Marks and Spencer 2008 Annual Report Download - page 64

62 MARKS AND SPENCER GROUP PLC
Notes to the financial statements
continued
1 Accounting policies continued
The fair value of each award is recognised as an expense over
the vesting period on a straight-line basis, after allowing for an
estimate of the share awards that will eventually vest. The level
of vesting is reviewed annually; and the charge is adjusted to
reflect actual and estimated levels of vesting.
Inventories
Inventories are valued at the lower of cost and net realisable
value using the retail method, which is computed on the
basis of selling price less the appropriate trading margin.
All inventories are finished goods.
Foreign currencies
The results of overseas subsidiaries are translated at the
weighted average of monthly exchange rates for sales and
profits. The balance sheets of overseas subsidiaries are
translated at year end exchange rates. The resulting exchange
differences are dealt with through reserves and reported in the
consolidated statement of recognised income and expense.
Transactions denominated in foreign currencies are translated
at the exchange rate at the date of the transaction. Foreign
currency assets and liabilities held at the balance sheet date
are translated at the closing balance sheet rate. The resulting
exchange gain or loss is recognised within the income statement.
Taxation
The tax charge comprises current tax payable and deferred tax.
The current tax charge represents an estimate of the amounts
payable to tax authorities in respect of the Group’s taxable
profits and is based on an interpretation of existing tax laws.
Deferred tax is recognised on temporary differences between
the carrying amount of an asset or liability in the balance sheet
and its tax base at tax rates that are expected to apply when
the asset is realised or the liability settled, based on tax rates
that have been enacted or substantively enacted by the
balance sheet date.
Deferred tax is not recognised in respect of:
• the initial recognition of goodwill that is not tax deductible; and
• the initial recognition of an asset or liability in a transaction
which is not a business combination and at the time of the
transaction does not affect accounting or taxable profits.
Deferred tax assets are only recognised when it is probable
that taxable profits will be available against which the deferred
tax asset can be utilised.
Deferred tax liabilities are not provided in respect of
undistributed profits of non-UK resident subsidiaries where
(i) the Group is able to control the timing of distribution of such
profits; and (ii) it is not probable that a taxable distribution will
be made in the foreseeable future.
Financial instruments
Financial assets and liabilities are recognised on the Group’s
balance sheet when the Group becomes a party to the
contractual provisions of the instrument.
A Trade receivables
Trade receivables are recorded at their nominal amount less
an allowance for any doubtful debts.
B Investments and other financial assets
Investments and other financial assets are classified as either
‘available for sale’, ‘fair value through profit or loss’ or ‘held
to maturity’. They are initially measured at cost, including
transaction costs, with the exception of ‘fair value through
profit and loss’. Where securities are designated as ‘fair value
through profit or loss’, gains and losses arising from changes
in fair value are included in net profit or loss for the period.
For ‘available for sale’ investments, gains or losses arising
from changes in fair value are recognised directly in equity,
until the security is disposed of or is determined to be
impaired, at which time the cumulative gain or loss previously
recognised in equity is included in the net profit or loss for the
period. Equity investments that do not have a quoted market
price in an active market and whose fair value cannot be
reliably measured by other means are held at cost. ‘Held to
maturity’ investments are measured at amortised cost using
the effective interest method.
Investments in subsidiaries are held at cost less impairment.
Dividends received from the pre-acquisition profits of
subsidiaries are deducted from the cost of investment.
C Classification of financial liabilities and equity
Financial liabilities and equity instruments are classified
according to the substance of the contractual arrangements
entered into. An equity instrument is any contract that
evidences a residual interest in the assets of the Group
after deducting all of its liabilities.
D Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the
proceeds received, net of direct issue costs. Finance charges,
including premiums payable on settlement or redemption and
direct issue costs, are accounted for on an effective interest
rate method and are added to the carrying amount of the
instrument to the extent that they are not settled in the period
in which they arise.
E Loan notes
Long-term loans are held at amortised cost unless the loan
is hedged by a derivative financial instrument in which case
hedge accounting treatment will apply.
F Trade payables
Trade payables are stated at their nominal value.
G Equity instruments
Equity instruments issued by the Company are recorded
at the proceeds received, net of direct issue costs.
Derivative financial instruments and hedging activities
The Group primarily uses interest rate swaps and forward foreign
currency contracts to manage its exposures to fluctuating
interest and foreign exchange rates. These instruments are
initially recognised at fair value on the trade date and are
subsequently remeasured at their fair value at the balance
sheet date. The method of recognising the resulting gain or
loss is dependent on whether the derivative is designated as
a hedging instrument and the nature of the item being hedged.
The Group designates certain hedging derivatives as either:
• a hedge of a highly probable forecast transaction or
change in the cash flows of a recognised asset or liability
(a cash flow hedge);