Lenovo 2014 Annual Report Download - page 154

152 Lenovo Group Limited 2013/14 Annual Report
NOTES TO THE FINANCIAL STATEMENTS
4 Critical accounting estimates and judgments (continued)
(a) Impairment of non-financial assets (continued)
Management prepared the financial budgets reflecting actual and prior year performance and market development
expectations. Judgment is required to determine key assumptions adopted in the cash flow projections and changes to
key assumptions can significantly affect these cash flow projections and therefore the results of the impairment reviews.
(b) Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the
worldwide provision for income taxes. There are certain transactions and calculations for which the ultimate tax
determination is uncertain during the ordinary course of business. The tax liabilities recognized are based on management’s
assessment of the likely outcome.
The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases
of assets and liabilities and their carrying values in the financial statements.
Deferred income tax assets are mainly recognized for temporary differences such as warranty provision, accrued sales
rebates, bonus accruals, and other accrued expenses, and unused tax losses carried forward to the extent it is probable
that future taxable profits will be available against which deductible temporary differences and the unused tax losses
can be utilized, based on all available evidence. Recognition primarily involves judgment regarding the future financial
performance of the particular legal entity or tax group in which the deferred income tax asset has been recognized. A
variety of other factors are also evaluated in considering whether there is convincing evidence that it is probable that some
portion or all of the deferred income tax assets will ultimately be realized, such as the existence of taxable temporary
differences, group relief, tax planning strategies and the periods in which estimated tax losses can be utilized. The carrying
amount of deferred income tax assets and related financial models and budgets are reviewed at each balance sheet date
and to the extent that there is insufficient convincing evidence that sufficient taxable profits will be available within the
utilization periods to allow utilization of the carry forward tax losses, the asset balance will be reduced and the difference
charged to the income statement.
Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will
impact the income tax provisions and deferred income tax assets and liabilities in the period in which such determination is
made.
(c) Warranty provision
Warranty provision is based on the estimated cost of product warranties when revenue is recognized. Factors that affect
the Group’s warranty liability include the number of sold units currently under warranty, historical and anticipated rates of
warranty claims on those units, and cost per claim to satisfy our warranty obligation. The estimation basis is reviewed on
an on-going basis and revised where appropriate. Certain of these costs are reimbursable from the suppliers in accordance
with the terms of relevant arrangements with the suppliers. These amounts are recognized as a separate asset, to the
extent of the amount of the provision made, when it is virtually certain that reimbursement will be received if the Group
settles the obligation.
(d) Revenue recognition
Application of various accounting principles related to the measurement and recognition of revenue requires the Group to
make judgments and estimates. Specifically, complex arrangements with non-standard terms and conditions may require
significant contract interpretation to determine the appropriate accounting, including whether the deliverables specified in
a multiple element arrangement should be treated as separate units of accounting. Other significant judgments include
determining whether the Group or a reseller is acting as the principal in a transaction and whether separate contracts are
considered part of one arrangement.
The Group sells products to channels. Sales through channels are primarily made under agreements allowing for volume
discounts, price protection and rebates, and marketing development funds. The Group monitors the channel inventory level
with reference to historical data. Revenue recognition is also impacted by the Group’s ability to estimate volume discounts,
price protection and rebates, marketing development funds. The Group considers various factors, including a review of
specific transactions, historical experience, market and economic conditions and channel inventory level when calculating
these provisions and allowances.
Revenue from sales of goods is recognized when both ownership and risk of loss are effectively transferred to customer.
Risk of loss associated with goods-in-transit is generally retained by the Group. The Group books revenue upon delivery
of products, and defers the amounts of revenue based on the estimated days-in-transit at the end of each month. The
days-in-transit is estimated based on the Group’s weighted average estimated time of shipment arrival. Cost of in-transit
products is deferred in deposits, prepayment and other receivables in the balance sheet until revenue is recognized. The
estimates of days-in-transit are reviewed semi-annually.