0175 Geely Automobile Holdings Limited Annual Report 2011

Annual Report 2011Geely Automobile Holdings LimitedNOTES TO THE CONSOLIDATEDFINANCIAL STATEMENTSFor the year ended 31 December 20116. Critical Accounting Judgements and Key Sources of Estimation UncertaintyIn the application of the Group’s accounting policies, which are described in note 5, management is required tomake judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are notreadily apparent from other sources. The estimates and associated assumptions are based on historical experienceand other factors that are considered to be relevant. Actual results may differ from these estimates.The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimatesare recognised in the period in which the estimate is revised if the revision affects only that period, or in the periodof the revision and future periods if the revision affects both current and future periods.Key sources of estimation uncertaintyThe following are the key assumptions concerning the future, and other key sources of estimation uncertainty atthe balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts ofassets and liabilities within the next financial year.Impairment of goodwillDetermining whether goodwill (note 18) is impaired requires an estimation of the value in use of the cash-generatingunits to which goodwill has been allocated. The value in use calculation requires the entity to estimate the futurecash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculatepresent value.Fair value of financial instrumentsAs described in note 37 to the consolidated financial statements, the valuation techniques applied and relatedinputs used by the external valuers for financial instruments not quoted in an active market have been agreedwith the directors.In valuing the share-based payments realised in the Group’s financial statements, the Company has used theBinomial Option Pricing model, which makes various assumptions on factors outside the Group’s control, suchas share price volatility and risk-free interest rates. Details of the options and assumptions used in deriving theshare-based payments are disclosed in note 33.The directors use their judgement to determine whether valuation techniques applied are appropriate to thecircumstances of the Group.Allowance for bad and doubtful debtsThe provisioning policy for bad and doubtful debts of the Group is based on the evaluation by management ofthe collectability of the trade and other receivables (note 21). A considerable amount of judgement is required inassessing the ultimate realisation of these receivables, including assessing the current creditworthiness and thepast collection history of each customer. If the financial conditions of these customers were to deteriorate, resultingin an impairment of their ability to make payments, an additional allowance will be required.Allowance for inventoriesThe Company’s management reviews the condition of inventories, as stated in note 20 to the consolidated financialstatements, at each balance sheet date, and makes allowance for inventories that are identified as obsolete, slowmovingor no longer recoverable or suitable for use in production. The Group carries out the inventory review ona product-by-product basis and makes allowances by reference to the latest market prices and current marketconditions.78