Financials. Strategic Report Governance Financials Company information. Imperial Innovations Annual Report and Accounts

Transcription

1 Financials Consolidated financial statements 100 Independent auditors report 104 Consolidated statement of comprehensive income 105 Consolidated balance sheet 106 Consolidated cash flow statement 107 Consolidated statement of changes in equity 108 Notes to the consolidated financial statements Company financial statements 144 Independent auditors report 146 Company balance sheet 147 Company statement of changes in equity 148 Notes to the Company financial statements Imperial Innovations Annual Report and Accounts 99

2 Independent auditors report to the members of Imperial Innovations Group plc Company information Financials Governance Strategic Report Report on the Group financial statements Our opinion In our opinion, Imperial Innovations Group plc s group financial statements (the financial statements ): give a true and fair view of the state of the group s affairs as at 31 July and of its loss and cash flows for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards ( IFRSs ) as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act What we have audited The financial statements comprise: the consolidated balance sheet as at 31 July ; the consolidated statement of comprehensive income for the year then ended; the consolidated cash flow statement for the year then ended; the consolidated statement of changes in equity for the year then ended; and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. The financial reporting framework that has been applied in the preparation of the financial statements is IFRSs as adopted by the European Union, and applicable law. Our audit approach Overview Overall group materiality: 4.6 million Audit scope Materiality Areas of focus which represents approximately 1% of net assets. We audited the complete financial information of the eight UK-based statutory entities which together provided the audit evidence we needed for our opinion on the Group financial statements. Valuation of unlisted equity investments. Valuation of the Carried Interest Plan liability The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) ( ISAs (UK & Ireland) ). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the Directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as areas of focus in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit. 100 Imperial Innovations Annual Report and Accounts

3 Area of focus Valuation of unlisted equity investments (see note 3 and the Audit and Risk Committee report on page 82) The Group has investments with a net carrying value of million. Of this, investments with a carrying value of 42.9 million are listed and market price data, providing objective evidence of the value, is readily available. The remaining million of investments has no quoted market price available. There is a risk that the carrying value of the portfolio does not reflect its fair value at the balance sheet date due to: the subjectivity of management estimates used in the valuation process (which is described in the Accounting Policies), including: the appropriateness of the valuation basis selected for each type of investment; the assessment of when an investment company has achieved a milestone event and the impact of this on the investment valuation; where the price of recent investment was used as the valuation basis that this was on an arm s length basis; and the assessment of when an investment has underperformed against previous expectation and the extent, if any, of impairment to be recognised; or inappropriate application of the International Private Equity and Venture Capital Valuation Guidelines. How our audit addressed the area of focus We obtained audit evidence in relation to the year-end quoted investment valuations by agreeing the bid prices on the quoted portfolio used at the balance sheet date to external market data. No exceptions were noted as a result of these procedures. For the unquoted investments, we performed our work firstly with a greater focus on the largest 8 unquoted investments which together represented 56% of the value of the unquoted portfolio as at the year-end date and, secondly, by selecting for testing individual investments with a value of more than 0.4 million or a movement of greater than 0.5 million from the prior year. For investments with an investment round in the year, we agreed pricing to supporting documentation and tested the calculation of the investment valuation. We then assessed the appropriateness of the resulting valuations in the unquoted investment portfolio by assessing management s key judgements and assumptions, as follows: we performed an independent search for milestones by reading third party news sources, websites and documents to compare to management s identified milestone events and, where there were milestones identified, we assessed the valuation judgements made by management using independent data sources where these were available; where the progress of an investment appeared to be behind earlier expectations, evaluating management s assessment as to the extent, if any, of impairment that may have arisen and challenging it based on our independently formed expectation; where the price of recent investment was used as the basis of the investment valuation, evaluating whether this was on an arm s length basis; and considering the objectivity of the evidence provided by management and considering this in the wider context of other available information, including that obtained from third party sources. Our evaluation included use of our valuation expertise and experience to challenge the assumptions used for certain of the more significant and subjective valuations. We also considered the consistency of the valuation methodologies used. We also considered events subsequent to the year end up to the date of this report and their impact on investment valuations. We identified a number of investments for which events after the balance sheet date provided support for their valuation at the year end and found that management had considered them and treated them appropriately in the financial statements. Based on this work, we found the judgements and assumptions used to be materially appropriate. We also checked that valuations were performed in a manner consistent with the International Private Equity and Venture Capital Valuation Guidelines and identified no material deviation from these guidelines. Valuation of the Carried Interest Plan liability The Group operates a Carried Interest Plan (CIP) for certain Executive Directors and employees (see explanation of the plan on page 87). The calculation of the CIP liability of 1.7 million is complex and includes a number of estimates including a leavers assumption, discount rate and timing of portfolio realisations. We agreed the inputs into the CIP calculation to supporting documentation and tested the accuracy of the calculation, without identifying any material differences. We discussed the leavers assumptions, discount rate and expected timing of the portfolio realisations with management and compared: the estimate of leaver rates to the actual leaver rate in previous years, finding it to be materially consistent; the discount rate to our independent expectation of the discount rate to be used, which was based upon prevailing market discount rates, finding it to be higher than our expectation but noting an immaterial difference to the CIP liability on applying a rate at the lower end of our expected range; and the portfolio realisation dates to the prior year and the Group s working capital model for consistency. We performed sensitivity analyses on the key assumptions used within the calculation, being the discount rate and the leaver assumptions, and also the forecast timing of the realisation of individual investment portfolios. Having ascertained the extent of change in those assumptions that either individually or collectively would be required for a material change in the valuation of the liability, we considered the likelihood of such a movement arising in those key assumptions. Based on this work we found the judgments and assumptions used to be materially appropriate. Imperial Innovations Annual Report and Accounts 101

4 Independent auditors report to the members of Imperial Innovations Group plc continued Company information Financials Governance Strategic Report How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group structure consists of the parent company (Imperial Innovations Group plc), one main trading entity (Imperial Innovations Limited), one main entity for holding the Group s investments (Imperial Innovations Businesses LLP), one entity for holding the Group s investment in the UCL fund (Imperial Innovations Limited Partner Limited), one holding company (Imperial Innovations Sarl), three further entities providing additional services to the Group, including Imperial Innovations Investment Management Limited, which is the Group s Financial Conduct Authority regulated entity, and one dormant entity. The Group financial statements are a consolidation of these nine entities. We audited the complete financial information of the eight UK-based statutory entities which together provided the audit evidence we needed for our opinion on the Group financial statements. There were no significant changes in the audit scope from the prior year as a consequence of the increase in the materiality benchmark applied. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall Group materiality How we determined it Rationale for benchmark applied 4.6 million (: 2.1 million). Approximately 1% of net assets. We have selected an asset-based benchmark given the nature of the Group s business activities with investment valuations being the focus of performance for the Group. The above benchmark has increased from 0.5% for the year ended 31 July to 1% for year ended 31 July. This is due to aligning to a more generally accepted rule of thumb for the benchmark used. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above 0.2 million (: 0.1 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern The Directors have chosen to voluntarily report how they have applied the UK Corporate Governance Code (the Code ) as if the company were a premium listed company. Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the Directors statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to. As noted in the Directors statement, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the Directors use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group s ability to continue as a going concern. Other required reporting Consistency of other information Companies Act 2006 opinion In our opinion, the information given in the Strategic Report and the Directors Report for the financial year for which the financial statements are prepared is consistent with the financial statements. ISAs (UK & Ireland) reporting As a result of the Directors voluntary reporting on how they have applied the Code, under ISAs (UK & Ireland) we are required to report to you if, in our opinion: information in the Annual Report is: materially inconsistent with the information in the audited financial statements; or apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or otherwise misleading. the statement given by the Directors on page 98, in accordance with provision C.1.1 of the Code, that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit. We have nothing material to add or to draw attention to. We have nothing material to add or to draw attention to. 102 Imperial Innovations Annual Report and Accounts

5 the Directors explanation on page 68 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing material to add or to draw attention to. Adequacy of information and explanations received Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we require for our audit. We have no exceptions to report arising from this responsibility. Directors remuneration Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors remuneration specified by law are not made. We have no exceptions to report arising from this responsibility. Responsibilities for the financial statements and the audit Our responsibilities and those of the Directors As explained more fully in the Statement of Directors responsibilities set out on page 98, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the company s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Other matter We have reported separately on the company financial statements of Imperial Innovations Group plc for the year ended 31 July. Simon Ormiston (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Cambridge 12 October Imperial Innovations Annual Report and Accounts 103

6 Consolidated statement of comprehensive income for the year ended 31 July Strategic Report Governance Revenue 2 4,257 5,099 Cost of sales (1,395) (1,769) Gross profit 2,862 3,330 Fair value losses and gains on investments 3(i) (56,249) 21,324 Administrative expenses: Carried Interest Plan release 4a 2,972 1,161 Other administrative expenses 4b (12,634) (11,567) administrative expenses (9,662) (10,406) Operating (loss)/profit (63,049) 14,248 Finance costs 6(i) (1,141) (555) Finance income 6(ii) 1,077 1,372 (Loss)/profit before taxation 7 (63,113) 15,065 Taxation 8 (Loss)/profit and total comprehensive income for the financial year (63,113) 15,065 Basic (loss)/earnings per Ordinary Share (pence) 9 (43.2) 11.1 Diluted (loss)/earnings per Ordinary Share (pence) 9 (43.2) 11.0 Note The notes on pages 108 to 143 are an integral part of these consolidated financial statements. Company information Financials 104 Imperial Innovations Annual Report and Accounts

7 Consolidated balance sheet as at 31 July Assets Non-current assets Property, plant and equipment Trade investments 3(i) 343, ,268 University Challenge Seed Fund (UCSF) investments 3(iii) Higher Education Innovation Fund (HEIF) loans 3(iv) Apollo Therapeutics and UCL Technology Fund 3(v) 1,173 non-current assets 345, ,936 Current assets Trade and other receivables 12 4,486 2,409 Short-term liquidity investments 13 15,000 20,000 Cash and cash equivalents , ,097 current assets 152, ,506 assets 498, ,442 Equity and liabilities Equity attributable to equity holders Issued share capital 17 4, ,500 Share premium 304, ,068 Capital redemption reserve 128,344 Retained (loss)/earnings (9,234) 53,879 Share-based payments reserve 8,861 8,528 Other reserves 18 18,096 18,096 equity 455, ,071 Liabilities Non-current liabilities Borrowings 15 24,089 27,222 Higher Education Innovation Fund (HEIF) and University Challenge Seed Fund (UCSF) Provisions for liabilities and charges 3(i) 8,887 6,048 Carried Interest Plan liability 4a 1,731 4,703 non-current liabilities 35,184 38,639 Note Current liabilities Borrowings 15 3,167 1,500 Trade and other payables 14 4,166 4,232 liabilities 42,517 44,371 equity and liabilities 498, ,442 The notes on pages 108 to 143 are an integral part of these consolidated financial statements. The Financial Statements on pages 104 to 143 were approved by the Board of Directors on 12 October and were signed on its behalf by Russ Cummings. Company registered number: Russ Cummings Chief Executive Officer 12 October Imperial Innovations Annual Report and Accounts 105

8 Consolidated cash flow statement for the year ended 31 July Company information Financials Governance Strategic Report Cash flows from operating activities: Operating (loss)/profit Note (63,049) 14,248 Adjustments to reconcile operating profit to net cash flows used in operating activities: Depreciation of property, plant and equipment Fair value movement in investments 56,249 (21,324) Share-based payment charge Carried Interest Plan release (2,972) (1,161) Working capital adjustments: Increase in trade and other receivables (273) (679) Decrease in trade and other payables (1,098) (653) Net cash used in operating activities (10,799) (9,331) Cash flows from investing activities: Purchase of trade investments 13 (69,873) (59,957) Investments in funds (1,173) Proceeds from sale of trade investments 13 4,979 7,179 Revenue-share paid on realisations of trade investments 13 (989) Net cash flows used in investments (66,067) (53,767) Purchase of property, plant and equipment (17) Interest received 1,079 1,410 Decrease in short-term liquidity investments 5,000 50,000 Net cash flows generated from other investing activities 6,079 51,393 Net cash used in investing activities (59,988) (2,374) Cash flows from financing activities: Proceeds from issuance of Ordinary Shares¹ 101,636 Transaction costs relating to issuance of Ordinary Shares² (3,037) Proceeds from EIB loan 15,000 Costs incurred for EIB loan (181) Repayment of EIB loan (1,500) (944) Interest paid (1,103) (535) Net cash generated from financing activities 95,996 13,340 Net increase in cash and cash equivalents 25,209 1,635 Cash and cash equivalents at beginning of the year 108, ,462 Cash and cash equivalents at end of the year , ,097 1 Issue of 523,677 ordinary shares on exercise of share options by two former Directors during August and a further issue of 23,529,412 ordinary shares as part of the placing during February (see note 17). 2 These transaction costs were deducted from share premium. The notes on pages 108 to 143 are an integral part of these consolidated financial statements. 106 Imperial Innovations Annual Report and Accounts

9 Consolidated statement of changes in equity for the year ended 31 July attributable to equity holders of the Group Issued share capital Share premium Capital redemption reserve Retained earnings/ (accumulated loss) Share-based payments reserve Other reserves At 1 August , ,068 38,814 8,304 18, ,782 Comprehensive income Profit for the financial year 15,065 15,065 comprehensive income 15,065 15,065 Transactions with owners recognised directly in equity Value of employee services Transactions with owners At 31 July 132, ,068 53,879 8,528 18, ,071 Comprehensive income Loss for the financial year (63,113) (63,113) comprehensive loss (63,113) (63,113) Transactions with owners recognised directly in equity Value of employee services Share capital issued , ,636 Costs of share capital issued (3,037) (3,037) Cancellation of deferred shares (128,344) 128,344 Transactions with owners (127,615) 97, , ,932 At 31 July 4, , ,344 (9,234) 8,861 18, ,890 Treasury shares with a cost of 2,564,009 (: 2,564,009) have been netted against retained earnings representing shares held by the Employee Benefit Trust. The notes on pages 108 to 143 are an integral part of these consolidated financial statements. equity Imperial Innovations Annual Report and Accounts 107

10 Notes to the consolidated financial statements 1. Accounting policies Strategic Report Governance General information Imperial Innovations Group plc is a Public Limited Company incorporated and domiciled in the United Kingdom whose shares are registered on the Alternative Investment Market of the London Stock Exchange (AIM). The address of the registered office is Imperial Innovations Group plc, 52 Princes Gate, Exhibition Road, London SW7 2PG. Imperial Innovations Group plc s shares were admitted to AIM on 31 July Imperial Innovations Group plc creates, builds and invests in pioneering technologies developed from the academic research within the Golden Triangle broadly bounded by London, Cambridge and Oxford, which is home to four of the UK s leading research-intensive universities. The Group supports scientists and entrepreneurs in the commercialisation of their ideas and intellectual property by leading the formation of new companies, providing facilities in the early stages, providing investment and encouraging co-investment to accelerate development, providing operational expertise and recruiting high-calibre management teams. It also runs a Technology Incubator in London that is the initial home for many of its technology spin-outs. Basis of preparation The consolidated financial statements comprise a consolidation of amounts included in the financial statements of the following subsidiary companies: Financials Company information Company Nature of operations Country of incorporation Imperial Innovations Limited Technology licensing and investment holding company England Imperial Innovations LLP Investment holding entity England Imperial Innovations Investments Limited Investment holding company England Imperial Innovations Businesses LLP Investment holding entity England Imperial Innovations Investment Management Limited Investment services company England Imperial College Company Maker Limited Investment holding company England Innovations Limited Partnership Limited Investment holding company England Imperial Innovations Sarl Investment holding company Luxembourg All the subsidiaries of the Group are 100% owned within the Group and have been included in the consolidated financial statements. The consolidated financial statements have been prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of certain financial assets and financial liabilities at fair value through profit or loss, as required by International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement. The consolidated financial statements of Imperial Innovations Group plc (the Group) have been prepared in accordance with European Union Endorsed International Financial Reporting Standards (IFRSs), the IFRS Interpretations Committee (formerly the International Financial Reporting Interpretations Committee (IFRIC)) interpretations as adopted by the European Union and the Companies Act 2006 applicable to companies reporting under IFRS. The principal accounting policies adopted in the preparation of these financial statements have been consistently applied to all the years presented, unless otherwise stated. The preparation of financial statements in conformity with IFRS as endorsed by the EU requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 20. Changes in accounting policies (a) New Standards, amendments and interpretations adopted by the Group Annual Improvements to IFRSs cycle Annual Improvements to IFRSs cycle No impact on the reported results or disclosures of the Group has occurred as a result of the introduction of the standards above. 108 Imperial Innovations Annual Report and Accounts

11 1. Accounting policies continued (b) New standards, amendments and interpretations not yet adopted IFRS 9 Financial Instruments effective for annual periods beginning on or after 1 January IFRS 16 Leases effective for Annual periods beginning on or after 1 January 2019 with earlier application permitted if IFRS 15, Revenue from Contracts with Customers, is also applied. IFRS 15 Revenue from Contracts with Customers effective for annual periods beginning on or after 1 January Amendments to IFRS 10 and IAS 28 on investment entities applying the consolidation exemption effective for annual periods beginning on or after 1 January. Amendment to IAS 1 Presentation of Financial Statements on the disclosure initiative effective for annual periods beginning on or after 1 January. Amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets on depreciation and amortisation effective for annual periods beginning on or after 1 January. Amendments to IAS 27 Separate Financial Statements on the equity method effective for annual periods beginning on or after 1 January. Annual Improvements to IFRS 2014 cycle effective for annual periods beginning on or after 1 January. IAS Amendments to IAS 7, Statement of cash flows on disclosure initiative effective for annual periods beginning on or after 1 January Amendments to IAS 12, Income taxes on Recognition of deferred tax assets for unrealised losses (effective 1 January 2017) effective for annual periods beginning on or after 1 January. Amendments to IFRS 11 Joint Arrangements on acquisition of an interest in a joint operation effective for annual periods beginning on or after 1 January. IFRS 15, Revenue from contracts with customers, deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity s contracts with customers. Revenue is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard is effective for annual periods beginning on or after 1 January 2018 and earlier application is permitted subject to EU endorsement. The Group assessed the impact of IFRS 15 and concluded that it will have no material impact on the Group. The Directors do not anticipate that the adoption of these standards, amendments and interpretations, where relevant, in future periods will have a material impact on the Group s financial statements. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. Basis of consolidation The Group s consolidated financial statements consist of Imperial Innovations Group plc and all of its subsidiaries. Subsidiaries Subsidiaries are consolidated from the date of their acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. The Group controls an investee when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. Where shareholdings exceed 50% of an investee company, but where the Group does not control these companies (control as defined by IFRS 10), it does not consolidate them. The acquisition method of accounting has been used and consistent accounting policies are in place throughout the Group. The cost of acquisition is measured at fair value of assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition related costs are expensed as incurred. Identifiable assets acquired, and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group s share of the identifiable net assets is recorded as goodwill. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Imperial Innovations Annual Report and Accounts 109

12 Notes to the consolidated financial statements continued Company information Financials Governance Strategic Report 1. Accounting policies continued Associates Investments that are held as part of the Group s investment portfolio are carried in the balance sheet at fair value even though the Group may have significant influence over these companies. This treatment is permitted by IAS 28 Investments in Associates, which requires such investments to be excluded from its scope where those investments are designated, upon initial recognition, as at fair value through profit or loss and accounted for in accordance with IAS 39 Financial instruments: Recognition and measurement, with changes in fair value recognised in the period of change. Foreign currency translation The consolidated financial statements are presented in pounds sterling, which is the Company s functional and the Group s presentation currency. The Group determines the functional currency of each entity and items included in the financial statements of each entity are measured using that functional currency. Transactions denominated in foreign currencies are translated into sterling at the actual rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at rates ruling at the balance sheet date. Exchange differences are included in the consolidated statement of comprehensive income. The assets and liabilities of foreign subsidiaries are translated into pounds sterling at closing rate at the date of the balance sheet and income and expenses are translated at average exchange rates. Revenue recognition and cost of sales Revenue, which excludes value added tax, represents the income generated by the Group from licensing activities, royalty revenues and patent cost recoveries, services provided by the Group to Imperial College London and other parties and corporate finance fees. Revenue is stated gross of any revenue-share due to Imperial College London or other parties, where appropriate, with any revenue-share included in cost of sales. Licence and royalty revenue When granting a licence, an initial up-front fee may be receivable on signing followed by subsequent payments when milestone conditions are met. The initial up-front fee receivable on the execution of a licence is generally recognised in full on signing as long as all the Group s obligations under the licence have been completed and the fees are not refundable. Milestone payments are recognised at the date all the conditions are satisfied for the particular milestone payment and all the Group s obligations have been completed. Additionally, a portion of costs previously incurred by the Group through the filing and enforcement of patents may be recovered from either licensees or portfolio companies when the intellectual property is commercialised or the portfolio company is funded. In addition, sales royalties may also be due under licence agreements. Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreements. Income received in the form of quoted or unquoted investments from licensing activities is recognised as licensing income for those investments that have either a market value or a value attributed to them by other independent third parties. Revenue from services Revenue from services represents intellectual property management and other commercialisation services provided to Imperial College London and other parties. Revenue from intellectual property management services is recognised on a straight line basis over the period to which the services relate. Grant (including government funding) and investment awards are recognised initially in deferred income and amortised to the consolidated statement of comprehensive income in line with the terms and conditions of the award. Commercial proof-of-concept type awards are recognised in the consolidated statement of comprehensive income and matched to related expenditure. Technical proof-of-concept type awards are recognised in the balance sheet, under payables, and reduced by related expenditure. Corporate finance fees Corporate finance fees are generally earned as a fixed percentage of total funds raised and recognised at the time the related transaction is successfully concluded. Dividend income Dividend income is recognised when the right to receive payment is established. 110 Imperial Innovations Annual Report and Accounts

13 1. Accounting policies continued Intangible assets Intangible assets, which include acquired patent rights, are stated at cost less any accumulated amortisation and any accumulated impairment losses and are tested annually for any impairment and whenever circumstances indicate that the carrying amount may not be recoverable. Patent costs incurred on internally generated intellectual property are written off to the consolidated statement of comprehensive income in the period in which they are incurred. Going concern After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for a period of at least 12 months from the date of approval of these financial statements. For this reason, they continue to adopt the going concern basis in preparing the financial statements. In addition, the Group has prepared a viability statement. Goodwill Goodwill arising on the acquisition of a subsidiary represents the excess of the fair value of the consideration given over the fair value of the identifiable net assets acquired. Goodwill is recognised as an asset and is reviewed annually for impairment and is carried at cost less accumulated impairment. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Property, plant and equipment All property, plant and equipment are stated at historical cost together with any incidental costs of acquisition less accumulated depreciation. Cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Depreciation is provided on all property, plant and equipment at rates calculated to write each asset down to its estimated residual value on a straight line basis over its expected useful life, as follows: Office equipment and computers over four years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. Financial assets Equity investments and other financial assets Financial assets within the scope of IAS 39 are classified as either financial assets at fair value through the profit or loss, loans and receivables, held to maturity investments or available for sale financial assets. When financial assets are recognised initially they are measured at fair value, plus directly attributable transaction costs. Financial assets at fair value through profit or loss The Group classifies all its equity investments as financial assets at fair value through profit or loss. The financial assets carried at fair value through profit or loss are initially recognised at fair value and subsequently re-measured at their fair value. Investments in associated undertakings that are held by the Group with a view to the ultimate realisation of capital gains are designated as financial assets at fair value through profit or loss. Investments in undertakings that do not meet the definition of an associated undertaking are also designated as financial assets at fair value through profit or loss on initial recognition. The fair value movement is net of revenue-share (as set out in note 3). Treatment of gains and losses arising on fair value Realised and unrealised gains and losses on financial assets at fair value through profit or loss are included in the consolidated statement of comprehensive income in the period in which they arise. Valuation of investments The fair values of quoted investments are based on bid prices at the balance sheet date. When a price for an asset or liability is not observable, the Group measures fair value using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. The fair value of unlisted securities is established using International Private Equity and Venture Capital Valuation Guidelines (IPEVCVG). The valuation methodology used most commonly by the Group is the price of recent investment or a milestone analysis approach. Given the nature of the Group s investments in seed, start-up and early-stage companies, where there are often no current and no short-term future earnings or positive cash flows, it can be difficult to gauge the probability and financial impact of the success or failure of development or research activities and to make reliable cash flow forecasts. Imperial Innovations Annual Report and Accounts 111

14 Notes to the consolidated financial statements continued Company information Financials Governance Strategic Report 1. Accounting policies continued Consequently, the most appropriate approach to determine fair value is a methodology that is based on market data, that being the price of a recent investment. The Group considers that fair value estimates that are based entirely on observable market data will be of greater reliability than those based on assumptions and accordingly where there has been any recent investment by third parties, the price of that investment will generally provide a basis of the valuation. Where the Group considers that the price of recent investment, unadjusted, is no longer relevant and there are limited or no comparable companies or transactions from which to infer value, the Group carries out an enhanced assessment based on milestone analysis and/or industry and sector analysis. In applying the milestone analysis approach to investments in companies in early or development stages the Group seeks to determine whether there is an indication of change in fair value based on a consideration of performance against any milestones that were set at the time of the original investment decision, as well as taking into consideration the key market drivers of the investee company and the overall economic environment. When considered appropriate, the Group may use external valuers to assess the reasonableness of any change in fair value estimated by management. The following considerations are used when calculating the fair value: where the investment being valued was itself made recently, its cost will generally provide a good indication of fair value unless there is objective evidence that the investment has since been impaired, such as observable data suggesting a deterioration of the financial, technical, or commercial performance of the underlying business; where there has been any recent investment by third parties, the price of that investment will provide a basis of the valuation; if there is no readily ascertainable value from following the price of recent investment methodology, the Group considers alternative methodologies in the IPEVCVG guidelines, being principally discounted cash flows and price-earnings multiples requiring management to make assumptions over the timing and nature of future earnings and cash flows when calculating fair value; where a fair value cannot be estimated reliably, the investment is reported at the carrying value at the previous reporting date unless there is evidence that the investment has since been impaired; all recorded values of investments are regularly reviewed for any indication of impairment and adjusted accordingly; the length of period for which it remains appropriate to use the price of recent investment depends on the specific circumstances of the investment and the stability of the external environment. During this period the Group considers whether any changes or events subsequent to the transaction would imply a change in the fair value of the investment may be required; where the Group considers that there is an indication that the fair value has changed, an estimation is made of the required amount of any adjustment from the last price of recent investment. Wherever possible, this adjustment is based on objective data from the investee company and the experience and judgement of the Group. However any adjustment is, by its very nature, subjective. Where deterioration in value has occurred, the Group reduces the carrying value of the investment to reflect the estimated decrease. If there is evidence of value creation, the Group may consider increasing the carrying value of the investment. However, in the absence of additional financing rounds or profit generation it can be difficult to determine the value that a purchaser may place on positive developments given the potential outcome and the costs and risks to achieving that outcome. This is a critical accounting judgement as set out in note 20; factors which the Group considers include, inter alia, technical measures such as product development phases and patent approvals, financial measures such as cash burn rate and profitability expectations, and market and sales measures such as testing phases, product launches and market introduction; and where the equity structure of a portfolio company involves different class rights in a sale or liquidity event, the Group takes these different rights into account when forming a view of the value of its investment. Recognition of financial assets The purchase or sale of financial assets is recognised using trade date accounting for all assets held at fair value through profit or loss. The recognition of an asset and the liability to pay for it or the de-recognition of an asset, recognition of any gain or loss on disposal and the recognition of a receivable from a buyer occur on the date that a commitment is made to purchase or to sell the asset. Trade and other receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. 112 Imperial Innovations Annual Report and Accounts

15 1. Accounting policies continued The amount of the provision is the difference between the asset s carrying amount and the present value of the estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the consolidated statement of comprehensive income within administrative expenses. Other receivables includes deferred consideration. Deferred consideration is recognised at its fair value at the date of sale and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held with banks and other short-term highly liquid investments with original maturities of less than three months. Short-term liquid investments with a maturity of over three months and less than 12 months are included in a separate category, Short-term liquidity investments. Share capital Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of new Ordinary shares are shown as a deduction, net of tax, from the proceeds. Deferred shares are not transferable and do not entitle the holder to the payment of any dividend or otherwise participate in the profits of the Company or to receive notice of or attend or vote at any general meeting of the Company and on any reduction of capital in accordance with the Companies Act 2006, may be cancelled without payment of consideration. The Deferred Shares are not listed on any stock exchange. The Company may purchase the Deferred Shares for not more than the sum of 0.01 in aggregate for all the Deferred Shares and cancel the Deferred Shares so purchased, without any requirement to obtain the consent or sanction of the holders of the Deferred Shares. After the Deferred Shares are purchased, the shares will be cancelled and the value will be recognised in a capital redemption reserve. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the consolidated statement of comprehensive income over the period of the borrowing using the effective interest rate method. Employee benefits Pensions The Group makes payments to a defined contribution scheme. The assets of the scheme are held separately from the Group in independently administered funds. Contributions made by the Group are charged to the consolidated statement of comprehensive income in the period to which they relate. Share-based payments Equity settled transactions Employees (and Directors) receive remuneration in the form of share-based payments, whereby employees render services in exchange for shares or for rights over shares. The fair value of the employee services received in exchange for the grant of options or shares is recognised as an expense. The total amount to be expensed is recognised on a straight line basis over the vesting period is determined by reference to the fair value of the options or shares determined at the grant date, excluding the impact of any non-market based vesting conditions (for example, continuation of employment and performance targets). The share options are valued using the binomial option pricing model for the long term incentive scheme and using the Black-Scholes model for the SAYE scheme. Non-market based vesting conditions are included in assumptions about the number of options that are expected to become exercisable or the number of shares that the employee will ultimately receive. This estimate is revised at each balance sheet date to allow for forecast leaving employees and the difference is charged or credited to the consolidated statement of comprehensive income, with a corresponding adjustment to the share-based payments reserve. Employee benefit trust An employee benefit trust holds shares in the Group. The trust is considered an independent entity and not controlled by the Group and therefore not consolidated. However, unallocated shares and cash which are considered to be under the de-facto control of the Group are consolidated in the financial statements. The cost of treasury shares is netted against retained earnings. Current and deferred income tax Income tax on the result for the period comprises current and deferred tax. Income tax is recognised in the consolidated statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Imperial Innovations Annual Report and Accounts 113