5th Jul 2007 07:00
Augean Plc05 July 2007 For immediate release5 July 2007 AUGEAN PLC TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS Introduction Augean PLC (Augean or the group) will be reporting its financial results inaccordance with International Accounting Standards (IAS) and InternationalFinancial Reporting Standards (IFRS) as adopted by the European Union (EU) witheffect from 1 January 2007. This statement presents and explains the conversionof the results of the group as previously reported under UK Generally AcceptedAccounting Principles (UK GAAP) onto an IFRS basis for the year ended 31December 2006 (unaudited). The transition to IFRS does not impact the group's underlying businessperformance, trading cash flows, its ability to pay ordinary dividends nor itsfinancing arrangements. Overview of Impact at 31 December 2006 • Profit before tax £2.3m (UK GAAP loss £7.5m) • Adjusted profit before tax £3.5m (UK GAAP £3.6m) • Earnings per share 3.7p (UK GAAP loss 11.3p) • Adjusted earnings per share 5.5p (UK GAAP 5.6p) • Revenue unchanged at £26.6m • Net assets £107.2m (UK GAAP £97.4m) • Free cash flow and movement in net borrowings unaffected Commenting on the statement, Peter Southby, Finance Director of Augean, said: "The issues that have had the most significant impact on the restated financialstatements are the requirement to cease amortising goodwill arising onacquisitions, and the requirement to reduce goodwill on utilisation ofpreviously unrecognised acquired tax losses. The group's underlying businessperformance and cash flow remain unaffected." For further information, please contact: Peter Southby, Tel: (01937 844980)Finance DirectorAugean PLC4 Rudgate CourtWetherbyWest YorkshireLS23 7BF Restatement of financial information for International Financial ReportingStandards Contents 1 Introduction 2 Basis of preparation 3 Transition to IFRS - first time adoption 4 IFRS Financial statements for the year ended 31 December 2006 5 Explanation of principal IFRS adjustments 6 Other impacts 7 Principal accounting policies following IFRS implementation 1 Introduction Following a change in the rules of the Alternative Investment Market (AIM),Augean is required, as a company quoted on the AIM part of the London StockExchange, to present its consolidated financial statements in accordance withEU-adopted International Financial Reporting Standards (IFRS) and InternationalAccounting Standards (IAS) for periods commencing on or after 1 January 2007. As Augean's statutory year end is 31 December, the group will adopt IFRS for thefirst time for the year ended 31 December 2007 together with restatedcomparatives for the year ended 31 December 2006. As such these standards applyfrom the date of transition, 1 January 2006, onwards. This unaudited announcement presents and explains the group's restated resultsfor the year ended 31 December 2006 as converted from UK GAAP to IFRS. The first results to be published under IFRS will be for the half year to 30June 2007. The accounting standards which produce the most significant impact on theconsolidated statements of the group are as follows: • IFRS 3 which results in goodwill no longer being routinely amortised, but instead subject to an annual impairment review. • IAS 12 which requires a reduction in goodwill as previously unrecognised acquired deferred tax assets are recognised or utilised. 2 Basis of preparation The restated financial information has been prepared in accordance with allapplicable IFRS and related interpretations in force at the date of thisannouncement under the assumption that all existing standards in issue from theInternational Accounting Standards Board (IASB) will be fully endorsed by theEU. The failure of the EU to endorse all of these standards for financialreporting in 2007, the issue of any new or revised standards, or the publishingof further interpretation guidance, could result in changes to the financialinformation presented in this document. In addition, as the financial communitygains more experience, and best practice and interpretative guidance develop,there may be consequential changes to the methodologies and approaches used inpreparing the financial information shown in this document. The financial information for the full year ended 31 December 2006, as preparedon the above basis and included in this document, has not been audited. The financial statements included here are presented in accordance with IAS 1,Presentation of Financial Statements. This format and presentation may requiremodification in the event that further guidance is issued and as best practicedevelops. IAS 1 does not provide definitive guidance on the format of the incomestatement, but states key lines that should be disclosed. It also requiresadditional line items and headings to be presented on the face of the incomestatement when such presentation is relevant to an understanding of the entity'sfinancial performance. Factors to be considered include materiality and thenature and function of the components of income and expense. 3 Transition to IFRS - first time adoption IFRS 1 "First-time Adoption of International Financial Reporting Standards"determines that the transition date for Augean will be 1 January 2006. Itpermits those companies adopting IFRS for the first time to take certainexemptions from the full requirements of IFRS during the transition period. Augean has taken the following key exemptions: 3.1 Business combinations The group has elected not to apply IFRS 3 "Business Combinations"retrospectively and restate business combinations completed prior to the date oftransition. As a result, in the opening balance sheet, goodwill arising frompast business combinations of £85.8 million remains as stated under UK GAAP at 1January 2006. 3.2 Share-based payments The group has elected to apply IFRS 2 "Share-based Payments" only to awards ofequity instruments made after 7 November 2002, which had not vested by 1 January2006. 4 IFRS Financial statements for the year ended 31 December 2006 4.1 Consolidated Income Statement for the year ended 31 December 2006 £'000 £'000 £'000 Unaudited Unaudited Unaudited Before Total Exceptional Exceptional items itemsContinuing operationsRevenue 26,561 - 26,561 Operating expenses (22,007) (1,223) (23,230) Operating profit 4,554 (1,223) 3,331 Finance costs (1,020) - (1,020) Profit before tax 3,534 (1,223) 2,311 Tax 89 - 89 Profit for the year 3,623 (1,223) 2,400 Earnings per shareBasic and diluted 5.53p (1.87p) 3.66p 4.2 Reconciliation of reported profits for the year ended 31 December 2006 As reported Goodwill Goodwill As restated under UK GAAP amortisation tax adjustment Other under IFRS £'000 £'000 £'000 £'000 £'000 Audited Unaudited Unaudited Unaudited Unaudited 5.1 5.2 6.3 Continuing operationsRevenue 26,561 - - - 26,561 Operating expenses (33,012) 10,405 (600) (23) (23,230) Operating profit / (loss) (6,451) 10,405 (600) (23) 3,331 Finance costs (1,020) - - - (1,020) Profit / (loss) before (7,471) 10,405 (600) (23) 2,311tax Tax 89 - - - 89 Profit / (loss) for the (7,382) 10,405 (600) (23) 2,400year Earnings / (loss) per shareBasic and diluted (11.27p) 15.89p (0.92p) (0.04) 3.66p 4.3 Consolidated Balance Sheets as at 31 December 2006 and 1 January 2006 31 December 2006 1 January 2006 £'000 £'000 Unaudited Unaudited Non-current assetsGoodwill 94,079 85,812Other intangible assets 217 144Property, plant and equipment 28,839 29,403 123,135 115,359 Current assetsTrade and other receivables 6,034 6,871Cash and cash equivalents - - 6,034 6,871 Current liabilitiesTrade and other payables (4,712) (3,613)Tax liabilities (2,306) (2,969)Debt factoring - (2,346)Obligations under finance leases and (132) (181)hire purchase contractsBank overdraft and loans (3,636) (729) (10,786) (9,838) Net current liabilities (4,752) (2,967) Non-current liabilitiesBank and other loans (7,000) (100)Provisions (4,084) (7,336)Obligations under finance leases and (119) (235)hire purchase contracts (11,203) (7,671) NET ASSETS 107,180 104,721 SHAREHOLDERS' EQUITYShare capital 6,549 6,549Share premium account 106,222 106,222Retained earnings / (losses) (5,591) (8,050) Total shareholders' equity 107,180 104,721 4.4 Reconciliation of equity and net assets as at 31 December 2006 As reported under Goodwill Goodwill As restated UK GAAP amortisation tax adjustment Other under IFRS £'000 £'000 £'000 £'000 £'000 Audited Unaudited Unaudited Unaudited Unaudited 5.1 5.2 6.3Non-current assetsGoodwill 84,390 10,405 (600) (116) 94,079Other intangible assets - - - 217 217Property, plant and equipment 28,963 - - (124) 28,839 113,353 10,405 (600) (23) 123,135Current assetsTrade and other receivables 6,034 - - - 6,034Cash and cash equivalents - - - - - 6,034 - - - 6,034Current liabilitiesTrade and other payables (4,712) - - - (4,712)Tax liabilities (2,306) - - - (2,306)Obligations under finance leases (132) - - - (132)and hire purchase contractsBank overdraft and loans (3,636) - - - (3,636) (10,786) - - - (10,786) Net current liabilities (4,752) - - - (4,752) Non-current liabilitiesBank loans (7,000) - - - (7,000)Provisions (4,084) - - - (4,084)Obligations under finance leases (119) - - - (119)and hire purchase contracts (11,203) - - - (11,203) Net assets 97,398 10,405 (600) (23) 107,180 Shareholders' equityShare capital 6,549 - - - 6,549Share premium account 106,222 - - - 106,222Retained losses (15,373) 10,405 (600) (23) (5,591) Total shareholders' equity 97,398 10,405 (600) (23) 107,180 4.5 Reconciliation of equity and net assets as at 1 January 2006 As reported Goodwill Goodwill As restated under UK GAAP amortisation tax adjustment Other under IFRS £'000 £'000 £'000 £'000 £'000 Audited Unaudited Unaudited Unaudited Unaudited 5.1 5.2 6.3.1Non-current assetsGoodwill 85,812 - - - 85,812Other intangible assets - - - 144 144Property, plant and equipment 29,547 - - (144) 29,403 115,359 - - - 115,359 Current assetsTrade and other receivables 6,871 - - - 6,871Cash and cash equivalents - - - - - 6,871 - - - 6,871 Current liabilitiesTrade and other payables (3,613) - - - (3,613)Tax liabilities (2,969) - - - (2,969)Debt factoring (2,346) - - - (2,346)Obligations under finance leases and (181) - - - (181)hire purchase contractsBank overdraft and loans (729) - - - (729) (9,838) - - - (9,838) Net current liabilities (2,967) - - - (2,967) Non-current liabilitiesBank and other loans (100) - - - (100)Provisions (7,336) - - - (7,336)Obligations under finance leases and (235) - - - (235)hire purchase contracts (7,671) - - - (7,671) Net assets 104,721 - - - 104,721 Shareholders' equityShare capital 6,549 - - - 6,549Share premium account 106,222 - - - 106,222Retained losses (8,050) - - - (8,050) Total shareholders' equity 104,721 - - - 104,721 4.6 Consolidated cash flow statement for the year ended 31 December 2006 £'000 Unaudited Operating activities Cash generated from operations 6,269Interest paid (1,026)Tax paid (82) Net cash from operating activities 5,161 Investing activities Proceeds on disposal of property, plant and equipment 171Purchases of property, plant and equipment (1,516)Purchase of subsidiary undertakings (11,112) Net cash used in investing activities (12,457) Financing activities Repayments of borrowings (3,446)Drawdown of loan facilities 10,000Repayments of obligations under finance leases and hire (165)purchase contracts Net cash from financing activities 6,389 Net decrease in cash and cash equivalents (907) Cash and cash equivalents at beginning of the year (729) Cash and cash equivalents at end of year (1,636) 5 Explanation of principal IFRS adjustments 5.1 Goodwill and impairments Principal difference Under UK GAAP, the group amortises goodwill on a straight line basis over theuseful economic life of the acquired asset, up to a maximum of twenty years.Provision is made when impairment is indicated by external business factors andis considered against the value of all businesses acquired as part of eachsingle acquisition. This is in accordance with FRS 10 "Goodwill and IntangibleAssets". Under IFRS 3 "Business Combinations" annual amortisation is no longerrequired. Instead goodwill must be allocated to each income generating unitexpected to benefit from the synergies of the combination, and an annualimpairment review must be performed for each discrete unit in accordance withIAS 36 "Impairment of Assets". The group has performed this allocation and subsequent review and no impairmenthas been noted. Impact on income statement for the year ended 31 December 2006 Amortisation of goodwill is reduced from £10.4 million under UK GAAP to £nilunder IFRS. Impact on net assets at 1 January 2006 No impact noted. Impact on net assets at 31 December 2006 The closing balance sheet for 2006 is subject to an increase in the value ofnon-current assets of £10.4 million. 5.2 Deferred tax Principal difference Under UK GAAP deferred tax is recognised on the basis of timing differences,being the difference between accounting profit and taxable profit. IFRSrequires deferred tax to be based on temporary differences, being the differencebetween the carrying value of an asset or liability and its tax base. Of itselfthis has no impact on the group's figures but IAS 12 "Income Taxes" alsorequires that when deferred tax assets such as losses have not been recognisedon acquisition and are subsequently utilised, both deferred tax assets andgoodwill are adjusted with corresponding entries to operating expense and tax inthe income statement. During the year the group utilised tax losses that hadpreviously not been recognised on the acquisition of Atlantic Waste HoldingsLimited and Zero Waste Holdings Limited. As the related tax credit had alreadybeen recorded in the UK GAAP accounts a charge has been recorded as anexceptional operating expense. Impact on income statement for the year ended 31 December 2006 An exceptional charge of £0.6 million for the reduced value of goodwill isrecognised in the income statement. Impact on net assets at 1 January 2006 No impact noted. Impact on net assets at 31 December 2006 The closing balance sheet for 2006 is subject to a decrease in the value ofnon-current assets of £0.6 million. 6 Other impacts 6.1 Cash flow The group's underlying cash position is unaffected by the transition to IFRS.However, there are a number of presentational differences arising in the cashflows reported under IAS 7 "Cash Flow Statements". The cash flows themselvesrelate to movements in cash and cash equivalents (rather than simply cash) andare classified under three headings (operating, investing and financing) whichresults in the reordering of entries from their UK GAAP format. 6.2 Segmental reporting Under IAS 14 "Segment Reporting" additional reporting requirements are requiredfor the primary reporting segments and disclosure is also required for secondaryreporting segments. The group has elected to treat its business segments oflandfill and treatment as the primary reporting segments. There are nogeographical business segments and so there are no secondary reporting segments. 6.3 Reclassifications Various reclassifications are required in order to comply with the disclosurerequirements of the IFRS and IAS. The most significant of these are: 6.3.1. Computer software Under UK GAAP, all capitalised software is included within tangible fixed assetsas plant and equipment. Under IFRS, only computer software that is integral toa related item of hardware should be included as plant and equipment. All othercomputer software should be recorded as an intangible asset. Accordingly a reclassification of the net book value amount of capitalisedsoftware of £144,000 has been made in the transition balance sheet and £124,000in the balance sheet as at 31 December 2006 between plant and machinery andintangible assets. There is no impact on the income statement as a result of the reclassificationsince, under both UK GAAP and IFRS, computer software is written down over itsestimated useful life. 6.3.2. Intangible assets During the year ended 31 December 2006 the group acquired the assets andbusiness of Credential Hazardous. IFRS 3 "Business Combinations" requires thatfor all business combinations completed after the date of transition to IFRS,separately identified intangible assets should be valued and are subject toamortisation. As a result, £116,000 of amounts previously classified as goodwill under UK GAAPin relation to acquired order books and contracts has been reclassified as anintangible asset. This will be amortised over a three year period from the dateof acquisition which results in a £23,000 charge to the income statement in theyear ended 31 December 2006. 7. Principal accounting policies following IFRS implementation The principal accounting policies that the group anticipates adopting in its 31December 2007 financial statements to be prepared under IFRS are detailed below. The accounting policies assume that all existing standards in issue from theIASB will be fully endorsed by the EU. 7.1 Basis of accounting The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS), International Financial ReportingInterpretations Committee (IFRIC) interpretations endorsed by the European Unionand those parts of the Companies Act 1985 that remain applicable to companiesreporting under IFRS. The financial statements have been prepared on thehistorical cost basis with the exception of certain items which are measured atfair value as disclosed in the principal accounting policies set out below.These policies have been consistently applied to all years presented unlessotherwise stated. The preparation of financial statements in conformity with generally acceptedaccounting principles requires the use of estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Although these estimates are based on management's bestknowledge of the amount, event or actions, actual results ultimately may differfrom these estimates. (a) Subsidiaries The consolidated financial statements incorporate the financial statements ofthe company and entities controlled by the company (its subsidiaries) made up to31 December each year. Control is achieved where the company has the power togovern the financial and operating policies of an investee entity so as toobtain benefits from its activities. Results of subsidiary undertakings acquired or sold during the year areconsolidated from or to the date on which control passes. The trading results ofcompanies acquired during the year are accounted for under the purchase methodof accounting. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. (a) Joint ventures A joint venture is a contractual arrangement whereby two or more partiesundertake an economic activity that is subject to joint control. Joint controlexists where the strategic, financial and operating decisions relating to theactivity require the unanimous consent of the parties. Joint ventures areaccounted for using the equity method under which the carrying value of thegroup's investment is made up of the cost plus the group's share ofpost-acquisition profits and less equivalent losses as recognised in the incomestatement. Should a joint venture result in losses in excess of the group'sinterest they will be recognised where the group has a legal or constructiveobligation to fund those losses. Unrealised gains on transactions with joint ventures are eliminated to theextent of the group's interest in the joint venture. Unrealised losses are alsoeliminated unless the transactions provide evidence of impairment of the assettransferred. The group ceases to use the equity method of accounting on the date from whichit no longer has significant influence in the joint venture or when the interestbecomes held for sale. (c) Business combinations The purchase method is used to account for all acquisitions. The cost of anacquisition is measured at the fair values on the date of exchange of assetsgiven, liabilities incurred or assumed and equity instruments issued, togetherwith any costs directly attributable to the acquisition. At the date of acquisition, the identifiable assets and liabilities andcontingent liabilities of a subsidiary are measured at their fair values. Anyexcess of the cost of acquisition over the fair values of the identifiable netassets acquired is recognised as goodwill. 7.2 Revenue recognition The group's responsibility for waste arises as soon as the waste is acceptedinto one of the disposal facilities. Revenue is therefore recognised at thepoint of acceptance. Revenue shown in the income statement represents chargesfor all waste accepted, inclusive of landfill tax but exclusive of value addedtax, relating to the principal activities of the group. 7.3 Segmental reporting Both of the group's business segments provide services which are subject torisks and returns which are different from the other. The group's internalorganisation and management structure and its system of internal financialreporting are based primarily on business segments. The business segmentscomprise the landfill division and the treatment division. Segmental revenue,expense and results include transactions between businesses. Inter-segmentaltransactions are eliminated on consolidation. There are no geographical businesssegments as all the group's activities take place within the same economicenvironment. Accordingly there are no secondary reporting segments. 7.4 Goodwill Goodwill arising on the acquisition of subsidiary undertakings and businesses,representing the excess of the fair value of the consideration given over thefair value of the identifiable assets and liabilities acquired, is capitalisedas an intangible asset. It is tested for impairment at least annually byreference to the relevant cash-generating units and is carried at cost lessaccumulated impairment losses. Any impairment is recognised immediately in theincome statement and is not subsequently reversed. Goodwill arising on acquisitions before the date of transition to IFRS has beenretained at the previous UK GAAP amounts subject to being tested for impairmentat that date. Where deferred tax assets such as tax losses, which were not recognised at theacquisition date due to uncertainty over their recovery, are subsequentlyutilised or recognised, goodwill is reduced by an amount equivalent to thedeferred tax assets calculated at the relevant tax rate and a charge made to theincome statement. 7.5 Other intangible assets Intangible assets purchased separately, such as software licences that do notform an integral part of related hardware, are capitalised at cost and amortisedon a straight line basis over their useful economic life of three years. Intangible assets acquired through a business combination such as customercontracts are initially measured at fair value and amortised on a straight linebasis over their useful economic lives which is taken to be the length of thecontract. An intangible asset is considered identifiable only if it is separableor if it arises from contractual or other legal rights, regardless of whetherthose rights are transferable or separable from the entity or from other rightsand obligations. After initial recognition assets acquired as part of a businesscombination are carried at cost less accumulated amortisation and any impairmentlosses. Methods of amortisation, residual value and useful lives are reviewed, and ifnecessary adjusted, at each balance sheet date. 7.6 Investments Investments held as fixed assets are stated at historic cost less any provisionfor impairment. 7.7 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciationand any recognised impairment loss. The cost of an item of property, plant andequipment comprises its purchase price and any costs directly attributable tobringing the asset into use. Borrowing costs related to the purchase of fixedassets are not capitalised. Subsequent costs are included in an asset's carrying value or recognised as aseparate asset, when it is probable that future economic benefits associatedwith the additional expenditure will flow to the group and the cost of the itemcan be measured reliably. All other costs are charged to the income statementwhen incurred. The acquisition, commissioning and site infrastructure costs for each landfillsite are capitalised when incurred. These costs are then depreciated over theuseful life of the site, which is assessed with reference to the usage of thevoid space available. Cell engineering costs are capitalised when incurred. The depreciation chargedto the income statement is calculated with reference to actual costs to date andexpected future costs for each cell including the cost of the future cap, thetotal of which is spread over the useful life of the cell. Useful life is againassessed by the usage of the void space available. Other tangible fixed assets are stated at cost, net of depreciation and anyprovision for impairment. Freehold land which is not part of a landfill site isnot depreciated. Depreciation is provided evenly on all other tangible fixedassets at rates calculated to write off the cost, less estimated residual value,of each asset over its useful life as follows: Freehold buildings - fifty yearsPlant and machinery - two to ten years Methods of depreciation, residual values and useful lives are reviewed andadjusted, if appropriate, at each balance sheet date. Assets held under finance leases are depreciated over the shorter of theirexpected useful lives or, where there is no reasonable certainty that title willbe obtained at the end of the lease term, the term of the relevant lease. The gain or loss arising from the disposal or retirement of an item of property,plant and equipment is determined as the difference between the net disposalproceeds and the carrying amount of the item, and is included in the incomestatement. 7.8 Impairment of non-current assets At each balance sheet sate, the group assesses whether there is any indicationthat its assets have been impaired. If any such indication exists, therecoverable amount of the asset is estimated in order to determine the extent ofthe impairment, if any. If it is not possible to estimate the recoverable amountof the individual asset, the recoverable amount of the cash-generating unit towhich the asset belongs is determined. The recoverable amount is defined as the higher of fair value less costs to selland value in use at the date the impairment review is undertaken. Value in userepresents the present value of expected future cash flows discounted on apre-tax basis, using the estimated cost of capital of the cash generating unit.If the recoverable amount of an asset is less than its carrying amount, thecarrying amount of the asset is reduced to its recoverable amount. Thatreduction is recognised as an impairment loss. An impairment loss relating to assets carried at cost less any accumulateddepreciation or amortisation is recognised immediately in the income statement. Goodwill is tested for impairment on an annual basis. An impairment loss isrecognised for cash-generating units if the recoverable amount of the unit isless than the carrying amount of the unit. The impairment loss is allocated toreduce the carrying amount of the assets of the unit by first reducing thecarrying amount of any goodwill allocated to the cash-generating unit, and thenreducing the other assets of the unit pro rata on the basis of the carryingamount of each asset in the unit. If an impairment loss subsequently reverses, the carrying amount of the asset isincreased to the revised estimate of its recoverable amount but limited to thecarrying amount that would have been determined had no impairment loss beenrecognised in prior years. A reversal of an impairment loss is recognised in theincome statement. Any impairments of goodwill cannot be subsequently reversed. 7.9 Leases and hire purchase contracts Assets held under hire purchase agreements are capitalised. The capital elementof future payments is treated as a liability and the interest is charged to theincome statement so as to give an approximate constant rate of charge on theoutstanding obligation. Where 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. Future instalments under such leases, net of finance charges, arerecognised as a liability. Rentals payable are apportioned between the financeelement, which is charged to the income statement so as to give an approximateconstant rate of charge on the outstanding obligation and the capital elementwhich reduces the outstanding obligation for future instalments. In both cases the asset and associated liability is recorded in the balancesheet as a tangible fixed asset and liability at their fair value or, if lower,at the present value of the minimum lease payments, both determined at theinception of the lease. Depreciation is calculated in accordance with the above depreciation policies. Other leases are treated as operating leases, the rentals for which are chargedto the income statement on a straight-line basis over the lease term. 7.10 Restoration and after-care provisions The anticipated total cost of restoration and post-closure monitoring andafter-care is charged to the income statement over the expected useful life ofthe sites in proportion to the amount of void consumed at the sites during theperiod. The costs of restoration and post-closure monitoring are charged to theprovision when incurred. The provision has been estimated using current costsand is discounted. 7.11 Tax Current tax Current tax is provided at amounts expected to be paid (or recovered) using taxrates and laws that have been enacted or substantively enacted by the balancesheet date. The tax currently payable is based on taxable profit for the year.Taxable profit differs from net profit as reported in the income statementbecause it excludes items of income that are taxable or deductible in otheryears and it further excludes items that are never taxable or deductible. Deferred tax Deferred tax on temporary differences at the balance sheet date between the taxbases of assets and liabilities and their carrying amounts for financialreporting purposes is accounted for using the balance sheet liability method. Using the balance sheet liability method, deferred tax liabilities arerecognised in full for all taxable temporary differences and deferred tax assetsare recognised to the extent that it is probable that taxable profits will beavailable against which deductible temporary differences can be utilised.However, if the deferred tax asset or liability arises from the initialrecognition of goodwill or the initial recognition of an asset or liability in atransaction, other than a business combination, that at the time of thetransaction affects neither accounting nor taxable profit, it is not recognised. Deferred tax is measured on an undiscounted basis at the tax rates that areexpected to apply when the asset is realised or the liability settled based ontax rates and laws enacted or substantively enacted at the balance sheet date. Current and deferred tax are recognised in the income statement except when theyrelate to items recognised directly in equity, when they are similarly taken toequity. Where deferred tax assets such as tax losses, which were not recognised at theacquisition date due to uncertainty over their recovery, are subsequentlyutilised or recognised, goodwill is reduced by an amount equivalent to thedeferred tax assets calculated at the relevant tax rate with an equivalentcredit to the tax account in the income statement. 7.12 Retirement benefits Contributions made by the group to individual money purchase pension schemes arecharged to the income statement as they fall due. 7.13 Share-based payments IFRS 2 "share based payments" requires that an expense for equity instrumentsgranted is recognised in the financial statements based on their fair values atthe date of the grant. This expense, which is in relation to employee shareoptions and executive LTIP schemes, is recognised over the vesting period of thescheme. The fair value of employee services is determined by reference to thefair value of the awarded grant calculated using the binomial lattice model,excluding the impact of any non-market vesting conditions. At the balance sheet date, the group revises its estimate of the number of shareincentives that are expected to vest. The impact of the revisions of original estimates, if any, is recognised in theincome statement, with a corresponding adjustment to equity, over the remainingvesting period. 7.14 Cash and cash equivalents Cash and cash equivalents comprise cash at bank and in hand and short-termdeposits with a maturity of three months or less. Bank overdrafts are shownwithin current liabilities. For the purposes of the cash flow statement, cashand cash equivalents consist of cash and cash equivalents as defined above, netof outstanding bank overdrafts. 7.15 Financial instruments (a) Trade receivables Trade receivables do not carry any interest and are stated at their invoicedvalue as reduced by appropriate irrecoverable amounts. (b) Trade payables Trade payables are not interest-bearing and are stated at their invoiced value. (c) Debt and finance costs Debt is initially stated at the amount of the net proceeds of the debt afterdeduction of issue costs. The carrying amount is increased by the finance costin respect of the accounting period and reduced by payments made in the period.Finance costs are recognised in the income statement over the term of suchinstruments using the effective interest rate method. (d) Derivatives The group's policy is that no trading in financial instruments or derivativesshall be undertaken. 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