Note 1: Accounting policies

The financial statements have been prepared under the historical cost convention and are in accordance with applicable accounting standards. 

Basis of consolidation

The Group’s financial statements consolidate the financial statements of Next Fifteen Communications Group plc and all of its subsidiary undertakings drawn up to 31 July each year using the acquisition method of accounting.

The consolidated financial statements are available to the public and can be obtained from the Company’s registered office at 5 Albion Court, Galena Road, London, W6 OQT.

Merger reserve

In accordance with the provisions of merger relief under section 131 of the Companies Act 1985, where the company issues shares as part of an acquisition the company records the cost of the investment at the nominal value of the shares issued and records the excess of fair value over nominal value as a merger reserve.

Associates

An entity is treated as an associated undertaking where the Group has a participating interest and exercises significant influence over its operating and financial policy decisions.

In the Group accounts, interests in associated undertakings are accounted for using the equity method of accounting. The consolidated profit and loss account includes the Group’s share of the operating results, interest, pre-tax results and attributable taxation of such undertakings based on audited financial statements. In the consolidated balance sheet, the interests in associated undertakings are shown as the Group’s share of the identifiable net assets, including any unamortised premium paid on acquisition. The premium on acquisition is dealt with under the goodwill policy.

Turnover, net revenue and income recognition

Turnover represents amounts receivable from clients, exclusive of sales taxes, in respect of charges for fees, commission and rechargeable expenses.

Net revenue represents fees and commissions earned in respect of turnover. Revenue is recognised on the following basis:

•     Retainer and other non-retainer fees are recognised as the services are performed.

•     Project fees are recognised on a percentage completion basis.

•      Expenses (other external charges) are recharged to clients at cost plus an agreed mark-up when the services are performed.

Goodwill

Purchased goodwill, which is the difference between the fair value of the consideration paid and the fair value of the net assets acquired, is capitalised in the year in which it arises and is amortised over its estimated useful life. Each acquisition is assessed separately with regard to the estimated useful life of the goodwill. Goodwill generated from the acquisition of a stand alone business is amortised over 20 years, whilst goodwill generated by acquisitions of businesses which are subsequently integrated into an existing brand, is amortised over 5 years. The directors regard 20 years as a maximum for the estimated useful life of goodwill since it is very difficult to make projections exceeding this period.

Impairment of fixed assets and goodwill

The need for any impairment write-down is assessed by comparison of the carrying value of the asset against the higher of realisable value and value in use.

Impairment tests on the carrying value of goodwill are undertaken:

•      At  the end of the first financial year following acquisition.

•      In other periods if events or changes in circumstances indicate that the carrying value may not be recoverable.

Tangible fixed assets

Tangible fixed assets are stated at cost, net of depreciation. Depreciation is provided on all tangible fixed assets at annual rates calculated to write off the cost, less estimated residual value, of each asset evenly over its expected useful life as follows:

Short leasehold premises   -      Over the term of the lease, or until the first break clause.

Office equipment           -      20%-50% per annum straight line.

Office furniture           -      20% per annum straight line.

Motor vehicles             -      25% per annum straight line.

Payments on account in respect of tangible fixed assets which are not yet operational in the business are recorded in a separate fixed asset category called “Assets in the course of construction”, and represent the cost of purchasing, constructing and installing tangible fixed assets ahead of their productive use. Only the incremental costs which are directly attributable to the asset in the course of construction are capitalised.

No depreciation is charged on assets in the course of construction until they are brought into operational use in the business, at which point the assets are transferred into the relevant asset category on the fixed asset register and depreciated over their useful economic life. In the year ended 31 July 2007, assets in the course of construction relate solely to a new IT system and comprise software and hardware costs, backfill staff costs and consultancy fees.

Foreign currencies

The results of overseas subsidiaries are translated at the average rates during the year and the balance sheets of these undertakings are translated at the year-end exchange rates. Exchange differences arising on retranslation of opening net assets of foreign subsidiaries and branches are taken to reserves.

Monetary assets and liabilities denominated in foreign currencies are expressed in sterling at the rate of exchange ruling at the balance sheet date. Foreign currency transactions are expressed in sterling at the rates of exchange ruling at the dates of the transactions. Exchange gains and losses and translation differences are taken directly to the profit and loss account.

The treatment of foreign exchange differences on long-term foreign currency inter-company loans has been revised such that the differences are taken directly to reserves rather than through the profit and loss account. The 31 July 2006 comparatives have been restated to reflect the change, reducing the interest payable figure in the profit and loss account by £110,000 after the transfer of £110,000 of foreign exchange loss to reserves. There is no impact on the net assets at 31 July 2006.

Financial instruments

Derivative instruments utilised by the Group are cap and collar contracts and forward contracts. The Group does not enter into speculative derivative contracts. All such instruments are used to alter the risk profile of an underlying exposure of the Group in line with the Group’s risk management policies. Premiums payable under foreign exchange contracts are expensed over the life of the contract and any gains and losses arising on these contracts are deferred and are recognised in the profit and loss account only when the hedged transaction has itself been reflected in the Group’s financial statements.

Leasing transactions

Assets held under finance leases are included in the balance sheet. The amount capitalised is the present value of the minimum lease payments. Depreciation on the relevant assets is charged to the profit and loss account over the shorter of the estimated useful economic life and the period of the lease. The interest element on these obligations is charged to the profit and loss account so as to approximate a constant interest rate over the life of each agreement. Operating lease rentals are charged to the profit and loss account in equal amounts over the lease term.

Pension costs

Pension costs, which relate to payments made by the Company to employees’ own defined contribution pension plans, are charged to the profit and loss account as incurred.

Investments

Fixed asset investments are stated at cost less provisions for impairment.

Deferred taxation

Deferred tax is provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise, based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements. Deferred tax is not provided on timing differences arising from the revaluation of fixed assets where there is no commitment to sell the asset, or on unremitted earnings of subsidiaries where there is no commitment to remit these earnings. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted.

Share-based employee remuneration

In accordance with FRS20, certain payments made to employees in respect of earn-out arrangements are required to be treated as remuneration within the profit and loss account. These amounts are required to be charged to the profit and loss account.

The Group has applied the requirements of FRS20 - “Share-based payments”. In accordance with the transitional provisions, FRS20 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 August 2006. The Group issues equity-settled share-based payments to certain employees. The share-based payments are measured at fair value at the date of the grant. The fair value determined at the grant date of the share-based payments is expensed on a straight line basis over the vesting period, based on the Group’s estimate of the number of shares that will eventually vest.

There are share options granted prior to 7 November 2002 which remain outstanding at 31 July 2007. Details of all grants are disclosed in note 20.

Fair value is measured by use of a Black Scholes model on the grounds that there are no market related vesting conditions. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Details of the risk free rate and dividend yield used to underpin these assumptions are included in note 19. The Market price on any given day is obtained from external publicly available sources.

Prior to the adoption of FRS20, the Group recognized the financial effect of the share-based payment in the following way: when shares and share options were awarded to employees a charge was made to the profit and loss account based on the difference between the market value of the company’s shares at the date of grant and the option exercise price in accordance with UITF Abstract 17 (revised 2003) ‘Employee share schemes’. The credit entry for this charge was taken to the profit and loss reserve and reported in the reconciliation of movement on shareholders’ funds.

The change in accounting policy has resulted in a net increase in profit and net assets for the year of £61,000.

Employee share ownership plan

The cost of the Company’s shares held by the ESOP is deducted from shareholders’ funds in the Company and Group balance sheet. Any cash received by the ESOP on disposal of the shares it holds is also recognised directly in shareholders’ funds. Other assets and liabilities of the ESOP (including borrowings) are recognised as assets and liabilities of the Company.

Any shares held by the ESOP are treated as cancelled for the purposes of calculating earnings per share.

Finance costs

Finance costs are charged to profit over the term of the debt so that the amount charged is at a constant rate on the carrying amount. Finance costs include issue costs which are initially recognised as a reduction in the proceeds of the associated capital instrument.

Dividends

Equity dividends are recognised when they become legally payable. Interim equity dividends are recognized when paid. Final equity dividends are recognized when approved by the shareholders at an annual general meeting.

Liquid resources

For the purposes of the cash flow statement, liquid resources are defined as current asset investments and short term deposits.