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Spectris plc is a limited company incorporated and domiciled in the United Kingdom under the Companies Act 1985, whose shares are publicly traded on the London Stock Exchange.
These financial statements are presented in pounds sterling. Foreign operations are included in accordance with the policies set out below.
The group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (IFRS). The company has elected to prepare its parent company financial statements in accordance with UK GAAP; these are presented in the Company balance sheet through to Note 52: Contingent liabilities. Reconciliations required by IFRS 1, First Time Adoption of IFRS, are included in Note 36 to these accounts.
The financial statements are prepared rounded to the nearest hundred thousand on the historical cost basis except that the derivative financial instruments are stated at fair value and non-current assets and disposal groups held for sale are stated at the lower of carrying amount and fair value less costs to sell.
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are continually evaluated and are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions that have a significant effect on the carrying amount of assets and liabilities are noted within specific accounting policies below. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
The accounting policies set out below have been applied consistently to all periods presented in these financial statements except where the policy is indicated as relating to the implementation of IAS 32 or IAS 39 which were adopted from 1 January 2005, or to the implementation of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, which was also adopted from 1 January 2005. The accounting policies have been applied consistently by group entities.
The group financial statements include the results of the company and all of its subsidiary undertakings. A subsidiary is an entity controlled by the group. Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into sterling at exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at average annual exchange rates. Foreign exchange differences arising on retranslation are recognised directly in a separate translation reserve within equity.
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate ruling at that date with any exchange differences arising on retranslation being recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
Derivative financial instruments may be purchased to hedge the group's exposure to changes in foreign exchange rates. The accounting policies applied in these circumstances are described under the heading 'Derivative financial instruments and hedge accounting' below.
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.
The group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operating and financing activities. In accordance with its treasury policy, it does not hold or use derivative financial instruments for trading or speculative purposes.
Following the transition to IFRS and in accordance with the transitional provisions set out in IFRS 1 the group adopted IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Measurement and Recognition, with effect from 1 January 2005. The paragraphs relating to cash flow hedge accounting, net investment hedge accounting, and other derivative financial instruments which follow therefore explain both the previous UK GAAP accounting policy applied in the comparative period ended 31 December 2004 and those new policies applied during the year ended 31 December 2005.
The financial impact of these changes of accounting policy is set out in Note 21.
Derivative financial instruments may be transacted to hedge the variability in cash flows of a recognised asset or liability, or of highly probable forecast transactions, caused by changes in exchange rates.
In the comparative period ended 31 December 2004, the value of such instruments is not recognised until the point at which the transactions being hedged occurred. At the point the hedged transaction occurs, the asset or liability is recorded using the rate of exchange under the related derivative financial instrument.
From adoption of IAS 39 as at 1 January 2005, derivative financial instruments are carried in the balance sheet at fair value. Where a derivative financial instrument is designated in a cash flow hedge relationship with a highly probable forecast transaction, the effective part of any gain or loss arising is recognised directly in equity. The ineffective part of any gain or loss is recognised in the income statement. When the forecast transaction subsequently occurs and results in the recognition of a financial asset or liability that impacts on the income statement, the associated cumulative gain or loss is removed from equity and presented within the income statement. When the forecast transaction subsequently occurs and results in the recognition of a non-financial asset or liability, the associated cumulative gain or loss is removed from equity and included within the initial cost of the non-financial asset or liability. If a derivative financial instrument is not formally designated in a cash flow hedge relationship, any change in fair value is recognised in the income statement.
The group uses US$ and euro-denominated borrowings as a hedge against the translation exposure on the group's net investment in overseas companies. In both 2004 and 2005, where the hedge is fully effective at hedging the variability in the net assets of such companies caused by changes in exchange rates, the changes in value of the borrowings are recognised in equity. The ineffective part of any change in value caused by changes in exchange rates is recognised in the income statement.
The group takes advantage of cross-currency swaps for some of its US$-denominated private placement borrowings. The swaps have the effect of converting fixed rate US$ borrowings into 'synthetic' fixed rate euro-denominated borrowings. The portion of the swap that locks interest payments at a fixed euro interest rate changes as US$ variable interest rates, euro variable interest rates, and foreign currency exchange rates change. Under IAS 39's rules, such changes in value are considered to be ineffective as a net investment hedge. In the comparative period ended 31 December 2004, the fair value attributed to the portion of the swap that locks euro interest payments at fixed rates was not recognised. From adoption of IAS 39 as at 1 January 2005, this value is recognised in the balance sheet with any changes in value being recognised in the income statement.
Certain other derivative financial instruments are transacted to provide a hedge against the group's overall exposure to changes in foreign currency exchange rates.
In the comparative period ended 31 December 2004, the value of these instruments is not recognised in the balance sheet or income statement until the accounting period they were intended to cover as a hedge. From adoption of IAS 39 as at 1 January 2005, these instruments do not meet IAS 39's hedge accounting criteria and consequently these instruments are carried at fair value with any gain or loss being recognised in the income statement.
All business combinations are accounted for by applying the purchase method. Goodwill represents the excess of the fair value of the purchase consideration for the interests in subsidiary undertakings over the fair value to the group of the net assets and any contingent liabilities acquired. In respect of acquisitions prior to 1 January 2004, goodwill is included on the basis of its deemed cost which represents the amount recorded previously under UK GAAP. Prior to 1 January 1998, goodwill was written off to reserves in the year of acquisition.
Goodwill arising on acquisitions is stated at cost less any accumulated impairment losses. From 1 January 2004, goodwill is allocated on acquisition to cash-generating units that are anticipated to benefit from the combination, and is no longer amortised but is tested annually for impairment. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. This estimate of recoverable amount is performed at each balance sheet date.
The estimate of recoverable amount requires significant judgement, and is based on a number of factors such as the near-term business outlook for the cash generating unit, including both its operating profit and operating cash flow performance. Where the recoverable amount of the cash generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.
Following the adoption of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations from 1 January 2005, non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale and an active programme to locate a buyer and complete the sale must have been initiated. Ordinarily the sale should be expected to qualify for recognition as a completed sale within one year from the date of the classification as held for sale.
A segment is a distinguishable component of the group that is engaged in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.
Segmental information is based on two segment formats: the primary format represents the group's business segments whereas the secondary format reflects the geographical segments.
Segment result represents operating profits (including intangible asset amortisation and goodwill charges) and includes an allocation of head office expenses. Segment result excludes tax and financing items.
Segment assets comprise goodwill, other intangible assets, property, plant and equipment, inventories, trade and other receivables and assets held for sale. Segment liabilities comprise trade and other payables, provisions, held for sale liabilities, and other payables. Unallocated items represent corporate and deferred taxation balances, defined benefit scheme liabilities and all components of net debt.
Self-funded research and development costs are charged to the income statement in the year in which they are incurred unless development expenditure meets certain strict criteria for capitalisation. These criteria include demonstration of the technical feasibility of completing a new intangible asset that will be available for sale and that the asset will generate probable future economic benefits. Where expenditure meets the criteria, development costs are capitalised and amortised over their useful economic lives.
Other intangible assets that are acquired by the group are stated at cost less accumulated amortisation and impairment losses. Subsequent expenditure on capitalised intangible assets is expensed as incurred.
Amortisation of intangible assets is charged to administrative expenses in the income statement on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are as follows:
| Patents and trademarks | up to 5 years |
| Other intangible assets | up to 3 years |
Property, plant and equipment is stated at cost less accumulated depreciation and any provision for impairments in value. The group recognises in the carrying amount of property, plant and equipment the subsequent costs of replacing part of such items when there are future economic benefits. All other costs are recognised in the income statement as an expense as they are incurred.
Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and equipment over its estimated useful life. The depreciation charge is revised where useful lives are different to previously estimated, or where technically obsolete assets are required to be written down. Where parts of an item of plant and equipment have separate lives, they are accounted for and depreciated as separate items. Land is not depreciated. Estimated useful lives are as follows:
| Freehold and long leasehold property | 20 to 40 years |
| Short leasehold property | over the period of the lease |
| Plant, machinery and other equipment | 5 to 20 years |
| Motor vehicles | 4 years |
| Tooling, computer hardware and software | 3 to 5 years |
The carrying amount of the group's assets is reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated. Where the asset does not generate cash flows that are independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount. An impairment loss is recognised as an operating expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.
Trade and other receivables are stated at their amortised cost as reduced by appropriate allowances for estimated irrecoverable amounts.
Inventories and work in progress are carried at the lower of cost and net realisable value. Cost represents direct costs incurred and, where appropriate, a proportion of attributable overheads. Inventory is accounted for on a first-in, first-out basis. Provision is made for slow moving and obsolete items based on an assessment of technological and market developments and on an analysis of historic and projected usage.
Cash and cash equivalents comprises cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the group's cash management are included as a component of cash equivalents for the purposes of the statement of cash flows.
Trade and other payables are stated at amortised cost.
A provision is recognised in the balance sheet when the group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. In respect of warranties a provision is recognised when the underlying products or services are sold. Provisions are recognised at an amount equal to the best estimate of the expenditure required to settle the group's liability. Obligations arising from restructuring plans are recognised when detailed formal plans have been established and when there is a valid expectation that such a plan will be carried out.
The group has applied the amendments in IAS 19 (revised 2004) from the date of transition to IFRS, 1 January 2004. The group operates both defined benefit schemes based on final pensionable pay and defined contribution schemes.
The group operates pension schemes providing benefits based on final pensionable pay. The assets of the schemes are held separately from those of the group. The group's net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any plan assets is deducted. The discount rate is determined by reference to market yields at the balance sheet date on high quality corporate bonds that have maturity dates approximating to the terms of the group's obligations.
The calculation is performed by a qualified actuary using the projected unit method. Actuarial gains and losses are recognised in full in the period in which they arise in the statement of recognised income and expense.
When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the income statement on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in the income statement.
For defined contribution schemes, the assets are held separately from those of the group in independently administered funds. Payments to defined contribution schemes are charged to the income statement as they fall due.
The fair value of employee share option grants is calculated at grant date. The resulting cost is charged to the income statement over the vesting period of the plans. The value of the charge is adjusted to reflect expected and actual levels of options that vest, except where forfeiture is only due to share prices not achieving the threshold for vesting.
Revenues comprise sales to outside customers after discounts and excluding value added tax.
Revenue from the sale of goods is recognised in the income statement when the significant risk and rewards of ownership of the goods have been transferred to the customer. For contracts which involve a significant element of installation or testing of equipment, revenue is recognised at the point of customer acceptance. Revenue from services rendered is recognised in the income statement in proportion to the measurement of the stage of completion of services rendered as at the balance sheet date. Rental income is recognised in the income statement on a straight-line basis over the term of the agreement. Revenue is not recognised if there are significant uncertainties regarding recovery of the consideration due.
Interest payable comprises the interest payable on borrowings calculated using the effective interest method.
Interest receivable and payable is recognised in the income statement as it accrues using the effective interest method. Dividend income is recognised in the income statement when the right to receive payment is established.
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.
Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.
Tax on the profit or loss for the year comprises both current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.
Additional income taxes that arise from the distribution of intra-group dividends are recognised at the same time as the liability to pay the related dividend.
When preparing the group's IFRS balance sheet at 1 January 2004, the date of transition, the following optional exemptions, provided by IFRS 1, First-time Adoption of International Financial Reporting Standards, from full retrospective application of IFRS accounting policies have been adopted:
The group's transitional balance sheet, and other reconciliations required by IFRS 1, First-time Adoption of International Financial Reporting Standards, together with a description of the significant adjustments applied, are included in Note 36 to these financial statements.