Notes to the Company Financial Statements

General information

Imperial Innovations Group plc is a Public Limited Company incorporated and domiciled in the United Kingdom whose shares are listed on the Alternative Investment Market of the London Stock Exchange (AIM). The address of the registered office is Imperial Innovations Group plc, Level 12, Electrical and Electronic Engineering Building, Imperial College, London SW7 2AZ. Imperial Innovations Group plc’s shares were admitted to the AIM market of the London Stock Exchange on 31 July 2006.

1. Accounting policies
Basis of Preparation

The consolidated Financial Statements comprise a consolidation of amounts included in the financial statements of the following companies:

All the principal subsidiaries of the Group have only Ordinary Share capital, are 100% owned within the Group and have been included in the consolidated Financial Statements.

The consolidated Financial Statements have been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and financial liabilities at fair value through profit and 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), International Financial Reporting Interpretations Committee (IFRIC) interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The Group has elected to prepare its entity accounts in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and these are presented in the Notes to the Company Financial Statements.

The preparation of financial statements in conformity with IFRS 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 24.

New Standards, amendments and interpretations

(a) Standards, amendments and interpretations effective for the first time in the year ended 31 July 2009:

There are no new Standards, amendments and interpretations effective for the first time in the year ended 31 July 2009.

(b) Standards, amendments and interpretations effective in the year ended 31 July 2009 but not relevant:

Amendment to IAS 39, 'Financial instruments: Recognition and measurement', and IFRS 7, 'Financial instruments: Disclosures', on the 'Reclassification of financial assets'.

This amendment allows the reclassification of certain financial assets previously classified as 'held-for-trading' or 'available-for-sale' to another category under limited circumstances. Various disclosures are required where a reclassification has been made. Derivatives and assets designated as 'at fair value through profit or loss' under the fair value option are not eligible for this reclassification.

IFRIC 12, ‘Service concession arrangements’.

This applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services, for example, under private finance initiative (PFI) contracts.

IFRIC 13, ‘Customer loyalty programmes relating to IAS 18, Revenue’.

This provides guidance on accounting for customer loyalty programmes. As the Group does not offer such incentives it is not relevant.

IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’.

This provides guidance on accounting for defined benefit pension schemes. The Group does not have any such schemes and therefore it is not relevant.

(c) Forthcoming accounting standards

Standards, amendments and interpretations that are not yet effective and have not been early adopted:

Amendment to IFRS 1, ‘First time adoption of IFRS’ and IAS 27 ‘Consolidated and separate financial statements’.

This allows first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investment in subsidiaries, jointly controlled entities and associates in the separate financial statements. The amendment also removed the definition of the cost method from IAS 27 and replaced it with a requirement to present dividends as income in the separate financial statements of the investor. Published on 22 May 2008, and effective for annual periods beginning on or after 1 January 2009, it is not likely to impact the Group.

IFRS 8, ‘Operating segments’.

This supersedes IAS 14, ‘Segmental reporting’, under which segments were identified and reported on a risk and return analysis. Under IFRS 8, segments are reported based on internal reporting, bringing segment reporting in line with the requirements of US standard FAS 131. Published by the IASB in November 2006, this Standard is effective for annual periods beginning on or after 1 January 2009.

Amendment to IFRS 2, ‘Share-based payment’.

This clarifies what events constitute vesting conditions and also specifies that all cancellations, whether by the Group or by another party, should receive the same accounting treatment. This may have an impact on the Group financial statements and is currently being assessed. Published by the IASB on 17 January 2008, this amendment is effective for annual periods beginning on or after 1 January 2009.

IFRS 3 (Revised), ‘Business combinations’.

The revision to this standard changes accounting for business combinations. While the acquisition method is still applied, there are significant changes to the treatment of contingent payments, transaction costs and the calculation of goodwill. Published by the IASB in January 2008, the standard is applicable to business combinations occurring in accounting periods beginning on or after 1 July 2009, with earlier application permitted. This could impact the Group financial statements in future if it makes acquisitions.

IAS 1 (Revised), ‘Presentation of financial statements’.

This new standard will require ‘non-owner changes in equity’ to be presented separately from ‘owner changes in equity’. As the Group currently does not have any minority interests, it will not be relevant. Published by the IASB in September 2007, this standard is effective for accounting periods beginning on or after 1 January 2009.

IAS 23 (Revised), ‘Borrowing costs’.

A result of the joint short-term convergence project with the FASB, this new standard requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. The option of immediately expensing those borrowing costs has been removed. This will be relevant if the Group funds acquisitions with debt in the future. Published by the IASB in March 2007, this is effective for annual periods beginning on or after 1 January 2009.

IAS 27 (Revised), ‘Consolidated and separate financial statements’

This revises the accounting for transactions with non-controlling interests. Published by the IASB in January 2008, and effective for annual periods beginning on or after 1 July 2009, this is unlikely to be relevant to the Group.

Amendment to IAS 32, ‘Financial instruments: Presentation’, and IAS 1, ‘Presentation of financial statements’.

This amendment requires entities to classify the following types of financial instruments as equity, provided they have particular features and meet specific conditions:

• Puttable financial instruments
• Instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation.

Published by the IASB in February 2008, this is effective for annual periods beginning on or after 1 January 2009. This amendment will not be relevant for the Group.

Amendment to IAS 39, ‘Financial Instruments; Recognition and measurement on eligible hedged items’.

The Amendment makes two significant changes. It prohibits designating inflation as a hedgable component of a fixed rate debt. It also prohibits including time value in the one-sided hedged risk when designating options as hedges. This does not currently impact the Group. Published on 31 July 2008, this is effective for accounting periods beginning on or after 1 July 2009 and must be applied retrospectively in accordance with IAS 8, ‘Accounting Policies’.

Amendment to IFRS 1 on first time adoption of IFRS additional exemptions.

These amendments exempt entities using the full cost method from retrospective application of IFRSs for oil and gas assets and exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with IFRIC 4. Published on 23 July 2009 and effective for periods beginning on or after 1 January 2010.

Amendments to IFRS 2, Share-based payments group cash-settled transactions.

These amendments provide a clear basis to determine the classification of share based payment awards in both consolidated and separate financial statements. The amendments incorporates IFRIC 8 and IFRIC 11 into the standard, expands on the guidance given in IFRIC 11 to address plans that were not considered in the interpretation and provides some useful tidying up to the definitions section of IFRS 2. The amended definitions remove inconsistencies between Appendix A, defined terms, and the main body of the standard. The original wording was inconsistent regarding the treatment of equity instruments of other entities in the group. Published on 18 June 2009, the standard is effective for annual periods beginning on or after 1 January 2010.

Amendments to IFRIC 9 and IAS 39 regarding embedded derivatives.

The amendment clarifies the accounting treatment of embedded derivatives for entities that make use of the reclassification amendment issued by the IASB in October 2008. The reclassification amendment allows entities to reclassify particular financial instruments out of the fair value through profit or loss or available for sale categories in specific circumstances. The amendments to IFRIC 9 and IAS 39 clarify that on reclassification of a financial asset out of the ‘at fair value through profit or loss’ category all embedded derivatives should be re-assessed and, if necessary, separately accounted for. Published in March 2009, and effective for accounting periods beginning on or after 1 July 2008 (although not yet endorsed by the EU), this is currently not relevant to the Group

Amendment to IFRS 7, 'Financial instruments: Disclosures'.

This amendment forms part of the IASB's response to the financial crisis and addresses the G20 conclusions aimed at improving transparency and enhancing accounting guidance. The amendment increases the disclosure requirements about fair value measurement and reinforces existing principles for disclosure about liquidity risk. The amendment introduces a three-level hierarchy for fair value measurement disclosure and requires some specific quantitative disclosures for financial instruments in the lowest level in the hierarchy. In addition, the amendment clarifies and enhances existing requirements for the disclosure of liquidity risk primarily requiring a separate liquidity risk analysis for derivative and non-derivative financial liabilities. Published in March 2009, this is effective for accounting periods starting on or after 1 January 2009 with no comparatives for the first year of application.

IFRIC 15, ‘Agreements for construction of real estates’.

The interpretation clarifies which standard (IAS 18 or IAS 11) should be applied to particular transactions and is likely to mean that IAS 18 will be applied to a wider range of transactions. Published on 3 July 2008, and effective for annual periods beginning on or after 1 January 2009, it is not relevant to the Group.

IFRIC 16, ‘Hedges of a net investment in a foreign operation’.

This interpretation clarifies certain areas in respect of net investment hedging. Published on 3 July 2008, and effective for annual periods beginning on or after 1 October 2008, it is not relevant to the Group.

IFRIC 17, 'Distributions of non-cash assets to owners'.

This interpretation clarifies how an entity should measure distributions of assets, other than cash, when it pays dividends to its owners. The interpretation states that 1) a dividend payable should be recognised when appropriately authorised, 2) it should be measured at the fair value of the net assets to be distributed, and 3) the difference between the fair value of the dividend paid and the carrying amount of the net assets distributed should be recognised in profit or loss. Published in November 2008, and effective for annual periods beginning on or after 1 July 2009, it is currently not relevant to the Group.

IFRIC 18, 'Transfer of assets from customers'.

This interpretation clarifies the accounting for arrangements where an item of property, plant and equipment, which is provided by the customer, is used to provide an ongoing service. This is particularly relevant to the utility sector with the provision of the service being that of, for example, gas or electricity. The interpretation applies prospectively to transfers of assets from customers received on or after 1 July 2009, although some limited retrospective application is permitted. Published in January 2009, it is currently not relevant to the Group.

Basis of Consolidation

The Group’s consolidated Financial Statements consist of Imperial Innovations Group plc and all of its subsidiaries. The consolidated financial statements exclude intra-group transactions.

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. Control comprises the power to govern the financial and operating policies of the investee so as to obtain benefit from its activities and is achieved through direct or indirect ownership of more than half of the voting rights, (currently exercisable or convertible potential voting rights) or by way of contractual agreement.

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 plus costs directly attributable to the transaction. Identifiable assets acquired, and liabilities assumed, in a business combination are initially measured at their fair values at acquisition date, irrespective of the extent of any minority 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.

The Group has elected not to apply IFRS 3, ‘Business Combinations’, retrospectively to business combinations that took place before 1 August 2005.

Associates

Associates are entities which the Group does not control, accompanied by a shareholding of between 20% to 50% of the equity or voting rights.

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, with changes in fair value recognised in the period of change.

Segmental Reporting

Activities are allocated to one business segment. A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that is subject to risks and returns which are different from those segments operating in other economic environments.

Foreign Currency Translation

The consolidated Financial Statements are presented in pounds sterling, which is the Group’s functional and presentational 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 Income Statement.

Property, plant and equipment

All property, plant and equipment are stated at historical cost, together with any incidental costs of acquisition. 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       - over four years

Computers                - over four years

Intangible fixed assets

Intangible fixed assets, which include acquired patent rights, are stated at recoverable amount (fair value) 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 income statement in the period in which they are incurred.

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.

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 and loss, loans or receivables, held to maturity investments or available for sale financial assets except in the case of University Challenge Seed Fund (UCSF) and Low Carbon Seed Fund (LCSF) investments. When financial assets are recognised initially they are measured at fair value, plus, in the case of investments not at fair value through profit and loss, directly attributable transaction cost. Changes in the fair value of the UCSF and LCSF investments are set against the value of the UCSF and LCSF funds respectively and not through the profit or loss. This is in recognition that the value of the fund has to increase threefold before any repayments or disbursements can be made to the Group in the case of the UCSF and that the fund has to exceed a hurdle amount (the lower of £2 million and the total amount of capital contributions drawn down by the partnership) before any distributions can be made in the case of the LCSF.

Financial Assets at Fair Value through Profit or Loss

The Group classifies all its equity investments as financial assets at fair value through profit and loss. 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 and loss. Investments in undertakings that do not meet the definition of an associate undertaking are also designated as financial assets at fair value through profit and loss on initial recognition. The fair value movement is net of revenue share.

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 Income Statement 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.

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' contained in the IPEVCVG. The following considerations are used when calculating the fair value using the 'price of recent investment' guidelines:

• where the investment being valued was itself made recently, its cost will generally provide a good indication of fair value;
• 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; and
• all recorded values of investments are regularly reviewed for any indication of impairment and adjusted accordingly.

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 and 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 an irrevocable commitment is made to purchase or to sell the asset.

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 income statement 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 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. 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 income statement, with a corresponding adjustment to equity.

Revenue recognition and cost of sales

Revenue, which excludes value added tax, represents the income generated by the Group from licensing activities, from intellectual property management services provided by the Group to Imperial College and other parties. Revenue is stated gross of any revenue share due to Imperial College with any revenue share included in cost of sales.

When granting a licence, an initial up-front fee is receivable on signing followed by subsequent payments when milestone conditions are met. In addition, sales royalties may also be due under licence agreements. 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 and the fees are not refundable. Sales royalties receivable under a licence are generally recognised on receipt of a royalty statement unless accurate sales information is available to accrue revenue for royalty over the financial period.

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. Income from intellectual property management services is recognised on a straight line basis over the period to which the services relate. Grant and investment awards are recognised on an accruals basis.

Commercial Proof of Concept type awards are recognised in the Income Statement and matched to related expenditure. Technical Proof of Concept type awards are recognised in the Balance Sheet, under creditors and matched to related expenditure.

Trade 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. 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 Income Statement within administrative expenses.

Trade payables

Trade Payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held with banks, bank overdrafts and other short-term highly liquid investments with original maturities of three months or less. Short term liquid investments with a maturity of over three months are included in a separate category ‘Short term liquidity investments’.

Deferred tax

Deferred tax arises from temporary timing differences as a result of the different treatment for accounts and taxation purposes of transactions and events recognised in the Financial Statements of the current period and previous periods. Net deferred tax assets are not currently recognised in the accounts because of the uncertainty of future taxable profits against which they may be recovered.

Provisions (revenue sharing)

Technology Pipeline Agreement
The Group provides for liabilities in respect of revenue sharing with Imperial College London, arising under the Technology Pipeline Agreement (TPA), and other parties. Provision for revenue share, based on fair value, on the future realisation of listed stock and unlisted stock is recognised.

Appointee Director Pool

Imperial Innovations LLP, whose ultimate parent company is Imperial Innovations Group plc, has entered into a Carry Plan Agreement with members of the Appointee Director Network. Upon a sale by Imperial Innovations LLP of all or part of a shareholding in one of the specified companies, an ‘allocated amount’ (based on a fixed percentage of net proceeds) will be paid to the Appointee Directors. The provision is based on fair value.

Operating leases

Costs in respect of operating leases are charged to the Income Statement on a straight line basis over the lease term.

Carried Interest Plan

The Group operates a Carried Interest Plan for Executive Directors and employees to invest their own money in the investment part of the business. Before any payment to a participant becomes due under the carried interest plan, the Group must first have received back the amount of their investment in the relevant class together with a hurdle rate of 8% per annum compound on their investment. At the point at which the hurdle rate has been exceeded a provision is included for the unrealised gain due to members of the carried interest plan.