EasyJet 2008 Annual Report Download - page 50

easyJet plc
Annual report and accounts 2008
Notes to the
financial statements
continued
Notes to the
financial statements
48
1 Accounting policies
Statement of compliance
easyJet’s (the Group’s or the Company’s) financial statements are
prepared in accordance with International Financial Reporting Standards
(IFRS) as adopted by the European Union, taking into account International
Financial Reporting Interpretations Committee (IFRIC) interpretations
and those parts of the Companies Acts 1985 and 2006 applicable to
companies reporting under IFRS.
IFRS as adopted by the EU differs in certain respects from IFRS as issued
by the International Accounting Standards Board (IASB). However the
consolidated financial statements for the years presented would be no
different had the Group applied IFRS as issued by the IASB. References to
IFRS hereafter should be construed as references to IFRS as adopted
by the EU.
Basis of preparation
The financial statements are prepared based on the historical cost
convention except for certain financial assets and liabilities including
derivative financial instruments that are measured at fair value.
The accounting policies set out below have been applied consistently
to all periods presented in these financial statements.
Significant judgements, estimates and
critical accounting policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Although these
estimates are based on management’s best knowledge of the amount,
events or actions may mean that actual results ultimately differ from
those estimates, and these differences may be material. The estimates
and the underlying assumptions are reviewed regularly.
The following four accounting policies are considered critical accounting
policies as they require a significant amount of management judgement
and the results are material to easyJet’s financial statements.
Goodwill impairment testing (note 7)
Goodwill is tested for impairment annually. easyJet assumes that it has
only one cash-generating unit being its complete route network. In making
this assessment, easyJet has considered the manner in which the business
is managed including the centralised nature of the Group’s operations
and the ability to open or close routes and redeploy aircraft and crew
across the whole route network. The value in use of the cash-generating
unit is determined by discounting future cash flows to their present value.
When applying this method, the Company relies on a number of estimates
including strategic plans, pre tax weighted average cost of capital, fuel
prices, exchange rates and the long-term growth rate assumption
applicable to the sector.
Assets held for sale (note 11)
When an aircraft is held for sale, the carrying value of the asset is
assessed by comparison with its fair value less costs to sell the asset. The
underlying market for aircraft is conducted in US dollars. In the current
uncertain economic environment, where the market for used aircraft is
thin, there are few transactions against which a market comparison of
fair value can be made. In these circumstances easyJet uses data available
from third-party agencies and indications of interest from prospective
purchasers to estimate the fair value at the balance sheet date. The time
it will take to sell the aircraft held for sale is also uncertain, and asset
values in sterling could rise or fall before a sale is completed.
Aircraft maintenance provisions (note 17)
easyJet incurs liabilities for maintenance costs in respect of aircraft leased
under operating leases during the term of the lease. These arise from
legal and constructive contractual obligations relating to the condition
of the aircraft when it is returned to the lessor. To discharge these
obligations, easyJet will also normally need to carry out one heavy
maintenance check on each of the engines and the airframe during
the lease term.
A charge is made in the income statement based on hours or cycles
flown to provide for the cost of these obligations. Estimates required
include the likely utilisation of the aircraft, the expected cost of the heavy
maintenance check at the time it is expected to occur, the condition
of the aircraft and the lifespan of life-limited parts.
The bases of all estimates are reviewed once each year, and also when
information becomes available that is capable of causing a material
change to an estimate, such as renegotiation of end of lease return
conditions, increased or decreased utilisation, or unanticipated changes
in the cost of heavy maintenance services.
Corporation tax (note 5)
In drawing up the financial statements, estimates are made of current
and deferred corporation tax assets and liabilities for each jurisdiction in
which easyJet operates. These estimates are affected by transactions and
calculations where the ultimate tax determination was uncertain at the
time the financial statements were finalised. The issues involved are often
complex and may take an extended period to resolve.