2    Accounting Policies

The principal accounting policies adopted in the preparation of these financial statements are set out below.

Basis of preparation

The financial statements have been prepared in accordance with IFRS and International Financial Reporting Interpretations Committee (“IFRIC”) interpretations endorsed by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention as modified to fair value for certain financial assets and liabilities.

The preparation of financial statements in conformity with generally accepted accounting practice 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 reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from these estimates.

Going concern

On 12 October 2009, the Board announced the acquisition of two major revenue‑generating products from Solvay Pharmaceuticals for a total consideration of €17.5 million, and an associated firm placing and open offer to raise up to £25 million. The firm placing and open offer is underwritten by certain irrevocable placing letters from certain shareholders and institutional investors, subject to standard underwriting conditions and on the basis that the proposed acquisition is approved by shareholders at the EGM. Approval requires a 75% majority of those who vote. The Board has consulted with major shareholders and has received comfort in respect of their support for the proposed acquisition and fundraising.

The Company also announced on 29 October that it has entered into a new debt facility of up to £9.0 million which it intends to use to past finance the proposed acquisition, and provide working capital, and a further £3.0 million to be used to replace an existing facility. As a consequence, the firm placing and open offer will be scaled back to £18.0 million.

The Directors, after taking into account the expected proceeds of the fundraising which will be used for the purchase of products and providing working capital, believe that they have a reasonable basis for concluding that the Group has adequate facilities to continue as a going concern. Accordingly the financial statements have been prepared on a going concern basis.

Basis of consolidation

The consolidated financial statements of Sinclair Pharma plc incorporate the financial statements of the Company and its subsidiaries. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. They are de‑consolidated from the date on which control ceases.

The acquisition method of accounting is applied to all business combinations made by the Group. The cost of an acquisition is measured, as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed, in a business combination are measured initially at their fair values on the date of acquisition, irrespective of the extent of any minority interest. The excess of the cost of the acquisition over the fair value of the Group’s share of identifiable net assets, including intangible assets acquired, is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group’s share of net assets of the subsidiary acquired, the difference is recognised directly in the income statement.

CS Portugal, which was previously jointly controlled, has been deconsolidated from the Group results since 1 July 2008 as the Group no longer has effective management control of this associate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used by the Group. On consolidation, all intra‑group transactions, balances, income and expenditure are eliminated.

Joint ventures

Entities that are jointly controlled are consolidated using the proportionate consolidation method on a line by line basis which combines the Group’s assets, liabilities, income and expenses with the Group’s share of assets, liabilities, income and expenses of the joint venture in which the group has an interest.

Segment reporting

The Group’s primary segment for reporting is by business segment: a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. The Group operates in two business segments, sales through international operations and country operations. Geographic location of assets is the Group’s secondary reporting segments. A geographic segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns which are different from those of segments operating in other economic environments.

Foreign currency translation

Items included in the financial statements of each of the Group’s entities are measured using the functional currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Sterling, which is the Company’s and the Group’s functional and presentational currency. Transactions in foreign currencies are translated into the functional currency at the rate of exchange ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the rates of exchange prevailing at that date. Gains and losses arising on translation are included in the income statement. The results of operations that have a functional currency different from the presentational currency are translated at the average rate of exchange during the period and their balance sheets at the rates ruling at the date of the balance sheet. Exchange differences arising on translation from 1 July 2005 are taken directly to a separate component of equity, the cumulative translation reserve. Exchange differences on intra‑group loan balances are taken to the income statement, unless they are considered long‑term equity type investments.

Revenue recognition

Revenue from product sales is recognised upon shipment to customers. Provisions for rebates, product returns and discounts to customers are provided for as reductions to revenue in the same period as the related sales occurred. Royalties receivable under licensing agreements are recognised as they are earned and are recorded within revenue. The recognition of other payments received and receivable, such as licence fees, upfront payments and milestones, is dependent on the terms of the related arrangement, having regard to the ongoing risks and rewards of the arrangement, and the existence of any performance or repayment obligations, if any, with the third party. Amounts received and receivable are recognised immediately as revenue where there are no substantial remaining risks, no ongoing performance obligations and amounts received are not refundable. Amounts are deferred over an appropriate period where these conditions are not met.

Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable net assets, including intangible assets, of the acquired subsidiary at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill arising on the acquisition of a foreign entity is treated as an asset of the foreign entity denominated in foreign currency and translated at the balance sheet date according to the rate of exchange prevailing at that date.

Intangible assets

a) Licences and trademarks

Licences and trademarks including product distribution rights and technical dossiers are recognized at cost. They have a definite useful life and are carried at cost less accumulated amortization. Amortisation is calculated using the straight‑line method to allocate the cost over their estimated useful lives (10 to 18 years).

b) Research and development

Research expenditure is recognised as an expense as incurred. Costs incurred on development activities are recognised as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, status of regulatory approval, and costs can be measured reliably. Other development expenditure is recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Development costs that have a finite useful life and that have been capitalised are amortised from the date of regulatory approval of the product on a straight‑line basis over the period of its expected benefit, not exceeding ten years.

Property, plant and equipment

All property, plant and equipment is shown at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the assets.

Subsequent costs are included in the assets’ carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Land is not depreciated. Depreciation on other assets is calculated using the straight‑line method to write off the cost of each asset to its residual value over its estimated useful life as follows:

Freehold buildings over 15 to 45 years;

Leasehold improvements expensed over period of lease;

Office equipment depreciated at 15% to 50% per year;

andMotor vehicles are depreciated at 20% per year.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.

Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or where shorter, over the term of the relevant lease.

Investments in subsidiary undertakings

Investments in subsidiary undertakings are carried at cost less impairment provision. Such investments are subject to review, and any impairment is charged to the income statement.

Impairment of tangible and intangible assets excluding goodwill

Annually, the Group reviews the carrying amounts of its tangible assets where those assets have infinite lives, and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). 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.

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 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 of the asset (cash‑generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying value of the asset (cash‑generating unit) is increased to the revised estimate of its recoverable amount, provided 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 (cash‑generating unit) in prior periods. A reversal of an impairment loss is recognised as income immediately.

Inventories

Inventories are valued at the lower of cost and net realisable value. Cost comprises materials, direct labour and a share of production overheads if appropriate at the relevant stage of production. Provision is made for obsolete, slow‑moving or defective items where appropriate. Net realisable value is determined at the balance sheet date on commercially saleable products based on estimated selling price less all further costs to completion and all relevant marketing, selling and distribution costs.

Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Taxation

The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the period. Taxable profit differs from net profit as reported in the income statement because it excludes items of income and expenses that are taxable and deductible in other periods and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or the initial recognition (other than a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising from investments in subsidiaries and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets are reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Leases
Leases, including hire purchase contracts, are classified as a finance lease 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 and hire purchase contracts are capitalised and included in property, plant and equipment at fair value. Each asset is depreciated over the shorter of the lease term or its useful life. The obligations related to finance leases, net of finance charges in respect of future periods, are included, as appropriate, under current, or non‑current liabilities. The interest element of a rental obligation charged to the income statement is allocated to accounting periods during the lease term to reflect a constant rate of interest on the remaining balance of the obligation for each accounting period. Rentals under operating leases are charged to the income statement on a straight‑line basis over the term of the relevant lease.

Pensions
The Group operates a defined contribution pension scheme for its employees. The assets of the scheme are held in independently administered funds. Contributions are charged to the income statement as they become payable in accordance with the rules of the schemes.

Other employee benefits
The expected cost of compensated short‑term absence (i.e. holidays) is recognised when employees provide services that increase their entitlement. An accrual is made for holidays earned but not taken.

Share‑based payments (options, warrants and performance share awards)
The Group grants share options, warrants and performance share awards to Directors, employees and certain consultants. Equity‑settled share‑based payments are measured at fair value at the date of grant and expensed on a straight‑line basis over the expected life of the option or warrant, based on the estimated number of options or warrants that will eventually vest. The share options or warrants granted have varying performance criteria required for the option or warrants to vest and these are considered in the method of measuring the fair value. Where it is considered appropriate, the fair value is measured using the Black‑Scholes model. Where complex market performance criteria exist, a Monte Carlo model has been used to establish the fair value on grant.

Equity settled share based payments granted by the Company to employees of subsidiaries are recognised as an expense charged to the relevant subsidiary with an equal increase in the investment in the subsidiary undertaking.

Trade receivables and trade payables
Trade receivables and trade payables do not bear any interest and are stated at their face value as reduced where appropriate with allowances for estimated irrecoverable amounts.

Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short‑term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.

Exceptional items
Exceptional items represent significant items of income and expense which due to their nature, size, or the expected infrequency of the events giving rise to them, are presented separately on the face of the income statement to give a better understanding to shareholders of the elements of the financial performance in the year, so as to facilitate comparison with prior periods and to better assess trends in financial performance.

Critical accounting estimates and judgements
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Estimated impairment of Goodwill
The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy set out above. The recoverable amounts of cash‑generating units have been determined using value‑in‑use calculations. These calculations require the use of estimates.

New IFRS standards and interpretations not applied
a)  Standards and interpretations effective in 2009

IAS 23 (amendment), ‘Borrowing costs’ (effective from 1 January 2009). The Group will apply the IAS 23 (amendment) prospectively to the capitalisation of borrowing costs on qualifying assets from 1 January 2009.

IAS 36 (amendment), ‘Impairment of assets’, (effective from 1 January 2009). The Group will apply the IAS 36 (amendment) and provide the required disclosure where applicable for impairment tests from 1 January 2009.

b)  Interpretations effective in 2009 but not relevant.

The following interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2009 but are not relevant to the group’s operations:

IAS 39, ‘Financial Instruments: Recognition and measurement’;
IFRIC 12, ‘Service concession arrangements’;
IFRIC 13, ‘Customer loyalty programmes’;
IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’;
IFRIC 15, ‘Agreement for the construction of real estate’; and
IFRIC 16, ‘Hedges of a net investment in a foreign operation’.

c ) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the group.

The following standards and amendments to existing standards have been published and are mandatory for the Group’s accounting periods beginning on or after 1 January 2009 or later periods, but the Group has not early adopted them:

IFRS 1 (amendment), ‘First time adoption of IFRS’, and IAS 27, ‘Consolidated and separate financial statements’, (effective from 1 January 2009).
IFRS 2 (amendment), ‘Share‑based payments’ (effective from 1 January 2009).
IFRS 3 (revised), ‘Business combinations’ (effective from 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes.
IFRS 5 (amendment), ‘Non‑current assets held‑for‑sale and discontinued operations’, (and consequential amendment to IFRS 1, ‘First‑time adoption’) (effective from 1 July 2009).
IFRS 7 (amendment), ‘Financial instruments: Disclosures’ (effective from 1 January 2009).
IFRS 8, ‘Operating segments’ (effective from 1 January 2009). IFRS 8 replaces IAS 14, ‘Segment reporting’. The expected impact is still being assessed by management.
IAS 1 (revised), ‘Presentation of financial statements’ (effective from 1 January 2009).
IAS 1 (amendment), ‘Presentation of financial statements’ (effective from 1 January 2009).
IAS 23 (amendment), ‘Borrowing costs’ (effective from 1 January 2009).
IAS 27 (revised), ‘Consolidated and separate financial statements’, (effective from 1 July 2009).
IAS 27 (amendment), ‘Consolidated and separate financial statements’ (effective from 1 January 2009).
IAS 28 (amendment), ‘Investments in associates’ (and consequential amendments to IAS 32, ‘Financial Instruments: Presentation’ and IFRS 7, ‘Financial instruments: Disclosures’) (effective from 1 January 2009).
IAS 31 (amendment), ‘Interests in joint ventures’, (and consequential amendments to IAS 32 and IFRS 7) (effective from 1 January 2009).
IAS 31 (amendment), ‘Interests in joint ventures’, (effective 1 July 2009).
IAS 38 (amendment), ‘Intangible assets’ (effective from 1 January 2009).
IAS 38 (amendment), ‘Intangible assets’, (effective from 1 July 2009).
IAS 39 (amendment), ‘Financial instruments: Recognition and measurement’ (effective from 1 January 2009).
IAS 39 (amendment), ‘Financial instruments: Recognition and measurement’ (effective from 1 July 2009).
The Group will apply the above amendments from 1 July 2009.
IFRS 2 (amendment), ‘Share‑based payments’ (effective from 1 July 2009).
IFRS 5 (amendment), ‘Non‑current assets held‑for‑sale and discontinued operations’ (effective from 1 January 2010).
IAS 1 (amendment), ‘Presentation of financial statements’ (effective from 1 January 2010).
IAS 7 (amendment), ‘Statement of cash flows’ (effective from 1 January 2010). IAS 17 (amendment), ‘Leases’ (effective from 1 January 2010).
IAS 17 (amendment), ‘Leases’ (effective from 1 January 2010).
IAS 32 (amendment), ‘Financial instruments: Presentation’, (effective from 1 February 2010).
IAS 36 (amendment), ‘Impairment of assets’ (effective 1 January 2010).
IAS 39 (amendment), ‘Financial instruments: Recognition and measurement’ (effective from 1 January 2010).
The Group will apply the above amendments from 1 July 2010.

d)    Interpretations and amendments to existing standards that are not yet effective and not relevant for the Group’s operations
The following interpretations and amendments to existing standards have been published and are mandatory for the group’s accounting periods beginning on or after 1 January 2009 or later periods but are not relevant for the Group’s operations:

IFRS 1 (amendment), ‘First time adoption of International Financial Reporting Standards’ (effective 1 January 2010).
IAS 1 (amendment), ‘Presentation of financial statements’ (effective 1 January 2010).
IAS 16 (amendment), ‘Property, plant and equipment’ (and consequential amendment to IAS 7, ‘Statement of cash flows’) (effective from 1 January 2009).
IAS 19 (amendment), ‘Employee benefits’, (effective from 1 January 2009). The Group will apply the IAS 19 (amendment) from 1 January 2009.
IAS 20 (amendment), ‘Accounting for government grants and disclosure of government assistance’ (effective from 1 January 2009).
IAS 29 (amendment), ‘Financial reporting in hyperinflationary economies’ (effective from 1 January 2009).
IAS 32 (amendment), ‘Financial instruments: Presentation’, and IAS 1 (amendment), ‘Presentation of financial statements’ – ‘Puttable financial instruments and obligations arising on liquidation’ (effective from 1 January 2009).
IAS 40 (amendment), ‘Investment property’ (and consequential amendments to IAS 16) (effective from 1 January 2009).
IAS 41 (amendment), ‘Agriculture’ (effective from 1 January 2009).
 

There are a number of minor amendments to IFRS 7, ‘Financial instruments: Disclosures’, IAS 8, ‘Accounting policies, changes in accounting estimates and errors’, IAS 10, ‘Events after the reporting period’, IAS 18, ‘Revenue’, and IAS 34, ‘Interim financial reporting’ are not addressed above. The amendments to the standards are still subject to endorsement by the EU. These amendments, subject to endorsement by the EU, are unlikely to have an impact on the group or company’s accounts and have, therefore, not been analysed in detail.

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