Vodafone 2016 Annual Report Download - page 94

Vodafone Group Plc
Annual Report 2016
92
Notes to the consolidated nancial statements (continued)
1. Basis of preparation (continued)
The cash ows inherent in these forecasts include the unsystematic risks of operating in the telecommunications business including the potential
impacts of changes in the market structure, trends in customer pricing, the costs associated with the acquisition and retention of customers, future
technological evolutions and potential regulatory changes, such as our ability to acquire and/or renew spectrum licences.
Changes in the assumptions which underpin the Group’s forecasts could have an impact on the amount of future taxable prots and could have
a signicant impact on the period over which the deferred tax asset would be recovered.
The Group only considers substantively enacted tax laws when assessing the amount and availability of tax losses to offset against the future taxable
prots. See note 6 “Taxation” to the consolidated nancial statements.
Business combinations and goodwill
When the Group completes a business combination, the fair values of the identiable assets and liabilities acquired, including intangible assets,
are recognised. The determination of the fair values of acquired assets and liabilities is based, to a considerable extent, on management’s judgement.
If the purchase consideration exceeds the fair value of the net assets acquired then the incremental amount paid is recognised as goodwill. If the
purchase price consideration is lower than the fair value of the assets acquired then the difference is recorded as a gain in the income statement.
Allocation of the purchase price between nite lived assets (discussed below) and indenite lived assets such as goodwill affects the subsequent
results of the Group as nite lived intangible assets are amortised, whereas indenite lived intangible assets, including goodwill, are not amortised.
On transition to IFRS the Group elected not to apply IFRS 3 “Business combinations” retrospectively as the difculty in applying these requirements
to business combinations completed by the Group between incorporation and 1 April 2004 exceeded any potential benets. Goodwill recorded
before the date of transition to IFRS amounted to £78,753 million. If the Group had elected to apply IFRS 3 retrospectively it may have led
to an increase or decrease in goodwill, licences, customer bases, brands and related deferred tax liabilities recognised on acquisition.
See note 28 “Acquisitions and disposals” to the consolidated nancial statements for further details.
Joint arrangements
The Group participates in a number of joint arrangements where control of the arrangement is shared with one or more other parties. A joint
arrangement is classied as a joint operation or as a joint venture, depending on management’s assessment of the legal form and substance
of the arrangement.
The classication can have a material impact on the consolidated nancial statements. The Group’s share of assets, liabilities, revenue, expenses and
cash ows of joint operations are included in the consolidated nancial statements on a line-by-line basis, whereas the Group’s investment and share
of results of joint ventures are shown within single line items in the consolidated statement of nancial position and consolidated income statement
respectively. See note 12 “Investments in associates and joint arrangements” to the consolidated nancial statements.
Finite lived intangible assets
Other intangible assets include amounts spent by the Group acquiring licences and spectrum, customer bases and brands and the costs
of purchasing and developing computer software.
Where intangible assets are acquired through business combinations and no active market for the assets exists, the fair value of these assets
is determined by discounting estimated future net cash ows generated by the asset. Estimates relating to the future cash ows and discount rates
used may have a material effect on the reported amounts of nite lived intangible assets.
Estimation of useful life
The useful life over which intangible assets are amortised depends on management’s estimate of the period over which economic benet will
be derived from the asset. Reducing the useful life will increase the amortisation charge in the consolidated income statement. Useful lives are
periodically reviewed to ensure that they remain appropriate. The basis for determining the useful life for the most signicant categories of intangible
assets is discussed below.
Licence and spectrum fees
The estimated useful life is generally the term of the licence unless there is a presumption of renewal at negligible cost; this is adjusted if necessary,
for example taking into account the impact of any expected changes in technology.
Customer bases
The estimated useful life principally reects management’s view of the average economic life of the customer base and is assessed by reference
to customer churn rates. An increase in churn rates may lead to a reduction in the estimated useful life and an increase in the amortisation charge.
Capitalised software
For computer software, the useful life is based on management’s view, considering historical experience with similar products as well as anticipation
of future events which may impact their life such as changes in technology. The useful life will not exceed the duration of a licence.
Property, plant and equipment
Property, plant and equipment represents 21.0% (2015: 21.7%) of the Group’s total assets; estimates and assumptions made may have a material
impact on their carrying value and related depreciation charge. See note 11 “Property, plant and equipment” to the consolidated nancial
statements for further details.
Estimation of useful life
The depreciation charge for an asset is derived using estimates of its expected useful life and expected residual value, which are reviewed annually.
Increasing an asset’s expected life or residual value would result in a reduced depreciation charge in the consolidated income statement.
Management determines the useful lives and residual values for assets when they are acquired, based on experience with similar assets and taking
into account other relevant factors such as any expected changes in technology. The useful life of network infrastructure is assumed not to exceed
the duration of related operating licences unless there is a reasonable expectation of renewal or an alternative future use for the asset.