Holiday Inn 2015 Annual Report Download - page 100

Accounting policies continued
Disposal of non-current assets
The Group recognises sales proceeds and any related gain or loss on
disposal on completion of the sales process. In determining whether
the gain or loss should be recorded, the Group considers whether it:
• has a continuing managerial involvement to the degree associated
with asset ownership;
• has transferred the significant risks and rewards associated
with asset ownership; and
• can reliably measure and will actually receive the proceeds.
Fair value measurement
The Group measures available-for-sale equity securities and
derivatives at fair value on a recurring basis and other assets when
impaired by reference to fair value less costs of disposal. Additionally,
the fair value of other financial assets and liabilities require disclosure.
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants. Fair value is measured by reference to the principal
market for the asset or liability assuming that market participants
act in their economic best interests.
The fair value of a non-financial asset assumes the asset is used
in its highest and best use, either through continuing ownership
or by selling it.
The Group uses valuation techniques that maximise the use of relevant
observable inputs using the following valuation hierarchy:
Level 1: quoted (unadjusted) prices in active markets for identical
assets or liabilities.
Level 2: other techniques for which all inputs which have a
significant effect on the recorded fair value are observable,
either directly or indirectly.
Level 3: techniques which use inputs which have a significant effect
on the recorded fair value that are not based on observable
market data.
Further disclosures on the particular valuation techniques used by
theGroup are provided in note 23.
For impairment testing purposes and where significant assets (such as
property) are valued by reference to fair value less costs of disposal, an
external valuation will normally be obtained using professional valuers
who have appropriate market knowledge, reputation and independence.
Exceptional items
The Group discloses certain financial information both including and
excluding exceptional items. The presentation of information excluding
exceptional items allows a better understanding of the underlying
trading performance of the Group and provides consistency with the
Group’s internal management reporting. Exceptional items are
identified by virtue of either their size or nature so as to facilitate
comparison with prior periods and to assess underlying trends in
financial performance. Exceptional items can include, but are not
restricted to, gains and losses on the disposal of assets, impairment
charges and reversals and restructuring costs.
Treasury shares
Own shares repurchased by the Company and not cancelled (treasury
shares) are recognised at cost and deducted from retained earnings.
If reissued, any excess of consideration over purchase price is
recognised in the share premium reserve.
Critical accounting policies and the use of judgements,
estimates and assumptions
In determining and applying the Group’s accounting policies,
management are required to make judgements, estimates and
assumptions. An accounting policy is considered to be critical if its
selection or application could materially affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities
at the date of the Financial Statements and the reported amounts of
revenues and expenses during the reporting period. Management
consider accounting for the System Fund to be a critical judgement
and that critical estimates and assumptions are used in impairment
testing and for measuring the value of intangible assets acquired in
business combinations, the loyalty programme liability and litigation
provisions, as discussed in further detail below. Estimates and
assumptions are evaluated by management using historical
experience and other factors believed to be reasonable based on
current circumstances. Actual results could differ under different
policies, judgements, estimates and assumptions or due to
unforeseen circumstances.
System Fund – in addition to management or franchise fees, hotels
within the IHG System (other than for Kimpton and InterContinental
hotels) pay cash assessments and contributions which are collected
by IHG for specific use within the System Fund (the Fund). The Fund
also receives proceeds from the sale of IHG Rewards Club points. IHG
exerts significant influence over the operation of the Fund, however
the Fund is managed for the benefit of hotels in the System with the
objective of driving revenues for the hotels. The Fund is used to pay for
marketing, the IHG Rewards Club loyalty programme and the Guest
Reservation System. The Fund is planned to operate at breakeven
with any short-term timing surplus or deficit carried in the Group
statement of financial position within working capital.
As all Fund income is designated for specific purposes and does not
result in a profit or loss for the Group, the revenue recognition criteria
as outlined in the accounting policy above are not met and therefore
the income and expenses of the Fund are not included in the Group
income statement.
The assets and liabilities relating to the Fund are included in the
appropriate headings in the Group statement of financial position as
the related legal, but not beneficial, rights and obligations rest with
the Group. These assets and liabilities include the IHG Rewards Club
liability, short-term timing surpluses and deficits and any receivables
and payables related to the Fund.
The cash flows relating to the Fund are reported within ‘cash flow
from operations’ in the Group statement of cash flows due to the
close interrelationship between the Fund and the trading operations
of the Group.
Further information on the Fund is included in note 32.
Loyalty programme – the hotel loyalty programme, IHG Rewards Club,
enables members to earn points, funded through hotel assessments,
during each qualifying stay at an IHG branded hotel and redeem points
at a later date for free accommodation or other benefits. The future
redemption liability is calculated by multiplying the number of points
expected to be redeemed before they expire by the redemption cost per
point. On an annual basis the Group engages an external actuary who
uses statistical formulae to assist in the estimate of the number
of points that will never be redeemed (‘breakage’). Following the
introduction of a points expiration policy, breakage has become more
judgemental due to there being limited historical data on the impact
of such a change. Actuarial gains and losses on the future redemption
liability are borne by the System Fund and any resulting changes in the
liability would correspondingly adjust the amount of short-term timing
surpluses and deficits held in the Group statement of financial position.
98 IHG Annual Report and Form 20-F 2015