Carphone Warehouse 2005 Annual Report Download - page 42

The Carphone Warehouse Group PLC Annual Report 2005
Notes to the Financial Statements
1 Accounting policies
The financial statements have been prepared in accordance with applicable
United Kingdom accounting standards under the historical cost convention.
The following principal accounting policies have been applied consistently
throughout the period and the preceding period.
a) Turnover
Turnover is stated net of VAT and other sales related taxes. The following
accounting policies are applied to each business segment:
Distribution:
Distribution turnover comprises revenue generated from the sale of mobile
communication products and services, commissions receivable on sales less
provision for promotional offers and network operator performance penalties,
ongoing revenue (share of customer airtime spend, and customer revenue and
retention bonuses) and insurance premiums.
•Commission receivable on sales is recognised when the sales to which
the commission relates are made.
•Volume bonuses are recognised when the conditions on which they
are earned have been met.
•Ongoing revenue is recognised as it is earned over the life of the relevant
customers.
•Insurance premiums are typically paid quarterly in advance. Initial administration
fees, which are specified in the contract, are recognised at the point of sale.
Insurance premium income is recognised over the life of the relevant policies.
•All other revenue is recognised when sales are made.
Telecoms Services:
Telecoms Services turnover comprises revenue generated from facilities management,
revenue from mobile and fixed network services and ongoing revenue. All such
revenue is recognised as it is earned over the life of the relevant customers.
Wholesale:
Wholesale turnover comprises revenue generated from the sale of mobile
hardware and is recognised when sales are made.
b) Basis of consolidation
The consolidated financial statements incorporate the results of The Carphone
Warehouse Group PLC and its subsidiary undertakings drawn up to 2 April
2005. The results of subsidiaries acquired or sold during the period are included
from or to the date on which control passed. Acquisitions are accounted for
under the acquisition method.
c) Intangible assets – goodwill
Goodwill arising on the acquisition of subsidiary undertakings and businesses,
representing any excess of the fair value of the consideration given over the fair
value of the identifiable assets and liabilities acquired, is capitalised and written
off on a straight-line basis over its useful economic life of up to 20 years.
Provision is made for any impairment. Deferred consideration is recognised
to the extent that it is considered probable that it will be paid.
d) Tangible fixed assets
Tangible fixed assets are stated at cost, net of depreciation and any provision for
impairment. Depreciation is provided on all tangible fixed assets at rates calculated
to write off the cost, less estimated residual value, of each asset on a straight-line
basis over its expected useful life from the date it is brought into use, as follows:
Freehold buildings 2-4% per annum
Short leasehold costs 10 years or the lease term if less
Computer hardware and software,
network and office equipment 12.5-50% per annum
Fixtures and fittings 20-25% per annum
Motor vehicles 25% per annum
e) Stock
Stock is stated at the lower of cost and net realisable value. Cost includes
all direct costs incurred in bringing stock to its present location and condition
and represents finished goods and goods for resale.
Net realisable value is based on estimated selling price, less further costs
expected to be incurred to disposal. Provision is made for obsolete, slow-
moving or defective items where appropriate.
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f) Investments
Fixed asset investments are shown at cost less provision for impairment, other
than investments held via independently managed external funds which are
evaluated on a portfolio basis at the end of the period. Current asset
investments are stated at the lower of cost and net realisable value.
g) Leases
Rental payments under operating leases are charged to the profit and loss
account on a straight-line basis over the period of the lease. Lease incentives
and rent-free periods are amortised through the profit and loss account over the
shorter of the period of the lease or the period until rentals are expected to
be revised to prevailing market rates.
h) Taxation
Current tax, including UK corporation tax and overseas tax, is provided at
amounts expected to be paid or recovered using the tax rates and laws that
have been enacted or substantively enacted by the balance sheet date. Deferred
tax is recognised in respect of all timing differences that have originated but not
reversed at the balance sheet date where transactions or events that result in an
obligation to pay more, or a right to pay less, tax in the future have occurred at
the balance sheet date, with the following exceptions:
•Provision is made for the tax that would arise on remittance of the retained
earnings of overseas subsidiaries only to the extent that, at the balance sheet
date, distributions are expected.
•Deferred tax assets are recognised only to the extent that the Directors consider
that it is more likely than not that there will be suitable taxable profits from which
the future reversal of the underlying timing differences can be deducted.
Deferred tax is measured on a non-discounted basis at the tax rates that are
expected to apply in the periods in which timing differences reverse, based on
tax rates and laws enacted or substantively enacted at the balance sheet date.
i) Subscriber acquisition costs
Subscriber acquisition costs, being the direct third-party costs of recruiting and
retaining new customers, net of incentives from network operators and provision
for in-contract churn, are capitalised and amortised over the minimum subscription
period. Subscriber acquisition costs for customers with no minimum subscription
commitment are taken to the profit and loss account as incurred.
j) Software and website development costs
The Group capitalises both internal and external infrastructure and design costs
incurred in the development of software for internal use and in the development
of the functionality of its website. These costs are depreciated in accordance
with the policy defined in note 1d.
k) Pensions
Contributions to defined contribution schemes are charged to the profit and loss
account as they become payable in accordance with the rules of the scheme.
l) Foreign exchange
Material transactions in foreign currencies are hedged using forward purchases
or sales of the relevant currencies and are recognised in the financial statements
at the exchange rates thus obtained. Unhedged transactions are recorded at
the exchange rate on the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are hedged, mainly using forward foreign
exchange contracts to create matching liabilities and assets. At the balance
sheet date, both the monetary assets and liabilities and the foreign currency
hedges are retranslated at rates prevailing at the balance sheet date and any
differences are taken to the profit and loss account. The results of overseas
operations are translated at the average foreign exchange rates for the period,
and their balance sheets are translated at the rates prevailing at the balance
sheet date. Exchange differences arising on translation of opening net assets
and results of overseas operations are dealt with through reserves. All other
exchange differences are included in the profit and loss account.
m) Employee incentive schemes
The cost of awards made under the Company’s Performance Share Plan is based
on the intrinsic value of the awards at the date of grant and is charged to the profit
and loss account on a straight-line basis over the relevant performance period.
The Company operates a Save As You Earn scheme that allows for the grant
of share options at a discount to the market price at the date of the grant. The
Company has made use of the exemption under UITF 17 ‘Employee Share
Schemes’ not to recognise any compensation charge in respect of these options.