Marks and Spencer 2006 Annual Report Download - page 59

57Marks and Spencer Group plc
1 ACCOUNTING POLICIES continued
IFRS requires the Group to make estimates and assumptions
that affect the application of policies and reported amounts.
Estimates and judgements 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. Actual results may differ from these
estimates. The estimates and assumptions which have a
significant risk of causing a material adjustment to the carrying
amount of assets and liabilities are discussed below:
A Impairment of goodwill
The Group is required to test, at least annually, whether
goodwill has suffered any impairment. The recoverable
amount is determined based on value in use calculations.
The use of this method requires the estimation of future cash
flows and the choice of a suitable discount rate in order to
calculate the present value of these cash flows. Actual
outcomes could vary.
B Impairment of property, plant and equipment
Property, plant and equipment are reviewed for impairment
if events or changes in circumstances indicate that the
carrying amount may not be recoverable. When a review for
impairment is conducted, the recoverable amount is
determined based on value in use calculations prepared on
the basis of management’s assumptions and estimates.
C Depreciation of property, plant and equipment
Depreciation is provided so as to write down the assets to
their residual values over their estimated useful lives as set
out above. The selection of these estimated lives requires
the exercise of management judgement.
D Post retirement benefits
The determination of the pension cost and defined benefit
obligation of the Group’s defined benefit pension schemes
depends on the selection of certain assumptions which
include the discount rate, inflation rate, salary growth,
mortality and expected return on scheme assets. Differences
arising from actual experiences or future changes in
assumptions will be reflected in subsequent periods. See
note 11 for further details.
E Refunds and loyalty provisions
Provisions for sales returns and loyalty scheme redemption
are estimated on the basis of historical returns and
redemptions and these are recorded so as to allocate them
to the same period as the original revenue is recorded.
Actual returns and redemptions could vary from these
estimates.
Non-GAAP performance measures
The Directors believe that the ‘adjusted’ profit and earnings
per share measures provide additional useful information for
shareholders on underlying performance of the business. These
measures are consistent with how business performance is
measured internally and with how the Group previously reported
under UK GAAP. The adjusted profit before tax measure is not a
recognised profit measure under IFRS and may not be directly
comparable with ‘adjusted’ profit measures used by other
companies. The adjustments made to reported profit before tax
are to exclude the following:
• Exceptional income and charges. These are largely one-off
in nature and therefore create volatility in reported earnings;
and
• Profits and losses on the disposal of properties. These were
previously reported below operating profit under UK GAAP
and while they do represent a profit or loss to the business,
they can vary significantly from year to year again creating
volatility in reported earnings.
Policies relating to UK GAAP comparatives
Derivative financial instruments
The Group uses derivative financial instruments to manage its
exposures to fluctuations in foreign currency exchange rates
and interest rates. Derivative instruments utilised by the Group
include interest rate and currency swaps, and forward currency
contracts. Amounts payable or receivable in respect of interest
rate swaps are recognised as adjustments to net interest
income over the period of the contract. Forward currency
contracts are entered into as hedges with the instrument’s
impact on profit deferred until the underlying transaction is
recognised in the profit and loss account.
Policies relating to discontinued operations
in comparatives
A Loans and advances to customers
Loans and advances are classified as impaired when
an instalment is in excess of 30 days overdue. Specific
provisions are made against all advances identified as
impaired at the balance sheet date to the extent that, in
the opinion of the directors, recovery is doubtful. Specific
provisions against such exposures are calculated using a
bad debt provision model, which uses the last two years’
credit history to produce estimates of the likely level of asset
impairment. General provisions relate to latent bad and
doubtful debts which are present in any lending portfolio but
have not been specifically identified. General provisions are
calculated using the same bad debt provision model and
an evaluation of current economic and political factors.
Loans and advances are written off when there is no realistic
prospect of recovery, based on a predetermined set of
criteria. Account balances written off include those where no
payment has been received for a period of 12 months since
the account was identified as doubtful, and in other
situations such as bankruptcy, insolvency or fraud.
B Long-term assurance business
The value of the long-term assurance business consists
of the present value of surpluses expected to emerge in
the future from business currently in force, and this value
is included in prepayments and accrued income. In
determining their value, these surpluses are discounted at
a risk-adjusted, post-tax rate. Changes in the value are
included in the income statement grossed up at the
standard rate of corporation tax applicable to insurance
companies.