16th Nov 2005 13:00
Imagination Technologies Group PLC16 November 2005 Imagination Technologies Group plc Transition to International Financial Reporting Standards Imagination Technologies Group plc ('the Group') will be reporting its financialresults in accordance with International Financial Reporting Standards (IFRS) asadopted by the European Union from 1 April 2005. This statement presents andexplains the conversion of the results of the Group as previously reported underUK Generally Accepted Accounting Principles (UK GAAP) onto an IFRS basis for theyear ended 31 March 2005. The key changes for the Group are: • non-amortisation of goodwill • inclusion of a fair value charge in relation to employee share schemes • balance sheet reclassification of computer software to intangible assets • inclusion of investment at fair value with effect from 1 April 2005. The net impact of these changes is that for the year ended 31 March 2005 theGroup's loss before taxation decreased to £6.4 million and that with effect from1 April 2005 its investment has been revalued to £6.2 million from £0.6 million. Full details are set out in this announcement. 16 November 2005 Enquiries: Imagination Technologies Group plc 01923 260511Trevor Selby, Chief Financial Officer College HillAdrian Duffield/Nick Elwes 020 7457 2020 Restatement of financial information for International Financial ReportingStandards 1 Introduction Following a European Union Regulation (IAS Regulation EC 1606/2002) issued inJune 2002, Imagination Technologies Group plc (the "Group") is required toprepare its financial statements under International Financial ReportingStandards ("IFRS") with effect for the year ending 31 March 2006. The financial statements for the year ended 31 March 2005 have been restatedunder IFRS, adopting a 1 April 2004 transition date. This announcement presentsand explains the Group's results for the year ended 31 March 2005 as convertedfrom UK GAAP to IFRS. The first results to be published under IFRS will be for the half year to 30September 2005 which will be reported in an announcement to be issued on 24November 2005. 2 Basis of preparation EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidatedfinancial statements of the company, for the year ending 31 March 2006, beprepared in accordance with International Financial Reporting Standards (IFRSs)adopted for use in the EU ("adopted IFRSs"). This interim financial information has been prepared on the basis of therecognition and measurement requirements of IFRSs in issue that either areendorsed by the EU and effective (or available for early adoption) at 31 March2006 or are expected to be endorsed and effective (or available for earlyadoption) at 31 March 2006, the Group's first annual reporting date at which itis required to use adopted IFRSs. Based on these adopted and unadopted IFRSs,the directors have made assumptions about the accounting policies expected to beapplied, which are as set out in note 6, when the first annual IFRS financialstatements are prepared for the year ending 31 March 2006. In addition, the adopted IFRSs that will be effective (or available for earlyadoption) in the annual financial statements for the year ending 31 March 2006are still subject to change and to additional interpretations and thereforecannot be determined with certainty. Accordingly, the accounting policies forthat annual period will be determined finally only when the annual financialstatements are prepared for the year ending 31 March 2006. 3 Transition to IFRS - first time adoption 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. The Groupis required to establish its accounting policies for the year ending 31 March2006 and, in general, apply these retrospectively to determine the IFRS openingbalance sheet as at its date of transition, 1 April 2004. This standard permitscompanies adopting IFRS for the first time to take certain exemptions from thefull requirements of IFRS during the transition period. As permitted under thetransitional provisions of IFRS1, the exemptions adopted by the Group are setout below. Share based payments The Group has adopted the exemption to apply IFRS 2 Share based payments only toawards made after 7 November 2002 that had not vested by 1 January 2005. Business combinations The Group has chosen not to restate business combinations completed prior to thetransition date on an IFRS basis. Financial Instruments The Group has adopted the exemption not to restate comparatives for IAS32 andIAS 39 and therefore the comparative information in the 2005 financialstatements will be presented on the existing UK GAAP basis and will not berestated in line with IAS32 and IAS 39. Cumulative translation differences Cumulative translation differences in respect of foreign operations have beendeemed to be nil at the date of transition. 4 Principal differences to UK GAAP Goodwill and impairments Under UK GAAP, amortisation of goodwill is charged to the profit and lossaccount so as to write off goodwill on a straight line basis over its usefuleconomic life. Under UK GAAP, the goodwill arising on the acquisitions ofEnsigma Limited and Cross Products Limited was being amortised on a straightline basis over 7 years. The charge for the year ended 31 March 2005 under UKGAAP was £1,019,000. Under IFRS, goodwill is not amortised but is reviewed for impairment annually.The charge in the income statement for the year ended 31 March 2005 is£1,019,000 lower than under UK GAAP. As a result, goodwill in the balance sheetas at 31 March 2005 is increased by £1,019,000 compared to under UK GAAP. Share-based payments With respect to share-based payments, under UK GAAP only the intrinsic value isexpensed e.g. where options are granted over shares with an exercise price belowmarket price at the date of grant. For share-based payments under IFRS, the expense under IFRS2 "Share-basedPayment" is determined based on the fair value of such payments at the date ofgrant, spread over the vesting period taking account of the number of sharesthat are expected to vest. The Group has determined the fair value by use of theBlack-Scholes pricing model with the expected life used in the model based onmanagement's best estimate, for the effects of non-transferability, exerciserestrictions and behavioural considerations. All share-based remuneration isequity settled. The charge for share-based payments for the year ended 31 March 2005 under IFRSis £172,000 higher than under UK GAAP. There is no effect on net assets as theprofit and loss charge is offset by an equivalent amount credited to reserves. Intangibles IFRS requires computer software and other intellectual property that is not anintegral part of the related hardware to be treated as an intangible asset. Thishas resulted in a balance sheet reclassification from property, plant andequipment to intangible assets of £1,420,000 as at 1 April 2004 and £727,000 asat 31 March 2005. Development Costs No development cost has been capitalised due to the directors' assessment thatthere is inadequate visibility of future cash flows resulting from developmentwork. Financial Instruments Under UK GAAP, trade investments are valued at the lower of cost and netrealisable value. Investments as at 31 March 2005 of £613,000 represented theGroup's shareholding in Frontier Silicon valued at cost. The trade investmentunder UK GAAP is reclassified as an available for sale asset under IFRS. Under IFRS, available for sale assets are valued at fair value. As permittedunder the transitional provisions of IFRS1, the Group has adopted the exemptionnot to restate investment comparatives for IAS 39 and therefore the comparativeinformation in the financial statements for the year ended 31 March 2005 ispresented on the existing UK GAAP basis and has not been restated in line withIAS 39. The investment has been revalued to a fair value of £6,155,000 as at 1April 2005. The financial information contained in this report does not constitute statutoryaccounts within the meaning of section 240 of the Companies Act 1985. Thecomparative figures for the year ended 31 March 2005 prepared under IFRS andshown in this report are unaudited. The consolidated statutory accounts ofImagination Technologies Group plc for the year ended 31 March 2005 preparedunder UK GAAP have been filed with the Registrar of Companies. The auditors'report on those accounts was unqualified and did not contain any statement undersection 237 (2) or (3) of the Companies Act 1985. 5 Restatement of financial information under IFRS The financial information set out below has been prepared on the basis of theaccounting policies set out in note 6. An explanation of the effects oftransition to IFRS is provided above in note 4. Consolidated Income Statements Year ended 31 March 2005 UK GAAP Effect of transition to IFRS IFRS Goodwill Share-based amortisation remuneration £'000 £'000 £'000 £'000Revenue 30,583 - - 30,583Cost of Sales (12,947) - - (12,947)Gross Profit 17,636 - - 17,636 Research and development expenses (19,243) - (138) (19,381)Sales and administrative expenses (5,938) 1,019 (34) (4,953)Total operating expenses (25,181) 1,019 (172) (24,334) Operating Loss (7,545) 1,019 (172) (6,698) Financial income 299 - - 299Financial expenses (39) - - (39)Net financing income 260 - - 260 Loss before taxation (7,285) 1,019 (172) (6,438) Income Tax 805 - - 805 Loss after taxation (6,480) 1,019 (172) (5,633) Loss per share - basic and diluted (3.5p) (3.0p) Consolidated Balance Sheets At 1 April 2004 At 31 March 2005 UK GAAP Effect of transition IFRS UK GAAP Effect of transition to IFRS IFRS to IFRS Reclassification Goodwill Reclassification amortisation £'000 £'000 £'000 £'000 £'000 £'000 £'000AssetsNon-current assetsIntangible Assets 4,114 1,420 5,534 3,203 1,019 727 4,949Property, plant and 4,115 (1,420) 2,695 4,474 - (727) 3,747equipmentInvestment 613 - 613 613 613 8,842 - 8,842 8,290 1,019 - 9,309Current assetsInventories 2,003 - 2,003 2,332 - - 2,332Trade and other 4,500 - 4,500 7,192 - - 7,192receivablesCash and cash 6,498 - 6,498 7,670 - - 7,670equivalents 13,001 - 13,001 17,194 - - 17,194Current liabilitiesTrade and other (5,752) - (5,752) (8,111) - - (8,111)payables Net current assets 7,249 - 7,249 9,083 - - 9,083 Non-current liabilitiesLong-term borrowings - - - (588) - - (588) Net assets 16,091 - 16,091 16,785 1,019 - 17,804 EquityCalled up share capital 18,014 - 18,014 18,905 - - 18,905Share premium account 30,134 - 30,134 36,415 - - 36,415Other capital reserves 267 - 267 313 - - 313Warrant Reserve 1,157 - 1,157 1,111 - - 1,111Merger Reserve 2,402 - 2,402 2,402 - - 2,402Translation Reserve - - - - - 2 2Retained earnings (35,883) - (35,883) (42,361) 1,019 (2) (41,344)Total equity 16,091 - 16,091 16,785 1,019 - 17,804 Note: With respect to the charge in the Income Statement for share-basedremuneration, there is no effect on net assets as the profit and loss charge isoffset by an equivalent amount credited to reserves. Cashflow Statement There are no material adjustments to the cashflow statement previously presentedunder UK GAAP arising from identified IFRS adjustments. 6 IFRS Accounting Policies The Group's accounting policies under IFRS are set out below. Basis of preparation The Group accounts include the accounts of the company and its subsidiaryundertakings made up to 31 March 2005. Unless otherwise stated, the acquisitionmethod of accounting has been adopted. Under this method, the results ofsubsidiary undertakings acquired or disposed of in the year are included in theconsolidated profit and loss account from the date of acquisition or up to thedate of disposal. Basis of consolidation The Group financial statements consolidate the financial statements of theCompany and its subsidiary undertakings. Profits and losses arising on tradingbetween Group undertakings are excluded. All companies within the Group make uptheir financial statements to the same date. Revenue Revenue comprises:- 1. the value of licence fees, development income, maintenance androyalties from licence and development agreements; 2. revenues from the sale of products to support technology licensees;and 3. revenues from the sale of systems products utilising the Group'stechnology to third parties. In principle, revenue is recognised to the extent that the Group has obtainedthe right to consideration through its performance. Revenue from licences is recognised on delivery to the customer. Revenue onlicence agreements for products which are either not finished or which need tobe modified to meet specific customer requirements is recognised on apercentage-to-completion basis over the period from starting development of theproduct to delivery. The percentage-to-completion is measured by monitoringprogress compared with the total estimated project requirement. Progress ismeasured by an assessment of performance against key development milestones. Revenue on development work is recognised on a percentage-to-completion basisover the period from the start of the development to delivery. Development workis normally invoiced as milestones are achieved. Where invoicing milestones on licence or development arrangements are such thatthe proportion of work performed is greater than the proportion of the totalcontract value which has been invoiced, the Group evaluates whether it hasobtained, through its performance to date, the right to the uninvoicedconsideration and therefore whether revenue should be recognised. In particularit considers whether there is sufficient certainty that the invoice will beraised in the expected timeframe, that the customer considers that the Group'scontractual obligations have been, or will be, fulfilled and that only thosecosts budgeted to be incurred will be incurred. Where the Group considers thatthere is insufficient evidence that it has the right to consideration, takinginto account these criteria, revenue is not recognised until there is sufficientevidence that the Group has obtained the right to consideration for itsperformance under such arrangements. Revenue for maintenance is recognised on a straight-line basis over the periodfor which maintenance is contractually agreed with the licensee. The excess of licence fees, development income and maintenance invoiced overrevenue recognised is recorded as deferred income. Royalty revenues are earned on the sale by licensees of products containing theGroup's technology. Revenues are recognised as they are earned to the extentthat the Group has sufficient evidence of sales of products containing theGroup's technology by licensees. Revenues from the sale of products to support technology licensees and systemsproducts utilising the Group's technology to third parties are recognised upondelivery and are accounted for net of VAT and returns. Research and development costs Expenditure on research is written off in the period in which it is incurred. Development expenditure is capitalised where it relates to a specific projectwhere technical feasibility has been established, adequate technical, financialand other resources exist to complete the project, the expenditure attributableto the project can be measured reliably and overall project profitability isreasonably certain. In this case, it is recognised as an intangible asset andamortised over its useful economic life. All other development expenditure isrecognised as an expense in the period in which it is incurred. Operating leases Rental charges in respect of operating leases are charged to the profit and lossaccount on a straight line basis over the life of the lease. Employee Benefits The Group contributes to a defined contribution pension plan. Payments arecharged to the profit and loss account in the period to which they relate. Taxation Income tax on the profit or loss for the year comprises current and deferredtax. Income tax is recognised in the income statement except to the extent thatit relates to items recognised directly in equity, in which case it isrecognised in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantially enacted at the balance sheet date, andany adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method on anytemporary differences between the carrying amounts for financial reportingpurposes and those for taxation purposes. The amount of deferred tax provided isbased on the expected manner of realisation or settlement of the carrying amountof assets and liabilities. A deferred tax asset is recognised only to the extent that it is probable thatsufficient taxable profit will be available to utilise the temporary difference. Foreign exchange Transactions in foreign currencies are translated at the rates of exchangeruling at the dates of the transactions. Monetary assets and liabilitiesdenominated in foreign currencies are translated at rates of exchange ruling atthe balance sheet date. Exchange gains and losses on settled transactions andmonetary items are taken to the income statement. On consolidation, results of foreign subsidiary undertakings are translated atthe average rates of exchange for the year. The assets and liabilities aretranslated at rates ruling at the balance sheet date. Exchange differencesarising from the retranslation of the opening net investments in overseassubsidiary undertakings and between the results for the year translated ataverage and closing rates are disclosed as movements in the translation reservewithin equity. Intangible Assets Software, trademarks and patents are capitalised as intangible assets at cost ofacquisition and amortised over their estimated useful economic lives, between 3and 5 years. Intangible assets acquired as part of a business combination arestated in the balance sheet at their fair value at the date of acquisition andamortised over their estimated useful economic lives. Goodwill Purchased goodwill (representing the excess of the fair value of theconsideration and associated costs over the fair value of the identifiable netassets acquired) arising on consolidation in respect of acquisitions iscapitalised. Goodwill is recognised as an intangible asset and reviewed forimpairment at least annually. Any impairment is recognised immediately in theincome statement and may not be subsequently reversed. On disposal of a subsidiary or business, the attributable goodwill is includedin the determination of the profit or loss on disposal. Property, plant and equipment Property, plant and equipment are depreciated to write down their cost to theirestimated residual values over the period of their estimated useful economiclives. Periodic reviews are made of estimated remaining useful economic livesand residual values, and the depreciation rates applied are: Freehold land No depreciationFreehold buildings 2 per cent on costLeasehold improvements Equally over the period of the leasePlant and equipment 20 per cent to 33 per cent on costMotor vehicles 25 per cent on cost Impairment Assets that have an indefinite useful life are not subject to amortisation andare tested annually for impairment. Assets that are subject to amortisation ordepreciation are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable. If anysuch condition exists, the recoverable amount of the asset is estimated in orderto determine the extent, if any, of the impairment loss. Where the asset doesnot generate cash flows that are independent from other assets, estimates aremade of the cashflows of the cash generating unit 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, estimated future cashflows are discounted totheir present value using a discount rate appropriate to the specific asset orcash generating unit. If the recoverable amount of an asset or cash generating unit is estimated to beless than its carrying amount, the carrying value of the asset or cashgenerating unit is reduced to its recoverable amount. Impairment losses arerecognised immediately in the income statement. In respect of assets other than goodwill, an impairment loss is reversed ifthere has been a change in the estimates used to determine the recoverableamount. An impairment loss is reversed only to the extent that the asset'scarrying amount does not exceed the carrying amount that would have beendetermined, net of depreciation or amortisation, if not impairment loss had beenrecognised. Impairment losses in respect of goodwill are not reversed. Inventories Stock is valued at the lower of cost and net realisable value. Finished goodsinclude direct costs and attributable overheads based on the normal level ofactivity. Work in progress is valued at the cost of work completed on contracts in hand,net of provisions. Cash and cash equivalents Cash and cash equivalents comprises cash balances and call deposits withmaturity of less than or equal to three months. 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