1. Basis of accounting
The policies are set out below and are in accordance with IFRS, as endorsed for use in the European Union, and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations that are expected to be applicable for the year ending 31 December 2007.
The Group has elected to make use of the exemptions available in IFRS 1 as follows:
- IFRS 2 ‘Share-based Payment’ has been applied to all grants of equity instruments after 7 November 2002 that were unvested at 1 January 2006.
- IFRS 3 ‘Business Combinations’ has not been applied retrospectively to business combinations that occurred before 1 January 2006.
- IAS 32 ‘Financial Instruments: Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’ is being applied from 1 January 2007.
The following new standards, amendments to standards and interpretations have been issued, are not effective for the financial year ending 31 December 2007 and have not been adopted early as the Directors do not expect these interpretations to be relevant to the Group:
- IFRS 8 ‘Operating Segments’ effective for annual periods beginning on or after 1 January 2009.
- IFRIC 11 ‘IFRS 2 – Group and Treasury Share Transactions’ effective for annual periods beginning on or after 1 January 2008.
- IFRIC 13 ‘Customer Loyalty Programmes’ effective for annual periods beginning on or after 1 July 2008.
- IFRIC 14 ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ effective for annual periods beginning on or after 1 January 2008.
- IAS 23 ‘Borrowing Costs’ effective for annual periods beginning on or after 1 January 2008.
The accounts have been prepared on the historical cost basis or fair value as appropriate.
2.1 Basis of consolidation
Where the Company has the power, either directly or indirectly, to govern the financial and operating policies of another entity or business, so as to obtain benefits from its activities, it is classified as a subsidiary. The consolidated financial information presents the results of the Company and its sole subsidiary Futura Medical Developments Limited (“FMDL”) as if they formed a single entity ("the Group"). Inter company transactions and balances between the Group companies are therefore eliminated in full.
2.2 Revenue
Revenue comprises the fair value received or receivable for exclusivity arrangements, royalties and milestone income, and the sale of rights to future royalties, net of value added tax.
The accounting policies for the principal revenue streams of the Group are as follows:
- Exclusivity arrangements and related services are recognised as revenue in the accounting period in which the related services are rendered, or activities performed, by reference to completion of the specific transaction.
- Royalty and milestone income comprise revenue generated from product out-licensing and research and development collaboration agreements. Where licensing agreements include non-refundable milestone income, revenue is recognised on achieving the milestones. If any milestone income is creditable against royalty payments then it is deferred and released to the income statement over the period in which the royalties would otherwise be receivable. Royalty income relating to the sale by a licensee of licensed product is recognised on an accruals basis in accordance with the substance of the relevant agreement and based on the receipt from the licensee of the relevant information to enable calculation of the royalty due.
- Sales of the rights to future royalties are recognised as revenue on the date on which the revenue becomes receivable.
2.3 Leased assets
Operating lease rentals are charged to the income statement on a straight line basis over the lease term.
2.4 Intangible assets
Research and development
Certain Group products are in the research phase and others are in the development phase.
Expenditure on internally developed products is capitalised if it can be demonstrated that:
- It is technically feasible to develop the product for it to be sold;
- Adequate resources are available to complete the development;
- There is an intention to complete and sell the product;
- The Group is able to sell the product;
- Sale of the product will generate future economic benefits; and
- Expenditure on the project can be measured reliably.
Capitalised development costs are amortised over the periods in which the Group expects to benefit from selling the products developed. The amortisation expense is included within the cost of sales line in the income statement.
Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the income statement as incurred.
The useful life and value of the capitalised development cost is assessed for impairment at least annually. The value is written down immediately if impairment has occurred and the remaining cost is amortised over its reduced useful life.
The Directors consider that the criteria to capitalise development expenditure are not met for a product prior to receiving regulatory approval for sale in at least one country.
Patents and trademarks
Patents and trademarks are either expensed or capitalised in accordance with the corresponding treatment of the development expenditure for the related product.
2.5 Plant and equipment
Plant and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is charged to the income statement on all plant and equipment at rates calculated to write off the cost or valuation, less estimated residual value, of each asset on a straight line basis over their estimated useful lives, which is between 2 and 5 years for plant and equipment and between 3 and 10 years for furniture and fittings.
The assets’ residual values and useful lives are determined by the Directors and reviewed and adjusted if appropriate at each balance sheet date in accordance with the Group policy for impairment of assets (note 2.6).
2.6 Impairment of assets
Assets that have a finite useful life, are not yet in use and are not subject to amortisation or depreciation are tested annually for impairment.
Assets that are subject to amortisation are reviewed for impairment annually and when events or circumstances suggest that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.
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 the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units).
If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in the income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
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 periods. A reversal of an impairment loss is recognised immediately in the income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
2.7 Inventories
Inventories are materials and supplies to be consumed in the course of research and development and are stated at the lower of cost and net realisable value. Cost includes materials, related contract manufacturing costs and other direct costs. Cost is calculated using the first-in first-out method. Net realisable value is based on estimated selling price, less further costs expected to be incurred to completion and disposal. Provision is made for obsolete, slow-moving or defective items where appropriate.
2.8 Trade and other receivables
Trade and other receivables are measured at initial recognition at fair value and are subsequently measured at amortised cost using the effective interest rate method.
2.9 Investments
Cash held in sterling fixed rate deposits with original maturities of more than three months are treated as investments.
2.10 Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, bank overdrafts and sterling fixed rate deposits with original maturities of three months or less which are held by the Group so as to be available to meet short-term cash commitments.
2.11 Trade and other payables
Trade and other payables are initially measured at fair value and subsequently measured at amortised cost using the effective interest rate method.
2.12 Government grants
Government grants are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period required to match them with the costs that they are intended to compensate.
2.13 Taxation
Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability on the balance sheet differs from its tax base, except for differences arising on:
- The initial recognition of goodwill;
- Goodwill for which amortisation is not tax deductible;
- The initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting or taxable profit; and
- Investments in subsidiaries and jointly controlled entities where the group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future.
Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised.
The amount of the asset or liability is determined using tax rates that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the deferred tax liabilities / (assets) are settled / (recovered). Deferred tax balances are not discounted.
Deferred tax assets and liabilities are offset when the Group has a legally enforceable right to offset current tax assets and liabilities and the deferred tax assets and liabilities relate to taxes levied by the same tax authority on either:
- The same taxable group company; or
- Different group entities which intend to settle current tax assets and liabilities on a net basis, or to realise the assets and settle the liabilities simultaneously, on each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered.
Current tax is provided at amounts expected to be recovered or to be paid using the tax rates and tax laws that have been enacted or substantially enacted at the balance sheet date. When research and development tax credits are claimed they are recognised on an accruals basis and are included as a taxation credit.
2.14 Foreign currency translation
The financial statements for each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial information is presented in sterling, which is the Group’s functional currency and presentation currency. All the Group’s entities have the same functional currency and presentation currency.
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.
2.15 Pension costs
The Group provides retirement benefits to all employees and Executive Directors (except the Chairman) who wish to participate in defined contribution pension schemes. The Group pays fixed contributions and has no legal or constructive obligations to pay further contributions. The assets of these schemes are held separately from those of the Group in independently administered funds. Contributions made by the Group are charged to the income statement in the period in which they become payable.
2.16 Share-based payments
The Group operates an equity-settled, share-based compensation plan. Where share options are awarded to employees and others providing similar services on or after 7 November 2002, the fair value of the options at the date of grant is charged to the income statement over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each balance sheet date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative charge is not adjusted for failure to achieve a market vesting condition. If the terms and conditions of options are modified before they vest, the change in the fair value of the options, measured immediately before and after the modification, is also charged to the income statement over the remaining vesting period. Where equity instruments are granted to persons other than employees and others providing similar services, the income statement is charged with the fair value of goods and services received.
2.17 National insurance on share options
Where possible, all employee option holders enter into a HM Revenue & Customs joint election to transfer the employers’ national insurance contribution potential liability to the employee. To the extent that such an election has not been entered into and where the share price at the balance sheet date is greater than the exercise price on options granted after 19 May 2000, provision for any employers’ national insurance contribution has been made based on the prevailing rate of national insurance. However, under the terms of all option rules any liability which may arise is recoverable from each option holder and a corresponding debtor is also included.
2.18 Segment reporting
The Group is organised and operates as one business unit being pharmaceutical drugs and medical devices. The principal activity of the Group is the research and development of drugs and medical devices and their commercial exploitation. The main area of research and development continues to be in the field of innovative products for the consumer healthcare market with the main focus being on sexual health.
The Group operates in and manages any overseas research and development from the UK. Segment revenue is based on the geographical location of the Group’s customers which at this stage is solely the UK. Since there is currently only one primary segment and one geographical segment, no separate segment reporting has been prepared.
2.19 Interest income
Interest income is recognised on a time-proportion basis using the effective interest rate method.
Page last up-dated: 13 August 2008
Page last reviewed: 12 August 2008