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BAKKAVOR ANNUAL REPORT AND ACCOUNTS 2012
notes to the consolidated financial statements
continued
3
CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY CONTINUED
Going concern
The Directors, in their detailed consideration of going concern, have reviewed the Group’s future cash forecasts and revenue projections, which they
believe are based on prudent market data and past experience, and believe, based on those forecasts and projections, that it is appropriate to prepare
the financial statements of the Company and the Group on a going concern basis.
In arriving at this conclusion the Directors considered the Group’s financing arrangements, which comprise £350 million of seven-year listed bonds
issued in February 2011 and £350 million of bank facilities committed to June 2014. The Company is in advanced discussions with its lenders regarding
the refinancing of these bank facilities. Both the Company and its lenders are committed to the refinancing of both the Term loan and Revolving Credit
Facility and the Board is confident of announcing new financing arrangements in the near future. Importantly, the Group’s liquidity remains particularly
strong with £83.8 million of facilities undrawn as at 29 December 2012.
The existing bank facilities are subject to a series of covenants set by the lenders. Financial covenants are measured quarterly and include an
assessment of leverage (the ratio of net debt to EBITDA, being earnings before interest, tax, depreciation and amortisation); cash flow cover (the ratio
of finance charges to cash generated from operations); interest cover (the ratio of finance charges to EBITDA) and capital expenditure limits. The key
financial covenant is leverage; this was re-set earlier in the year following the successful restructuring of the Company’s parent. Under the revised
covenant, leverage must be less than 5.75 times at the 2012 financial year-end and less than 5.0 times at the 2013 financial year-end. At 29 December
2012 the leverage ratio of net debt to EBITDA was 4.9 times. At the date of this report the Group has complied in all respects with the terms of its
borrowing agreements, including its financial covenants and forecasts to continue to do so.
The Group believes it is adequately placed to manage covenant compliance successfully despite the challenging macroeconomic environment.
In the event that conditions worsen, the Group has the flexibility to react by accessing additional working capital arrangements that we have already
agreed with key stakeholders. Further actions available to management may include a reduction to our capital expenditure programme and supply
chain improvements. Consequently the Directors have a reasonable expectation that the Company and the Group have adequate resources
to comply with these covenants and meet their liabilities as they fall due for a period of at least 12 months from the date of approval of the financial
statements. For this reason they continue to adopt the going concern basis in preparing the financial statements.
Impairment of goodwill and other intangible assets
The recoverable amount of CGUs are determined based on the higher of net realisable value and value-in use calculations. These calculations require
the use of estimates. The Group has considered the impact of the assumptions used on the calculations and has conducted sensitivity analysis on the
impairment tests of the CGUs carrying values. See notes 15 and 16 for further details.
Fair value of derivatives and other financial instruments
Derivative financial instruments and certain other financial assets are recorded at fair value in the statement of financial position. The fair value of
the financial instruments that do not have quoted market prices requires significant judgement and estimates. The Directors use their judgement in
selecting an appropriate valuation technique for these financial instruments. Valuation techniques commonly used by market practitioners are applied.
For derivative financial instruments, assumptions are made based on quoted market rates adjusted for specific features of the instrument. Other
financial instruments are valued using a discounted cash flow analysis based on assumptions supported, where possible, by observable market
prices or rates. The estimation of fair value of unlisted shares includes some assumptions not supported by observable market prices or rates. These
assumptions are based on past and expected future performance. Details of the assumptions used and of the results of sensitivity analyses regarding
these assumptions are disclosed in note 29.
Pensions
The Group maintains a number of defined benefit pension plans for which it has recorded a pension asset or liability. The pension asset/liability
is based on an actuarial valuation that requires a number of assumptions including discount rate, mortality rates and actual return on plan assets
that may necessitate material adjustments to this asset/liability in the future. The assumptions used by the Group are the best estimates based on
historical trends and the composition of the work force. Details of the principal actuarial assumptions used in calculating the recognised asset/liability
for the defined benefit plan are given in note 36.
Recognition of deferred tax assets and current tax provision
The recognition of deferred tax assets is based upon whether it is probable that sufficient and suitable taxable profits will be available in the future
against which the reversal of temporary differences can be deducted. Where the temporary differences related to losses, the availability of the losses
to offset against forecast taxable profits is also considered. Recognition therefore involves judgement regarding the future financial performance of
the particular legal entity or tax group in which the deferred tax asset has been recognised.
The Group had unrecognised deferred tax assets as a result of unused tax losses of £40.5 million (2011: £17.9 million), available for offset against
future profits. Deferred tax assets are not recognised on the losses carried forward to the extent that it is not probable that the losses will be utilised.
The Group operates in various countries and its income tax returns are subject to audit and adjustment by local tax authorities. The nature of the
Group’s tax exposures is often complex and subject to change and the amounts at issue can be substantial. The Group develops an estimate of the
potential tax liability based on the tax positions taken, historical experience and its internal tax expertise. These estimates are refined as additional
information becomes known. Any outcome upon settlement that differs from a recorded provision may result in a materially higher or lower tax
expense in future periods.
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