Pace plc Annual Report and Accounts 2012 - Financial Statements

Financial StatementsNotes1 Basis of preparation and business environmentThe following accounting policies have been applied consistently in dealing with items which are considered material in relationto the Financial Statements:Basis of preparationThe Financial Statements have been prepared in accordance with applicable accounting standards and under the historical costconvention as modified by the revaluation of derivative instruments.International Financial Reporting StandardsThe Group’s Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) asendorsed by the European Union and International Financial Reporting Interpretations Committee (IFRIC) interpretations and withthose parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Company’s Financial Statements havebeen prepared on the same basis and as permitted by Section 408 of the Companies Act 2006, no income statement ispresented for the Company. The result of the Company for the year is shown in Note 25.Financial year endThe current year’s Financial Statements are for the year ended 31 December 2012 and the previous year’s Financial Statementsare for the year ended 31 December 2011.Basis of consolidationThe Group Financial Statements consolidate those of the Company and of its subsidiary undertakings (Note 13) drawn up to31 December 2012. Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directlyor indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control,potential voting rights that presently are exercisable or convertible are taken into account. Intra-group transactions, including sales,profits, receivables and payables, have been eliminated on the Group consolidation. Investments in subsidiaries are carried at costless any impairment loss in the Financial Statements of the Company.Functional and presentational currencyItems included in the Financial Statements of each of the Group’s entities are measured using the currency of the primary economicenvironment in which the entity operates (the functional currency). The consolidated Financial Statements are presented in US Dollarswhich is the Company’s functional and presentational currency.The US Dollar/Pound Sterling exchange rate at 31 December 2012 was 1.62 (2011: 1.55).Significant judgements, key assumptions and estimation uncertaintyThe Group’s main accounting policies affecting its results of operations and financial condition are set out on pages 42 to 47.Judgements and assumptions have been required by management in applying the Group’s accounting policies in many areas.Actual results may differ from the estimates calculated using these judgements and assumptions. Key areas of estimationuncertainty and critical accounting judgements are as follows:WarrantiesPace provides product warranties for its products. Although it is difficult to make accurate predictions of potential failure rates orthe possibility of an epidemic failure, as a warranty estimate must be calculated at the outset of a product before field deploymentdata is available, these estimates improve during the lifetime of the product in the field.A provision for warranties is recognised when the underlying products are sold. The provision is based on historical warranty dataand a weighting of all possible outcomes against their associated probabilities. The level of warranty provision required is reviewedon a product by product basis and provisions adjusted accordingly in the light of actual performance.RoyaltiesPace’s products incorporate third party technology, usually under licence. Inadvertent actions may expose Pace to the risk of infringingthird party intellectual property rights. Potential claims can still be submitted many years after a product has been deployed.Any such claims are always vigorously defended.A provision for royalties is recognised where the owners of patents covering technology allegedly used by the Group have indicatedclaims for royalties relating to the Group’s use (including past usage) of that technology. Having taken legal advice, the Boardconsiders that there are defences available that should mitigate the amounts being sought. The Group will vigorously negotiateor defend all claims but, in the absence of agreement, the amounts provided may prove to be different from the amounts at whichthe potential liabilities are finally settled. The provision is based on the latest information available.Annual Report and Accounts 2012 Pace plc 41