Lenovo 2008 Annual Report Download - page 99

3 Financial risk management (continued)
(d) Fair value estimation
The fair value of financial instruments traded in active markets (such as trading and available-for-sale securities) is based
on quoted market prices at the balance sheet date. The quoted market price used for financial assets held by the Group
is the current bid price.
The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is
determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based
on market conditions existing at each balance sheet date. Quoted market prices or dealer quotes for similar instruments
are used for long-term debt. Other techniques, such as estimated discounted cash flows, are used to determine fair
value for the remaining financial instruments. The fair value of interest rate swaps is calculated as the present value of
the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using quoted forward
exchange rates at the balance sheet date.
The carrying value less impairment provision of trade receivables and payables is a reasonable approximation of their
fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual
cash flows at the current market interest rate that is available to the Group for similar financial instruments.
4 Critical accounting estimates and judgments
The preparation of financial statements often requires the use of judgment to select specific accounting methods and policies
from several acceptable alternatives. Estimates and judgments used in preparing the financial statements are continually
evaluated and are based on historical experience and other factors, including expectations of future events that are believed
to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, seldom equal the related actual results. The following is the more significant assumptions
and estimates, as well as the accounting policies and methods used in the preparation of the financial statements:
(a) Impairment of non-financial assets
The Group tests at least annually whether goodwill and other assets that have indefinite useful lives have suffered any
impairment.
Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
of the asset exceeds its recoverable amount. The recoverable amount of an asset or a cash-generating unit has been
determined based on value-in-use calculations. These calculations require the use of estimates.
The value-in-use calculations primarily use cash flow projections based on five-year financial budgets approved by
management and estimated terminal values at the end of the five-year period. There are a number of assumptions and
estimates involved for the preparation of cash flow projections for the period covered by the approved budget and the
estimated terminal value. Key assumptions include the expected growth in revenues and operating margin, effective
tax rate, growth rates and selection of discount rates, to reflect the risks involved and the earnings multiple that can be
realized for the estimated terminal value.
Management prepared the financial budgets reflecting actual and prior year performance and market development
expectations. Judgment is required to determine key assumptions adopted in the cash flow projections and changes to key
assumptions can significantly affect these cash flow projections and therefore the results of the impairment reviews.
(b) Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide
provision for income taxes. There are certain transactions and calculations for which the ultimate tax determination is
uncertain during the ordinary course of business. The tax liabilities recognized are based on management’s assessment
of the likely outcome.
The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due.
Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences
will impact the income tax and deferred tax provisions in the period in which such determination is made.
Deferred taxation is provided in full, using the liability method, on temporary differences arising between the tax bases
of assets and liabilities and their carrying values in the financial statements.
Lenovo Group Limited • Annual Report 2007/08 97