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64 Notes to the consolidated fi nancial statements 2 Principal accounting policies continued 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 credited or charged to the statement of comprehensive income as they arise. Past service costs are recognised immediately in the income statement, 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 Group pays contributions to privately administered pension schemes on a contractual basis. The Group 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. (ii) Share-based compensation The Group 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. n. Taxation The income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profi t for the year. Taxable profi t differs from profi t before taxation as reported in the income statement because it excludes items of income or expense which are taxable or deductible in other years or which are never taxable or deductible. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the fi nancial statements and the corresponding tax bases used in the computation of taxable profi t and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that taxable profi ts will be available against which deductible temporary differences or unused tax losses can be utilised. Deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill in a business combination. Deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction which affects neither the taxable profi t nor the accounting profi t. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, joint ventures and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Kingfi sher plc Annual Report and Accounts 2009/10 The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that suffi cient taxable profi ts will be available to allow all or part of the asset to be recovered. Current and deferred tax are calculated using tax rates which have been enacted or substantively enacted by the balance sheet date and are expected to apply in the period when the liability is settled or the asset is realised. Current and deferred tax are charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the current or deferred tax is also recognised directly in equity. Current and deferred tax assets and liabilities are offset against each other when they relate to income taxes levied by the same tax jurisdiction and when the Group intends to settle its current tax assets and liabilities on a net basis. o. Provisions Provisions are recognised when the Group 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. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash fl ows at a pre-tax rate which refl ects current market assessments of the time value of money and, where appropriate, the risks specifi c to the liability. p. Financial instruments Financial assets and fi nancial liabilities are recognised on the Group’s balance sheet when the Group 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 Group 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) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held on call with banks and other short term highly liquid investments with original maturities of three months or less. (ii) 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 income statement using the effective interest method. (iii) Other investments Other investments include bank deposits, government bonds and other short term investments with an original maturity of more than three months. (iv) Trade receivables Trade receivables are initially recognised at fair value and are subsequently measured at amortised cost less any provision for bad and doubtful debts. (v) Trade payables Trade payables are initially recognised at fair value and are subsequently measured at amortised cost.
Kingfi sher plc Annual Report and Accounts 2009/10 (vi) 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 income statement as they arise. Changes in the fair value of derivatives transacted as hedges of operating items and fi nancing items are recognised in operating profi t and net fi nance costs respectively. Derivatives are initially recorded at fair value on the date a derivative contract is entered into and are subsequently carried at fair value. The accounting treatment of derivatives and other fi nancial instruments classifi ed as hedges depends on their designation, which occurs at the start of the hedge relationship. The Group designates certain fi nancial instruments as: – a hedge of the fair value of an asset or liability or unrecognised fi rm commitment (‘fair value hedge’); – a hedge of a highly probable forecast transaction or fi rm commitment (‘cash fl ow hedge’); or – a hedge of a net investment in a foreign operation (‘net investment hedge’). Fair value hedges 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 income statement. Gains or losses from remeasuring the corresponding hedging instrument are recognised in the same line of the income statement. Cash fl ow hedges Changes in the effective portion of the fair value of derivatives that are designated as hedges of future cash fl ows are recognised directly in equity, and the ineffective portion is recognised immediately in the income statement where relevant. If the cash fl ow hedge of a fi rm commitment or forecast transaction results in the recognition of a non-fi nancial asset or liability, then, at the time it is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the non-fi nancial asset or liability. For hedges that result in the recognition of a fi nancial asset or liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profi t or loss. Net investment hedges Where the Group hedges net investments in foreign operations through foreign currency borrowings, the gains or losses on the retranslation of the borrowings are recognised in equity. If the Group uses derivatives as the hedging instrument, the effective portion of the hedge is recognised in equity, with any ineffective portion being recognised in the income statement. Gains and losses accumulated in equity are recycled through the income statement on disposal of the foreign operation. In order to qualify for hedge accounting, the Group documents in advance the relationship between the item being hedged and the hedging instrument. The Group 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. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the highly probable forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement. 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 income statement. 65 3 Critical accounting estimates and judgements The preparation of consolidated fi nancial statements under IFRS requires the Group to make estimates and assumptions that affect the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a signifi cant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next fi nancial year are discussed below. Impairment of goodwill and other assets As required, the Group applies procedures to ensure that its assets are carried at no more than their recoverable amount. The procedures, by their nature, require estimates and assumptions to be made. The most signifi cant are set out below. The Group is required, on at least an annual basis, to test whether goodwill has suffered any impairment. As part of this testing the recoverable amounts of cash generating units have been determined based on value-in-use calculations. The use of this method requires the estimation of future cash fl ows expected to arise from the continuing operation of the cash generating unit and the choice of a suitable discount rate in order to calculate the present value of the forecast cash fl ows. Actual outcomes could vary signifi cantly from these estimates. Further information on the impairment tests undertaken, including the key assumptions, is given in note 12. Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount of an asset or a cash generating unit is determined based on value-in-use calculations prepared on the basis of management’s assumptions and estimates. At each reporting date the Group is required to assess whether there is objective evidence that its investments in associates and joint ventures may be impaired. This requires estimates of the investments’ recoverable amounts, including present values of the Group’s share of future cash fl ows. Inventories As inventories are carried at the lower of cost and net realisable value this requires the estimation of the eventual sales price of goods to customers in the future. A high degree of judgement is applied when estimating the impact on the carrying value of inventories of factors such as slow moving items, shrinkage, damage and obsolescence. The quantity, age and condition of inventories are regularly measured and assessed as part of range reviews and inventory counts undertaken throughout the year and across the Group. Refer to note 18 for further information. Income taxes The Group is subject to income taxes in numerous jurisdictions. Signifi cant judgement is required in determining the provision for income taxes in each territory. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the fi nal outcome of these matters is different from the amounts which were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Refer to notes 9 and 25 for further information.
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