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2008/09 Annual Report Lenovo Group Limited
100
NOTES TO THE FINANCIAL STATEMENTS (Continued)
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.