Notes to the Company Financial Statements

23. Financial risk management
Financial risk factors

In the normal course of business, the Group uses certain financial instruments including cash, equity rights, equity investments and loans to investee companies.

In the normal course of business, the Group uses certain financial instruments including cash, equity rights, equity investments and loans to investee companies.

Monies provided by way of UCSF grants are loaned to individual technology businesses. These loans are repayable in cash or convertible to equity, at a rate mutually agreed by the Group and technology business, at the earliest opportunity after the technology business’ formation. Loans are treated on the same basis as equity for valuation purposes.

Risk Management Objectives

The Group is exposed to a number of risks through the performance of its normal operations. The most significant are liquidity and market price risk. Income from surplus funds is dependent on market interest rates and expose the Group to credit risk.

The Group’s main objective in using financial instruments is to promote the commercialisation of intellectual property held by technology businesses through the raising and investing of funds for this purpose. The Group’s policies in calculating the nature, amount and timing of investments are determined by planned future investment activity.

Due to the nature of the Group’s activities, the Directors do not consider it necessary to use derivative financial instruments to hedge the Group’s exposure to fluctuations in interest rates, as these exposures have not been significant during the period covered by this report.

(a) Market risk
(i) Price risk

The Group is exposed to price risk in respect of equity rights, equity investments and loans to the technology businesses held by the Group and classified on the balance sheet as fair value through profit and loss. The Group seeks to manage this risk by routinely monitoring the performance of these investments. The Group employs stringent investment appraisal processes prior to deciding on investment. Regular reports are made to the Board on the status and valuation of investments and significant disposals require Board approval.

The value of the investment portfolio is affected by the performance of the international equity markets and the carrying value is likely to be adversely affected by material declines in these markets. Furthermore, the ability to liquidate market positions will be affected by weak equity markets.

The Group holds investments which are traded on The Alternative Investment Market (‘AIM’) and investments which are not traded on an active market.

The table below summarises the impact of one percent increase/decrease in price of both quoted and unquoted investments on the Group’s post tax profit for the year.

Post tax profit for the year would increase/decrease as a result of fair value gains/losses on investments classified at fair value through profit and loss. There would be no impact on other components of equity.

(ii) Interest rate risk

The Group has directly maintained special interest bearing accounts with a corporate bank at variable and fixed rates of interest related to LIBOR. These deposits are made on a daily basis with minimal balances held on current account. The table below sets out the Group’s cash and deposits:

The variable rates are linked to clearing banks’ base rates. The weighted average interest rate on the variable deposits during the year ended 31 July 2009 was 2.58% (2008: 5.61%). The weighted average interest rate on the fixed rate deposits during the year ended 31 July 2009 was 4.99% (2008: 6.12%).

At 31 July 2009, it is estimated that a general increase/decrease of one percentage point in interest rates would increase/decrease the Group’s profit before tax by approximately £27,000 (2008: £89,000) as a result of higher/lower interest received on floating rate cash deposits.

At 31 July 2009, it is estimated that a general increase/decrease of one percentage point in interest rates would increase/decrease the Group’s profit before tax by approximately £377,000 (2008: £293,000) as a result of higher/lower interest received on fixed rate deposits.

The Group’s liabilities consist of short-term payables and other creditors falling due after more than one year, none of which are interest bearing. The other payables falling due after more than one year relate to UCSF loans.

The Group had no undrawn committed borrowing facilities available during the period.

(iii) Foreign exchange risk

The Group occasionally enters into transactions in currencies other than sterling. Any exposure to fluctuations in market currency exchange rates is considered immaterial from a Group perspective.

(b) Liquidity risk

The Group seeks to manage financial risk, and in particular liquidity risk, ensuring that sufficient liquidity is available to meet foreseeable requirements and to invest surplus cash in low risk instruments with reputable institutions.

The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows equal to the carrying balances.

The repayment terms of UCSF and Low Carbon Seed Fund creditors are set out in notes 15 and 16 respectively.

(c) Credit risk

Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents and short term liquidity investments as well as credit exposures to trade and other receivables.

For bank and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted which reduces the credit risk.

The table below shows analysis of the Group’s cash and cash equivalents according to Standard & Poor’s long term credit rating.

The table below shows analysis of the Group’s short-term liquidity investments according to Standard & Poor’s credit rating.

Group policy is to place no more than 20% of its cash (at the time the cash is placed) with any one institution.

The maximum exposure to credit risk for trade and other receivables is represented by their carrying amount set out in note 17. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and customers. The Group assesses credit quality of the customers, taking into account their current financial position and past experience.

Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group maintains a maturity analysis profile for short term liquidity investments.

Fair values

The fair values of financial assets and liabilities, together with the carrying values shown in the balance sheet, are as follows:

The basis for determining fair values is disclosed in note 1.