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98 1 Principal accounting policies continued e. Employee benefi ts (i) Pensions Notes to the Company fi nancial statements Kingfi sher plc Annual Report and Accounts 2009/10 The Company operates defi ned benefi t and defi ned contribution pension schemes for its employees. A defi ned benefi t scheme is a pension scheme that defi nes an amount of pension benefi t that an employee will receive on retirement. A defi ned contribution scheme is a pension scheme under which the Company usually pays fi xed contributions into a separate entity. In all cases a separate fund is being accumulated to meet the accruing liabilities. The assets of each of these funds are either held under trusts or managed by insurance companies and are held entirely separate from the Company’s assets. The asset or liability recognised in the balance sheet in respect of defi ned benefi t pension schemes is the fair value of scheme assets less the present value of the defi ned benefi t obligation at the balance sheet date, together with an adjustment for any past service costs not yet recognised. The defi ned benefi t obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defi ned benefi t obligation is determined by discounting the estimated future cash outfl ows using interest rates of high quality corporate bonds which are denominated in the currency in which the benefi ts will be paid and which have terms to maturity approximating to the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited directly to the profi t and loss reserve as they arise. Past service costs are recognised immediately in the profi t and loss account, unless the changes to the pension scheme are conditional on the employees remaining in service for a specifi ed period of time (the vesting period). In this case, the past service costs are amortised on a straight line basis over the vesting period. For defi ned contribution schemes, the Company pays contributions to privately administered pension schemes on a contractual basis. The Company has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefi t expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (ii) Share-based compensation The Company operates several equity-settled, share-based compensation schemes. The fair value of the employee services received in exchange for the grant of options or deferred shares is recognised as an expense and is calculated using Black-Scholes and stochastic models. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options or deferred shares granted, excluding the impact of any non-market vesting conditions. The value of the charge is adjusted to refl ect expected and actual levels of options vesting due to non-market vesting conditions. (iii) Employee Share Ownership Plan Trust (‘ESOP’) The ESOP is a separately administered discretionary trust. Liabilities of the ESOP are guaranteed by the Company and the assets of the ESOP mainly comprise shares in the Company. Own shares held by the ESOP are deducted from equity shareholders’ funds and the shares are held at historical cost until they are sold. The assets, liabilities, income and costs of the ESOP are included in both the Company’s and the consolidated fi nancial statements. f. Deferred tax Provision is made for deferred tax using the incremental provision approach and is measured on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws substantively enacted at the balance sheet date. Deferred tax is recognised in respect of timing differences that have originated but not reversed by the balance sheet date subject to the following: – Deferred tax is not recognised on the revaluation of non-monetary assets such as property unless a binding sale agreement exists at the balance sheet date. Where rollover relief is available on an asset then deferred tax is not recognised. – Deferred tax is recognised on unremitted earnings of overseas subsidiaries and associates only where dividends are accrued as receivable or there is an intention to remit these in the foreseeable future. – Deferred tax assets are recognised to the extent that they are regarded as recoverable. Assets are regarded as recoverable when it is regarded as more likely than not that there will be suitable taxable profi ts from which the future reversal of the underlying timing differences can be deducted. – Deferred tax is not recognised on permanent differences. g. Provisions Provisions are recognised when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outfl ow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses.
Kingfi sher plc Annual Report and Accounts 2009/10 99 h. Financial instruments Financial assets and fi nancial liabilities are recognised on the Company’s balance sheet when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the contractual rights to the cash fl ows from the fi nancial asset expire or the Company has substantially transferred the risks and rewards of ownership. Financial liabilities (or a part of a fi nancial liability) are derecognised when the obligation specifi ed in the contract is discharged or cancelled or expires. (i) Borrowings Interest bearing borrowings are recorded at the proceeds received, net of direct issue costs and subsequently measured at amortised cost. Where borrowings are in designated and effective fair value hedge relationships, adjustments are made to their carrying amounts to refl ect the hedged risks. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are amortised to the profi t and loss account using the effective interest method. (ii) Trade creditors Trade creditors are initially recognised at fair value and are subsequently measured at amortised cost. (iii) Derivatives and hedge accounting Where hedge accounting is not applied, or to the extent to which it is not effective, changes in the fair value of derivatives are recognised in the profi t and loss account as they arise. Derivatives are initially recorded at fair value on the date a derivative contract is entered into and subsequently carried at fair value. The accounting treatment of derivatives classifi ed as hedges depends on their designation, which occurs at the start of the hedge relationship. The Company designates certain derivatives as a hedge of the fair value of an asset or liability (‘fair value hedge’). For an effective hedge of an exposure to changes in fair value, the hedged item is adjusted for changes in fair value attributable to the risk being hedged with the corresponding entry being recorded in the profi t and loss account. Gains or losses from remeasuring the corresponding hedging instrument are also recognised in the profi t and loss account. In order to qualify for hedge accounting, the Company documents in advance the relationship between the item being hedged and the hedging instrument. The Company also documents and demonstrates an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge has been and will be highly effective on an ongoing basis. The effectiveness testing is re-performed at each period end to ensure that the hedge remains highly effective. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifi es for hedge accounting. Derivatives embedded in other fi nancial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts, and the host contracts are not carried at fair value with unrealised gains or losses reported in the profi t and loss account.
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