HSB Engineering Insurance Services Limited Annual report and accounts
Contents Company information 3 Strategic report 4 Directors report 6 Statement of Directors responsibilities in respect of the annual financial statements 8 Independent Auditor s report to the members of HSB Engineering Insurance Services Limited 9 Income statement 11 Statement of other comprehensive income 11 Statement of financial position 12 Statement of changes in equity 13 Statement of cash flows 14 15
Company information COMPANY NUMBER 3010292 DIRECTORS REGISTERED OFFICE AUDITOR G Bendelow A P Milton (Managing Director) A O Reilly S Worrall New London House 6 London Street London EC3R 7LP KPMG LLP 1 St Peter s Square Manchester M2 3AE 3
Strategic report The Directors present to the members of HSB Engineering Insurance Services Limited (the Company) the Strategic report for the year ended. The results for the year are set out in the financial statements on pages 11 to 32. Principal activities The principal activities of the Company are the provision of accredited engineering inspection services in the United Kingdom and the Republic of Ireland. The Company also provides engineering advisory services to its parent company, HSB Engineering Insurance Limited. Business review The Company reported a profit before tax for the year of 1,917,000 (: 440,000), representing a profit margin of 6.0% (: 1.4%). Revenue increased by 947,000, or 3.1%, on the prior year, reflecting an increase in new business and good levels of customer retention during the year, supported by the Company s emphasis on good customer service delivery. The principal key performance indicators which the Directors use to monitor the Company s performance are revenue, operating profit and profit before tax. These are set out on page 11. Future developments The Company plans to continue investing in process improvements and its employees to further enhance the efficiency and effectiveness of the services provided to its customers. The Company has considered the risks posed by the UK s planned exit from the European Union ( Brexit ). Risks identified include the impact of a downturn in the UK economy and that changes to existing cross-border arrangements may increase the cost of servicing European business. As the European market is not a significant part of the inspection business, the Directors believe that Brexit will not have a material impact on the Company s revenue or profits. The Directors continue to monitor closely developments in the Brexit negotiations to ensure that the Company can respond accordingly as the structure and form of the UK s exit from the European Union is confirmed. Risk management The Company s approach to risk management follows a number of principles which provide guidance for the design of its risk management framework. These include ensuring risk transparency, ensuring consistency with the Risk Management Principles set out by the Company s immediate and ultimate parent companies, considering risks proportionately, ensuring accountability throughout the organisation, having several levels of independent oversight, ensuring staff are well trained and embedding risk management practices and principles at all levels of the organisation. The Board of Directors is responsible for setting the strategic direction of the Company and defining the overall tolerance for risk, including the review of major risk exposures and the establishment of certain risk limits. The Board is also responsible for risk governance. An independent risk function is in place through the Company s immediate parent company, HSB Engineering Insurance Limited, this function serves to provide an objective challenge to management over the effectiveness of the Company s risk management practices; the risk monitoring processes; and the adequacy of the internal controls framework. The Company adheres to the risk management framework established by its immediate parent company, which focuses on timely recognition and proactive management of risks. The framework also includes an internal selfassessment system to assess the effectiveness of the key controls in place to mitigate risks. This system is used to focus attention on any identified weaknesses and action plans are put in place when any weakness is identified. The risk framework and self-assessment system is used as a basis for review and challenge by management. 4
Strategic report (continued) Principal risks and uncertainties The Company s operations expose it to a variety of risks that include credit risk, liquidity risk and operational risk. Given the size of the Company and its position within the Group comprising Munchener Ruckversicherungs- Gesellschaft Aktiengellschaft (Munich Re) and its subsidiaries, collectively known as Munich Re Group, the Directors have not established a sub-committee of the Board to monitor financial risk management, but implement and monitor those policies established by the Company s immediate parent, HSB Engineering Insurance Limited. The principal risks of the Company are as follows: Credit risk Credit risk is defined as the risk of financial loss as a result of a change in the financial position of a counterparty. The Company is exposed to credit risk on outstanding receivables from customers. Where appropriate, relevant credit checks are performed on potential customers before sales are made. Liquidity risk Liquidity risk is defined as the risk that funds are not available to meet obligations at a reasonable time or at a reasonable cost. The Company ensures that funds are available to meet such calls through its operating cash and working capital management processes as well as the funding available from its immediate parent, HSB Engineering Insurance Limited. Operational risk Operational risk is defined as the potential losses resulting from inadequate processes, technical failure, human error or external events. The Company adopts a range of measures to mitigate operational risk exposure. Emphasis is placed on the selection and training of managers and staff and the provision of effective guidance, through such measures as documented policies and procedures, operating manuals and systems controls. The Company has retained its accreditations for both the quality assurance system and occupational health and safety management system to ISO/IEC 17020:2012 and BS OHSAS 18001 respectively. These systems include frameworks for internal and external audit, safety systems, technical training and competency assessment. Group risk Group risk is defined as the risk of any activity, circumstance, event or series of events involving one or more affiliates of the Group that, if not remedied promptly, is likely to have a material adverse effect upon the financial condition or liquidity of the Group. The Company is reliant on services performed by other entities within the Group, such as outsourced IT activities performed by Munich Re. There is a regular flow of information between the Company, its immediate parent company and Munich Re to mitigate this risk. Defined benefit pension scheme funding risk The Company has an ongoing commitment to fund its defined benefit pension scheme, which is closed to new entrants and, from 30 June, to accrual of future benefits. Pension funding risk is the risk that the value of the scheme assets will be insufficient to cover the obligations to scheme members. To mitigate this risk, management, together with the trustees of the scheme, regularly review reports prepared by the scheme s independent actuary to assess the risks and take appropriate actions. By order of the Board A P Milton Managing Director 17 April 2018 Registered Number: 3010292 5
Directors report The Directors present to the members of HSB Engineering Insurance Services Limited their Directors report and the audited financial statements for the year ended. As permitted by Section 414C(11) of the Company s Act 2006, certain information is not included in the Directors report because it has instead been shown in the Strategic Report. This information is: - Principal activities - Business review - Principal risks and uncertainties Results and Dividends The results for the year are set out in the Income Statement on page 11. A review of the Company s business activities and any likely future developments can be found in the Strategic Report. The profit for the year before taxation amounted to 1,917,000 (: 440,000). The Directors have paid a dividend in respect of the year ended of 1,000,000 (: nil). The Directors do not recommend any further distribution by way of dividends. Directors The Directors who held office during the year were as follows: G Bendelow A P Milton (Managing Director) A O Reilly S Worrall Liability insurance The Company, through its ultimate parent company, Munich Re, purchased and maintained liability insurance for its Directors as permitted by section 233 of the Companies Act 2006. Policy and practice on payment of creditors It is the policy of the Company to agree terms of payment when orders for goods and services are placed and to pay in accordance with those terms. Political and charitable contributions Charitable donations of 500 (: 425) were made during the year. No political contributions were made during the year (: nil). Going concern The Company s business activities, together with the factors likely to affect its future development, performance and position, are set out above and in the Strategic Report. The Company s Statement of financial position shows net current assets of 4,326,000 and net assets of 4,896,000. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. Employees Disabled persons Applications for employment by disabled persons are always fully considered, bearing in mind the respective aptitudes and abilities of the applicant concerned. In the event of members of staff becoming disabled every effort is made to ensure that their employment with the Company continues and appropriate training is arranged. It is the policy of the Company that the training, career development and promotion of a disabled person should as far as possible, be identical to that of a person who does not suffer from a disability. 6
Directors report (continued) Employees (continued) Employee involvement Involvement of employees is achieved through various methods which include, but are not limited to, quarterly all employee meetings, employee forums, periodic employee surveys, performance reviews, Company news bulletins, intranet, and staff wellness and recognition programmes. Consultation with employees or their representatives has continued at all levels, with the aim that views are taken into account when decisions are made that are likely to affect their interests. Gender pay reporting The UK Government has recently introduced a requirement for employers with 250 or more employees to report annually on their gender pay gap. This information is available on the Company s website. The Company believes that having a balanced and diverse employee base is key to the success of the business and is committed to creating an inclusive culture and environment of equality where all employees can have the opportunity to realise their full potential. This is the first time the Company has produced and reported gender pay figures, which provide a further means of measuring the results of the positive work which has already begun to attract and retain the best talent. The Directors are committed to continuing to undertake action to reduce the gender pay gap shown in the first reported figures. Board diversity policy It is the Company s policy to maintain and develop the diversity of its Board without compromising on the calibre of new directors appointed. Appointments to the Board are based on merit while complementing the existing diversity of skills, knowledge and experience of the Board as a whole. Disclosure of information to the auditor The Directors who held office at the date of approval of this Directors Report confirm that, so far as each Director is aware, there is no relevant audit information of which the Company s auditor is unaware. Each Director has taken all the steps that he or she ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company s auditor is aware of that information. Auditor The Company s auditor is KPMG LLP. The auditor is deemed to have been reappointed in accordance with section 487 of the Companies Act 2006 and KPMG LLP will therefore continue in office. By order of the Board A P Milton Managing Director 17 April 2018 Registered Number: 3010292 7
Statement of Directors responsibilities in respect of the annual financial statements The Directors are responsible for preparing the Strategic Report, the Directors Report and the annual Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and applicable law. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period. In preparing financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgments and estimates that are reasonable, relevant and reliable state whether they have been prepared in accordance with IFRS as adopted by the EU; assess the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 8
Independent Auditor s report to the members of HSB Engineering Insurance Services Limited Opinion We have audited the financial statements of HSB Engineering Insurance Services Limited ( the Company ) for the year ended which comprise the Income Statement, Statement of other comprehensive income, Statement of financial position, Statement of changes in equity, Statement of cash flows and related notes, including the accounting policies in note 1. In our opinion the financial statements: give a true and fair view of the state of the Company s affairs as at and of its profit for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) ( ISAs (UK) ) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the company in accordance with, UK ethical requirements including the FRC Ethical Standard. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Going concern We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least twelve months from the date of approval of the financial statements. We have nothing to report in these respects. Strategic report and directors report The Directors are responsible for the strategic report and the directors report. Our opinion on the financial statements does not cover those reports and we do not express an audit opinion thereon. Our responsibility is to read the strategic report and the directors report and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work: we have not identified material misstatements in the strategic report and the directors report; in our opinion the information given in those reports for the financial year is consistent with the financial statements; and in our opinion those reports have been prepared in accordance with the Companies Act 2006. Matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or the financial statements are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 9
Independent Auditor s report to the members of HSB Engineering Insurance Services Limited (Continued) Directors responsibilities As explained more fully in their statement set out on page 8, the Directors are responsible for: the preparation of the financial statements and for being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Auditor s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC s website at www.frc.org.uk/auditorsresponsibilities. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company s members those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the Company s members, as a body, for our audit work, for this report, or for the opinions we have formed. Jessica Katsouris (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 1 St Peter s Square Manchester M2 3AE 17 April 2018 10
Income statement for the year ended Note Revenue 31,938 30,991 Cost of sales (4,511) (4,347) Gross profit 27,427 26,644 Administrative expenses (25,643) (26,483) Operating profit 1,784 161 Finance income 7 133 279 Profit before tax 5 1,917 440 Income tax expense 8 (327) (150) Profit for the year 1,590 290 All income statement transactions relate to continuing activities. Statement of other comprehensive income for the year ended Note Profit for the year 1,590 290 Other comprehensive income Items that will not be reclassified to income statement: Actuarial gains/ (losses) on defined benefit pension scheme 12 3,675 (1,795) Amount of defined benefit pension scheme not recognised due to effect of asset ceiling 12 (3,676) (5,676) Deferred tax on actuarial gains/ losses 8 (52) 1,345 Other comprehensive loss for the year, net of tax (53) (6,126) Total comprehensive income/ (loss) for the year 1,537 (5,836) The notes on pages 15 to 32 form an integral part of these financial statements. 11
Statement of financial position at Note Non-current assets Pension scheme assets 12 - - Property, plant and equipment 9 305 588 Deferred tax assets 14 265 203 Total non-current assets 570 791 Current assets Trade and other receivables 10 18,407 17,200 Prepayments 1,763 1,789 Cash and bank balances 3,195 963 Total current assets 23,365 19,952 Total assets 23,935 20,743 Equity and liabilities Equity Share capital 13 912 912 Other reserves 3,292 3,292 Retained earnings 692 155 Total equity 4,896 4,359 Liabilities Trade and other payables 11 5,938 4,961 Deferred income 12,650 11,420 Current tax liabilities 451 3 Total liabilities 19,039 16,384 Total equity and liabilities 23,935 20,743 The notes on pages 15 to 32 form an integral part of these financial statements. The financial statements were approved and authorised for issue by the Board of Directors on 17 April 2018 and were signed on its behalf by: A P Milton Managing Director A O Reilly Finance Director HSB Engineering Insurance Services Limited Registered Number: 3010292 12
Statement of changes in equity at Share capital Share premium account Capital redemption reserve Retained earnings Total At 1 January 912 3,289 3 5,991 10,195 Profit for the year - - - 290 290 Other comprehensive income - - - (6,126) (6,126) Total comprehensive income - - - (5,836) (5,836) At 912 3,289 3 155 4,359 Profit for the year - - - 1,590 1,590 Other comprehensive loss - - - (53) (53) Total comprehensive loss - - - 1,537 1,537 Dividend paid - - - (1,000) (1,000) At 912 3,289 3 692 4,896 The notes on pages 15 to 32 form an integral part of these financial statements. 13
Statement of cash flows at Note Restated* Cash flow used in operating activities Profit after tax 1,590 290 Adjustments Working capital changes assets / (liabilities) (Increase)/ decrease in trade debtors and other receivables (1,323) 26 Decrease/ (increase) in prepaid expenses and other assets 26 (64) Increase in deferred income 1,230 18 Increase in trade creditors and other payables 977 492 Non-cash items in profit after tax Provision for taxation 8 327 150 Depreciation 9 293 357 Gain on sale of property, plant and equipment - (6) Interest income - 1 Pension scheme interest and service costs - 447 Allowance for doubtful debts 116 (118) Effect of exchange rate changes (65) 30 Pension contributions (1) (423) Tax refunded/ (paid) 7 (251) Net cash inflow from operating activities 3,177 949 Purchases of property, plant and equipment 9 (10) (106) Proceeds from the sale of property, plant and equipment - 46 Net cash outflow from investing activities (10) (60) Dividend paid (1,000) - Net cash outflow from financing activities (1,000) - Net increase in cash and cash equivalents 2,167 889 Cash and bank balances at beginning of the year 963 104 Effect of exchange rate changes 65 (30) Cash and bank balances at end of the year 3,195 963 The notes on pages 15 to 32 form an integral part of these financial statements. *The cash flow statement at has been re-presented to begin with profit after tax 14
HSB Engineering Insurance Services Limited (the Company) is a private company, limited by shares and incorporated and domiciled in England. The principal activities of the Company are the performance of statutory, general and insurance inspections of plant and electrical installations and the provision of related advisory services. 1 Accounting policies Basis of preparation and statement of compliance The financial statements of the Company have been prepared and approved by the directors in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU), and those parts of the Companies Act 2006 applicable to those reporting under IFRS. The financial statements have been prepared on the historical cost basis, except for the revaluation of the defined benefit pension asset, which is recognised as the fair value of the plan assets less the present value of the defined benefit obligation. Functional and presentation currency These financial statements are presented in Great British Pounds (GBP), which is the Company s functional and presentational currency. Except as otherwise indicated, all financial information presented in GBP has been rounded to the nearest thousand. Going concern The financial statements have been prepared on the going concern basis. The Directors have reviewed the budget and cash flow forecasts of the Company for a period of not less than 12 months from the date of approving these financial statements and are confident that they show the Company will have sufficient resources to meet their liabilities as they fall due. Accordingly the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis. New and revised Standards and Interpretations None of the new standards, interpretations or amendments, which are effective for the first time in these financial statements, have had a material impact on these financial statements. The following standards were in issue or revised but not yet effective that are relevant for the Company and have not been early adopted by the Company in preparing the financial statements. The Company intends to adopt these relevant standards when they become effective. IFRS 9 Financial Instruments IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. The Company plans to adopt the new standard on the required effective date and will not restate comparative information. During, the Company has performed an assessment of IFRS 9 s application to financial statements. Overall, the Company expects no significant impact on its statement of financial position and equity. While the Company will prepare its first IFRS 9 compliant financial statements for the year ending 2018, its results will be consolidated by its immediate parent entity based on requirements of IAS 39. 15
1 Accounting policies (continued) New and revised Standards and Interpretations (continued) IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014, and amended in April, and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring services to a customer. The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. The Company plans to adopt the new standard on the required effective date using the full retrospective method. During, the Company performed an assessment of IFRS 15 s application and concluded that its current method and timing of revenue recognition and measurement is in accordance with the requirements of IFRS 15. The presentation and disclosure requirements in IFRS 15 are more detailed than under IAS 18. In particular, the Company expects that the notes to the financial statements will be expanded because of the disclosure of: Revenue recognised in reporting period from performance obligations satisfied (or partially satisfied) in previous periods; Amount of transaction price allocated to performance obligation that are unsatisfied at reporting date and quantitative explanation of when the Company expects to recognise as revenue; Description of method used to recognise revenue over time and reason for such methods being faithful depiction of transfer of services; and Use of practical expedients in applying requirement of IFRS 15. IFRS 16 Leases IFRS 16 was issued in January and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. IFRS 16 also requires lessees to make more extensive disclosures than under IAS 17. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The Company has completed an initial assessment of the potential impact on its financial statements but has not yet completed its detailed assessment. The actual impact of applying IFRS 16 on the financial statements in the period of initial application will depend on future economic conditions, including the Company s borrowing rate at 1 January 2019, the composition of the Company s lease portfolio at that date, the Company s latest assessment of whether it will exercise any lease renewal options and the extent to which the Company chooses to use practical expedients and recognition exemptions. So far, the most significant impact identified is that the Company will recognise new assets and liabilities for its operating leases of motor vehicles. As at, the Company s future minimum lease payments under non-cancellable operating leases amounted to 2,131,000, on an undiscounted basis (refer to note 15). The Company plans to apply IFRS 16 initially on 1 January 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative information. Other standards in issue or amendments that are not yet effective are not expected to significantly impact the financial statements of the Company. 16
1 Accounting policies (continued) Use of estimates and assumptions The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management s best knowledge of current events and actions, actual results ultimately may differ from those estimates. Revenue recognition and cost of sales Engineering inspection fees are earned in the period in which the services are rendered and represent fees before deducting commissions payable. A provision for unearned fees is held as deferred revenue within the statement of financial position. Cost of sales includes commissions payable on inspection fees earned. Commissions are earned over the period of the contract to which it relates. Property, plant and equipment Property, plant and equipment comprise leasehold properties, fixtures, fittings and equipment (including computer hardware). All classes are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset only when it is probable that future economic benefits associated to the item will flow to the Company and the cost can be measured reliably. Depreciation is calculated on the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is recognised in the income statement on the bases set out below, over the estimated useful lives, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Fixtures and fittings Computer hardware and software Leasehold property and improvements 3 to 10 years straight-line 3 to 5 years straight-line Written off over the life of the lease, to a maximum of 10 years Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. Leases Leases, where a significant portion of the risks and rewards of ownership is retained by the lessor, are classified as operating leases. Payments made under operating leases are charged to the income statement on a straightline basis over the period of the lease. Lease incentives are recognised in the profit and loss account on a straight line basis over the shorter of the lease term and the period ending in a date from which it is expected the prevailing market rental will be payable. Employee benefits The Company operates various post-employment benefit schemes. The Company has both defined contribution schemes and a defined benefit scheme. A defined contribution scheme is a pension scheme under which the Company pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. A defined benefit scheme is a pension scheme that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The cost of defined benefit pensions earned by employees is actuarially determined using the projected benefit method prorated on service and management s best estimate of expected plan investment performance, salary escalation and retirement ages of employees. For the purpose of calculating the expected return on plan assets, those assets are assessed based upon market values. 17
1 Accounting policies (continued) Employee benefits (continued) The Company immediately recognises actuarial gains and losses on the benefit obligation and plan assets, which are recorded in other comprehensive income and then included in retained earnings. The Company determines the net interest expenses (income) on the net defined benefit liability (asset) for the year by applying the discounted rate used to measure the defined obligation at the beginning of the annual period to the then net defined benefit liability (asset) during the year, adjusted for the impact of the asset ceiling and for contributions and benefit payments. Consequently, the net interest on the net defined benefit liability (asset) now comprises interest cost on the defined benefit obligation, interest income on plan assets and interest cost on the effect of the asset ceiling. Termination benefits are recognised as an expense when the Company is committed demonstrably, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Company has made an offer of voluntary redundancy, it is probable that the offer will be accepted and the number of acceptances can be estimated reliably. If benefits are payable more than 12 months after the reporting period, then they are discounted to their present value. Financial instruments IAS 39, Financial Instruments: Recognition and Measurement requires the classification of certain financial assets and liabilities into separate categories for which the accounting requirements differ. The classification depends on the nature and purpose of the financial assets and liabilities, and is determined at the time of initial recognition. The Company classify financial assets and liabilities into the following categories: - All financial assets are classified as loans and receivables - Financial liabilities are classified as financial liabilities measured at amortised cost. Initial recognition Regular purchases and sales of financial assets are recognised on the trade date. All other financial assets and financial liabilities are recognised on the date that the Company becomes a party to the contractual provisions of the instrument. All financial assets and liabilities are measured initially at fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Loans and receivables Loan and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including trade and other receivables, bank balances and cash) are measured at amortised cost using the effective interest method less any impairment losses, if any. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. Financial liabilities Subsequent to initial recognition, financial liabilities are measured at amortised cost using the effective interest method. Impairment At each reporting date the Company, assess whether financial assets are impaired. A financial asset is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the future cash flows of the asset that can be estimated reliably. Impairment losses on loans and receivables are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset s original effective interest rate. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the income statement. 18
1 Accounting policies (continued) Financial instruments (continued) Impairment of trade receivables Individual receivables which are known to be uncollectible are written off by reducing the carrying amount directly. The other receivables are assessed collectively to determine whether there is objective evidence that an impairment has been incurred but not yet been identified. For these receivables the estimated impairment losses are recognised in a separate allowance for doubtful debts. The Company considers that there is evidence of impairment if any of the following indicators are present: significant financial difficulties of the debtor probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments. Receivables for which an impairment allowance was recognised are written off against the allowance when there is no expectation of recovering additional cash. Impairment losses are recognised in the income statement within administrative expenses. Subsequent recoveries of amounts previously written off are credited against administrative expenses. Derecognition The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the financial asset in a transaction in which either substantially all the risks and rewards of ownership of the financial asset are transferred, or in which the Company neither transfers or retains substantially all the risks and rewards of ownership and does not retain control of the financial asset. Control is not retained if the transferee has the practical ability to sell the asset and is able to exercise that ability unilaterally. The Company derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. Offset of financial assets and financial liabilities Financial assets and liabilities are offset, and the net amount reported in the Company s statement of financial position, when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Impairment of non-financial assets The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or Cash Generating Unit s (CGU) fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Impairment losses are recognised in the income statement. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of amortisation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement. Taxation Income tax comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised in the statement of other comprehensive income. Current tax is the expected tax payable on the taxable result for the period and any adjustment to the tax payable in respect of previous periods. 19
1 Accounting policies (continued) Taxation (continued) Deferred tax is provided in full on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes and these differences will be eliminated at a later date with a corresponding effect on taxable income. Deferred tax is measured using tax rates expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled based on tax rates and laws which have been enacted or substantively enacted at the year-end date. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets and liabilities are not discounted. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Foreign currency translation Foreign currency transactions are translated into the functional currency GBP ( ), using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate at the reporting date. 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. Nonmonetary items are carried at historical cost using the exchange rate at the date of transaction. 2 Critical accounting estimates in applying accounting policies The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates are regularly reviewed and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The key area that requires accounting estimates and judgement is the valuation of the defined benefit pension scheme. Defined benefit pension scheme The Company operates a defined benefit pension scheme. The pension asset or liability recognised in the balance sheet net of associated deferred taxation is the value of the scheme s assets less the present value of the scheme s liabilities. The pension cost for the scheme is analysed between current service cost, past service cost and net return on pension scheme. Current service cost is the actuarially calculated present value of the benefits earned by the active employees in each period. Past service costs, relating to employee service in prior periods arising in the current period as a result of the introduction of or improvement to, retirement benefits, are recognised in the profit and loss account on a straight-line basis over the period in which the increase in benefits vest. The actuarial gains and losses which arise from a valuation and from updating the latest actuarial valuation to reflect conditions at the balance sheet date are taken to the statement of other comprehensive income for the period. The movement in the attributable deferred taxation is shown separately in the statement of other comprehensive income. The assumptions used in determining the charge to income statement for these benefits include the discount rate. Any changes in these assumptions will impact profit or loss and may affect planned funding of the pension plans. At the end of each year an appropriate discount rate is used to determine the present value of estimated future cash outflows expected to be required to settle the pension obligations. Other key assumptions for the pension costs and credits are based in part on current market conditions. Refer to note 12. 20
2 Critical accounting estimates and judgements in applying accounting policies (continued) Defined benefit pension scheme (continued) Under the requirements of IFRIC 14, the amount of surplus of defined benefit assets over defined benefit obligation, if any, which is recoverable as an asset is calculated as the present value of the difference between: (i) the estimated future service cost in each year over the expected future lifetime of the plan less (ii) the minimum funding contributions required in respect of the future accrual of benefits in that year over the expected future lifetime of the plan. 3 Staff costs Staff costs for all employees comprise: Wages and salaries 15,064 15,228 Social security costs 1,790 1,712 Pension costs defined contribution plans 1,617 1,296 Pension costs defined benefit plan - 933 18,471 19,169 The average number of employees during the year was as follows: Number Number Technical 249 249 Administrative and management 34 33 283 282 4 Directors emoluments The aggregate amount of Directors emoluments was as follows: a) Aggregate emoluments 305 291 b) Emoluments of the Directors were as follows: Fees and Salaries Bonus Other benefits Total Total Highest paid Director 118 57 23 198 190 All Directors 200 64 41 305 291 Other benefits include pension contributions. Retirement benefits accrued to two Directors under defined benefit pension schemes (: two). The remuneration of certain Directors is paid by the Company s immediate parent company, HSB Engineering Insurance Limited, and the Company was recharged 178,000 (: 171,000) in respect of their services to the Company. The remuneration of these Directors is disclosed within the financial statements of HSB Engineering Insurance Limited. 21