total assets less current liabilities 51,847 (228) 1,108 52,727 Non current liabilitiesProvisions (15,860) (1,040) (16,900)Obligations under finance leases (97) (97) Net assets 35,890 (228) 68 35,730 Capital and reservesShare capital 3,277 3,277Share premium 18,019 18,019Retained earnings 4,001 (228) 68 3,841Other reserves 10,593 10,593 Equity attributable to equity holders of 35,890 (228) 68 35,730parent Total Equity 35,890 (228) 68 35,730 Cello Group plcConsolidated Balance Sheet31 December 2006 Previously IFRS 3 IAS 12 Restated under stated UK adopted IFRS GAAP £'000 £'000 £'000 £'000 Goodwill 58,234 (3,878) 1,163 55,519Intangible assets 0 3,187 3,187Property, plant and equipment 2,304 2,304Investments 65 65 Non-current assets 60,603 (691) 1,163 61,075 Work in progress 928 928Trade and other receivables 18,669 18,669Cash and cash equivalents 7,010 7,010 Current Assets 26,607 0 0 26,607 Trade and other payables (20,560) (20,560)Current tax liabilities (1,245) (1,245)Obligations under finance leases (87) (87) Creditors < 1 year (21,892) 0 0 (21,892) Net Current Assets 4,715 0 0 4,715 Total assets less current liabilities 65,318 (691) 1,163 65,790 Non current liabilitiesBank loans (6,050) (6,050)Provisions (19,622) (956) (20,578)Obligations under finance leases (81) (81) Net assets 39,565 (691) 207 39,081 Capital and reservesShare capital 3,448 3,448Share premium 19,981 19,981Retained earnings 5,510 (691) 207 5,026Othere reserves 10,620 10,620 Equity attributable to equity holders of 39,559 (691) 207 39,075parent Minority interest 6 6 Total Equity (691) 207 39,565 39,081 Cello Group plc Consolidated Income StatementSix months ended 30 June 2006 Previously IFRS 3 IAS 12 Restated under stated UK adopted IFRS GAAP £'000 £'000 £'000 £'000 Revenue 31,704 31,704Cost of sales (13,965) (13,965) Operating income 17,739 0 0 17,739 Administration expenses before (15,117) (15,117)amortisation Headline operating profit 2,622 0 0 2,622 Amortisation of intangible assets 0 (228) (228)Acquisition related employee expenses (519) (519)Share option charges (38) (38) Operating profit 2,065 (228) 0 1,837 Financing income 88 88Finance costs (94) (94)Finance cost of deferred consideration (121) (121) Profit before taxation 1,938 (228) 0 1,710 Tax (631) 68 (563) Profit for the period 1,307 (228) 68 1,147 Attributable to:Equity holders of the parent 1,307 (228) 68 1,147Minority interest 0 0 0 0 Cello Group plc Consolidated Income StatementYear ended 31 December 2006 Previously IFRS 3 IAS 12 Restated under stated UK adopted IFRS GAAP £'000 £'000 £'000 £'000 Revenue 74,702 74,702Cost of sales (35,870) (35,870) Operating income 38,832 0 0 38,832 Administration expenses before (32,844) (32,844)amortisation Headline operating profit 5,988 0 0 5,988 Amortisation of intangible assets 0 (691) (691)Acquisition related employee expenses (1,336) (1,336)Share option charges (65) (65) Operating profit 4,587 (691) 0 3,896 Financing income 211 211Finance costs (346) (346)Finance cost of deferred consideration (234) (234) Profit before taxation 4,218 (691) 0 3,527 Tax (1,265) 207 (1,058) Profit for the period 2,953 (691) 207 2,469 Attributable to:Equity holders of the parent 2,947 (691) 207 2,463Minority interest 6 0 0 6 This information is 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