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AVESCO GROUP PLC ANNUAL REPORT 2011 www.avesco.com


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED 30 SEPTEMBER 2011


Management have assessed the potential impact of the above amendments and interpretations on the Consolidated Financial Statements of the Group. None of the above standards are expected to have a material impact on the Group.


2.2 Basis of consolidation


Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.


The Group uses the acquisition method of accounting to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by- acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.


Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Cost also includes direct attributable costs of investment.


The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income.


Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.


2.3 Alternative performance measures


The Group uses alternative non-Generally Accepted Accounting Practice (“non-GAAP”) financial measures which are not defined within IFRS. The Directors use these measures in order to assess the underlying operational performance of the Group and as such, these measures are important and should be considered alongside the IFRS measures. The following non-GAAP measures are referred to in these annual report and accounts.


a) Trading profit/(loss) ‘Trading profit/(loss)’ is separately disclosed, being defined as operating profit/(loss) adjusted to exclude amortisation of acquired intangible assets, restructuring costs and other non-recurring costs. Other non recurring costs relate to items which management believe do not accurately reflect the underlying trading performance of the business in the period. The Directors believe that trading profit/(loss) is an important measure of the underlying performance of the Group.


b) Adjusted earnings per share ‘Adjusted earnings per share’ is calculated by dividing the profit for the period excluding the amortisation of acquired intangible assets, restructuring costs, other non-recurring costs and the deferred tax charge/credit by the weighted average number of ordinary shares in issue during the period. The Directors believe that adjusted earnings per share provides an important measure of the underlying performance of the Group.


c) Trading EBITDA Trading earnings before interest, taxation, depreciation and amortisation (‘EBITDA’) is separately disclosed, being defined as trading profit/loss adjusted to exclude depreciation and amortisation of software. The Directors believe that trading EBITDA is an important measure of the underlying performance of the Group.


2.4 Segmental reporting


Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision- maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors. 2.5 Foreign currency translation


a) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the 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 functional and presentational currency.


b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement for the period, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.


c) Group companies The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the Group’s presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and


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