Carphone Warehouse 2015 Annual Report Download - page 94

Dixons Carphone plc Annual Report and Accounts 2014/15
Financial statements
Notes to the Group financial statements
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Under the classifications stipulated by IAS 39, borrowings,
finance lease obligations and trade and other payables
(excluding derivative financial liabilities) are classified as
‘financial liabilities measured at amortised cost’. Derivative
financial instruments, which are described further in note 25,
are classified as ‘held for trading unless designated in a
hedge relationship’.
Trade and other payables
Trade and other payables (excluding derivative financial
liabilities) are recorded at cost. Derivative financial instruments,
are initially recorded at fair value and then subsequently
remeasured to fair value at each balance sheet date and are
held within assets or liabilities as appropriate. Gains and losses
arising from revaluation at the balance sheet date are
recognised in the income statement unless the derivatives
are designated as hedges and such hedges are proved to
be effective.
t) Provisions
Provisions are recognised when a legal or constructive
obligation exists as a result of past events and it is probable
that an outflow of resources will be required to settle the
obligation and a reliable estimate can be made of the amount
of the obligation. Provisions are discounted where the time
value of money is considered to be material.
Provisions fall into the following categories:
Reorganisation
Reorganisation provisions relate principally to the costs
of onerous leases, redundancy costs and other onerous
contracts, and are only recognised where plans are
demonstrably committed and where appropriate
communication to those affected has been undertaken
at the balance sheet date.
Sales
Sales provisions relate to ‘cash-back’ and similar promotions,
product warranties, product returns, and network operator
performance penalties. The anticipated costs of these items
are assessed by reference to historical trends and any other
information that is considered to be relevant.
Other
Other provisions relate mainly to warranties provided in relation
to business disposals and provisions in respect of the
expected costs of insurance claims, contingent liabilities
recognised through business combinations and costs
associated with onerous contracts.
All provisions are assessed by reference to the best available
information at the balance sheet date.
u) Critical accounting judgements and key sources of
estimation uncertainty
Critical accounting estimates and assumptions used in the
preparation of the financial statements are continually reviewed
and revised as necessary.
Whilst every effort is made to ensure that such estimates and
assumptions are reasonable, by their nature they are uncertain,
and as such changes in estimates and assumptions may have
a material impact. The principal items subject to such
estimates and assumptions are as follows:
Revenue recognition
Commission receivable on mobile phone sales depends for
certain transactions on customer behaviour after the point of
sale. Assumptions are therefore required, particularly in relation
to levels of customer default within the contract period,
expected levels of customer spend, and customer behaviour
beyond the initial contract period. Such assumptions are based
on extensive historical evidence, and provision is made for the
risk of potential changes in customer behaviour. Changes in
estimates recognised as an increase to revenue may be made,
where for example more reliable information is available, and
any such changes are required to be recognised in the income
statement. Changes of estimates in relation to commission
receivable after the initial contract term for sales originating in
previous years totalled £33 million (2013/14: £18 million). The
total value of ongoing revenues receivable was £629 million
(2013/14: £525 million).
Revenue earned from the sale of customer support agreements
is recognised over the term of the contracts when the Group
obtains the right to consideration as a result of performance of
its contractual obligations. Revenue in any one year is
recognised to match the proportion of the expected costs of
fulfilling the Group’s total obligations under the agreements.
An estimate of the degree of performance of these contractual
obligations is determined by reference to extensive historical
claims data.
For both commission receivable on mobile phone sales and
revenue from customer support agreements, reliance on
historical data assumes that current and future experience will
follow past trends. The directors consider that the quantity and
quality of data available provides an appropriate proxy for
current trends.
Income received from suppliers such as volume rebates
The Group has provided enhanced disclosure on supplier
funding following guidance issued by the Financial Reporting
Council in December 2014. This disclosure is aimed at assisting
the users of the financial statements in understanding the
judgements and estimates made in the recognition of supplier
funding in the Group’s financial statements.
The Group’s agreements with suppliers contain a price for units
purchased as well as other rebates and discounts which are
summarised below:
Volume Rebates: This income is linked to purchases made from
suppliers and is recognised as a reduction to cost of goods sold
as inventory is sold. Unearned rebates that relate to inventory
not sold are recognised within the value of inventory at the
period end. Where an agreement spans period ends, judgement
is required regarding amounts to be recognised. Forecasts are
used as well as historical data in the estimation of the level of
income recognised. Amounts are only recognised where the
Group has a clear entitlement to the receipt of the rebate and a
reliable estimate can be made.
Discounts: This income is received from suppliers on a price per
unit basis. The level of estimation is minimal as amounts are
recognised as a reduction to cost of goods sold based on the
agreement terms and only once the item is sold.
Marketing income: This income is received in relation to
marketing activities that are performed on behalf of suppliers.