Notes to the financial statements (continued) Under FRS 102, the group recognised deferred revenue for an obligation to transfer goods or services to a customer for which the entity has received consideration or the amount is due from the customer. Under IFRS, the obligation should be recognised as a contract liability rather than deferred revenue. Therefore, at the date of transition to IFRS, the group reclassified £3,191 (31 December 2018: £3,382, 31 December 2019: £3,897) from deferred revenue to contract liabilities. Furthermore, at 1 January 2018, the group recognised additional contract liabilities amounting to £3,191 (31 December 2018: £3,392, 31 December 2019: £3,897) relating to obligations to transfer goods or services to a customer not yet satisfied under IFRS, but recognised as revenue under FRS 102. Statement of cash flows Under FRS 102, a lease is classified as a finance lease or an operating lease. Cash flows arising from operating lease payments are classified as operating activities. Under IFRS, a lessee generally applies a single recognition and measurement approach for all leases and recognises lease liabilities. Cash flows arising from payments of principal portion of lease liabilities are classified as financing activities. Therefore, cash outflows from operating activities decreased by £2,026 and cash outflows from financing activities increased by the same amount for the year ended 31 December 2018, and £2,342 for the year 31 December 2019.
3. Accounting estimates and judgements The preparation of the group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Accounting estimates and assumptions The assumptions concerning the future and other sources of estimation uncertainty at the reporting date are described below. The group based its assumptions and estimates on information available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the group. Such changes are reflected in the assumptions when they occur. Development costs The group capitalises costs for product development projects. Initial capitalisation of costs is based on management’s judgement that technological and economic feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. In determining the amounts to be capitalised, management makes assumptions regarding the expected future cash generation of the project, discount rates to be applied and the expected period of benefits.
Impairment of non-financial assets Impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use calculation is based on a DCF model. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the group is not yet committed to or significant future investments that will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes. These estimates are most relevant to goodwill and other intangibles with indefinite useful lives recognised by the group. The key assumptions used to determine the recoverable amount for the different CGUs, including a sensitivity analysis, are disclosed and further explained in Note 10. Fair values on acquisition of Neoconsult ApS and Nomad IP ApS The fair value of the intangible asset acquired on the step-acquisition of Neoconsult ApS and Nomad IP ApS involved the use of a valuation technique and estimation of future cash flows to be generated over a number of years. The key intangible asset acquired was determined to have an economic useful life of eight years and a discounted cash flow model was used over the same period to validate its indicative acquisition date fair value. The estimation of the fair value required a combination of assumptions including cashflow forecasts of the IoT business over 8 years applying a 12% discount rate on the discounted cashflow model. In addition, the deferred and contingent consideration payable required estimation of the level of profitability of the business unit incorporating the acquired entities as well as an assessment of performance on other agreed deliverables on each pre-agreed date. As the deferred and contingent consideration are payable over a three-year period, the expected outflows were discounted to present value. Useful lives of tangible and intangible assets The annual depreciation and amortisation charges for tangible assets are sensitive to the estimated lives allocated to each type of asset. Lives are assessed annually and changed when necessary to reflect expected impact from changes in technology, network investment plans and physical condition of the assets.
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