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46 Compass Group PLC Annual Report 2007Accounting policiesfor the year ended 30 September 2007F Foreign currencyThe consolidated financial statements areprepared in pounds Sterling, which is thefunctional currency of the parent company.In preparing the financial statements ofindividual companies within the Group,transactions in currencies other than poundsSterling are recorded at the rates of exchangeon the dates of the transaction. At eachbalance sheet date, monetary assets andliabilities that are denominated in foreigncurrencies are retranslated at the rates on thebalance sheet date. Gains and losses arisingon retranslation are included in the incomestatement for the period, except for wherethey arise on items taken directly to equity, inwhich case they are also recognised in equity.In order to hedge its exposure to certainforeign exchange risks the Group enters intoforward contracts (see section Q below forthe Group’s accounting policies in respect ofderivative financial instruments).On consolidation, the assets and liabilities ofthe Group’s overseas operations (expressed intheir functional currencies, being the currencyof the primary economic environment inwhich each entity operates) are translatedat the exchange rates on the balance sheetdate. Income and expense items are translatedat the average exchange rates for the period.Exchange differences arising, if any, areclassified as equity and transferred to theGroup’s translation reserve. Such translationdifferences are recognised as income orexpense in the period in which the operationis disposed of.Goodwill and fair value adjustments arisingon the acquisition of a foreign entity aretreated as assets and liabilities of the foreignentity and translated at the closing rate.G RevenueRevenue is recognised in the period in whichservices are provided in accordance with theterms of the contractual relationships withthird parties. Revenue represents the fair valueof the consideration received or receivable forgoods and services provided in the normalcourse of business, excluding trade discounts,value added tax and similar sales taxes.Management fee contractsRevenue from management fee contractscomprises the total of sales made to consumers,the subsidy charged to clients, together with themanagement fee charged to clients.Fixed price contractsRevenue from fixed price contracts is recognisedin proportion to the volume of services that theGroup is contracted to supply in each period.Inter-segment transactionsThere is minimal intra-group trading betweenthe reported business segments. Where suchtrading does take place it is on similar terms andconditions to those available to third parties.H Rebates and other amountsreceived from suppliersRebates and other amounts received fromsuppliers include agreed discounts fromsuppliers’ list prices, value and volume-relatedrebates.Income from value and volume-related rebatesis recognised based on actual purchases in theperiod as a proportion of total purchases madeor forecast to be made over the rebate period.Agreed discounts relating to inventories arecredited to the income statement as the goodsare consumed.Rebates relating to items purchased but stillheld at the balance sheet date are deductedfrom the carrying value of these items so thatthe cost of inventories is recorded net ofapplicable rebates.Rebates received in respect of plant andequipment are deducted from the costscapitalised.I Borrowing costsBorrowing costs are recognised in the incomestatement in the period in which they areincurred.J Operating profitOperating profit is stated before the share ofresults of associates, investment revenue andfinance costs.K Exceptional itemsExceptional items are disclosed and describedseparately in the financial statements whereit is necessary to do so to provide furtherunderstanding of the financial performanceof the Group. They are material items ofincome or expense that have been shownseparately due to the significance of theirnature or amount.L TaxIncome tax expense comprises current anddeferred tax. Tax is recognised in the incomestatement except where it relates to itemstaken directly to equity, in which case it isrecognised in equity.Current tax is the expected tax payable onthe taxable income for the period, using taxrates that have been enacted or substantivelyenacted by the balance sheet date.Deferred tax is provided using the balancesheet liability method, providing for temporarydifferences between the carrying amounts ofassets and liabilities for financial reportingpurposes and the amounts used for taxpurposes. Deferred tax liabilities are generallyrecognised for all taxable temporary differencesand deferred tax assets are recognised to theextent that it is probable that taxable profitswill be available against which deductibletemporary differences can be utilised. Suchassets and liabilities are not recognised if thetemporary difference arises from goodwill orfrom the initial recognition (other than in abusiness combination) of other assets andliabilities in a transaction that affects neitherthe taxable profit nor the accounting profit.Deferred tax liabilities are recognised fortaxable temporary differences arising oninvestments in subsidiaries and associates,and interest in joint ventures, except wherethe Group is able to control the reversal ofthe temporary difference and it is probablethat the temporary difference will not reversein the foreseeable future.The carrying amount of deferred tax assetsis reviewed at each balance sheet date andreduced to the extent that it is no longerprobable that sufficient taxable profits willbe available to allow all or part of the assetto be recovered.Deferred tax is calculated at the tax rates thatare expected to apply in the period when theliability is settled or the asset realised.Deferred tax assets and liabilities are offsetagainst each other when they relate to incometaxes levied by the same tax jurisdiction andthe Group intends to settle its current taxassets and liabilities on a net basis.M Intangible assetsGoodwillGoodwill arising on consolidation representsthe excess of the cost of acquisition overthe fair value of the Group’s share of theidentifiable assets and liabilities of theacquired subsidiary, associate or joint ventureat the date of acquisition. Goodwill is testedannually for impairment and is carried at costless any accumulated impairment losses.Goodwill is allocated to cash-generating units(‘CGU’) for the purpose of impairmenttesting. A CGU is identified at the lowestaggregation of assets that generate largelyindependent cash inflows, and that which islooked at by management for monitoring andmanaging the business. This is generally thetotal business for a country. However, in someinstances, where there are distinct separatelymanaged business activities within a country,particularly if they fall within differentsecondary business segments, the CGUis identified at this lower level.
47 Compass Group PLC Annual Report 2007If the recoverable amount of the cashgeneratingunit is less than the carryingamount, an impairment loss is allocatedfirst to reduce the carrying amount of anygoodwill allocated to the unit and then tothe other assets of the unit pro-rata on thebasis of the carrying amount of each assetin the unit. Any impairment is immediatelyrecognised in the income statement and animpairment loss recognised for goodwill isnot subsequently reversed.On disposal, the attributable amount ofgoodwill is included in the determinationof the gain or loss on disposal.Goodwill arising on acquisitions before thedate of transition to IFRS has been retainedat the previous UK GAAP amounts subjectto being tested for impairment at that date.Goodwill written off to reserves under UKGAAP prior to 1998 has not been reinstatedand is not included in determining anysubsequent gain or loss on disposal.Other intangible assetsIntangible assets acquired separately arecapitalised at cost or, if acquired as part ofa business combination, are capitalised atfair value as at the date of the acquisition.Internally-generated intangible assets arenot capitalised. Amortisation is charged ona straight-line basis on assets over theirexpected useful lives.The following rates applied for the Group:Contract-related intangible assets: the lifeof the contract; andComputer software: 6% to 33% per annum.The typical life of contract-related intangiblesis between 2 and 20 years.N Property, plant and equipmentAll tangible fixed assets are reviewed forimpairment when there are indications thatthe carrying value may not be recoverable.Freehold land is not depreciated. All otherproperty, plant and equipment assets arecarried at cost less accumulated depreciationand any recognised impairment in value.Depreciation is provided on a straight-line basisover the anticipated useful lives of the assets.The following rates applied for the Group:Freehold buildings and long-termleasehold property: 2% per annum;Short-term leasehold property: the lifeof the lease;Plant and machinery: 8% to 33%per annum; andFixtures and fittings: 8% to 33% per annum.When assets are sold, the difference betweensales proceeds and the carrying amount of theassets is dealt with in the income statement.O Assets held for saleNon-current assets and disposal groups areclassified as held for sale if the carryingamount will be recovered through a saletransaction rather than through continuinguse. This condition is regarded as met onlywhen the sale is highly probable, managementis committed to a sale plan, the asset isavailable for immediate sale in its presentcondition and the sale is expected to becompleted within one year from the dateof classification. These assets are measuredat the lower of carrying value and fair valueless costs to sell.P InventoriesInventories are valued at the lower of costand net realisable value. Cost is calculatedusing either the weighted average price orthe first in, first out method as appropriateto the circumstances. Net realisable value isthe estimated selling price in the ordinarycourse of business, less applicable variableselling expenses.Q Financial instrumentsFinancial assets and financial liabilities arerecognised on the Group’s balance sheet whenthe Group becomes a party to the contractualprovisions of the instrument. Financial assetsand liabilities, including derivative financialinstruments, denominated in foreign currenciesare translated into Sterling at period-endexchange rates. Gains and losses are dealt withthrough the income statement, unless hedgeaccounting treatment is available.Cash and cash equivalentsCash and cash equivalents comprise cash atbank and in hand and short-term deposits withan original maturity of three months or less.BorrowingsBorrowings are recognised initially at theproceeds received, net of direct issue costs.Borrowings are subsequently stated atamortised cost; any difference between theproceeds (net of direct issue costs) and theredemption value is recognised in the incomestatement over the period of the borrowingsusing the effective interest method.Equity instrumentsEquity instruments issued by the Companyare recorded at the proceeds received, net ofdirect issue costs.Liabilities in respect of option agreementsOption agreements that allow minorityshareholders to require the Group to purchasethe minority interest are treated as derivativesover equity instruments. These are recordedin the balance sheet at fair value and thevaluation is re-evaluated at each period end.Fair value is based on the present value ofexpected cash outflows. The movement in fairvalue is recognised as income or expensewithin finance costs in the income statement.Derivative financial instruments andhedge accountingThe Group uses derivative financialinstruments such as foreign currency contractsand interest rate swaps to hedge its risksassociated with changes in foreign exchangerates and interest rates. Such derivativefinancial instruments are initially measuredat fair value on the contract date, and arere-measured to fair value at subsequentreporting dates.The use of financial derivatives is governedby the Group’s policies approved by the Boardof directors that provide written principleson the use of financial derivatives consistentwith the Group’s risk management strategy.The Group does not use derivative financialinstruments for speculative purposes.The fair value of forward foreign exchangecontracts is calculated by reference to currentforward exchange rates for contracts withsimilar maturity profiles. The fair value ofinterest rate swaps is determined by referenceto market values for similar instruments.For the purpose of hedge accounting, hedgesare classified as either fair value hedges whenthey hedge the exposure to changes in the fairvalue of a recognised asset or liability; or cashflow hedges where they hedge exposure tovariability in cash flows that is either attributableto a particular risk associated with a recognisedasset or liability or a forecasted transaction.In relation to fair value hedges (interestrate swaps) which meet the conditions forhedge accounting, any gain or loss fromre-measuring the hedging instrument at fairvalue is recognised immediately in the incomestatement. Any gain or loss on the hedgeditem attributable to the hedged risk is adjustedagainst the carrying amount of the hedgeditem and recognised in the income statement.Where the adjustment is to the carryingamount of a hedged interest-bearing financialinstrument, the adjustment is amortised tothe net profit and loss such that it is fullyamortised by maturity.When fair value hedge accounting isdiscontinued, any adjustment to the carryingamount of the hedged item for the designatedrisk for interest-bearing financial instrumentsis amortised to profit or loss, with amortisationcommencing no later than when the hedgeditem ceases to be adjusted.The Group’s policy is to convert a proportionof its floating rate debt to fixed rates, usingfloating to fixed interest rate swaps. The Groupdesignates these as cash flow hedges of interestrate risk.
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2568.11 kb - Compass Group

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