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Notes to the Financial Statements
for the year ended 30 June 2008

1. 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 International Financial Reporting Standards (‘IFRS’) and International Financial Reporting Interpretations Committee (‘IFRIC’) interpretations adopted by the European Union and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS. The financial statements have been prepared on the going concern basis, 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
The Group had cash balances of £1.1m at 30 June 2008, and had a net cash outflow of £3.3m during the year. The Directors expect a further net cash outflow in the six months to 31 December 2008 and recognise that there will be a need to have increased facilities.

The financial statements have been prepared on the going concern basis which assumes that the Group will continue in operational existence for the foreseeable future. The Directors have reviewed the working capital requirements of the Group for the next 12 months, and are confident that the further facilities required can be obtained. The Directors have also identified a number of steps that could be taken to improve the working capital situation, should the further facilities not be available in the timeframe required. The financial statements do not reflect any adjustments that would be required if they were to be prepared on a basis other than the going concern basis.

Accounting Developments
a. Standards, and interpretations effective in 2008
IFRS 7 ‘Financial instruments: Disclosures’ and the complimentary amendment to IAS1 ‘Presentation of financial statements – Capital disclosures’ introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Group’s financial instruments, or the disclosures relating to taxation and trade and other payables. Disclosures have been presented within the financial statements accordingly.

IFRIC 8 ‘Scope of IFRS 2’, requires consideration of transactions involving the issuance of equity instruments where the identifiable consideration received is less than the fair value of the equity instruments issued in order to establish whether or not they fall within the scope of IFRS 2. This standard does not have any impact on the Group or Company’s financial statements.

IFRIC 10 ‘Interim financial reporting and impairment’, prohibits impairment losses recognised in an interim period on goodwill and investment sin equity instruments and in financial assets carried at cost to be reversed at a subsequent balance sheet date. This standard does not have any impact on the Group or Company’s financial statements.

IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’, provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent’s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the Parent and Group Companies. This interpretation does not have any impact on the Group or Company’s financial statements.

b. Standards, and interpretations effective in 2008 but not relevant
The following standards and interpretations are mandatory for the first time but are not relevant to the Group’s operations:

IFRS 4, ‘Insurance contracts’; and

IFRIC 9 ‘Re-assessment of embedded derivatives’.

c. Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group
The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year ended 30 June 2008 and have not been early adopted:

IFRS 8, ‘Operating segments’, effective for annual periods beginning on or after 1 January 2009. IFRS 8 replaces IAS 14, ‘Segment reporting’, and requires a ‘management approach’ under which segment information is presented on the same basis as that used for internal reporting purposes. The expected impact is still being assessed in detail by management.

IAS 23 (amendment), ‘Borrowing costs’, effective for annual periods beginning on or after 1 January 2009. This amendment is not relevant to the Group as the Group currently applies a policy of capitalising borrowing costs.

IFRS 2 (amendment) ‘Share-based payment’, effective for annual periods beginning on or after 1 January 2009. Management is assessing the impact of changes to vesting conditions and cancellations on the Group’s financial statements.

IFRS 3 (amendment), ‘Business combinations’ and consequential amendments to IAS 27, ‘Consolidated and separate financial statements’, IAS 28, ‘Investments in associates’ and IAS 31, ‘Interests in joint ventures’, effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. Management is assessing the impact of the new requirements regarding acquisition accounting, consolidation and associates on the Group.

IAS 1 (amendment), ‘Presentation of financial statements’, effective for annual periods beginning on or after 1 January 2009. Management is in the process of developing proforma accounts under the revised disclosure requirements of this standard.

IAS 32 (amendment), ‘Financial instruments: presentation’, and consequential amendments to IAS 1, ‘Presentation of financial statements’, effective for annual periods beginning on or after 1 January 2009. This is not relevant to the Group, as the Group does not have any puttable instruments.

d. Interpretations to existing standards that are not yet effective and not relevant for the Group’s operations
The following interpretations to existing standards have been issued and are mandatory for the Group’s accounting periods beginning on or after 1 January 2008 but are not relevant for the Group’s operations:

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’.

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 power to 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 purchased, 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 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.

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 marketing partners and direct sales. Geographic location of assets are 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 recognised at cost. They have a definite useful life and are carried at cost less accumulated amortisation. 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; and
• Motor 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 recognised 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 income 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 charged to the income statement when employees provide services that increase their entitlement. An accrual is made for holidays earned but not taken.

Share-based payments (options and warrants)
The Group grants share options and warrants 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 subsidiary undertakings.

Trade receivables and trade payables
Trade receivables and trade payables do not carry 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 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 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.

 

 

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