The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.
Basis of preparation
The Group and Company have prepared their financial statements under International
Financial Reporting Standards (IFRSs) as adopted by the European Union.
IFRSs comprise standards and interpretations approved by the International
Accounting Standards Board (IASB) and the International Financial Reporting
Interpretations Committee (IFRIC) as adopted in the European Union as
at 31st December, 2007.
The following new or revised accounting standards, which have been issued but are not yet effective, are not anticipated to have a material impact on the financial statements:
| IFRS 3 |
Business combinations |
| IAS 27 | Consolidated and separate financial statements |
| IAS 1 | Presentation of financial statements |
| IFRS 8 | Operating segments |
| IAS 23 | Borrowings costs |
| IFRS 2 | Share-based payment |
The financial statements have been prepared on the historical cost basis of accounting, except for measurement at fair value of certain assets.
The significant accounting policies are set out below:
Investment Trust SORP
Where presentational guidance set out in the Statement of Recommended
Practice (SORP) for investment trusts, issued by the Association of Investment
Companies in January 2003 (revised December 2005), is consistent with
the requirements of IFRSs, the directors have sought to prepare the financial
statements on a basis compliant with the SORP.
Management expenses and finance costs
Management expenses and finance costs have been allocated 80% to capital
and 20% to revenue.
Basis of consolidation
The consolidated financial statements incorporate the financial statements
of the Company and entities controlled by the Company (its subsidiary
undertakings) made up to the balance sheet date. Control is achieved where
the Company has the power to govern the financial and operating policies
of an investee entity so as to obtain benefits directly from its activities.
Income
Income arises from investment management, fees relating to advisory work
on investment transactions and interest income. Investment management
fees are recognised under the accruals basis, other fees are recognised
in full once a contractual obligation is created for the third party.
Interest income on financial investments, and cash and cash equivalents, is recognised in the income statement using the effective interest rate applicable. A provision will be made against this income where there is uncertainty as to its future recoverability. The requirement or otherwise for a provision is considered in conjunction with the valuation of the related financial investment, the approach to which is stated below.
Placement fees
Pre-paid placement fees incurred in the establishment of managed funds
are carried as current assets recoverable from future management fees
receivable and are written off over the anticipated duration of the managed
fund.
Share-based payments
The Group has applied the requirements of IFRS2 Share-based payments.
The Group enters into arrangements that are equity-settled share-based
payments with certain employees. These are measured at fair value at the
date of grant, which is then recognised in the income statement on a straight-line
basis over the vesting period, based on the estimate of shares that will
eventually vest. The charge is adjusted at each balance sheet date to
reflect the actual number of forfeitures, cancellations and leavers during
the period. The movement in cumulative changes since the previous balance
sheet is recognised in the income statement, with a corresponding entry
in equity. Fair value is measured by use of the Black-Scholes model.
Property, plant and equipment
All property, plant and equipment is stated at historical cost less depreciation.
Depreciation is calculated to write down the cost less residual value of all property, plant and equipment by equal annual instalments over their expected useful lives. The periods generally applicable are plant and equipment two to five years and motor vehicles three years. Leasehold improvements are depreciated over the duration of the lease. The residual value of all assets is assessed annually.
Financial investments
The directors consider that a substantial measure of the performance of
the Group is assessed through the capital gains and losses arising from
the investment activity of the Group. Consequently, for measurement purposes,
financial investments, including equity, loan and similar instruments,
are designated at fair value through profit and loss, and are valued in
compliance with IAS 39 Financial Instruments: Recognition and Measurement
and the International Private Equity and Venture Capital Valuation Guidelines
as recommended by the British Venture Capital Association, the principles
of which are set out in the valuation policy section.
Financial investments are recognised in the balance sheet at fair value. Gains and losses on the realisation of financial investments are dealt with through the income statement, and taken to the realised capital reserve. Financial investments are not held for immediate resale and any gains on realisations are not available for distribution as a dividend. The difference between the fair value of financial investments and cost to the Group is shown as an unrealised gain or loss in the income statement, and taken to the unrealised capital reserve.
Investments in subsidiary undertakings are reflected in the Company’s accounts at cost less impairment.
Trade receivables and payables are accounted for at fair value at initial recognition and thereafter at amortised cost using the effective interest rate method.
Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call
with banks, other short-dated listed fixed income securities and money
market instruments. Such assets are held-for-trading, with capital gains,
losses and fair value movements accounted for in the income statement,
and taken to capital reserves due to the fact that such balances are held
for future investment in financial investments.
Borrowings
Interest-bearing loans and overdrafts are initially recognised at the
fair value of the consideration received, net of direct issue costs. After
initial recognition, these are subsequently measured at amortised cost
using the effective interest method, which is the rate that exactly discounts
the estimated future cash flows through the expected life of the liabilities.
Amortised cost is calculated by taking into account any issue costs and
any discount or premium on settlement. Finance costs, including premiums
payable on settlement or redemption and direct issue costs, are accounted
for on an accruals basis to the income statement using the effective interest
method. Movements in value for currency fluctuations are taken to unrealised
capital reserves, net of the impact of any designated hedging arrangements.
Derivative financial instruments
Derivative financial instruments are used to manage the risk associated
with foreign currency fluctuations and changes in interest rates on its
borrowings. This is achieved by the use of currency swaps and interest
rate swaps. All derivative financial instruments are held at fair value.
Where appropriate derivative financial instruments are designated as fair
value hedges on inception with the effectiveness tested both at this date
and semi-annually thereafter on a prospective and retrospective basis.
Derivative financial instruments are recognised initially at fair value on the contract date and subsequently remeasured to the fair value at each reporting date. The fair value of currency swaps and interest rate swaps is determined with reference to future cash flows and current interest and exchange rates. All changes in the fair value of financial instruments are accounted for in the income statement, and taken to the unrealised capital reserve net of any designated hedging arrangements which are offset against the increments in the instrument being hedged. The ineffective portion of any fair value hedge is assessed semi-annually and where material taken to the income statement.
Deferred tax
Deferred tax is recognised in full, using the liability method, on all
temporary differences arising between the tax bases of assets and liabilities
and their carrying amounts in the financial statements. Deferred tax is
measured using rates of tax that have been enacted or substantively enacted
by the balance sheet date.
Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.
Due to the Company’s status as an investment trust, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided for deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
Foreign currencies
Foreign currency transactions are translated into the functional currency
using the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement of such
transactions and from the translation at period-end exchange rates of
monetary assets and liabilities denominated in foreign currencies are
recognised in the income statement. Where exchange differences result
from the translation into sterling of foreign currency resources that
are held for future financial investments, the gain or loss is accounted
for in the income statement, and taken to capital reserves.
The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
The cumulative exchange gains and losses on foreign currency net investments are accounted for in the income statement when these operations are disposed.
Pension costs
The Group contributes towards a number of funded defined contribution
pension schemes designed to provide retirement benefits for its directors
and employees. The assets of the schemes are held separately from the
Group in independently administered funds. The pension cost charge represents
contributions payable by the Group to the schemes in respect of the accounting
period.
Leases
Leases in which a significant portion of the risks and rewards of ownership
are retained by the lessor are classified as operating leases. Payments
made under operating leases (net of any incentives received from the lessor)
are charged to the income statement on a straight-line basis over the
period of the lease.
Dividends payable
Final dividends are accounted for when they are ratified at the Annual
General Meeting. Interim dividends are recognised when paid.
Critical accounting estimates and judgements
The preparation of financial statements requires the use of estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Although these estimates are
based on management’s best knowledge of the amount, event or actions,
actual results ultimately may differ from those estimates.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities relate to: