TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS
Introduction
CML Microsystems Plc ("CML" or "the Group") has historically prepared its consolidated financial statements under UK Generally Accepted Accounting Practice (UK GAAP). Following the adoption by the United Kingdom of a European Union (EU) Regulation issued on 19th July 2002, the Group is required to prepare its financial statements in accordance with International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) from 1st April 2005. Accordingly the interim results for the period ended 30th September 2005 will be the Group’s first results to be prepared and reported under IFRS.
The Group’s financial performance and position is altered by the adoption of IFRS, however, there is no change to the cash flows of the Group. This document explains how the Group’s reported UK GAAP financial results for the year ended 31st March 2005 and its financial position as at that date would have been reported under IFRS. Although this document has been prepared in accordance with our current understanding of IFRS the accounting policies applied assume that all existing standards in issue from the International Accounting Standards Board ("IASB") will be fully endorsed by the EU. Since these standards are subject to ongoing amendment by the IASB and subsequent endorsement by the EU these first IFRS statements are subject to possible change. This document includes:
- the Group’s consolidated Income statements for the period ended 30th September 2004 and year ended 31st March 2005;
- the Group’s consolidated balance sheets at 30th September 2004 and 31st March 2005 ;
- the Group’s consolidated cash flow statements for the period ended 30th September 2004 and the year ended 31st March 2005;
- the Group’s consolidated statement of changes in equity for the year ended 31st March 2005 and the period ended 30th September 2004;
- a reconciliation of the Group’s consolidated Income statements for the period ended 30th September 2004 and year ended 31st March 2005, from those prepared under UK GAAP to IFRS;
- a reconciliation of the Group’s consolidated balance sheets at 31st March 2004, 30th September 2004 and 31st March 2005, from those prepared under UK GAAP to IFRS;
- the Group’s accounting policies applied in the preparation of this financial information.
In conjunction with our auditors, the Group has reviewed the changes necessary to comply with IFRS. The financial information presented in this document is unaudited. The auditors, Baker Tilly, have reviewed this announcement and the financial information and accounting policies contained therein.
Financial Impact Summary
The full effect of the financial impact of IFRS in respect of the Group’s year ended 31st March 2005 reported results is set out in detail later in this document. A summary of the effect on the income statement for the year ended 31st March 2005 is:
| RECONCILIATION OF PROFIT FOR THE YEAR ENDED 31st MARCH 2005 | 2005 £’000 |
|---|---|
| UK GAAP profit for year (before dividend) | 419 |
| Exchange differences (net of tax) | (7) |
| Share based payments (net of tax) | (56) |
| Removal of amortisation of goodwill | 1,561 |
| Employee benefits – pension charge (net of tax) | 57 |
| Capitalised research and development expenditure in excess of amortisation (net of tax) | 512 |
| IFRS underlying profit on ordinary activities before tax | 2,486 |
The key areas which will affect the financial statements and accounting policies as reported under UK GAAP are goodwill, share-based payments, employee benefits, dividends and accounting for research and development costs. The reporting under IFRS will change the Group’s financial performance and position; however, there is no change to the cash flows of the Group.
CML Microsystems Plc IFRS Results
IFRS 1 "First-time Adoption of International Financial Reporting Standards" lays 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. Although in general the Group is required to apply the new accounting standards retrospectively to determine its opening balance sheet this standard allows companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS in the year of transition. The group has elected to take the following exemptions:
IFRS 2 – Share-based payments
The Group has elected to apply the exemption that allows entities to apply IFRS 2 to share based payment awards granted after November 2002.
IFRS 3 – Business combinations
The Group has elected not to apply IFRS 3 retrospectively to acquisitions that took place prior to the date of transition. As a result, the carrying amount of goodwill in the UK GAAP balance sheet at 31st March 2004 is brought forward to the IFRS opening balance sheet without adjustment.
IAS 19 – Employee benefits – actuarial gains and losses
The Group has elected to recognise all cumulative actuarial gains and losses at the date of transition.
IAS 21 – Foreign currencies
The Group has elected to deem the cumulative amount of exchange differences arising on consolidation of the net investments in subsidiaries at 1st April 2004 to be zero.
Key financial impacts
The most significant adjustments arising from the transition to IFRS were highlighted in the 2005 Report and Accounts. These are set out in more detail below:
Presentation of financial statements
The presentation of the Groups primary financial statements has been presented in accordance with IAS 1 "Presentation of Financial Statements".
Goodwill
Under UK GAAP the Group was amortising the goodwill arising on the acquisition of Hyperstone AG over a 36-month period. Under IAS 38 intangible assets with an indefinite life shall not be amortised, but tested for impairment annually. Though the Board considered the approach taken under UK GAAP to be the more prudent, it has complied, as it is required to do, with the accounting approach under IAS 38.
Share-based payments
In accordance with IFRS2 the Group has recognised the cost of outstanding share options granted. The fair value has been calculated using the Black-Scholes model. Deferred tax is provided based upon expected future deductions relating to share based payments and is recognised over the vesting period of the scheme concerned.
Employee benefits
Under IAS 19 the Group is required to separately recognise the operating and financing costs of defined benefit pension schemes. The group has adopted the amendment to IAS 19 issued on 16th December 2004 that allows all actuarial gains and losses to be charged or credited to equity rather than in the income statement. Actuarial gains and losses will be recognised in full immediately in the statement of recognised income and expenditure. Deferred tax is provided based upon the expected future deductions or additions as appropriate.
Dividends
IFRS requires that dividends declared after the balance sheet date should not be recognised as a liability until approved by shareholders. Accordingly the dividend for the year ended 31st March 2005 and 31st March 2004 is not accrued in the balance sheet as at those dates.
Accounting for research and development
The Group is continually engaged in significant research and development in respect of new products and has concluded that the majority of this meets the criteria as set out in IAS 38 for capitalisation. Though the Board considers that the previous method of accounting under UK GAAP to be a more prudent approach it has, as it is required to do, adopted accounting for this expenditure under IAS 38.
Accordingly the Group has retrospectively reviewed all research and development expenditure previously charged to the profit and loss account under UK GAAP to determine its opening balance for this new asset class, amortising the asset over the appropriate period that has been decided to be between 2 and 4 years.
This change in accounting policy has had the most significant impact on the Groups results when restated under IFRS since over the last four years the Groups overall research and development expenditure has significantly increased (2002-£1,942k; 2003-£2,276k; 2004-£2,817k; 2005-£3,578k) which when capitalised and amortised must result in an increase in profits when restated.
Cash flow statement
Although there is no effect on the underlying cash receipts and expenditure of the Group, there are significant presentational changes. Under IAS 7 "Cash Flow Statements", the movement in cash and cash equivalents includes short –term investments with maturity of less than three months.
The format of the of the cash flow statement shows cash flows analysed between operating, investment and financing activities. Cash flows relating to tax are classified within operating cash flows whereas under UK GAAP these items were classified separately from operating activities.
| George W Gurry Chairman |
15th November 2005 |
For further information contact:
| Nigel G Clark Financial Director and Company Secretary |
01621 875500 |