Corporate Group Accounts Under IFRS
(a) Basis of preparation
These financial statements have been prepared, under the historical cost basis of accounting and for the first time, on the basis of the IFRS accounting policies set out below. The disclosures required by IFRS 1 concerning the transition from UK GAAP are included in note 18.
In preparing the Group's 2007 financial statements, management has amended certain accounting, valuation and consolidation methods applied in the UK GAAP financial statements to comply with IFRS. The comparative figures in respect of 2006 were restated to reflect these adjustments, except as described in the accounting policies.
The financial statements have been prepared in accordance with IFRS as adopted for use in the European Union, including IFRIC interpretations and in line with those provisions of the Companies Act 1985 applicable to companies reporting under IFRS.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies.
The Group financial statements consolidate those of the Company and of its subsidiary undertakings. The results of subsidiaries accounted for under the acquisition accounting method are included in the Consolidated income statement from the date of their acquisition. The results of subsidiaries, accounted for under the merger accounting method, are included in the Consolidated income statement as if they had always been part of the Group. Intra-Group sales and results are eliminated on consolidation and all sales and results relate to external transactions only.
(c) Foreign currency translation
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
(d) Property, plant and equipment
These are stated at the cost of acquisition less any provision for depreciation. Cost includes expenditure that is directly attributable to the acquisition of the items.
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Depreciation is charged so as to write off the cost of property, plant and equipment less estimated residual value over their estimated useful economic lives at the following rates:
Office and computer equipment - 20% per annum on cost
Plant and machinery - 10-25% per annum on cost
Tooling - 20% per annum on cost
Placed equipment - 33.3% per annum on cost
Tooling developed for the Group's own products is only depreciated when brought into use.
Placed equipment relates to equipment placed in clinical settings to generate a stream of disposables revenue.
(e) Intangible assets
Research and development
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
Development expenditure arising from the Group's development activities is capitalised and amortised over the life of the product only if the Group can demonstrate the following:
Where no intangible asset can be recognised, development expenditure is recognised as an expense in the period in which it is incurred. Capitalised development costs are amortised over the life of the product within cost of sales, which is usually no more than ten years.
(f) Impairment of non-financial assets
Impairment reviews are carried out on an annual basis. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.
Inventories are stated at the lower of cost (using weighted average) and net realisable value.
Cost is the purchase cost, including transport, for raw materials, together with a proportion of manufacturing overheads based on normal levels of activity, for work in progress and finished goods.
Net realisable value is based on estimated normal selling price, less further costs expected to be incurred to completion and sale. Provision is made for obsolete, slow moving or defective items where appropriate.
(h) Trade receivables
Trade receivables are recognised initially at fair value, thereafter at amortised costs less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows. The amount of the loss is recognised in the income statement, as are subsequent recoveries of amounts previously written off.
(i) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held on call at banks and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
(j) Trade payables
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate.
(k) Share capital
Ordinary shares are classified as equity.
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from proceeds.
(l) Income tax
The charge for current tax is based on the results for the period as adjusted for items which are non-assessable or disallowed and any adjustment to tax payable in respect of previous years. It is calculated using rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit. In principle, deferred tax liabilities are recognised for all taxable and 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 negative goodwill) or from the initial recognition (other than in business combination) of other assets and liabilities in a transaction which affects neither the taxable profit nor the accounting profit.
Where the Group is able to control the distribution of reserves from subsidiaries, and there is no intention to distribute the reserves, deferred tax is not recognised for these temporary differences.
Deferred tax is calculated at the rates that are enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Information as to the calculation of the income tax expense is included in note 7.
(m) Employee benefits
The Group provides pension benefits to its employees through contributions to defined contribution Group personal pension policies. The amounts charged to the income statement are the contributions payable in the period.
All share-based payment arrangements granted after 7 November 2002 that had not vested by 1 January 2006 are recognised in the financial statements. The Group issues share options to certain employees which are measured at fair value and recognised as an expense in the income statement with a corresponding increase in profit and loss reserve. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted.
The fair values of these payments are measured at the dates of grant and are recognised over the period during which employees become unconditionally entitled to the awards. At each balance sheet date, the Group revises its estimate of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to retained earnings.
(n) Income recognition
Revenue is the total amount receivable by the Group for the supply of goods and services, excluding VAT and trade discounts. It is recognised when title of goods passes and the Group fulfils its contractual obligations.
Royalty income derived from agreements with other parties for them to manufacture and distribute products. Such Royalty income is recognised in the same period as the licensee makes the related sale.
As soon as the outcome of a design contract can be estimated reliably, contract revenue and expenses are recognised in the income statement in proportion to the stage of completion of the contract. The stage of completion is assessed by reference to milestones of work performed. An expected loss on the contract is recognised immediately in the income statement.
Interest income is accounted for on a receivable basis.
Government grants are recognised in the Consolidated income statement so as to match them with the expenditure towards which they are intended to contribute. To the extent that the grants received are intended as a specific reduction against certain assets, they are recognised in the Consolidated income statement over the expected useful life of the related assets.
(p) Related party disclosures
In accordance with IAS 24 "Related party transactions", the Company discloses details, if any, of material transactions between the reporting entity and related parties.
(q) Significant areas of judgement
In applying the above accounting policies, management has made appropriate estimates in key areas and the actual outcome may differ from those calculated. The key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing material adjustment to the carrying amount of assets and liabilities in the next financial year are:
Forecasts and discount rates
The carrying value of a number of items on the balance sheet are dependant on the estimates of future cash flows arising from the Group's operations:
The impairment test for capitalised development costs is dependant upon forecasts of the cash flows resulting from expected sales and cost of sales over the projected life of the relevant product. Allowance is also made for any future costs of associated product development . No impairments resulted from the annual impairment testing conducted in 2007.
The realisation of deferred tax assets recognised is dependant on the generation of sufficient future taxable profits. The Group recognises deferred tax assets where it is likely that the benefit will be realised and recognises no more than five years of future profitability given uncertainty after this timeframe.
The Group measures provisions at the Directors' best estimates of the expenditure required to settle the obligation at the balance sheet date. These estimates are made taking account of information available and different possible outcomes.
Equity is broken down into the elements listed below:
(t) Details of standards not yet effective
There are a number of new standards and interpretations issued but not yet effective which the Group has not applied in these accounts.
It is anticipated that the adoption of these standards will not have a significant impact on the accounts of the Group except for additional disclosure and presentational requirements.