The accounting policies that have been used in the preparation of these consolidated financial statements are described below.
3.1 Accounting convention
The financial statements are prepared under the historical cost convention, except for the revaluation of certain investments and financial assets and liabilities.
3.2 Basis of consolidation
The Group financial statements incorporate those of the Company and of its subsidiary undertakings by full consolidation. The results of subsidiaries acquired are included from the date on which the Company obtains control of the subsidiaries’ operating and financial policies. In addition, acquired subsidiaries are subject to application of the purchase method. This involves the revaluation at fair value of all identifiable assets and liabilities, including contingent liabilities, of the subsidiary at the acquisition date, regardless of whether they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the consolidated balance sheet at their revalued amounts, which are also used as the basis for subsequent measurement in accordance with Group accounting policies. Goodwill arising on consolidation represents the excess of the acquisition cost over the fair value of the Group’s share of identifiable net assets of the acquired subsidiary at the date of acquisition. Companies in which the Group holds a shareholding between 20% and 50% but cannot exercise significant influence are accounted for as financial assets held at fair value through profit and loss. All intra-Group balances and transactions are eliminated on consolidation.
3.3 Financial assets
Financial assets can be divided into the following categories:
- loans and receivables
- financial assets at fair value through profit and loss
Financial assets are assigned to the different categories on initial recognition depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether resulting income and expenses are recognised in the income statement or charged directly against equity. All income and expenses in respect of financial assets held by the Group in the year under review are recognised in the income statement. Generally the Group recognises all financial assets using trade date accounting. An assessment of whether a financial asset is impaired is made at least at each reporting date. All income relating to financial assets is recognised in the income statement under the heading “Total income” and interest payable is recognised under the heading “Finance costs”. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. The Group’s trade and other receivables fall into this category of financial asset and are initially recognised at fair value and subsequently measured at amortised cost, using the effective interest rate method. Discounting is omitted where its effect is immaterial. Individual receivables are considered for impairment when they are overdue or when there is objective evidence that the debtor will default. Financial assets at fair value through profit and loss include financial assets that are classified as held for trading or are designated by the Group to be carried at fair value through profit or loss upon initial recognition. The Group’s financial assets, largely comprising listed securities, fall into this category. Fair values of securities listed in active markets are determined by the current bid prices. Where independent prices are not available, fair values have been determined with reference to financial information available at the time of the original investment updated to reflect all relevant changes to that information at the reporting date. This may include, among other factors, changes in the business outlook affecting a particular investment, performance of the underlying business against original projections and valuations of similar quoted companies.
3.4 Total income
The Group follows the principles of IAS 18 “Revenue Recognition” in determining appropriate revenue recognition policies. In principle, therefore, revenue is recognised to the extent that it is probable that the economic benefits associated with the transaction will flow into the Group. Total income comprises institutional brokerage commission, net trading profit or loss on trading positions, corporate broking retainers, commodity commissions, deal fees and placing commissions. Institutional commissions are recognised on trade dates. Net trading gains or losses are the realised and unrealised profits and losses from market making for long and short positions on a trade date basis. Investment income is the realised and unrealised profits and losses from securities held outside the market making portfolio on a trade date basis. Corporate retainers are recognised on an accruals basis. Deal fees and placement commissions are only recognised once there is a contractual entitlement for the Group to receive them.
3.5 Foreign currencies
The financial statements are presented in sterling, which is the Group’s functional currency. Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the balance sheet date. All other exchange differences are dealt with through the income statement.
3.6 Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
3.7 Property, plant and equipment
Property, plant and equipment are stated at cost, net of depreciation and any provision for impairment. Depreciation is calculated to write down the cost less estimated residual value of all property, plant and equipment by the reducing balance method over their estimated useful economic lives. The rates generally applicable are: Office equipment 25% Residual value estimates are updated as required, but at least annually.
3.8 Impairment testing of intangible assets and property, plant and equipment
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the group at which management monitors goodwill. Cash-generating units to which goodwill has been allocated are tested for impairment at least annually. All other individual assets or cash-generating units are tested 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 or cash-generating unit's carrying amount exceeds its recoverable amount. To determine the recoverable amount, the Group’s management compares a historical consensus price-earnings ratio based on a group of 10 comparable investment banks and applies it to the current earnings of its subsidiaries. Impairment losses for cash-generating units reduce first the carrying amount of any goodwill allocated to that cash-generating unit. Any remaining impairment loss is charged pro-rata to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment charge that has been recognised is reversed if the cash-generating unit’s recoverable amount exceeds its carrying amount.
3.9 Pensions
The Company contributes to the private pension schemes of certain directors. The assets of the scheme are held separately from that of the Company. Contributions are charged in the accounts as incurred.
3.10 Share-based payment
All share-based payment arrangements granted after 7 November 2002 that had not vested prior to 1 January 2006 are recognised in the financial statements. The fair values of employees’ services rewarded using share-based payments, are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions. All equity-settled share-based payments are ultimately recognised as an expense in the income statement with a corresponding credit to ‘reserve for share-based payments’. If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different from that estimated on vesting. Upon exercise of share options the proceeds received net of attributable transaction costs are credited to share capital, and where appropriate share premium.
3.11 Equity
Called up share capital is determined using the nominal value of shares that have been issued.
Share premium account includes any premium received on the initial issuing of the share capital. Any transaction costs associated with the issuing of shares are deducted from share premium account, net of any related income tax benefits. Merger reserve arises from merger relief taken under section 131 of the Companies Act 1985 in respect of the premium paid on the issue of shares to finance the acquisition of a subsidiary undertaking prior to the Group’s IFRS transition date. Equity-settled share-based employee remuneration is credited to the reserve for share-based payments until related stock options are exercised. Retained earnings include all current and prior period results as disclosed in the income statement.
3.12 Employee benefit trust
The assets and liabilities of the Employee Benefit Trust (EBT) have been included in the Group accounts. Any assets held by the EBT cease to be recognised on the Group balance sheet when the assets vest unconditionally in identified beneficiaries. The costs of purchasing own shares held by the EBT are shown as a deduction against equity. The proceeds from the sale of own shares held increase equity. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the Group income statement.
3.13 Treasury shares
The costs of purchasing Treasury shares are shown as a deduction against equity. The proceeds from the sale of own shares held increase equity. Neither the purchase nor sale of own shares leads to a gain or loss being recognised in the Group income statement.
3.14 Operating leases
In accordance with IAS 17 “Leases”, a lease is defined as a finance lease if the economic ownership of a leased asset is transferred to the lessee and the lessee bears substantially all the risks and rewards related to the ownership of the leased asset. All other leases are accounted for as operating leases. Rentals paid under operating leases are charged against income on a straight-line basis over the lease term.
3.15 Segment reporting
Business segments are distinguishable components of the Group that provide products or services that are subject to risks and rewards that are different from those of other business segments. The Group operates entirely within the United Kingdom and accordingly there are no distinguishable geographical segments.
3.16 Disposal of assets, non-current assets classified as held for sale
The gain or loss arising on the disposal of an asset is determined as the difference between the disposal proceeds and the carrying amount of the asset and is recognised in the income statement. The gain or loss arising from the sale of non-current assets is included in “administrative expenses” in the income statement. If the Group intends to sell non-current assets or groups of assets, and if the sale is highly probable to be carried out within 12 months, the asset or group of assets is classified as “held for sale” and presented as such on the balance sheet. Assets classified as “held for sale” are measured at the lower of their carrying amounts, immediately prior to their classification as held for sale and their fair value less costs to sell. They are not subject to depreciation or amortisation. Any profit or loss arising from the sale or revaluation of “held for sale” assets is included in “other income” or ” administrative expenses“, respectively, in the income statement.