Transition to International Financial Reporting Standards

14 August 2007

IQE plc (‘the Group’), the leading global supplier of advanced wafer products and wafer services to the semiconductor industry, will be reporting its financial results in accordance with International Financial Reporting Standards (‘IFRS’) with effect from 1 January 2007.  On 22 August 2007 the Group will report its interim results for the six months ended 30 June 2007 under IFRS, including the restated comparatives for the six months to 30 June 2006. 

This statement presents and explains the conversion of the Group’s results as previously reported under UK Generally Accepted Accounting Principles (‘UK GAAP’) onto an IFRS basis for the year ended 31 December 2006.

The key changes for the Group are:

• accounting for the two acquisitions in the second half of 2006, which includes the separate recognition of intangibles that formed part of goodwill under UK GAAP

• goodwill is no longer amortised

• the capitalisation of expenditure on the development of new or significantly improved products and processes

The net impact of these changes for the year ended 31 December 2006 is a £0.3 million reduction in the Group’s loss before taxation, and a reduction in the basic loss per share from 1.21 pence to 1.14 pence.

Full details are set out in this announcement.

Contacts:

Restatement of financial information for International Financial Reporting Standards

1    Introduction

Following a European Union Regulation (IAS Regulation EC 1606/2002) issued in June 2002, and AIM notice 22, IQE plc is required to prepare its consolidated financial statements under International Financial Reporting Standards with effect for the year ending 31 December 2007.

The financial statements for the year ended 31 December 2006 have been restated under IFRS, adopting a 1 January 2006 transition date. This announcement presents and explains the Group’s results for the year ended 31 December 2006 as converted from UK GAAP to IFRS. 

The first results to be published under IFRS will be for the half year to 30 June 2007, which will be reported in an announcement to be issued on 22 August 2007.

The financial information contained in this report does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985. The comparative figures for the year ended 31 December 2006 prepared under IFRS and shown in this report are unaudited. The consolidated statutory financial statements of IQE plc for the year ended 31 December 2006 prepared under UK GAAP have been filed with the Registrar of Companies. The auditors’ report on those financial statements was unqualified and did not contain any statement under section 237 (2) or (3) of the Companies Act 1985.

2    Basis of preparation

EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidated financial statements of the company, for the year ending 31 December 2007, be prepared in accordance with International Financial Reporting Standards (IFRSs) adopted for use in the EU (“adopted IFRSs”). 

This interim financial information has been prepared on the basis of the recognition and measurement requirements of IFRSs in issue that either are endorsed by the EU and effective (or available for early adoption)  or are expected to be endorsed and effective (or available for early adoption) at 31 December 2007, the Group’s first annual reporting date at which it is required to use adopted IFRSs.  Based on these adopted and unadopted IFRSs, the directors have made assumptions about the accounting policies expected to be applied, which are as set out in note 6, when the first annual IFRS financial statements are prepared for the year ending 31 December 2007.

In addition, the adopted IFRSs that will be effective (or available for early adoption) in the annual financial statements for the year ending 31 December 2007 are still subject to change and to additional interpretations and therefore cannot be determined with certainty.  Accordingly, the accounting policies for that annual period will be determined finally only when the annual financial statements are prepared for the year ending 31 December 2007.

3    Transition to IFRS - first time adoption

IFRS 1 'First Time Adoption of International Financial Reporting Standards' sets out the procedures that the Group must follow when it adopts IFRS for the first time as the basis for preparing its consolidated financial statements. The Group is required to establish its accounting policies for the year ending 31 December 2007 and, in general, apply these retrospectively to determine the IFRS opening balance sheet as at its date of transition, 1 January 2006. This standard permits companies adopting IFRS for the first time to take certain exemptions from the full requirements of IFRS during the transition period. As permitted under the transitional provisions of IFRS1, the exemptions adopted by the Group are set out below.

i) Share based payments

The Group has adopted the exemption to apply IFRS 2 (‘Share Based Payments’) only to awards made after 7 November 2002 that had not vested by 1 January 2005.   This exemption is consistent with the previous policy adopted under UK GAAP.

ii) Business combinations

The Group has chosen not to restate business combinations completed prior to the transition date on an IFRS basis.

iii) Financial Instruments

The Group has taken advantage of the exemptions in IAS 32 and IAS 39 enabling it to apply these standards from 1 January 2007.

iv) Cumulative translation differences

Cumulative translation differences in respect of foreign operations have been deemed to be nil at the date of transition.
 

4    Principal differences to UK GAAP

i) Business combinations

Acquisitions undertaken since 1 January 2006 have been restated in accordance with IFRS 3 (“Business Combinations”).  This has impacted the accounting adopted in respect of the acquisition of IQE RF LLC in August 2006 and the acquisition of MBE Technologies Pte Ltd in December 2006.

The main impact is the requirement to separately identify certain intangible assets previously included within goodwill under UK GAAP.   Therefore, the estimated fair values of development projects have been separately recognised and will be amortised over their estimated useful lives.  The estimated fair value of development projects acquired as part of the acquisitions is £2.2 million.

In addition, the fair value of the acquisition consideration has been re-assessed under IFRS and adjusted for discounting and acquisition expenses, resulting in a £0.2 million reduction in the fair value of consideration for the acquisitions.

The remaining goodwill is no longer amortised.  Therefore, the amortisation charge in 2006 of £0.2 million has been reversed.

ii) Intangible assets

In accordance with IAS 38 (“Intangible Assets”) the Group is required to capitalise development expenditure incurred on projects which meet certain criteria, including the projects’ technical feasibility and likelihood that future economic benefits will be obtained.  The net book value of deferred development costs as at 31 December 2006 was £0.3 million.

IAS 38 also requires computer software to be treated as an intangible asset. This has resulted in a balance sheet reclassification from property, plant and equipment to intangible assets at 31 December 2006 of £0.1m

iii) Employee benefits

In accordance with IAS 19 (‘Employee Benefits’) the Group is required to recognise a liability for employees’ unused entitlement to annual leave.  Therefore, an additional accrual amounting to £0.1m has been recognised at 31 December 2006.

 

5        Restatement of financial information under IFRS

The financial information set out below has been prepared on the basis of the accounting policies set out in note 6. An explanation of the effects of transition to IFRS is provided above in note 4.

i) Consolidated Income Statement for the year ended 31 December 2006

ii) Consolidated Balance Sheet as at 31 December 2006

iii) Consolidated Balance Sheet as at 31 December 2005

iv) Cash flow Statement

The IAS 7 (‘Cash flow Statements’) adjustment of £3,621,000 reflects the inclusion of highly liquid deposits within cash and cash equivalents as required by IAS 7.

6    IFRS Accounting Policies

The Group’s accounting policies under IFRS are set out below.

Basis of preparation

This financial information has been prepared under the historical cost convention and in accordance with International Financial Reporting Standards (‘IFRS’) and interpretations expected to be in issue at 31 December 2007.  The principal accounting policies of the Group are stated below.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and its subsidiary undertakings.  Subsidiaries are all entities over which the Group has the power to govern their financial and operating policies.

Subsidiaries are consolidated from the date on which control is transferred to the Group and are de-consolidated from the date that control ceases.

Business combinations

The acquisition of subsidiaries is accounted for using the purchase method.  The cost of an acquisition is measured at the fair value of the consideration plus costs directly attributable to the acquisition. The acquired identifiable assets, liabilities and contingent liabilities are recognised at their fair value at the date of acquisition.

Goodwill

Goodwill arising on an acquisition is recognised as an asset and initially measured at cost, being the excess of the fair value of the consideration and directly attributable costs over the fair value of the identifiable assets, liabilities and contingent liabilities.

Goodwill is not amortised. However, it is reviewed annually for any indication of potential impairment.  Any impairment identified is immediately charged to the Consolidated Income Statement.  Subsequent reversals of impairment losses for goodwill are not recognised.

Revenue recognition

Revenue represents the amounts receivable for goods and services provided in the ordinary course of business net of value added tax and other sales related taxes.   Revenue is recognised when the risks and rewards of the underlying sale have been transferred to the customer, and when collectability of the related receivable is reasonably assured, which is usually on the delivery of the goods or services supplied and accepted by the customer.

Research and development

Expenditure incurred on the development of new or substantially improved products or processes is capitalised, provided that the related project satisfies the criteria for capitalisation, including the project’s technical feasibility and likely commercial benefit.  All other research and development costs are expensed as incurred.

Capitalised development costs are amortised on a straight line basis over the period during which the economic benefits are expected to be received.  The estimated remaining useful lives of development costs are reviewed at least on an annual basis.

The carrying value of capitalised development costs is reviewed for potential impairment at least annually.  Any impairment identified is immediately charged to the Consolidated Income Statement.

Tangible fixed assets

Tangible fixed assets are stated at cost less accumulated depreciation and any provision for impairment. Cost comprises all costs that are directly attributable to bringing the asset into working condition for its intended use.  Depreciation is calculated to write down the cost of fixed assets to their residual values on a straight-line basis over the following estimated useful economic lives:

            Freehold buildings ………………………………………………….. 25 years
            Leasehold improvements …………………………………….. 5 to 27 years
            Plant and machinery …………………………………………..  5 to 15 years
            Fixtures and fittings ……………………………………………..  4 to 5 years

No depreciation is provided on land or assets yet to be brought into use.

Impairment

Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount.  The recoverable amount is the higher of an asset’s fair value (less disposal costs) and value in use.

Value in use is based on the present value of the future cash flows relating to the asset.  For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (Cash Generating Units).

Inventories

Inventories are stated at the lower of cost and net realisable value.  Cost comprises direct materials and, where applicable, direct labour costs and attributable overheads that have been incurred in bringing the inventories to their present location and condition.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand, and call deposits which have maturity of three months or less. 

Provisions

Provisions are recognised when the Group has a legal or constructive obligation as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated.  Provisions are calculated based on management’s best estimate of the expenditure required to settle the obligation after due consideration of the risks and uncertainties that surround the event.

Foreign currencies

Transactions in foreign currencies during the year are recorded at the rates of exchange ruling at the date of the transaction.  Monetary assets and liabilities in foreign currencies are translated into sterling at the rates ruling at the balance sheet date.  All exchange differences are taken to the income statement.

The balance sheets of overseas subsidiaries are translated into sterling at the closing rates of exchange at the balance sheet date, whilst the income statements are translated into sterling at the average rate for the period.  The resulting translation differences are taken directly to reserves.

Foreign exchange gains and losses on the retranslation of foreign currency borrowings that are used to finance overseas operations are accounted for on the ‘net investment’ basis and are recorded directly in reserves provided that the hedge is ‘effective’ as defined in IAS 39 (‘Financial Instruments : recognition and measurement’).

Pension costs

The Group operates defined contribution pension schemes.  Contributions are charged in the Consolidated Income Statement as they become payable in accordance with the rules of the scheme.

Share based payment

Under the IQE plc Share Option Scheme, the scheme participants are eligible for the grant of share options in the Company.  These have vesting periods of between one and four years and can be exercised within ten years from the date of grant, subject to performance criteria relating to profitability and share price growth.  The fair value of the employee services received in exchange for the grant of the options is recognised as an expense.  The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted which is calculated using the Black-Scholes option pricing model.

Under the IQE plc All Employee Share Ownership Plans, the scheme participants are eligible for the grant of matching shares from the Company which are equivalent to the number of partnership shares that the company purchases on their behalf with their monthly contributions.

The matching shares have a three year vesting period.  The Company issues its own shares in the open market in order to meet its obligations under the share incentive schemes.  Shares held by the Employee Share Ownership Trust’s are shown as a deduction from shareholders’ funds.  The cost of employee share plans is charged to Consolidated Income Statement using the quoted market price of shares at the date of grant and credited to reserves under shares to be issued.  The charge is accrued over the vesting period of the shares to the extent that they are projected to vest.

Taxation

Income tax on the profit or loss for the year comprises current and deferred tax.

Current tax is the expected tax payable on the taxable income for the year using rates substantially enacted at the balance sheet date, and any adjustments to tax payable in respect of prior years.

Deferred tax is provided in full on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the amounts used for taxation purposes. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.  Deferred tax assets are only recognised to the extent that it is probable that future taxable profits will be utilised. 

Tax is recognised in the Consolidated Income Statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Government grants

Government grants receivable in connection with expenditure on tangible fixed assets are accounted for as deferred income, which is credited to the Consolidated Income Statement by instalments over the expected useful economic life of the related assets on a basis consistent with the depreciation policy.  Revenue grants for the reimbursement of costs charged to the Consolidated Income Statement are credited to the Consolidated Income Statement in the year in which the costs are incurred.

Leases

Leases which transfer substantially all the risks and rewards of ownership of an asset are treated as a finance lease.  Assets held under finance lease are capitalised at their fair value at the inception of the lease and depreciated over the estimated useful economic life of the asset or lease term if shorter.  The finance charges are allocated to the Consolidated Income Statement in proportion to the capital amount outstanding.

All other leases are classified as operating leases. Operating lease rentals are charged to the Consolidated Income Statement in equal annual amounts over the lease term.