Hybrid Software Group PLC Annual Report 2022 Hybrid Software Group Strategic report Governance Financial statements Other information Hybrid Software Group PLC Annual Report 2022 84 85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New standards which were not adopted by the Group in 2022 (continued) • Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12) • Classification of Liabilities as Current or Non-Current (Amendments to IAS 1) • IFRS 17 Insurance Contracts and amendments to IFRS 17 Insurance Contracts • Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) • Definition of Accounting Estimates (Amendments to IAS 8) 4. DETERMINATION OF FAIR VALUES Several of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Other intangible assets The fair value of other intangible assets which were acquired in business combinations is based on either the discounted cash flows expected to be derived from the use of these intangible assets, or the average of the discounted cash flows and the total replacement cost of these intangible assets. Non-derivative financial instruments The carrying values less impairment provision of trade and other receivables, current tax assets, other current assets, cash, trade payables, current tax liabilities, accrued liabilities, are assumed to approximate their fair values at each of the balance sheet dates presented herein. Share-based payments The fair value of share options which are granted are valued by using a Black-Scholes valuation model. Measurement inputs include the share price on the measurement date, the exercise price of the share option, the expected volatility, the weighted average expected life of the option, the expected absence of dividends, and a risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value of the options. 5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial information in conformity with IFRS requires the Directors to make critical accounting estimates and judgements that affect the application of policies and reported amounts of assets and liabilities, income and expenses. An assessment of the impact of these estimates and judgements on the financial statements is set out below. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from these estimates and any subsequent changes are accounted for with an effect on income at the time such updated information is available. Estimates Identification and valuation of separately identifiable intangibles related to acquisitions Where a business combination is considered significant, the Group commissions and relies upon independent valuation reports to identify and value the intangible assets related to that acquisition. For less significant business combinations, internal estimates to calculate a discount rate are determined by the Directors to apply a consistent approach with previous acquisitions. The key assumptions in relation to this estimate for the iC3D acquisition were the discount rate, forecast revenue and forecast EBITDA margin. Assessing whether goodwill and acquisition-related intangibles have been impaired The Group tests annually whether the goodwill has been impaired and assesses acquisition-related intangible assets for indicators of impairment by reference to expected future generation of cash from the relevant intangible assets. In estimating the cash flow, the Directors make estimates, based on forecasts, about the amount of future profits from the relevant products that will be generated and the timing of when these will be realised. See Note 17 ‘Goodwill’ for further details. Deferred tax recognition Deferred tax assets are reviewed at each reporting date and are recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. The Directors make estimates about future sales and expenses, and the timing of their realisation, to derive an estimate of the future profits. The Directors have recognised an amount that they expect to recover in the foreseeable future of €2.07 million (2021: €2.24 million) and if there was a reduction in this period by 2 years the impact would be to reduce the asset by €0.82 million (2021: €0.33 million). See Note 19 ‘Tax’ for further details. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (CONTINUED) Estimates (continued) Provisions for obsolete inventory Inventory items are reviewed at each reporting date for possible obsolescence. Estimates are made in respect of the future demand and net realisable value of items that are deemed to be slow moving. The estimates of demand are based on a variety of factors, including the number of customers for that have purchased that item and historical transactions. As at 31 December the total gross inventory balance is €3,913,000 (2021: €2,308,000) and the provision against slow moving and obsolete inventory is €265,000 (2021: €225,000). Judgements Assessing whether development costs meet the criteria for capitalisation The point at which development costs meet the criteria for capitalisation is critically dependent on management’s judgement of the point at which technical feasibility is demonstrable, that the asset will probably generate future economic benefit, the intention to complete the asset and that the expenditure can be reliably measured. Furthermore, the useful economic lives of capitalised development costs are based on management’s knowledge of the life cycle of the Group’s products and technology. The carrying value of development assets also depends on management’s ability to demonstrate the future economic benefits they will deliver. This judgement requires assumptions about factors outside the business’s control such as medium-term economic conditions, technological developments, and market changes. The Directors have made a judgement that €3,981,000 (2021: €3,396,000) has been capitalised as eligible, qualifying expenditure for the purposes of IAS 38. A movement of 10.0% in this judgement would result in a material misstatement. There is judgement in determining whether development activity constitutes a substantial enhancement to the underlying assets, and in quantifying the time spent on these substantial enhancements. The Group utilise a timesheet tracking system to monitor the nature of development being undertaken and the time spent on this activity. Allocation of value to performance obligations in contracts with customers The Group enters into contracts with customers, some of which include multiple performance obligations. The allocation of the transaction price to the performance obligations is subject to management’s judgement of the performance obligations that are both explicit and implied in the contract and the subsequent stand-alone selling price of each of those performance obligations. 6. OPERATING SEGMENTS Identification of reportable segments Management has determined the operating segments based on the reports reviewed by the Group’s Chief Executive Officer (“CEO”) that are used for deciding how to allocate resources and also in assessing both operating and financial performance of each segment. The Group’s CEO is considered as the Group’s chief operating decision maker (“CODM”). The Group’s segments are: • Enterprise Software, for enterprise workflow software used primarily for the production of labels & packaging (includes iC3D, see Note 34 ‘Acquisitions’); • Printhead Solutions, for electronics and software developed for industrial inkjet printing; • Printing Software, for digital printing and colour management software; and • Group, for group related expenses that are not allocated to another segment. Measurement of the operating segments’ profit is assessed against revenue forecasts and expense budgets, excluding non-operating IFRS items such as the amortisation of intangible assets acquired through acquisition. The following tables provide information on revenue, operating profit, interest, depreciation and amortisation and tax as reported to the CODM for each of the Group’s operating segments for the years ended 31 December 2021 and 31 December 2022. The Group has disclosed these amounts for each reportable segment because they are regularly provided to the CODM or are required to be disclosed by IFRS 8. Assets and liabilities by segment are not regularly reported to the CODM, hence are not disclosed within this note. Inter-segment revenues are included in cost of sales for the reciprocal segment and are eliminated on consolidation. Unallocated amounts relate to expenses incurred by the Group’s parent company (HYBRID Software Group PLC) and exchange gains and losses that are not attributable to a particular operating segment. Segment EBITDA is calculated by adding back interest, depreciation, amortisation and tax to segment operating profit/(loss) after tax. The operating segments are unchanged from the previous year, with the exception of the addition of iC3D into the Enterprise Software segment, following the acquisition in the year.
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