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2 ergo Group plc - IFRS Restatement Report

RNS Number : 7119U 2 ergo Group plc 19 May 2008 Embargoed until 07:00, Monday 19 May 2008 2ergo Group plc IFRS Restatement Report This report covers the restatement of the opening consolidated balance sheet as at 1 September 2006, the consolidated accounts for the year ended 31 August 2007 and the consolidated accounts for the six months ended 28 February 2007 under International Accounting Standards and International Financial Reporting Standards as adopted by the European Union (collectively referred to as 'IFRS' through this document) in respect of 2ergo Group plc. The IFRS adjustments are not audited. 1. Introduction All companies listed on the Alternative Investment Market ('AIM') are required to prepare consolidated financial statements in accordance with IFRS for accounting periods commencing on or after 1 January 2007. 2ergo Group plc ('the Group') will publish its 2008 annual report in accordance with IFRS. Previously, the Group prepared its financial statements in accordance with accounting standards and generally accepted accounting principles in the UK ('UK GAAP'). This document provides information on the impact of adoption of IFRS on the Group's financial statements. The adoption of IFRS represents a change in the basis of preparation of financial statements and does not therefore affect the operations or cash flows of the Group. The transition date to IFRS is 1 September 2006 as this is the start of the earliest period for which the Group will present full comparative information under IFRS in the 2008 Annual Report and Accounts. The purpose of this document is to provide information on the expected impact of IFRS. The financial information represents our current best estimates and may be affected by business or other changes or by changes to IFRSs or the interpretation thereof. As such, it should be treated with appropriate caution. The information is based on IFRSs expected to be effective for financial periods beginning on 1 September 2007. The standards currently in issue are subject to ongoing review and endorsement by the European Union, and the application of the standards continues to be subject to interpretation by the International Financial Reporting Interpretations Committee ('IFRIC') and emerging practice. This document presents the unaudited consolidated income statement for the year ended 31 August 2007 and the six months ended 28 February 2007 and the unaudited consolidated balance sheets as at 1 September 2006, 28 February 2007 and 31 August 2007 under IFRS. The financial information set out in this statement relating to the year ended 31 August 2007 and the six months to 28 February 2007 does not constitute statutory accounts for those periods. Full audited accounts of the Group in respect of the financial year to 31 August 2007, prepared in accordance with UK GAAP, which received an unqualified audit opinion and did not contain a statement under either section 237(2) or (3) of the Companies Act 1985, have been delivered to the Registrar of Companies. 2. Financial highlights 6 months to 28 February 2007 Year to 31 August 2007 UK GAAP IFRS UK GAAP IFRS as previously as reported previousl y reported Unaudited Unaudited Audited Unaudited Profit for the period (Â#000) 1,017 1,048 2,443 2,428 3.73 3.84 8.64 8.58 Basic earnings per share (pence) Net assets UK GAAP as previously reported IFRS Â#000 Â#000 6,400 Audited 6,408 Unaudited 1 September 2006 12,645 Unaudited 12,682 Unaudited 28 February 2007 14,890 Audited 15,316 Unaudited 31 August 2007 3. Basis of preparation The Group's financial statements for the year ended 31 August 2008 and the interim financial statements to 29 February 2008 will be prepared in accordance with IFRS and the comparatives for those periods will be restated to reflect IFRS, except where otherwise required or permitted by IFRS 1, 'First Time Adoption of International Financial Reporting Standards'. This document has been prepared in accordance with the accounting policies described in more detail in section 5; these comply in all material aspects with IFRS and interpretations from the IFRIC. The financial statements are prepared on the historical cost convention, except that they have been modified to include the revaluation of certain financial assets. 4. IFRS transitional arrangements The International Accounting Standards Board (IASB) issued IFRS 1 'First Time Adoption of International Financial Reporting Standards' to establish requirements for the first time adoption of IFRS. In general a company is required to select accounting policies that comply with IFRS and apply these accounting policies retrospectively to all of the periods presented in the first IFRS financial statements. The opening IFRS balance sheet is to be prepared at the date of transition to IFRS based upon the selected accounting policies under IFRS. The transition date is the start of the earliest period for which the full comparative information is presented in accordance with IFRS. The Group's transition date is 1 September 2006. IFRS 1 permits companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS in the transition period. This document has been prepared on the basis of taking the following exemptions: * The Group will not apply IFRS 2 'Share Based Payments' to instruments granted prior to 7 November 2002. * The Group has elected not to apply IFRS 3 'Business Combinations' retrospectively to business combinations prior to the date of transition. 5. Accounting policies As noted above, the accounting policies have changed from the previous year when the financial statements were prepared under UK GAAP. The comparative information has been restated in accordance with IFRS. The changes to accounting policies are explained in note 6, together with the reconciliation of opening balances. The accounting policies that have been applied in the opening balance sheet have also been applied throughout all periods presented in this document. These accounting policies comply with each IFRS, as adopted by the EU, that is mandatory for accounting periods beginning on 1 September 2007. The accounting policies have been applied consistently throughout the Group for the purposes of preparation of this document. Basis of consolidation The Group financial statements consolidate those of the company and its subsidiary undertakings drawn up to 31 August each year. Subsidiaries are entities over which the Company has the power to control the financial and operating policies so as to obtain benefits from their activities. The Group generally obtains and exercises control through voting rights. The results of subsidiaries acquired are consolidated from the date on which control passed. Acquisitions of subsidiaries are accounted for under the purchase method, other than for the original acquisition of 2ergo Limited by 2ergo Group plc which has been accounted for using the principles of merger accounting as permitted by IFRS 1. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Business combinations Under the provisions of IFRS 1, the Group has elected not to apply IFRS 3 Business Combinations retrospectively to business combinations prior to the date of transition. Accordingly, the classification of acquisitions prior to the date of transition remain unchanged from those used under UK GAAP. Assets and liabilities are recognised at the date of transition (if they would be recognised under IFRS), and are recognised at net book value. Subsequent to the date of transition, the purchase method is used for the acquisition of subsidiaries. This involves the recognition at fair value of the assets, liabilities and contingent liabilities of the subsidiary at the acquisition date. These fair values are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Revenue Revenue represents the fair value of consideration receivable by the Group for services provided, net of Value Added Tax. The Group's revenue streams include monthly service fees, application development fees, licence fees and transaction fees depending on the type and delivery of service. Revenue for transaction fees is recognised at the point of service delivery and when collection of the resulting receivable is reasonably assured. Monthly service, development and licence fees are recognised over the period of the agreement. Intangible assets Purchased intellectual property Purchased intellectual property is capitalised at cost and amortised on a straight line basis based upon the directors' estimate of their useful economic lives (1 to 5 years). Research and development Expenditure on research is written off in the period in which it is incurred, except where such expenditure is recoverable from third parties. Development costs incurred are capitalised when all the following conditions are satisfied: * completion of the product is technically feasible so that it will be available for use or sale * the Group intends to complete the product and use or sell it * the Group has the ability to use or sell the product * the product is commercially viable and will generate probable future economic benefits * there are adequate technical, financial and other resources to complete development of the product, and * the expenditure attributable to the product during its development can be measured reliably Development costs comprise all directly attributable costs, including employee costs incurred on software development along with an appropriate portion of relevant overheads. Development costs not meeting the criteria for capitalisation are written off as incurred. Development costs are capitalised at cost and amortised on a straight line basis based upon the directors' estimate of their useful economic lives (3 to 5 years). Assets acquired as part of a business combination In accordance with IFRS 3 Business Combinations, an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects expectations about the probability that future economic benefits from the asset will flow to the Group. These costs are amortised on a straight line basis based upon the directors' estimate of their useful economic lives as above. Property, plant and equipment Property, plant and equipment are stated at cost less depreciation and any provision for impairment. Depreciation is provided to write down the cost less estimated current residual value of property, plant and equipment over their estimated useful economic lives as follows: Office furniture and fittings 25% or 33.3% straight-line Computer equipment 25% or 33.3% straight-line Impairment testing of intangible assets and property, plant and equipment For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Those intangible assets not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset or cash-generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value less costs to sell, and value in use based on an internal discounted cash flow valuation. Any impairment loss is charged pro rata to the assets in the cash-generating unit. Leased assets Rentals paid under operating leases are charged to the income statement on a straight line basis over the period of the lease. Taxation Current tax is the tax currently payable based upon the taxable profit for the period. Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries and joint ventures is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Tax losses which are available to be carried forward and other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are measured at tax rates that are expected to apply in the period of realisation based on tax rates and laws that have been enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement except where they relate to items that are charged or credited directly to equity in which case the related deferred tax is also charged or credited directly to equity. Financial assets Financial assets are recognised when the Group becomes a party to the contractual provisions of the contract. They are assigned to the categories described below by management on initial recognition, depending on the purpose for which they were acquired. The designation of financial assets is re-evaluated at every reporting date at which a choice of classification or accounting treatment is available. Trade receivables Trade receivables are non-derivative financial assets with fixed payments that are not quoted in an active market. Trade receivables are measured at nominal value less provision for estimated irrecoverable amounts. Any change in their value through impairment or reversal of impairment is recognised in the income statement. The carrying value less impairment provision of trade receivables is assumed to approximate to their fair value. Available for sale investments Available for sale investments include non-derivative financial assets that are either designated as such or do not qualify for inclusion in any of the other categories of financial assets. These investments are measured subsequently at fair value, with changes in value recognised in equity, through the statement of changes in equity. The fair value of quoted investments are based on market prices at the balance sheet date. Gains and losses arising from investments classified as available for sale are recognised in the income statement when they are sold or when there is a permanent diminution in value. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Derecognition of financial assets and liabilities A financial asset or liability is generally derecognised only when the contract that gives rise to it is settled, sold, cancelled or expires. Financial liabilities Financial liabilities are obligations to pay cash or other financial assets and are recognised when the Group becomes a party to the contractual provisions of the contract. A financial liability is derecognised only when the obligation is extinguished, that is, when the obligation is discharged or cancelled or expires. Trade payables Trade payables are measured at nominal value. Foreign currencies Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. The results of overseas operations are translated at the average rates of exchange during the period and their assets and liabilities at the rates of exchange ruling at the balance sheet date. Exchange differences arising on translation of the opening net assets and results of overseas operations are taken directly to equity. Employee benefits The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund. The pension costs charged against profits are the contributions payable to the scheme in respect of the accounting period. Share-based payments All share-based payment arrangements granted after 7 November 2002 that had not vested prior to 1 September 2006 are recognised in the financial statements. The Group has made use of the exemption under IFRS 1 not to apply IFRS 2 Share-based payments to instruments granted prior to 7 November 2002. The Group issues equity-settled share-based payments to certain employees. The fair value of these payments is determined at the date of grant and is expensed on a straight line basis over the vesting period based on the Group's estimate of shares or options that will eventually vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. In the case of options granted, fair value is measured by the Black-Scholes pricing method. All equity-settled share-based payments are ultimately recognised as an expense in the income statement with a corresponding credit to the share option reserve. Upon exercise of share options the proceeds received, net of attributable transaction costs, are credited to share capital, and where appropriate share premium. Employee benefit trust The assets and liabilities of the Employee Benefit Trust (EBT) have been included in the Group accounts. Any assets held by the EBT cease to be recognised on the Group balance sheet when the assets vest unconditionally in identified beneficiaries. The costs of purchasing own shares held by the EBT are shown as a deduction against equity. The proceeds from the sale of own shares increase equity. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the Group income statement. Equity Equity comprises the following: * Share capital, representing the nominal value of shares of the Company * Share premium account, representing the excess over the nominal value of the fair value of consideration received for shares, net of expenses of the share issue * Merger reserve, representing the excess of the Company's cost of investment over the nominal value of 2ergo Limited's shares acquired where the Group reorganisation qualified as a common control transaction * Other reserve, representing the cost of the Company's shares held by the EBT that are shown as a deduction against equity. * Share option reserve, representing the cost of equity-settled share-based payments until such share options are exercised. 6. Explanation of transition to IFRS An explanation of how the transition from UK GAAP to IFRS has affected the Group's financial position, financial performance and cash flows is set out below. Reconciliation of income statement for the 6 months ended 28 February 2007 UK GAAP Effect of IFRS Unaudite transition Unaudite d to d IFRS Unaudited Note Â#000 Â#000 Â#000 Revenue 15,711 - 15,711 Cost of sales (11,652) - (11,652) Gross profit 4,059 - 4,059 Administrative costs a,b (2,951) 16 (2,935) Operating profit 1,108 16 1,124 Finance income 89 - 89 Profit before tax 1,197 16 1,213 Taxation e (180) 15 (165) Profit for the period 1,017 31 1,048 Basic earnings per share 3.73p 0.11p 3.84p Reconciliation of income statement for the year ended 31 August 2007 UK GAAP Effect of IFRS Audited transition Unaudite to d IFRS Unaudited Note Â#000 Â#000 Â#000 Revenue 33,309 - 33,309 Cost of sales (24,695) - (24,695) Gross profit 8,614 - 8,614 Administrative costs a,b (6,300) 6 (6,294) Operating profit 2,314 6 2,320 Finance income 272 - 272 Profit before tax 2,586 6 2,592 Taxation e (143) (21) (164) Profit for the period 2,443 (15) 2,428 Basic earnings per share 8.64p (0.06)p 8.58p Reconciliation of UK GAAP consolidated profit to IFRS consolidated profit Six months Year ended ended 31 August 28 February 2007 2007 Note Â#000 Â#000 Profit after tax as reported under UK 1,017 2,443 GAAP Adjustments for: Short term employee benefits a 13 3 Negative goodwill b 3 3 Deferred tax e 15 (21) Profit after tax as reported under IFRS 1,048 2,428 Reconciliation of balance sheet at 1 September 2006 Note UK GAAP Effect of IFRS Audited transition Unaudit to ed IFRS Unaudited Â#000 Â#000 Â#000 Non-current assets Intangible assets c 3,413 51 3,464 Property, plant and equipment 234 - 234 3,647 51 3,698 Current assets Inventories c 51 (51) - Trade and other receivables a 4,923 8 4,931 Cash and cash equivalents 4,857 - 4,857 9,831 (43) 9,788 Total assets 13,478 8 13,486 Current liabilities a (6,986) (33) (7,019) Trade and other payables e (92) 33 (59) Non-current liabilities Deferred tax liability Total liabilities (7,078) - (7,078) Net assets 6,400 8 6,408 Equity Share capital 299 - 299 Share premium 4,147 - 4,147 Merger reserve 1,512 - 1,512 Other reserve (536) - (536) Share option reserve 278 - 278 Retained earnings a,e 700 8 708 Total equity 6,400 8 6,408 Reconciliation of balance sheet at 28 February 2007 Note UK GAAP Effect of IFRS Unaudite transition Unaudit d to ed IFRS Unaudited Â#000 Â#000 Â#000 Non-current assets Intangible assets c 4,495 51 4,546 Property, plant and equipment 239 - 239 Negative goodwill b (3) 3 - 4,731 54 4,785 Current assets Inventories c 51 (51) - Trade and other receivables a 5,349 3 5,352 Cash and cash equivalents 9,598 - 9,598 14,998 (48) 14,950 Total assets 19,729 6 19,735 Current liabilities a,e (7,052) (1) (7,053) Trade and other payables e 32 Non-current liabilities Deferred tax liability (32) - Total liabilities (7,084) 31 (7,053) Net assets 12,645 37 12,682 Equity Share capital 301 - 301 Share premium 7,141 - 7,141 Merger reserve 1,512 - 1,512 Other reserve (413) - (413) Share option reserve 448 - 448 Retained earnings a,b,e 3,656 37 3,693 Total equity 12,645 37 12,682 Reconciliation of balance sheet at 31 August 2007 Note UK GAAP Effect of IFRS Audited transition Unaudit to ed IFRS Unaudited Â#000 Â#000 Â#000 Non-current assets Intangible assets c 2,674 49 2,723 Property, plant and equipment 255 - 255 Available for sale investments d 4,004 601 4,605 Negative goodwill b (3) 3 - 6,930 653 7,583 Current assets Inventories c 49 (49) - Trade and other receivables a 5,947 8 5,955 Cash and cash equivalents 9,251 - 9,251 15,247 (41) 15,206 Total assets 22,177 612 22,789 Current liabilities a (7,209) (30) (7,239) Trade and other payables e (156) Non-current liabilities Deferred tax liability (78) (234) Total liabilities (7,287) (186) (7,473) Net assets 14,890 426 15,316 Equity Share capital 301 - 301 Share premium 7,141 - 7,141 Merger reserve 1,512 - 1,512 Other reserve (413) - (413) Share option reserve 605 - 605 Retained earnings a,b,d,e 5,744 426 6,170 Total equity 14,890 426 15,316 Reconciliation of UK GAAP consolidated equity to IFRS consolidated equity As at As at As at 1 28 31 Septem Februar August ber y 2007 2006 2007 Note Â#000 Â#000 Â#000 Total equity as reported under UK GAAP 6,400 12,645 14,890 Adjustments for: Short term employee benefits a (25) (14) (22) Negative goodwill b - 3 3 Available for sale investments d - - 601 Deferred tax e 33 48 (156) Total equity as reported under IFRS 6,408 12,682 15,316 Notes to the reconciliations a) Under IAS 19 Employee Benefits, all accumulating employee-compensated absences (e.g. holiday pay) must be recognised as they are earned. Accordingly an asset or liability will be recognised relating to the actual absences that have occurred compared to the number earned. There is no similar requirement under UK GAAP. As a result of this adjustment, profit in the year to 31 August 2007 increases by Â#3,000, and as at 31 August 2007 net current assets decrease by Â#22,000 (2006: Â#25,000). In the half-year to 28 February 2007 profit increases by Â#13,000, with net current assets at 28 February 2007 decreasing by Â#14,000. b) Negative goodwill recognised by the Group on acquisition of Telitas US Inc and its subsidiary Proteus Inc under UK GAAP was recognised on the balance sheet. Under IFRS negative goodwill must be recognised as a gain in the income statement on acquisition. The result of this adjustment is to realise a gain in the income statement for the six months ending 28 February 2007 and year to 31 August 2007 of Â#3,000 with non-current assets as at those dates increasing by Â#3,000. c) The adoption of IFRS has caused the Group to review all of its accounting policies and disclosures, including those related to databases of mobile phone numbers. The Group has determined that these databases are more appropriately classified as intellectual property within intangible assets and accordingly non-current assets at 31 August 2007 increase by Â#49,000 (2006: Â#51,000) and at 28 February 2007 by Â#51,000, with respective decreases in current assets at each reporting date. d) Under UK GAAP, the Group's investment in Broca plc was held at cost less impairment. However under IAS 39 this investment is classified as an available for sale investment and therefore must be fair valued at each reporting period, with the unrealised gain or loss being taken to equity until disposal. As a result of this adjustment non-current assets increase in value by Â#601,000 at 31 August 2007 (2006: Â#nil and 28 February 2007: Â#nil) and retained earnings increase by Â#601,000 at 31 August 2007 (2006: Â#nil and 28 February 2007: Â#nil). e) Under UK GAAP, deferred tax was recognised on the timing difference between the intrinsic value of the share option apportioned over the vesting period of the option and the charge to the profit and loss account. Under IFRS, deferred tax is recognised on the temporary difference without apportioning it over the vesting period of the option. This, and the recognition of holiday pay accruals under IFRS, have resulted in deferred tax assets. The recognition of negative goodwill as a gain in the income statement and the unrealised gain on the available for sale investment in Broca have resulted in the creation of deferred tax liabilities. The result of these adjustments is to realise a loss in the income statement for the year to 31 August 2007 of Â#21,000 and a gain for the period to 28 February 2007 of Â#15,000. The deferred tax liability at 31 August 2007 increases by Â#156,000 (2006: decreases by Â#33,000) and at 28 February 2007 decreases by Â#48,000. Explanation of reclassifications to the cash flow statement The application of IFRS has resulted in the reclassification of certain items in the cash flow statement as follows: (i) under UK GAAP, payments to acquire property, plant and equipment were classified as part of 'Capital expenditure and financial investment'. Under IFRS, payments to acquire property, plant and equipment have been classified as part of 'Investing activities'. (ii) income taxes are classified as operating cash flows under IFRS, but were included in a separate category of tax cash flows under UK GAAP. (iii) interest received is classified as an investing cash flow under IFRS, but was included in a separate category of returns on investment and servicing of finance under UK GAAP. There are no other material differences between the cash flow statement presented under IFRS and the cash flow statement presented under UK GAAP. For further information, please contact: 2ergo Group 01706 221 777 Jill Collighan, Finance Director Tavistock Communications 020 7920 3150 Lulu Bridges/Andrew Dunn Numis Securities Limited 020 7260 1000 David Poutney/Stuart Skinner <HR/>--------------------------------------- This information is provided by RNS The company news service from the London Stock Exchange END IR EAKSKFANPEFE

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