13th Mar 2006 07:03
Sinclair Pharma PLC13 March 2006 Sinclair Pharma PLC 13 March, 2006 TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) SUPPORTING DOCUMENT FOR 31 DECEMBER 2005 INTERIM STATEMENT 1. Introduction The Group's financial statements for the year ended 30 June 2006 will be thefirst annual financial statements that comply with International FinancialReporting Standards (IFRS). The Group's financial statements prior to andincluding 30 June 2005 had been prepared in accordance with Generally AcceptedAccounting Principles in the United Kingdom (UK GAAP). The purpose of this document is to explain the principal changes in accountingpolicies arising from the adoption of IFRS and present the restated financialinformation in section 6 as follows: • Income statements for six months ended 31 December 2004 and the year ended 30 June 2005. • Balance sheets as at 30 June 2004, 31 December 2004 and 30 June 2005. 2. Basis of preparation The financial information has been prepared on the basis of IFRS as adopted bythe European Union, and that the Directors expect to apply as at 30 June 2006.IFRS remains subject to amendment and interpretation by the InternationalAccounting Standards Board (IASB) and there is an ongoing process of review andendorsement by the European Commission. Consequently, the revised accountingpolicies, which are detailed in section 5 are provisional and subject to change.These policies have been consistently applied to all the periods presentedexcept those relating to the classification and measurement of financialinstruments. The Group has made use of the exemption available under IFRS 1,First time adoption of International Accounting Standards, to apply IAS 32,Financial Instruments: Disclosure and Presentation and IAS 39, FinancialInstruments: Recognition and Measurement from 1 July 2005 only. The financial information contained in this document is unaudited and does notconstitute full financial information as defined in Section 240 of the CompaniesAct 1985 (as amended). The financial information in respect of the year ended 30 June 2005 has beenprepared using extracts from the statutory accounts prepared under UK GAAP forthis period and amended by adjustments arising from the implementation of IFRSas detailed below. The statutory accounts for this period have been filed withthe Register of Companies. The auditors report on these accounts was unqualifiedand did not contain a statement under section 237 (2) or (3) of the CompaniesAct 1985 which deal respectively with the maintaining of proper accounting booksand records and the availability of information to the auditors. 3. Transitional provisions IFRS 1, First Tme Adoption of IFRS, sets out the procedures to be followed whenadopting IFRS for the first time as the basis for preparing the Group'sfinancial statements. The Group is required to establish its IFRS accountingpolicies for the year ending 30 June 2006, and, apply these retrospectively todetermine the IFRS opening balance sheet at the date of transition, 1 July 2004.IFRS 1 provides a number of optional exemptions to this general principle. TheGroup has taken advantage of two of the exemptions afforded to it under IFRS: IFRS 3, Business Combinations The Group has elected not to restate business combinations occurring before thedate of transition. IFRS 2, Share-based payments The Group has elected to only apply IFRS 2 to all share-based awards and optionsgranted post 7 November 2002 that had not vested by 1 July 2005. 4. Principal differences between IFRS and UK GAAP The principal effects of IFRS on the financial statements of the Group are asfollows: Presentation - IAS 1, Presentation of Financial Statements The presentation format of IFRS is different from UK GAAP and the illustrativefinancial information herein is designed to assist the reader to understandthese changes. Employee option and performance share schemes - IFRS 2, Share-based Payments The Group makes equity-settled share based payments to its employees anddirectors. Such payments are measured at fair value at the date of grant andexpensed to the profit and loss account over time. All transactions within thescope of IFRS 2 are valued based on the fair value of the option or award atgrant date and expensed to the income statement over the vesting period of thescheme. Aquisitions - IFRS 3, Business Combinations IFRS 3 requires that goodwill arising upon acquisition of businesses is notamortised but is subject to impairment reviews. As noted in section 3, the Grouphas applied the exemption not to restate business combinations prior to the dateof transition, and as a result, amortisation previously charged under U.K. GAAPhas been reversed from 1 July 2004 onwards. As a result of the transition to IFRS, the accounting for the Eurodermacquisition, completed in January 2005, has been reviewed. As a result of thetransition and the revaluation using fair value of the intangible assetsacquired, the intangible assets recognized under UK GAAP have not now beenrecognized under IFRS, resulting in an increase in the goodwill arising on thisacquisition. 5. Summary of principal accounting policies The financial information included in the interim statement for the six monthsended 31 December 2005 and the restated comparative information contained inthis document have been prepared under the historical cost convention applyingthe principal accounting policies summarised below. As previously indicated,IFRS is subject to amendment and interpretation by the IASB and to review andendorsement by the European Commission. Consequently these accounting policiesmay be subject to change. Basis of consolidation The consolidated financial statements of Sinclair Pharma PLC incorporate thefinancial statements of the Company and its subsidiaries. Subsidiaries are fullyconsolidated from the date on which control is transferred to the Group. Controlis achieved where the Group has the power to govern the financial and operatingpolicies of an entity so as to obtain benefits from its activities. They arede-consolidated from the date on which control ceases. The acquisition method of accounting is applied to all business combinationsmade by the Group. The cost of an acquisition is measured, as the fair value ofthe assets given, equity instruments issued and liabilities incurred or assumedat the date of exchange, plus costs directly attributable to the acquisition.Identifiable assets acquired and liabilities and contingent liabilities assumed,in a business combination are measured initially at their fair values on thedate of acquisition, irrespective of the extent of any minority interest. Theexcess of the cost of acquisition over the fair value of the Group's share ofidentifiable net assets, including intangible assets acquired, is recorded asgoodwill. If the cost of acquisition is less than the fair value of the Group'sshare of net assets of the subsidiary acquired, the difference is recogniseddirectly in the income statement. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring accounting policies used into line with those used by theGroup. On consolidation, all intra-group transactions, balances, income andexpenditure are eliminated. Foreign currency translation Items included in the financial statements of each of the Group's entities aremeasured using the functional currency of the primary economic environment inwhich the entity operates (the "functional currency"). The consolidatedfinancial statements are presented in Sterling, which is the Company'sfunctional and presentational currency. Transactions in foreign currencies arerecorded at the rate of exchange ruling at the date of transaction. Monetaryassets and liabilities denominated in foreign currencies at the balance sheetdate are translated at the rates of exchange prevailing at that date. Gains andlosses arising on translation are included in the income statement. The resultsof operations that have a functional currency different from the presentationalcurrency are translated at the average rate of exchange during the period andtheir balance sheets at the rates ruling at the date of the balance sheet.Exchange differences arising on translation from 1 July 2004 are taken directlyto a separate component of equity, the cumulative translation reserve. Revenue recognition Revenue from product sales is recognised upon shipment to customers. Provisionsfor rebates, product returns and discounts to customers are provided for asreductions to revenue in the same period as the related sales occurred.Royalties receivable under licensing agreements are recognised as they areearned and are recorded within revenue. The recognition of other paymentsreceived and receivable, such as licence fees, upfront payments and milestones,is dependent on the terms of the related arrangement, having regard to theongoing risks and rewards of the arrangement, and the existence of anyperformance or repayment obligations, if any, with the third party. Amountsreceived are recognised immediately as revenue where there are no substantialremaining risks, no ongoing performance obligations and amounts received are notrefundable. Amounts are deferred over an appropriate period where theseconditions are not met. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net identifiable assets, including intangibleassets, of the acquired subsidiary at the date of acquisition. Goodwill onacquisitions of subsidiaries is included in intangible assets. Goodwill istested annually for impairment and carried at cost less accumulated impairmentlosses. Gains and losses on the disposal of an entity include the carryingamount of goodwill relating to the entity sold. Goodwill arising on acquisitions before the date of transition to IFRS has beenretained at the previous UK GAAP amounts. Intangible assets a) Licences and trademarks Licences and trademarks including product distribution rights and technicaldossiers are recognized at cost. They have a definite useful life and arecarried at cost less accumulated amortization. Amortisation is calculated usingthe straight-line method to allocate the cost over their estimated useful lives(10 to 18 years). b) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred ondevelopment activities are recognised as intangible assets when it is probablethat the project will be a success, considering its commercial and technologicalfeasibility, status of regulatory approval, and costs can be measured reliably.Other development expenditure is recognised as an expense as incurred.Development costs previously recognised as an expense are not recognised as anasset in a subsequent period. Development costs that have a finite useful lifeand that have been capitalised are amortised from the date of regulatoryapproval of the product on a straight-line basis over the period of its expectedbenefit. Property, plant and equipment All property, plant and equipment is shown at cost less accumulated depreciationand impairment. Cost includes expenditure that is directly attributable to theacquisition of the items. Subsequent costs are included in the assets' carrying amount or recognised as aseparate asset, as appropriate, only when it is probable that future economicbenefits associated with the item will flow to the Group and the cost of theitem can be measured reliably. All other repairs and maintenance are charged tothe income statement during the financial period in which they are incurred. Depreciation on assets is calculated to write off the cost of each asset to itsresidual value over its estimated useful life as follows: Leasehold improvements expensed over period of lease - straight-line basis Computer equipment and software depreciated at 25% per year - reducing balancebasis Fixtures and fittings depreciated at 15% to 25% per year - reducing balancebasis The assets residual values and useful lives are reviewed, and adjusted ifappropriate, at each balance sheet date. Assets held under finance leases are depreciated over their expected usefullives on the same basis as owned assets or where shorter, over the term of therelevant lease. Impairment of intangible assets Annually, the Group reviews the carrying amounts of its intangible assets todetermine whether there is any indication that those assets have suffered animpairment loss. If any such indication exists, the recoverable amount of theasset is estimated in order to determine the extent of the impairment loss (ifany). Where the asset does not generate cash flows that are independent fromother assets, the Group estimates the recoverable amount of the cash-generatingunit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cash flows are discountedto their present value using a pre-tax discount rate that reflects currentassessments of the time value of money and the risks specific to the asset forwhich the estimates of future cash flows have not been adjusted. If therecoverable amount of an asset (or cash-generating unit) is estimated to be lessthan its carrying amount, the carrying amount of the asset (cash-generatingunit) is reduced to its recoverable amount. An impairment loss is recognised asan expense immediately. Inventories Inventories are valued at the lower of cost and net realisable value. Cost isdetermined using the first in first out (FIFO) method. Provision is made forobsolete, slow-moving or defective items where appropriate. Net realisable valueis determined at the balance sheet date on commercially saleable products basedon estimated selling price less all further costs to completion and all relevantmarketing, selling and distribution costs. 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 period. Taxableprofit differs from net profit as reported in the income statement because itexcludes items of income and expenses that are taxable and deductible in otherperiods 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 the initial recognition (other than abusiness combination) of other assets and liabilities in a transaction thataffects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising from investments in subsidiaries and associates, and interests in jointventures, except where the Group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying amount of deferred tax assets are 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. Leases Leases are classified as a finance lease whenever the terms of the leasetransfer substantially all the risks and rewards of ownership to the lessee. Allother leases are classified as operating leases. Assets held under finance leases and HP contracts are capitalised and includedin tangible fixed assets at fair value. Each asset is depreciated over theshorter of the lease term or its useful life. The obligations related to financeleases, net of finance charges in respect of future periods, are included, asappropriate, under creditors due within, or creditors due after more than, oneyear. The interest element of a rental obligation is allocated to accountingperiods during the lease term to reflect a constant rate of interest on theremaining balance of the obligation for each accounting period. Rentals under operating leases are charged to income on a straight-line basisover the term of the relevant lease. Pensions The Group operates a defined contribution pension scheme for its employees. Theassets of the scheme are held in independently administered funds.Contributions are charged to the profit and loss account as they become payablein accordance with the rules of the schemes. Other employee benefits The expected cost of compensated short-term absence (i.e. holidays) isrecognised when employees under services that increase their entitlement. Anaccrual is made for holidays earned but not taken. Share-based payments The Group has applied the requirements of IFRS2, Share-based payments. Inaccordance with the transitional provisions, IFRS 2 has been applied to allgrants of equity instruments after 7 November 2002 that were unvested at 1 July2005. The Group grants share options to directors and employees. Equity-settledshare-based payments are measured at fair value at the date of grant andexpensed on a straight-line basis over the expected life of the option, based onthe estimated number of options that will eventually vest. The share options granted have varying performance criteria required for theoption to vest and these are considered in the method of measuring the fairvalue. Where it is considered appropriate, the fair value is measured using theBlack-Scholes model. Where complex market performance criteria exist, aMontecarlo model has been used to establish the fair value on grant. Trade receivables Trade receivables do not carry any interest and are stated at their face valueas reduced by appropriate allowances for estimated irrecoverable amounts. Trade payables Trade payables are not interest bearing and are stated at their face value. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call withbanks, other short-term highly liquid investments with original maturities ofthree months or less, and bank overdrafts. Bank overdrafts are shown withinborrowings in current liabilities on the balance sheet. 6. Restated IFRS financial information Reconciliation of the UK GAAP profit and loss account to the IFRS incomestatement for the six months ended 31 December 2004 (unaudited) Effect of UK GAAP in IFRS transition to Notes format IFRS IFRS £'000 £'000 £'000 Revenue 796 - 796Cost of Sales (408) - (408) ______ ______ ______Gross Profit 388 388 Administrative expenses Selling, marketing and distribution costs (711) - (711) General and administrative expenses (i) (1,942) 85 (1,857) ______ ______ ______Total administrative expenses (2,653) 85 (2,568) ______ ______ ______ Operating loss (2,265) 85 (2,180) Interest receivable 149 - 149Interest payable and similar charges (1) - (1) ______ ______ _____Loss before tax (2,117) 85 (2,032) Taxation 10 - 10 ______ ______ ______ Loss for the period (2,127) 85 (2,042) ______ ______ ______ Reconciliation of the UK GAAP profit and loss account to the IFRS incomestatement for the year ended 30 June 2005 (unaudited) Effect of UK GAAP in IFRS transition to Notes format IFRS IFRS £'000 £'000 £'000 Revenue 6,971 - 6,971Cost of Sales (2,616) - (2,616) ______ ______ ______Gross Profit 4,355 4,355 Administrative expenses Selling, marketing and distribution costs (2,489) - (2,489) General and administrative expenses (i) (4,720) 168 (4,552) ______ ______ ______Total administrative expenses (7,209) 168 (7,041) ______ ______ ______ Operating loss (2,854) 168 (2,686) Interest receivable 248 - 248Interest payable and similar charges (18) - (18) ______ ______ ______Loss before tax (2,624) 168 (2,456) Taxation 45 - 45 ______ ______ ______ Loss for the year (2,669) 168 (2,501) ______ ______ ______ Reconciliation of UK GAAP balance sheet to the IFRS balance sheet at 30 June2004 - date of transition to IFRS (unaudited) Effect of UK GAAP in IFRS transition to format IFRS IFRS £'000 £'000 £'000Non-current assetsGoodwill 15,662 - 15,662Other intangible assets 1,266 - 1,266Property, plant and equipment 124 - 124 _____ _____ _____ 17,052 - 17,052 _____ _____ _____ Current assetsInventories 109 - 109Trade and other receivables 2,061 - 2,061Cash and cash equivalents 7,753 - 7,753 _____ _____ _____ 9,923 - 9,923 _____ _____ _____ Total assets 26,975 - 26,975 Current liabilitiesTrade and other payables 1,406 - 1,406Current tax liabilities 384 - 384Financial liabilities Bank overdraft, loans and other borrowings 70 - 70 _____ _____ _____ 1,860 - 1,860 _____ _____ _____ Non-current liabilitiesMinority equity interest (4) 4 - _____ _____ _____ (4) 4 - _____ _____ _____ Total liabilities 1,856 4 1,860 _____ _____ _____ Net assets 25,119 (4) 25,115 _____ _____ _____ EquityShare capital 539 - 539Share premium account 16,030 - 16,030Shares to be issued 4,367 - 4,367Merger reserve 10,062 - 10,062Other reserve 698 - 698Retained earnings (6,577) - (6,577) _____ _____ _____ 25,119 - 25,119Minority equity interests - (4) (4) _____ _____ _____Total equity 25,119 (4) 25,115 Reconciliation of UK GAAP balance sheet to the IFRS balance sheet at 31 December2004 - (unaudited) Effect of UK GAAP in IFRS transition to format IFRS IFRS £'000 £'000 £'000Non-current assetsGoodwill 14,373 457 14,830Other intangible assets 1,224 - 1,224Property, plant and equipment 169 - 169 _____ _____ _____ 15,766 457 16,223 _____ _____ _____ Current assetsInventories 82 - 82Trade and other receivables 1,607 - 1,607Cash and cash equivalents 6,680 - 6,680 _____ _____ _____ 8,369 - 8,369 _____ _____ _____ Total assets 24,135 457 24,592 Current liabilitiesTrade and other payables 1,882 - 1,882Current tax liabilities 111 - 111 _____ _____ _____ 1,993 - 1,993 _____ _____ _____ Non-current liabilitiesMinority equity interest (4) 4 - _____ _____ _____ (4) 4 - _____ _____ _____ Total liabilities 1,989 4 1,993 _____ _____ _____ Net assets 22,146 453 22,599 _____ _____ _____ EquityShare capital 552 - 552Share premium account 17,303 - 17,303Shares to be issued 2,251 - 2,251Merger reserve 10,062 - 10,062Cumulative translation reserve - (50) (50)Other reserve 695 - 695Retained earnings (8,717) 507 (8,210) _____ _____ _____ 22,146 457 22,603Minority equity interests - (4) (4) _____ _____ _____Total equity 22,146 453 22,599 Reconciliation of UK GAAP balance sheet to the IFRS balance sheet at 30 June2005- (unaudited) Effect of UK GAAP in IFRS transition to format IFRS IFRS £'000 £'000 £'000Non-current assetsGoodwill 15,949 2,156 18,105Other intangible assets 2,392 (1,209) 1,183Property, plant and equipment 393 - 393 _____ _____ _____ 18,734 947 19,681 _____ _____ _____ Current assetsInventories 601 - 601Trade and other receivables 4,901 - 4,901Cash and cash equivalents 4,908 - 4,908 _____ _____ _____ 10,410 10,410 _____ _____ _____ Total assets 29,144 947 30,091 Current liabilitiesTrade and other payables 4,343 - 4,343Current tax liabilities 17 - 17Financial liabilities - Obligations under finance leases 16 - 16 - Bank overdrafts 464 - 464 _____ _____ _____ 4,840 - 4,840 _____ _____ _____ Non-current liabilitiesFinancial liabilities - Bank loan 135 - 135 - Obligations under finance leases 40 - 40Minority equity interest (4) 4 - _____ _____ _____ 171 4 175 _____ _____ _____ Total liabilities 5,011 4 5,015 _____ _____ _____ Net assets 24,133 943 25,076 _____ _____ _____ EquityShare capital 592 - 592Share premium account 16,171 - 16,171Merger reserve 15,684 - 15,684Cumulative translation reserve - 48 48Other reserve 686 - 686Retained earnings (9,000) 899 (8,101) _____ _____ _____ 24,133 947 25,080Minority equity interests - (4) (4) _____ _____ _____Total equity 24,133 943 25,076 Notes to the reconciliations (i) Reconciliation of net loss (unaudited) Year ended 6 months ended 30 June 31 December 2005 2004 £'000 £'000 Loss for the period reported under UK GAAP (2,669) (2,127) Effects of transitionGoodwill amortisation 958 457Share based payments (779) (372)Business combinations - intangible assets 53 -Other GAAP differences (64) - ______ ______ 168 85 ______ ______ Loss of the year/period under IFRS (2,501) (2,042) ______ ______ (ii) Reconciliation of equity (unaudited) 30 June 31 December 30 June 2005 2004 2004 £'000 £'000 £'000 Equity reported under UK GAAP 24,133 22,146 25,119 Effects of transitionGoodwill amortisation 958 457 -Other GAAP differences (64) - -Business combinations - intangible assets 53 - -Minority interest (4) (4) (4) ______ ______ ______ 943 453 (4) ______ ______ ______ Equity under IFRS 25,076 22,599 25,115 ______ ______ ______ This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Sinclair Pharma