Vtech 2008 Annual Report Download - page 36

NOTES TO THE FINANCIAL STATEMENTS
VTech Holdings Ltd Annual Report 2008
34
PRINCIPAL ACCOUNTING POLICIES CONTINUED
Q Trade and Other Creditors
Trade and other creditors are initially recognised at fair value
and thereafter stated at amortised cost unless the e ect of
discounting would be immaterial, in which case they are stated
at cost.
R Provisions and Contingent Liabilities
A provision is recognised in the balance sheet when the Group
has a legal or constructive obligation as a result of past events,
and it is probable that an out ow of economic bene ts will be
required to settle the obligation, and a reliable estimate of the
amount of the obligation can be made.
The Group recognises the estimated liability on expected return
claims with respect to products sold. This provision is calculated
based on past experience of the level of repairs and returns.
The Group recognises the expected costs of accumulating
compensated absences when employees render a service that
increases their entitlement to future compensated absences,
measured as the additional amount that the Group expects to
pay as a result of the unused entitlement that has accumulated
at the balance sheet date.
Where it is not probable that an out ow of economic bene ts
will be required, or the amount cannot be estimated reliably,
the obligation is disclosed as a contingent liability, unless the
probability of out ow of economic bene ts is remote. Possible
obligations, whose existence will only be con rmed by the
occurrence or non-occurrence of one or more future events are
also disclosed as contingent liabilities unless the probability of
out ow of economic bene ts is remote.
S Income Tax
Income tax comprises current and deferred tax. Current tax is
calculated on taxable income by applying the applicable tax
rates. Deferred tax is provided using the balance sheet liability
method in respect of temporary di erences between the
carrying amounts of assets and liabilities for  nancial reporting
purposes and the amounts used for taxation purpose. Deferred
tax is calculated on the basis of the enacted tax rates that are
expected to apply in the period when the asset is being realised
or the liability is settled.
A deferred tax asset is recognised only to the extent that it is
probable that future taxable pro ts will be available against
which the asset can be utilised.
Provision for withholding tax which could arise on the
remittance of earnings retained overseas is only made where
there is a current intention to remit such earnings.
T Employee Bene ts
The Group operates a number of de ned contribution
retirement schemes throughout the world, including Hong
Kong, and a de ned bene t retirement scheme in Hong Kong.
The assets of all schemes are held separately from those of the
Company and its subsidiaries.
(i) De ned contribution plans
Contributions to the de ned contribution schemes are at
various funding rates that are in accordance with the local
practice and regulations. Contributions relating to the
de ned contribution schemes are charged to the income
statement as incurred.
(ii) De ned bene t plans
For long-term employee bene ts, pension costs arising
under the de ned bene t scheme are assessed using
the projected unit credit method. Under this method,
the cost of providing pensions is charged to the income
statement so as to spread the regular cost over the service
lives of employees in accordance with the advice of
quali ed actuaries who carry out a full valuation of the
plan every year. Plan assets are measured at fair value.
Pension obligations are measured as the present value of
the estimated future cash  ows of bene ts derived from
employee past service, with reference to market yields
on high quality corporate bonds which have terms to
maturity approximating the terms of the related liability.
All actuarial gains and losses are spread forward over the
average remaining service lives of employees. The net
assets or liabilities resulting from the valuation of the plan
are recognised in the Group’s balance sheet.
(iii) Equity and equity related compensation bene ts
The fair value of share options granted to employees is
recognised as an employee cost with a corresponding
increase in a capital reserve within equity. The fair value
is measured at grant date using the Black-Scholes
option pricing model, taking into account the terms
and conditions upon which the options were granted.
Where the employees have to meet vesting conditions
before becoming unconditionally entitled to the share
options, the total estimated fair value of the share option
is spread over the vesting period, taking into account the
probability that the options will vest.
During the vesting period, the number of share options
that is expected to vest is reviewed. Any adjustment to the
cumulative fair value recognised in prior years is charged/
credited to the consolidated income statement for the
year of the review, unless the original employee expenses
qualify for recognition as an asset, with a corresponding
adjustment to the capital reserve. On vesting date, the
amount recognised as an expense is adjusted to re ect
the actual number of share options that vest (with
a corresponding adjustment to the capital reserve)
except where forfeiture is only due to not achieving
vesting conditions that relate to the market price of the
Company’s shares. The equity amount is recognised in the
capital reserve until either the option is exercised (when it
is transferred to the share premium account) or the option
expires (when it is released directly to revenue reserves).