30th August 2007
Cello Group plc (AIM: CLL, “Cello” or the “Group”) is preparing for the adoption of 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 financial information prepared in accordance with IFRS for the year ended 31 December 2006 and for the six months ended 30 June 2006. The purpose of this statement is to present the effects of IFRS on the Group for 2006 full-year and half-year comparative periods.
The principal changes to the Group’s reported financial information under UK GAAP* 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; and
• the recognition of deferred tax assets and liabilities on a different basis.
*throughout this statement ‘UK GAAP’ means the accounting standards and framework in issue at 31 December 2006, which were applied to the financial statements of the Group for the year ended 31 December 2006.
For the year ended 31 December 2006 the expected impact of the adoption of IFRS is 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 net assets for the Group at 31 December 2006 from £39.6 million to £39.1 million.
Cello Group plc 020 7812 8463
Mark Bentley – Finance Director
Evolution 020 7488 4040
College Hill 020 7457 2020
Cello is preparing for the adoption of International Financial Reporting Standards as adopted by the European Union (‘IFRS’) as its primary accounting basis 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 financial performance and position are reported under IFRS. It provides reconciliations from 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 no adjustments.
The preliminary IFRS financial information set out below does not constitute the company’s statutory accounts for the year ended 31 December 2006. Those accounts, which were prepared under UK GAAP, have been reported on by the company’s auditors and delivered to the registrar of companies; their report was (i) unqualified, (ii) did not include reference to any matters to which the auditors 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 the Companies Act 1985.
BASIS OF PREPARATION
The financial information presented in this document has been prepared on the basis of the recognition and measurement requirements of adopted IFRS in issue that either are endorsed by the EU and effective (or available for early adoption) at 31 December 2007 or are expected to be endorsed and effective (or available for early adoption) at 31 December 2007, the Group’s first annual reporting date at which it is required to use IFRS. The directors have made assumptions about the accounting policies expected to be applied, the significant effects of which are set out below, when the first annual IFRS financial 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 are still subject to change and to additional interpretations and therefore cannot be determined with certainty. Accordingly, the accounting policies for that annual period will be determined finally only when the annual financial statements 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 will be prepared on the basis of the principles of IFRS, and will be presented together with details of the accounting policies expected to be applied for the year ending 31 December 2007.
IFRS 1 Exemptions
IFRS 1 First-time Adoption of International Financial Reporting Standards sets out the procedures that the Group must follow when it adopts IFRS for the first time as the basis for preparing its consolidated financial statements. As explained above, the Group is required to establish what its IFRS accounting policies are expected to be as at 31 December 2007 and, in general, apply these retrospectively to determine the IFRS opening balance sheet at its date of transition, 1 January 2006.
This standard provides a number of optional exceptions to this general principle. The most significant of these for the Group relates to business combinations that occurred before the opening IFRS balance sheet date (IFRS 3 Business Combinations). The Group has elected to apply IFRS 3 with effect from 1 December 2005, earlier than technically required. The practical effect of this is that the Group has opted to account under IFRS for the acquisition of Charios Holdings Limited (which trades as TMI), which was acquired in December 2005. This approach has been taken as the fundamental intangible asset of Charios Holdings Limited is a licence to sell the TMI brand and range of products in the UK.
KEY IMPACT ANALYSIS
The analysis below sets out the most significant adjustments arising from the transition to IFRS for the year ended 31 December 2006. Similar adjustments arise 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 available on request.
2) Intangible Assets
(a) Goodwill and acquired intangible asset amortisation
IFRS 3 Business Combinations requires that, when businesses are acquired, any intangible assets acquired with the business are valued separately and capitalised as an intangible asset. Any residual difference between the consideration paid or payable and the net fair value of the identifiable assets, liabilities and contingent liabilities acquired is recognised as goodwill. IFRS 3 also requires that goodwill is not amortised but is instead subject to an annual impairment review, whereas intangible assets are amortised over their useful lives which range from 3 months to 8 years.
The Group has recognised intangible assets on acquisition in relation to licences and customer contracts. The amount in the Group’s balance sheet in respect of all intangible assets is £3.5 million at 30 June 2006 and £3.2 million 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 these assets is £0.7 million for the year ended 31 December 2006 and £0.2 million for the six months ended 30 June 2006.
3) Deferred and Current Taxes
The scope of IAS 12 Income Taxes is wider than the corresponding UK GAAP standards, and requires deferred tax to be provided on the majority of temporary differences, rather than just on timing differences as under UK GAAP. In particular this has resulted in deferred tax assets and liabilities being set up in respect of differences between the net book value and the tax base of intangible assets.
A deferred tax liability has been set up on creation of these intangibles and is released over the period over which the assets are amortised. Upon creation of this liability, an equal and opposite adjustment is posted to increase goodwill arising on the business in question. This adjustment to goodwill is not amortised. The impact on the income statement of releasing elements of the liability is £0.2 million for the year ended 31 December 2006 and £0.1 million for the six months ended 30 June 2006. The deferred tax liability in respect of intangibles stands at £1.0 million at 30 June 2006 and £1.0 million at 31 December 2006.
For the avoidance of doubt and following the transition to IFRS, the Group expects to apply the following accounting policies for the year ending 31 December 2007.
1) Basis of Accounting
The financial statements have been prepared under the historical cost convention and 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 all of its subsidiary undertakings. The results of subsidiary undertakings acquired in the year are included in the consolidated profit and loss account from the effective date of acquisition.
3) Turnover, Cost of Sales and Revenue Recognition
Turnover is recognised as contract activity progresses, in accordance with the terms of the contractual agreement and the stage of completion of the work. It is in respect of the provision of services including fees, commissions, rechargeable expenses and sales of materials performed subject to specific contract. Where recorded turnover exceeds amounts invoiced to clients, the excess is classified as accrued income.
Cost of sales include amounts payable to external suppliers where they are retained at the Group’s discretion to perform part of a specific client project or service where the Group has full exposure to the benefits and risks of the contract with the client.
4) Goodwill and Intangible Assets
In accordance with IFRS 3 Business Combinations goodwill arising on acquisitions is capitalised as an intangible fixed asset. Other intangible assets are also then identified and amortised over their useful economic lives. Examples of these are licences to trade, and client contracts. The useful economic lives vary from 3 months to 8 years. Goodwill is not amortised.
Under IAS 36 Impairment of assets, the carrying values of all intangible fixed assets are reviewed annually for impairment on the basis stipulated in IAS 36 and adjusted to the recoverable amount. Typically, such a review will entail an assessment of the present value of projected returns from the asset over a 3-5 year projection period, and an RPI based growth assumption for future years after that.
5) Tangible Fixed Assets
Tangible fixed assets are stated at historical cost. Depreciation is provided at rates calculated to write off the cost, less estimated residual value, of each asset, over their estimated useful economic lives as follows:-
Leasehold improvements Over the remaining term of the lease
Motor vehicles 25% pa. straight line
Computer equipment 33% pa. straight line
Fixtures, fittings and office equipment 25% pa. straight line
Fixed asset investments are stated at cost less provision for any impairment in value.
7) Work in Progress
Work in progress comprises third party costs incurred on behalf of clients and is stated at the lower of cost and net realisable value.
8) Deferred Taxation
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying value of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the tax profit or the accounting profit.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply 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 it relates to items charged or credited directly to equity, in which case the deferred 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 the risks and rewards of ownership of an asset, the lease is treated as a finance lease or similar hire purchase contract. The asset is recorded in the balance sheet as a tangible fixed asset and is depreciated over the estimated useful life or the term of the lease, whichever is shorter. Future instalments under such leases, net of finance charges, are included within creditors. Rentals payable are apportioned between the finance element, which is charged to the profit and loss account, and the capital element which reduces the outstanding obligation for future instalments.
All other leases are treated as operating leases and rentals payable are charged to 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 the rates of exchange ruling at the balance sheet date. Transactions in foreign currencies are translated into sterling at the rate of exchange ruling at the date of the transaction. Exchange differences are taken into the profit and loss account for the year.
11) Pension Contributions
Subsidiaries operate defined contribution pension schemes and contribute to the personal pension schemes of certain employees or to a Group personal pension plan. The assets of the schemes are held separately from those of the subsidiary companies in independently administered funds. The amount charged against profits represents the contributions payable to the scheme in respect of the accounting period.
12) Share-based Payments
The Group has applied the requirements of IFRS 2 Share-based payment which requires 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 such equity instruments that were granted after 7 November 2002 and which had not vested by 1 January 2006.
This standard has been applied to various types of share-based payments as follows:
i. Share options
Certain employees receive remuneration in the form of share options. The fair value of the equity instruments granted is measured on the date at which they are granted by using the Black-Scholes model, and is expensed to the profit and loss 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 with IAS 8 Accounting policies and IFRS 3 Business Combinations, the Group treats certain payments made to employees in respect of earn out arrangements as remuneration within the profit and loss account.