Annual Report and Accounts 2006 - Optos
Annual Report and Accounts 2006 - Optos
Annual Report and Accounts 2006 - Optos
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Notes to the Consolidated Financial Statements<br />
continued<br />
s) Financial instruments<br />
Prospective adoption of IAS32 <strong>and</strong> IAS39<br />
As permitted by IFRS1, the Group has elected to apply IAS32 “Financial Instruments: Disclosure <strong>and</strong> Presentation” <strong>and</strong> IAS39 “Financial Instruments: Recognition <strong>and</strong><br />
Measurement” prospectively from 1 October 2005. As a result, the relevant comparative information for the year ended 30 September 2005 <strong>and</strong> as at 30 September<br />
2005 does not reflect the impact of these st<strong>and</strong>ards <strong>and</strong> is accounted for in accordance with UK GAAP.<br />
Derivative financial instruments<br />
<strong>Optos</strong> has used derivative financial instruments, principally forward currency contracts, to reduce its exposure to exchange rate movements. Under UK GAAP,<br />
such derivative contracts are not recognised as assets <strong>and</strong> liabilities on the balance sheet, <strong>and</strong> gains or losses arising on them are not recognised until the hedged<br />
item has itself been recognised in the financial statements.<br />
From 1 October 2005, derivative financial instruments are recognised as assets <strong>and</strong> liabilities measured at their fair value at the balance sheet date. Changes in fair<br />
values will be recognised in the income statement <strong>and</strong> this is likely to cause volatility in situations where the carrying value of the hedged item is either not adjusted<br />
to reflect fair value changes arising from the hedged risk, or is so adjusted but that adjustment is not recognised in the income statement. However, under certain<br />
conditions specified within IAS39, hedge accounting may be used to mitigate income statement volatility. The Group had no outst<strong>and</strong>ing contracts at 30 September<br />
2005 <strong>and</strong> had no contracts during the year to 30 September <strong>2006</strong>.<br />
Compound financial instruments<br />
<strong>Optos</strong> had in issue secured loan notes <strong>2006</strong> <strong>and</strong> unsecured loan notes 2007, both of which were convertible at the holder’s option into ordinary shares of<br />
1p each. Under UK GAAP, convertible bonds are treated as debt, with the finance cost being measured on the assumption that the debt will not be converted.<br />
Under IAS 32, from 1 October 2005 convertible bonds are split into a liability <strong>and</strong> a conversion option. On issue, the fair value of the liability component is determined<br />
using a market rate for an equivalent non-convertible bond <strong>and</strong> recognised in non-current liabilities as part of borrowings on an amortised cost basis until<br />
extinguished on conversion or redemption. The remainder of the proceeds is allocated to the conversion option. If the conversion option meets the definition of<br />
an equity instrument, no subsequent changes in the value are recognised in the financial statements. However, where settlement is in a currency other than the<br />
functional currency of <strong>Optos</strong>, the remainder of the proceeds are recognised as a financial liability, with the change in value of the conversion option in subsequent<br />
accounting periods being recognised in the income statement. At the date of issue, the compound financial instruments were denominated in the functional currency<br />
of <strong>Optos</strong> <strong>and</strong>, accordingly, the remainder of the proceeds were treated as an equity instrument.<br />
At 1 October 2005, the carrying value of the secured loan stock <strong>2006</strong> <strong>and</strong> unsecured loan stock 2007 was reduced by $1,439,000, of which $2,744,000 reflects the<br />
removal of the original value of the conversion options (which is taken to equity) <strong>and</strong> the balance of $1,305,000 represents the imputed interest calculated on an<br />
amortised costs basis from date of issue to 1 October 2005 (which is taken to retained earnings). The impact on <strong>2006</strong>, up to the point of conversion, has been to<br />
increase finance costs by $253,000 for imputed interest <strong>and</strong> a decrease in administrative expenses of $162,000 related to foreign exchange movements.<br />
Share warrants<br />
<strong>Optos</strong> had in issue a number of share warrants entitling the holders to subscribe for ordinary shares of 1p each at set prices under certain conditions. UK GAAP requires<br />
the net proceeds of an issue to be credited direct to shareholders’ funds. Thereafter, the accounting depends on whether the warrant is exercised or is allowed to lapse.<br />
If it is exercised, the proceeds on the original issue of the warrant are included in the net proceeds of the shares issued; if it lapses, they are included instead in the<br />
statement of total recognised gains <strong>and</strong> losses.<br />
Under IFRS, a non-derivative contract involving the delivery of a fixed number of own equity instruments, in exchange or a fixed amount of cash, is classified as an<br />
equity instrument. Any consideration received, such as a premium on issues, is added directly to equity. Subsequent changes in the fair value of the instrument are not<br />
recognised in the financial statements. However, where settlement is in a currency other than the functional currency of <strong>Optos</strong>, the net proceeds are recognised as a<br />
financial liability, with the change in value of the conversion option in subsequent accounting periods being recognised in the income statement. At the date of issue,<br />
the warrants were denominated in the functional currency of <strong>Optos</strong> <strong>and</strong>, accordingly, have been treated as an equity instrument.<br />
t) Derecognition of financial assets & liabilities<br />
Financial assets<br />
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised where the rights to receive cash flows from<br />
the asset have expired; the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a<br />
third party under a ‘pass-through’ arrangement; or the Company has transferred its rights to receive cash flows from the asset <strong>and</strong> either (a) has transferred substantially<br />
all the risks <strong>and</strong> rewards of the asset, or (b) has neither transferred nor retained substantially all the risks <strong>and</strong> rewards of the asset, but has transferred control of the asset.<br />
Financial liabilities<br />
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by<br />
another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is<br />
treated as a derecognition of the original liability <strong>and</strong> the recognition of a new liability, such that the difference in the respective carrying amounts together with any<br />
costs or fees incurred are recognised in profit or loss.<br />
44<br />
<strong>Optos</strong> plc <strong>Annual</strong> <strong>Report</strong> & <strong>Accounts</strong> <strong>2006</strong>