Annual report 2010 - Imperial Tobacco Group

Accounting Policies continuedStrategy Performance Governance FinancialsProperty, Plant and EquipmentProperty, plant and equipment are initially recognised in the balance sheet at historical cost unless they are acquired aspart of a business combination, in which case they are initially recognised at fair value. They are shown in the balancesheet at historical cost or fair value (depending on how they are acquired), less accumulated depreciation and impairment.Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs areincluded in the assets’ carrying amounts or recognised as a separate asset as appropriate only when it is probable thatfuture economic benefits associated with them will flow to the Group and the cost of the item can be measured reliably.All other repairs and maintenance costs are charged to the income statement as incurred.Land is not depreciated. Depreciation is provided on other property, plant and equipment so as to write off the initial costof each asset to its residual value over its estimated useful life as follows:Buildings up to 50 years straight linePlant and equipment 2 – 20 years straight line/reducing balanceFixtures and motor vehicles 2 – 14 yearsstraight lineThe assets’ residual values and useful lives are reviewed and, if appropriate, adjusted at each balance sheet date.Gains and losses on disposals are determined by comparing proceeds with carrying amounts. These are included in theincome statement.LeasesAssets acquired under finance leases are included within property, plant and equipment. They are initially valued at the lowerof fair value and the present value of the minimum lease payments. The assets are depreciated over the shorter of the leaseterm and the useful life of the asset. The associated lease liabilities are recognised in the balance sheet and the interestelement of the leasing payments is charged to the income statement.Rental payments under operating leases are charged to the income statement on a straight line basis over the lease term.Impairment of AssetsAssets that are not subject to amortisation or depreciation are tested at least annually for impairment. Assets that are subjectto amortisation or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by whichthe carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of the fair value lesscosts to sell and the value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for whichthere are separately identifiable cash flows (cash-generating units).Financial InstrumentsFinancial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of therelevant instrument. Financial assets are de-recognised when the rights to receive benefits have expired or been transferred,and the Group has transferred substantially all risks and rewards of ownership. Financial liabilities are de-recognised whenthe obligation is extinguished.Non-derivative financial assets are classified as loans and receivables (including cash and cash equivalents). Receivables areinitially recognised at fair value and are subsequently stated at amortised cost using the effective interest method, subject toreduction for allowances for estimated irrecoverable amounts. A provision for impairment of receivables is established whenthere is objective evidence that the Group will not be able to collect all amounts due according to the original terms of thosereceivables. The amount of the provision is the difference between the asset’s carrying amount and the present value ofestimated future cash flows, and is recognised in the income statement. For interest-bearing assets, the carrying valueincludes accrued interest receivable.Cash and cash equivalents include cash in hand and deposits held on call, together with other short-term highlyliquid investments.Non-derivative financial liabilities are initially recognised at fair value and are subsequently stated at amortised cost usingthe effective interest method. For borrowings, the carrying value includes accrued interest payable, as well as unamortisedtransaction costs.The Group transacts derivative financial instruments to manage the underlying exposure to foreign exchange and interestrate risks. The Group does not transact derivative financial instruments for trading purposes. Derivative financial assetsand liabilities are included in the balance sheet at fair value, which includes accrued interest receivable and payable whererelevant. However, as the Group has decided (as permitted under IAS 39) not to apply cash flow or fair value hedgeaccounting for its derivative financial instruments, changes in fair values are recognised in the income statement in the periodin which they arise unless the derivative qualifies and has been designated as a net investment hedging instrument in whichcase the changes in fair values, attributable to foreign exchange, are recognised in other comprehensive income.Collateral transferred under the terms and conditions of credit support annex documents under International Swaps andDerivatives Association (ISDA) agreements in respect of certain derivatives are net settled and are therefore netted off thecarrying value of those derivatives on the balance sheet.106