Carphone Warehouse 2016 Annual Report Download - page 100

Notes to the Group financial statements
98
r) Provisions
Provisions are recognised when a legal or constructive
obligation exists as a result of past events and it is probable
that an outflow of resources will be required to settle the
obligation and a reliable estimate can be made of the amount
of the obligation. Provisions are discounted where the time
value of money is considered to be material.
All provisions are assessed by reference to the best available
information at the balance sheet date.
s) Critical accounting judgements and key sources of
estimation uncertainty
Critical accounting judgements and estimates used in the
preparation of the financial statements are continually reviewed
and revised as necessary.
Whilst every effort is made to ensure that such judgements and
estimates are reasonable, by their nature they are uncertain,
and as such changes may have a material impact. The
principal items subject to such judgements and estimates are
as follows:
Revenue recognition
For certain transactions with MNOs, commission receivable on
mobile phone sales depends on customer behaviour after the
point of sale. The method of measuring the fair value of the
revenue and associated receivables at the date of sale is to
estimate all future cash flows that will be received from the
network and then discount these based on their timing of
receipt. The associated receivables are subsequently
measured at amortised cost with remeasurements due to
changes in customer behaviour recognised in the income
statement. Assumptions are therefore required, particularly in
relation to levels of customer default within the contract period,
expected levels of customer spend, and customer behaviour
beyond the initial contract period. Further details of estimates
used to value commission receivable, carrying amounts at the
balance sheet date, effects on the current year income
statement of changes in estimates and sensitivity analysis of
the carrying value can be found in note 26.
Income received from suppliers such as volume rebates
The Group has provided enhanced disclosure on supplier
funding following guidance issued by the Financial Reporting
Council in December 2014. This disclosure is aimed at assisting
the users of the financial statements in understanding the
judgements and estimates made in the recognition of supplier
funding in the Group’s financial statements.
The Group’s agreements with suppliers contain a price for units
purchased as well as other rebates and discounts which are
summarised below:
Volume Rebates: This income is linked to purchases made from
suppliers and is recognised as a reduction to cost of goods sold
as inventory is sold. Unearned rebates that relate to inventory
not sold are recognised within the value of inventory at the
period end. Where an agreement spans period ends, judgement
is required regarding amounts to be recognised. Forecasts are
used as well as historical data in the estimation of the level of
income recognised. Amounts are only recognised where the
Group has a clear entitlement to the receipt of the rebate and a
reliable estimate can be made.
Discounts: This income is received from suppliers on a price per
unit basis. The level of estimation is minimal as amounts are
recognised as a reduction to cost of goods sold based on the
agreement terms and only once the item is sold.
Marketing income: This income is received in relation to
marketing activities that are performed on behalf of suppliers.
Judgement is required to ensure that income is only recognised
when all performance obligations within the contract have been
fulfilled and the income is expected to be collected.
Supplier funding amounts that have been recognised and
not invoiced are shown within accrued income on the
balance sheet.
Inventory valuation
Inventories are valued at the lower of cost and net realisable
value. Cost comprises direct purchase cost and those
overheads that have been incurred in bringing the inventories
to their present location and condition. Net realisable value
represents the estimated selling price less all estimated and
directly attributable costs of completion and costs to be
incurred in marketing, selling and distribution. Net realisable
value includes, where necessary, provisions for slow moving
and damaged inventory. The provision represents the
difference between the cost of stock and its estimated net
realisable value, based on ageing and other factors.
Calculation of these provisions requires judgements to be
made which include forecast consumer demand, the
promotional, competitive and economic environment and
inventory loss trends.
Recoverable amount of non-current assets
All non-current assets, including goodwill and other intangible
assets, are reviewed for potential impairment using estimates
of the future economic benefits attributable to them. Any
estimates of future economic benefits made in relation to non-
current assets may differ from the benefits that ultimately arise
and materially affect the recoverable value of the asset. The
methodology and key assumptions used in assessing the
carrying value of goodwill is set out in note 9 and in respect of
intangible assets and property, plant & equipment in note 1k)
and 1l).
Trade and other receivables
Provisions for irrecoverable receivables are based on extensive
historical evidence and the best available information in
relation to specific issues, but are unavoidably dependent
on future events.
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