Lenovo 2012 Annual Report Download - page 124

2011/12 Annual Report Lenovo Group Limited
122
NOTES TO THE FINANCIAL STATEMENTS
2 Significant accounting policies (continued)
(v) Non-base manufacturing costs
Non-base manufacturing costs are costs that are periodic in nature as opposed to product specific. They are typically
incurred after the physical completion of the product and include items such as outbound freight for in-country finished
goods shipments, warranty costs, engineering charges, storage and warehousing costs, and contribute to bringing
inventories to their present location and condition. Non-base manufacturing costs enter into the calculation of gross
margin but are not inventoriable costs.
(w) Employee benefits
(i) Pension obligations
The Group operates various pension schemes. The schemes are generally funded through payments to insurance
companies or trustee-administered funds, determined by periodic actuarial calculations. The Group has both
defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which the
Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to
pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating
to employee service in the current and prior periods. A defined benefit plan is a pension plan which defines an
amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors
such as age, years of service and compensation.
The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the
defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments
for unrecognized past service costs. Significant portion of the defined benefit obligation is calculated annually by
independent actuaries using the projected unit credit method. The present value of the defined benefit obligation
is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate
bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity
approximating to the terms of the related pension liability. In countries where there is no deep market in such
bonds, the market rates on government bonds are used.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are
recognized as other comprehensive income/expense in the year they arise.
Past service costs are recognized immediately in the income statement, unless the changes to the pension plan
are conditional on the employees remaining in service for a specified period of time (the vesting period). In this
case, the past service costs are amortized on a straight-line basis over the vesting period.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance
plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the
contributions have been paid. The contributions are recognized as employee benefit expense when they are due
and are reduced by employer’s portion of voluntary contributions forfeited by those employees who leave the
scheme prior to vesting fully. Prepaid contributions are recognized as an asset to the extent that a cash refund or
a reduction in the future payments is available.
The Group’s contributions to local municipal government retirement schemes in connection with retirement benefit
schemesintheMainlandofChina(“ChineseMainland”)areexpensedasincurred.Thelocalmunicipalgovernments
in the Chinese Mainland assume the retirement benefit obligations of the qualified employees.
(ii) Post-employment medical benefits
The Group operates a number of post-employment medical benefit schemes, the largest being in the United
States. The entitlement to these benefits is usually conditional on the employee remaining in service up to
retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued
over the period of employment using an accounting methodology similar to that for defined benefit pension
plans. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are
recognized as other comprehensive income/expense in the period in which they arise. The obligations of these
schemes in the United States are valued annually by independent qualified actuaries.