2006 20-F - Sappi

SAPPI
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS (Continued)
2. ACCOUNTING POLICIES (Continued)
for the year ended September 2006
In assessing value-in-use, the expected future cash flows from the asset are discounted to their present
value using a pre-tax discount rate that reflects current market assessments of the time value of money and
the risks specific to the asset. For an asset whose cash flows are largely dependent on those of other assets
the recoverable amount is determined for the cash-generating unit to which the asset belongs.
A previously recognised impairment loss will be reversed if the recoverable amount increases as a
result of a change in the estimates used previously to determine the recoverable amount, but not to an
amount higher than the carrying amount that would have been determined, net of depreciation or
amortisation, had no impairment loss been recognised in prior periods.
2.2.9 Inventories
Inventories are assets held-for-sale in the ordinary course of business, in the process of production for
such sale or in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
Inventories are stated at the lower of cost or net realisable value. Cost includes all costs of purchase,
costs of conversion and other costs incurred in bringing the inventories to their preset location and
condition. Net realisable value is the estimated selling price in the ordinary course of business, less the
estimated cost of completion, distribution and selling.
Cost is determined on the following basis:-
• First in first out (FIFO):- finished goods
• Weighted average:- raw materials, work in progress and consumable stores
• The specific identification basis is used to arrive at the cost of items that are not interchangeable.
The cost of raw materials and consumable stores is the delivered landed cost, while the cost of work in
progress and finished goods includes both direct costs and production overheads.
2.2.10 Leases
(i) The group as lessee
Leases in respect of which the group bears substantially all the risks and rewards incidental to
ownership are classified as finance leases. Finance leases are capitalised at the inception of the lease at the
lower of the fair value of the lease property or the present value of the minimum lease payments. Each
lease payment is allocated between the liability and finance charges to achieve an effective rate of interest
on the balance outstanding. The corresponding rental obligations, net of finance charges, are included in
other long-term payables. The interest element of the finance cost is charged to profit or loss over the lease
period.
Capitalized leased assets are depreciated on a straight-line basis over the shorter of the lease period
and the expected useful life of the asset.
Leases in respect of which a significant portion of the risks and rewards of ownership is retained by
the lessor are classified as operating leases. These leases are mainly for the use of premises and certain
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