Marks and Spencer 2011 Annual Report Download - page 83

Strategy Performance & Marketplace Operating review Financial review Governance
Financial statements & other information
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Financial statements
1 Accounting policies continued
A. Cash flow hedges Changes in the fair value of derivative
financial instruments that are designated and effective as hedges
of future cash flows are recognised directly in comprehensive
income and any ineffective portion is recognised immediately
in the income statement. If the firm commitment or forecast
transaction that is the subject of a cash flow hedge results in
the recognition of a non-financial asset or liability, then, at the time
the asset or liability is recognised, the associated gains or losses
on the derivative that had previously been recognised in
comprehensive income are included in the initial measurement
of the asset or liability. For hedges that do not result in the
recognition of an asset or a liability, amounts deferred in
comprehensive income are recognised in the income statement
in the same period in which the hedged items affect net
profit or loss.
B. Fair value hedges For an effective hedge of an exposure to
changes in the fair value, the hedged item is adjusted for changes
in fair value attributable to the risk being hedged with the
corresponding entry in the income statement. Gains and losses
from remeasuring the derivative, or for non-derivatives the foreign
currency component of its carrying amount, are recognised in the
income statement.
C. Net investment hedges Changes in the fair value of derivative
or non-derivative financial instruments that are designated and
effective as hedges of the net investments are recognised directly
in comprehensive income and any ineffective portion is
recognised immediately in the income statement.
Changes in the fair value of derivative financial instruments that do
not qualify for hedge accounting are recognised in the income
statement as they arise.
D. Discontinuance of hedge accounting Hedge accounting is
discontinued when the hedging instrument expires or is sold,
terminated or exercised, or no longer qualifies for hedge
accounting. At that time, any cumulative gain or loss on the
hedging instrument recognised in comprehensive income is
retained in equity until the forecast transaction occurs. If a hedged
transaction is no longer expected to occur, the net cumulative
gain or loss recognised in equity is transferred to net profit or loss
for the period.
The Group does not use derivatives to hedge income statement
translation exposures.
Embedded derivatives
Derivatives embedded in other financial instruments or other host
contracts are treated as separate derivatives when their risks and
characteristics are not closely related to those of the host
contracts and the host contracts are not carried at fair value, with
unrealised gains or losses reported in the income statement.
Embedded derivatives are carried in the statement of financial
position at fair value from the inception of the host contract.
Changes in fair value are recognised within the income statement
during the period in which they arise.
Critical accounting estimates and judgements
The preparation of consolidated financial statements 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:
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.
Where there is a non-controlling interest, goodwill is tested for the
business as a whole. This involves a notional increase to goodwill,
adjusted to reflect the non-controlling shareholders’ interest.
Actual outcomes could vary from those calculated. See note 14
for further details.
B. Impairment of property, plant and equipment and computer
software Property, plant and equipment and computer
software 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. See notes 14 and 15 for further details.
C. Depreciation of property, plant and equipment and
amortisation of computer software Depreciation and amortisation
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 residual values and estimated lives requires the exercise of
management judgement. See notes 14 and 15 for further details.
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 of assumptions and note 12 for
critical judgements associated with the Marks & Spencer UK
Pension Scheme interest in the Marks and Spencer Scottish
Limited Partnership.
E. Refunds and loyalty scheme accruals Accruals 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. These accruals are reviewed regularly and updated to
reflect management’s latest best estimates, however, actual
returns and redemptions could vary from these estimates.
Non-GAAP performance measures
The directors believe that the underlying profit and earnings per
share measures provide additional useful information for
shareholders on the underlying performance of the business.
These measures are consistent with how underlying business
performance is measured internally. The underlying 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:
–profits and losses on the disposal of properties and investment
property impairment charges;
–costs relating to strategy changes that are not considered
normal operating costs of the underlying business;
–one-off pension credits arising on changes of the defined
benefit pension schemes; and
–non-cash fair value movements in financial instruments.