Annual Report and Accounts 2006 - Optos

Notes to the Company Financial Statements
continued
Compound financial instruments
Optos had in issue secured loan notes 2006 and unsecured loan notes 2007, both of which were convertible at the holder’s option into ordinary shares of 1p each.
Under previous UK GAAP, convertible bonds are treated as debt, with the finance cost being measured on the assumption that the debt will not be converted.
Under new UK GAAP, from 1 October 2005 convertible bonds are split into a liability and a conversion option. On issue, the fair value of the liability component is
determined using a market rate for an equivalent non-convertible bond and recognised in non-current liabilities as part of borrowings on an amortised cost basis
until extinguished on conversion or redemption. The remainder of the proceeds is allocated to the conversion option. If the conversion option meets the definition
of an equity instruments no subsequent changes in the value are recognised in the financial statements. However, where settlement is in a currency other than the
functional currency of Optos, the remainder of the proceeds are recognised as a 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, the compound financial instruments were denominated in the functional currency
of Optos and, accordingly, the remainder of the proceeds have been treated as an equity instrument.
At 1 October 2005, the carrying value of the secured loan stock 2006 and unsecured loan stock 2007 was reduced by $1,439,000, of which $2,745,000 reflects the
removal of the original value of the conversion options (which is taken to equity) and the balance of $1,306,000 represents the imputed interest calculated on an
amortised costs basis from date of issue to 1 October 2005 (which is taken to retained earnings). The impact on 2006, up to the point of conversion, has been to
increase finance costs by $253,000 for imputed interest and a decrease in administrative expenses of $162,000 related to foreign exchange movements.
Share warrants
Optos 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. Previous UK GAAP
requires 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. If it is exercised, the proceeds on the original issue of the warrant are included in the net proceeds of the shares issued; if is lapses, they are included instead in
the statement of total recognised gains and losses.
Under new UK GAAP, 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 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 recognised in the financial statements. However, where settlement is in a currency other than the functional currency of Optos, the net proceeds are
recognised as a 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, the warrants were denominated in the functional currency of Optos and, accordingly, have been treated as an equity instrument.
Derecognition of financial assets & liabilities
Financial assets
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
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
third party under a ‘pass-through’ arrangement; or the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially
all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Financial liabilities
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
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
treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any
costs or fees incurred are recognised in profit or loss.
2 LOSS attributable to the Company
Directors
Details of Director remuneration, pension benefits and share options are included in the Directors’ Remuneration report on pages 28-31.
Auditors remuneration
The total fees payable by the Company to Ernst & Young LLP for work performed in respect of the audit of the Company was $30,000 (2005: $18,000).
68
Optos plc Annual Report & Accounts 2006