2008 Annual report - Sappi

sappi //
necessary in estimating future cash flows, significant judgments
in estimating discounted cash flows also include the selection of
the pre-tax discount rate (weighted average cost of capital) and
the terminal value (net present value at end of period where there
is a willing buyer and seller) multiple used in our valuation model.
The discount rate used in our valuation model considers a
debt and equity mix, a market risk premium, and other factors
consistent with valuation methodologies. The terminal value
multiple used in our valuation model considered the valuations for
comparable companies.
Small changes to the valuation model would not significantly
impact the results of our valuation; however, if future cash
flows were materially different than our forecasts, then the
assessment of the potential impairment of the carrying value
may be impacted.
Property, plant and equipment
Where significant parts of an item of property, plant and
equipment have different useful lives to the item itself, these
parts are depreciated over their estimated useful lives. The
methods of depreciation, useful lives and residual values are
reviewed annually. Depreciation rates for similar items of plant
or equipment could vary significantly based on the location and
use of the asset.
Determining the depreciable amount for an item of plant and
equipment, the residual amount of the item of plant and
equipment is taken into consideration. The residual value for
the majority of items of plant and equipment has been deemed
to be zero by management due to the underlying nature of the
equipment.
The following methods and rates were used during the year to
depreciate property, plant and equipment to estimated residual
values:
Land
No depreciation
Buildings
straight line 40 years
Plant
straight line 5 to 20 years
Vehicles
straight line 5 to 10 years
Furniture and equipment straight line 3 to 6 years
Assets held under finance leases are depreciated over their
expected useful lives or the term of the relevant lease, where
shorter. The useful lives and residual values of property,
plant and equipment are reviewed on an annual basis and
are revised when the current estimate is different from the
existing estimate.
For material items of property, plant and equipment an internal
engineer is used to assist in determining the remaining useful
lives and residual values. Management believes that the assigned
values and useful lives, including the underlying assumptions
have been adequately considered and consistently applied.
Different assumptions and assigned useful lives could have an
impact on the reported amounts.
Taxation
The group estimates its income taxes in each of the jurisdictions
in which it operates. This process involves estimating its current
tax liability together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which
are included within the consolidated balance sheet.
The group then assesses the likelihood that the deferred tax
assets will be recovered from future taxable income and, to the
extent recovery is not likely, a deferred tax asset is not recognised.
In recognising deferred tax assets the group considers profit
forecasts including the effect of exchange rate fluctuations on
sales and external market conditions. Where it is probable that
a position may be successfully challenged by revenue authorities,
a tax provision is raised for the tax on the probable adjustment.
Management’s judgement is required in determining the provision
for income taxes, deferred tax assets and liabilities. Deferred tax
assets have been recognised where management believes
there are sufficient taxable temporary differences or convincing
other evidence that sufficient taxable profits will be available in
future to realise deferred tax assets. Although the deferred tax
assets which have been recognised are considered realisable,
actual amounts could be reduced if future taxable income is
not achieved. This can materially affect our reported net income
and financial position.
Hedge accounting for financial instruments
The financial instruments that are used in hedging transactions
are assessed both at inception and quarterly thereafter to
ensure they are effective in offsetting changes in either the fair
value or cash flows of the related underlying exposures. Hedge
accounting is mainly used for debt instruments to hedge
interest rate and foreign currency risk exposures and for firm
commitments to hedge foreign currency risk exposures. We do
not currently use hedge accounting for trading transactions.
External market data is applied in measuring the hedge
effectiveness of financial instruments. Hedge ineffectiveness is
recognised immediately against income.
// 2008 Annual report
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