(b)Use of estimates in interim financial statements

 

The preparation of interim financial statements, in conformity with U.S. GAAP and SEC regulations, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are primarily made in relation to the valuation of share options, valuation allowances relating to deferred tax assets, revenue recognition, estimating clinical trial expenses and estimating reimbursements from R&D tax and expenditure credits. If actual results differ from the Company’s estimates, or to the extent these estimates are adjusted in future periods, the Company’s results of operations could either benefit from, or be adversely affected by, any such change in estimate.

 

 

(d)Cash, cash equivalents and restricted cash

 

The Company considers all highly-liquid investments with a maturity at acquisition date of three months or less to be cash equivalents. Cash and cash equivalents comprise cash balances and deposits with maturities of three months or less.  The cash and cash equivalents and short-term deposits are held with multiple banks and we monitor the credit rating of those banks.  The Company maintains cash balances in excess of amounts insured by the Federal Deposit Insurance Corporation in the U.S. and the U.K. Government Financial Services Compensation Scheme in the U.K.

 

The Company’s restricted cash consists of cash providing security for letters of credit in respect of lease agreements.

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet that sum to the total of the same such amounts shown in the statement of cash flows (in thousands).

 

 

 

(f)Fair value measurements

 

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. The hierarchy defines three levels of valuation inputs:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities

 

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

 

Level 3 — Unobservable inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability

 

The carrying amounts of the Company’s cash and cash equivalents, short-term deposits, restricted cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments.  The fair value of marketable securities, which are measured at fair value on a recurring basis is detailed in Note 5, Fair value measurements.

 

 

(h)           New accounting pronouncements

 

Adopted in the period

 

Intra-Entity Transfers of Assets Other Than Inventory

 

The Company has adopted Accounting Standards Update (“ASU”) ASU 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory issued by the Financial Accounting Standards Board (“FASB”) in October 2016, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance has been adopted on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption prospectively to all arrangements entered into or materially modified after January 1, 2017.  The adoption of this guidance did not have any impact on the financial position, results of operations or cash flows.

 

To be adopted in future periods

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued ASU 2014-09 - Revenue from Contracts with Customers (“ASU 2014-09”) which requires a new approach to revenue recognition and, in March, April, May and December 2016, the FASB issued additional clarification related to this guidance. This guidance has been codified within Accounting Standard Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

Step 1: Identify the contract(s) with a customer.

 

Step 2: Identify the performance obligations in the contract.

 

Step 3: Determine the transaction price.

 

Step 4: Allocate the transaction price to the performance obligations in the contract.

 

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

The Company intends to adopt the guidance retrospectively, with the cumulative effect of initially applying the guidance recognized at the date of initial application, with effect from January 1, 2018.  Whilst the Company’s assessment of the impact of the guidance is substantially complete, the cumulative effect of adopting the guidance on our financial statements cannot reasonably be quantified at this time because it is dependent on estimates, such as the probability of future milestone payments, which cannot be determined until the date of initial application. However, the adoption of ASC 606 may have a material impact on the Company’s financial statements due to the following:

 

 

 

ASC 606 requires an entity to provide financial statement users with sufficient information to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. To help achieve this objective, ASC 606 requires certain quantitative and qualitative disclosures, which will be more extensive than our current revenue disclosures.

 

The Company continues to monitor additional changes, modifications, clarifications or interpretations undertaken by the FASB, which may impact the Company’s assessment of ASC 606.

 

Accounting for Leases

 

In February 2016, the FASB issued ASU 2016-02 - Leases.  The guidance requires that lessees recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term at the commencement date.  The guidance also makes targeted improvements to align lessor accounting with the lessee accounting model and guidance on revenue from contracts with customers.  The guidance is effective for the fiscal year beginning January 1, 2019, including interim periods within that fiscal year. Early application is permitted.  The guidance must be adopted on a modified retrospective transition approach for leases existing, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The Company is currently evaluating the impact of the guidance on the consolidated financial statements.

 

Measurement of Credit Losses on Financial Instruments

 

In June 2016, the FASB issued ASC 2016-13 — Financial Instruments — Credit losses, which replaces the incurred loss impairment methodology for financial instruments in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance is effective for the fiscal year beginning January 1, 2020, including interim periods within that fiscal year.  Early application is permitted for the fiscal year beginning January 1, 2019, including interim periods within that fiscal year. The guidance must be adopted using a modified-retrospective approach and a prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently evaluating the impact of the guidance on the consolidated financial statements.

 

Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued ASU 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amended the guidance on the recognition and measurement of financial assets and financial liabilities.  The new guidance requires that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) are measured at fair value with changes in fair value recognized in net income.  The guidance also requires the use of an exit price when measuring the fair value of financial instruments for disclosure purposes, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset.  The guidance is effective for the fiscal year beginning January 1, 2018, including interim periods within that fiscal year.  The Company does not believe the adoption of the guidance will have a material impact on the consolidated financial statements.