Experian 2014 Annual Report Download - page 121

Financial statements • Notes to the Group financial statements 117
6. Critical accounting estimates and judgments
(a) Critical accounting estimates and assumptions
In preparing the Group financial statements, management is required to make estimates and assumptions that affect the reported
amount of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities. The resulting accounting estimates,
which are based on management’s best judgment at the date of the Group financial statements, will, by definition, seldom equal the
related actual results. The estimates and assumptions that have a signicant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next nancial year are summarised below. Commentary on share incentive plans and
pension benefits, which was included in the annual report for the year ended 31 March 2013, no longer features as management no
longer considers these to be areas of critical accounting estimates or judgment. Revenue recognition is again excluded from this
summary on the grounds that the policy adopted in this area is sufficiently objective.
Tax (note 16)
The Group is subject to tax in numerous jurisdictions. Signicant judgment is required in determining the related assets or provisions
as there are transactions in the ordinary course of business and calculations for which the ultimate tax determination is uncertain.
The Group recognises liabilities based on estimates of whether additional tax will be due. Where the nal tax outcome of these
matters is different from the amounts that were initially recognised, the differences will affect the results for the year and the
respective income tax and deferred tax assets or provisions in the year in which such determination is made. The Group recognises
deferred tax assets based on forecasts of future profits against which those assets may be utilised.
Goodwill (note 20)
The Group tests goodwill for impairment annually or more frequently if events or changes in circumstances indicate that the
goodwill may be impaired. The recoverable amount of each CGU is generally determined on the basis of value-in-use calculations,
which require the use of cash flow projections based on approved nancial budgets, looking forward up to five years. Management
determines budgeted profit margin based on past performance and its expectations for the market’s development. Cash flows are
extrapolated using estimated growth rates beyond a five-year period. The growth rates used do not exceed the long-term average
growth rate for the markets in which the CGU operates. The discount rates used reflect the CGU’s pre-tax weighted average cost of
capital (‘WACC’).
Fair value of derivatives and other nancial instruments (note 29)
The fair value of derivatives and other nancial instruments that are not traded in an active market is determined using valuation
techniques. The Group uses its judgment to select a variety of methods and makes assumptions, or uses observable market-based
inputs, that are mainly based on market conditions at each balance sheet date.
(b) Critical judgments
In applying the Group’s accounting policies, management has made judgments that have a significant effect on the amounts
recognised in the Group financial statements. These judgments include the classification of transactions between the Group income
statement and the Group balance sheet.
The most significant of these judgments are in respect of intangible assets and contingencies:
Intangible assets
Certain costs incurred in the developmental phase of an internal project are capitalised as intangible assets if a number of criteria
are met. Management has made judgments and assumptions when assessing whether a project meets these criteria, and on
measuring the costs and the economic life attributed to such projects.
On acquisition, specific intangible assets are identified and recognised separately from goodwill and then amortised over their
estimated useful lives. These include items such as brand names and customer lists, to which value is first attributed at the time of
acquisition. The capitalisation of these assets and the related amortisation charges are based on judgments about the value and
economic life of such items.
The economic lives for intangible assets are estimated at between three and ten years for internal projects, which include databases,
internal use software and internally generated software, and between two and 20 years for acquisition intangibles. Further details of
the amounts of, and movements in, such assets are given in note 21.
Contingencies
In the case of pending and threatened litigation claims, management has formed a judgment as to the likelihood of ultimate liability.
No liability has been recognised where the likelihood of any loss arising is possible rather than probable.