Vodafone 2009 Annual Report Download - page 73

Financials
Vodafone Group Plc Annual Report 2009 71
Critical accounting estimates
The Group prepares its consolidated financial statements in accordance with IFRS as
issued by the International Accounting Standards Board and IFRS as adopted by the
European Union, the application of which often requires judgements to be made by
management when formulating the Group’s financial position and results. Under
IFRS, the directors are required to adopt those accounting policies most appropriate
to the Group’s circumstances for the purpose of presenting fairly the Group’s financial
position, financial performance and cash flows.
In determining and applying accounting policies, judgement is often required in
respect of items where the choice of specific policy, accounting estimate or
assumption to be followed could materially affect the reported results or net asset
position of the Group should it later be determined that a different choice would be
more appropriate.
Management considers the accounting estimates and assumptions discussed below
to be its critical accounting estimates and, accordingly, provides an explanation of
each below.
The discussion below should also be read in conjunction with the Group’s disclosure
of significant IFRS accounting policies, which is provided in note 2 to the consolidated
financial statements, “Significant accounting policies”.
Management has discussed its critical accounting estimates and associated
disclosures with the Company’s Audit Committee.
Impairment reviews
IFRS requires management to undertake an annual test for impairment of indefinite
lived assets and, for finite lived assets, to test for impairment if events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Impairment testing is an area involving management judgement, requiring
assessment as to whether the carrying value of assets can be supported by the net
present value of future cash flows derived from such assets using cash flow
projections which have been discounted at an appropriate rate. In calculating the net
present value of the future cash flows, certain assumptions are required to be made
in respect of highly uncertain matters. including management’s expectations of:
growth in EBITDA, calculated as adjusted operating profit before depreciation and •
amortisation;
timing and quantum of future capital expenditure;•
long term growth rates; and•
the selection of discount rates to reflect the risks involved.•
The Group prepares and internally approves formal five year plans for its businesses
and uses these as the basis for its impairment reviews. In certain markets which are
forecast to grow ahead of the long term growth rate for the market, further years will
be used until the forecast growth rate trends towards the long term growth rate, up
to a maximum of ten years.
For businesses where the first five years of the ten year management plan are used
for the Group’s value in use calculations, a long term growth rate into perpetuity has
been determined as the lower of:
the nominal GDP rates for the country of operation; and•
the long term compound annual growth rate in EBITDA in years six to ten estimated •
by management.
For businesses where the full ten year management plans are used for the Group’s
value in use calculations, a long term g rowth rate into perpetuity has been determined
as the lower of:
the nominal GDP rates for the country of operation; and•
the compound annual growth rate in EBITDA in years nine to ten of the •
management plan.
Changing the assumptions selected by management, in particular the discount rate
and growth rate assumptions used in the cash flow projections, could significantly
affect the Group’s impairment evaluation and, hence, results.
The Group’s review includes the key assumptions related to sensitivity in the cash
flow projections. Further details are provided in note 10 to the consolidated
financial statements.
Revenue recognition and presentation
Arrangements with multiple deliverables
In revenue arrangements including more than one deliverable, the deliverables are
assigned to one or more separate units of accounting and the arrangement
consideration is allocated to each unit of accounting based on its relative fair value.
Determining the fair value of each deliverable can require complex estimates due to
the nature of the goods and services provided. The Group generally determines the
fair value of individual elements based on prices at which the deliverable is regularly
sold on a standalone basis, after considering volume discounts where appropriate.
Presentation: gross versus net
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.
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 profits, losses and/or cash flows.
The complexity of the Group’s structure following its geographic expansion makes
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 f inal resolution of open items. A s a result, there can be substant ial differences
between the tax charge in the consolidated income statement and tax payments.
Significant items on which the Group has exercised accounting judgement include a
provision in respect of an enquir y from UK HMRC with regard to the CFC tax legislation
(see note 33 to the consolidated financial statements), potential tax losses in respect
of a write down in the value of investment s in Germany (see note 6 to the consolidated
financial statements) and litigation with the Indian tax authorities in relation to the
acquisition of Vodafone Essar (see note 33 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.