1Principal accounting policies

The financial statements have been prepared in accordance with the Companies Act 1985 and applicable Accounting Standards in the UK. A summary of the more important accounting policies, which have been consistently applied and reviewed by the board of directors in accordance with Financial Reporting Standard (FRS) 18, “Accounting policies”, is set out below:

Basis of accounting The financial statements are prepared in accordance with the historical cost convention, as modified for fair value in relation to share-based payments.

Investments in subsidiaries Investments in subsidiaries are initially recorded at cost. Where an acquisition satisfies the provisions of sections 131 to 134 of the Companies Act 1985 for merger relief, the investment is stated at the nominal value of shares issued plus the fair value of any other consideration.

Cash flow statement The Company has taken advantage of the exemption in FRS 1 Revised 1996 “Cash flow statements” which provides that where a company is a member of a group and a consolidated cash flow statement is published, the company does not have to prepare a cash flow statement.

Foreign currency Transactions denominated in foreign currencies have been translated into sterling at actual rates of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies have been translated at rates ruling at the balance sheet date. Exchange differences have been included in operating profit.

Taxation Current tax is provided at amounts expected to be paid using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

Financial instruments The Company does not have any financial instruments, other than intercompany payables and receivables and cash. Due to the short-term nature of these balances, the Company considers the fair value of these items to equal the carrying value. Because the Company is included in the consolidated financial statements of the ARM Holdings plc group which are publicly available, and the financial disclosures required by FRS 29 are in those financial statements, no disclosure has been presented in these financial statements.

Share schemes The Group’s Employee Share Ownership Plan (ESOP) is a separately administered trust which is funded by loans from the group, and the assets of which comprise shares in the Company. In accordance with UITF 38, “Accounting for ESOP Trusts”, the Company recognises the assets and liabilities of the ESOP in its own accounts and shares held by the trust are recorded at cost as a deduction in arriving at shareholders’ funds until such time as the shares vest unconditionally to employees. All shares within the ESOP have now been awarded and the ESOP is in the process of being wound-up.

The Company issues equity-settled share-based payments, including an LTIP, to certain employees of subsidiary undertakings. In accordance with FRS 20, equity-settled share-based payments are measured at fair value at the date of grant. Fair value is measured by use of the Black-Scholes pricing model. The fair value determined at the grant date of the equity-settled share-based payments is expensed in the accounts of the subsidiary companies on a straight-line basis over the vesting period, based on the Company’s estimate of the number of shares that will eventually vest.

The Company operates Save As You Earn (SAYE) schemes in the UK and an Employee Share Purchase Plan (ESPP) in the US. Options under the SAYE scheme granted in 2007 and 2008 were at a 20% discount to market price of the underlying shares on the date of grant, whereas for all prior years was at a 15% discount. The UK SAYE schemes are approved by the Inland Revenue, which stipulates that the saving period must be at least 36 months.

The Company has taken advantage of the exemption available, and has applied the provisions of FRS 20 only to those options granted after 7 November 2002 and which were outstanding at 31 December 2004. The Company does not have any employees and as such, in accordance with UITF 44, all share-based compensation has been recorded as capital contributions to subsidiaries.

Treasury shares The Company has a share buyback programme under which the Company purchases its own shares and holds them as treasury shares. These shares will be used to satisfy employee share option exercises and other share awards. In accordance with UITF 38, the Company recognises these shares at cost as a deduction in arriving at shareholders’ funds.