Lenovo 2012 Annual Report Download - page 134

2011/12 Annual Report Lenovo Group Limited
132
NOTES TO THE FINANCIAL STATEMENTS
4 Critical accounting estimates and judgments (continued)
(b) Income taxes (continued)
Deferred income tax assets are mainly recognized for temporary differences such as warranty provision, accrued
sales rebates, bonus accruals, and other accrued expenses, and unused tax losses carried forward to the extent it is
probable that future taxable profits will be available against which deductible temporary differences and the unused
tax losses can be utilized, based on all available evidence. Recognition primarily involves judgment regarding the
future financial performance of the particular legal entity or tax group in which the deferred income tax asset has been
recognized. A variety of other factors are also evaluated in considering whether there is convincing evidence that it is
probable that some portion or all of the deferred income tax assets will ultimately be realized, such as the existence of
taxable temporary differences, group relief, tax planning strategies and the periods in which estimated tax losses can
be utilized. The carrying amount of deferred income tax assets and related financial models and budgets are reviewed
at each balance sheet date and to the extent that there is insufficient convincing evidence that sufficient taxable profits
will be available within the utilization periods to allow utilization of the carry forward tax losses, the asset balance will be
reduced and the difference charged to the income statement.
Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences
will impact the income tax provisions and deferred income tax assets and liabilities in the period in which such
determination is made.
(c) Warranty provision
Warranty provision is based on the estimated cost of product warranties when revenue is recognized. Factors that affect
the Group’s warranty liability include the number of sold units currently under warranty, historical and anticipated rates
of warranty claims on those units, and cost per claim to satisfy our warranty obligation. The estimation basis is reviewed
on an on-going basis and revised where appropriate. Certain of these costs are reimbursable from the suppliers in
accordance with the terms of relevant arrangements with the suppliers. These amounts are recognized as a separate
asset, to the extent of the amount of the provision made, when it is virtually certain that reimbursement will be received
if the Group settles the obligation.
(d) Revenue recognition
Application of various accounting principles related to the measurement and recognition of revenue requires the Group
to make judgments and estimates. Specifically, complex arrangements with non-standard terms and conditions may
require significant contract interpretation to determine the appropriate accounting, including whether the deliverables
specified in a multiple element arrangement should be treated as separate units of accounting. Other significant
judgments include determining whether the Group or a reseller is acting as the principal in a transaction and whether
separate contracts are considered part of one arrangement.
The Group sells products to channels. Sales through channels are primarily made under agreements allowing for volume
discounts, price protection and rebates, and marketing development funds. The Group assesses the channel inventory
level based on a systematic and consistent approach with reference to historical data and, where appropriate, defers
the revenue and cost in relation to sales in excess of the reasonable channel inventory level. Revenue recognition is also
impacted by the Group’s ability to estimate volume discounts, price protection and rebates, and marketing development
funds. The Group considers various factors, including a review of specific transactions, historical experience and market
and economic conditions when calculating these provisions and allowances.
Revenue from sales of goods is recognized when both ownership and risk of loss are effectively transferred to customer.
Risk of loss associated with goods-in-transit is generally retained by the Group. The Group books revenue upon delivery
of products, and defers the amounts of revenue based on the estimated days-in-transit at the end of each month. The
days-in-transit is estimated based on the Group’s weighted average estimated time of shipment arrival. Cost of in-transit
products is deferred in deposits, prepayment and other receivables in the balance sheet until revenue is recognized. The
estimates of days-in-transit are reviewed semi-annually.