Vodafone 2007 Annual Report Download - page 34

32 Vodafone Group Plc Annual Report 2007
Critical Accounting Estimates
continued
Estimation of useful life
The charge in respect of periodic depreciation is derived after determining an
estimate of an asset’s expected useful life and the expected residual value at
the end of its life. Increasing an asset’s expected life or its residual value would
result in a reduced depreciation charge in the Group’s income statement.
The useful lives of Group assets are determined by management at the time
the asset is acquired and reviewed annually for appropriateness. The lives
are based on historical experience with similar assets as well as anticipation
of future events, which may impact their life, such as changes in
technology. Furthermore, network infrastructure is only depreciated over a
period that extends beyond the expiry of the associated licence under
which the operator provides telecommunications services, if there is a
reasonable expectation of renewal or an alternative future use for the asset.
Historically, changes in useful lives have not resulted in material changes to
the Group’s depreciation charge.
Cost capitalisation
Cost includes the total purchase price and labour costs associated with the
Group’s own employees to the extent that they are directly attributable to
construction costs, or where they comprise a proportion of a department
directly engaged in the purchase or installation of a fixed asset.
Management judgement is involved in determining the appropriate internal
costs to capitalise and the amounts involved. For the year ended 31 March
2007, internal costs capitalised represented approximately 6% (2006: 7%) of
expenditure on property, plant and equipment and computer software and
approximately 1% (2006: 1%) of total operating expenses.
Taxation
The Group’s tax charge on ordinary activities is the sum of the total current
and deferred tax charges. The calculation of the Group’s total tax charge
necessarily involves a degree of estimation and judgement in respect of
certain items whose tax treatment cannot be finally determined until
resolution has been reached with the relevant tax authority or, as
appropriate, through a formal legal process. The final resolution of some of
these items may give rise to material profit and loss and/or cash flow
variances. See “Performance – Financial Position and Resources”.
The growth in complexity of the Group’s structure following its rapid
expansion geographically has made the degree of estimation and
judgement more challenging. The resolution of issues is not always within
the control of the Group and it is often dependent on the efficiency of the
legal processes in the relevant taxing jurisdictions in which the Group
operates. Issues can, and often do, take many years to resolve. Payments in
respect of tax liabilities for an accounting period result from payments on
account and on the final resolution of open items. As a result, there can be
substantial differences between the tax charge in the income statement
and tax payments.
Significant items on which the Group has exercised accounting judgement
include a provision in respect of an enquiry from UK HM Revenue and
Customs with regard to the Controlled Foreign Companies tax legislation
(see note 6 to the Consolidated Financial Statements), legal proceedings to
recover VAT in relation to 3G licence fees (see page 53) and potential tax
losses in respect of a write down in the value of investments in Germany
(see note 6 to the Consolidated Financial Statements). The amounts
recognised in the Consolidated Financial Statements in respect of each
matter are derived from the Group’s best estimation and judgement, as
described above. However, the inherent uncertainty regarding the outcome
of these items means eventual resolution could differ from the accounting
estimates and therefore impact the Group’s results and cash flows.
Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it is more
likely than not that sufficient and suitable taxable profits will be available in
the future, against which the reversal of temporary differences can be
deducted. Recognition, therefore, involves judgement regarding the future
financial performance of the particular legal entity or tax group in which the
deferred tax asset has been recognised.
Historical differences between forecast and actual taxable profits have not
resulted in material adjustments to the recognition of deferred tax assets.
Revenue Recognition and Presentation
Revenue from mobile telecommunications comprises amounts charged to
customers in respect of monthly access charges, airtime charges,
messaging, the provision of other mobile telecommunications services,
including data services and information provision, fees for connecting users
of other fixed line and mobile networks to the Group’s network, revenue
from the sale of equipment, including handsets, and revenue arising from
the Group’s Partner Network agreements.
Arrangements with multiple deliverables
In revenue arrangements including more than one deliverable, the
arrangement consideration is allocated to each deliverable based on the fair
value of the individual element. The Group generally determines the fair
value of individual elements based on prices at which the deliverable is
regularly sold on a standalone basis.
Deferral period
Customer connection fees, when combined with related equipment
revenue, in excess of the fair value of the equipment are deferred and
recognised over the expected life of the customer relationship. The life is
determined by reference to historical customer churn rates. An increase in
churn rates would reduce the expected customer relationship life and
accelerate revenue recognition. Historically, changes to the expected
customer relationship lives have not had a significant impact on the Group’s
results and financial position.
Any excess upgrade or tariff migration fees over the fair value of equipment
provided are deferred over the average upgrade or tariff migration period as
appropriate. This time period is calculated based on historical activity of
customers who upgrade or change tariffs. An increase in the time period
would extend the period over which revenue is recognised.
Presentation
When deciding the most appropriate basis for presenting revenue or costs
of revenue, both the legal form and substance of the agreement between
the Group and its business partners are reviewed to determine each party’s
respective role in the transaction.
Where the Group’s role in a transaction is that of principal, revenue is
recognised on a gross basis. This requires revenue to comprise the gross
value of the transaction billed to the customer, after trade discounts, with
any related expenditure charged as an operating cost.
Where the Group’s role in a transaction is that of an agent, revenue is
recognised on a net basis, with revenue representing the margin earned.