Marks and Spencer 2008 Annual Report Download - page 65

marksandspencer.com/annualreport08 MARKS AND SPENCER GROUP PLC 63
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1 Accounting policies continued
• a hedge of the exposure to change in the fair value of
a recognised asset or liability (a fair value hedge); or
• a hedge of the exposure on the translation of net
investments in foreign entities (a net investment hedge).
Underlying the definition of fair value is the presumption that
the Group is a going concern without any intention of materially
curtailing the scale of its operations.
For those of the Group’s derivative instruments stated at fair
value, the fair value will be determined by the Group applying
discounted cash flow analysis using quoted market rates as
an input into the valuation model.
In determining the fair value of a derivative, the appropriate
quoted market price for an asset held is the bid price, and
for a liability issued is the offer price.
At inception of a hedging relationship, the hedging instrument
and the hedged item are documented and prospective
effectiveness testing is performed. During the life of the hedging
relationship, effectiveness testing is continued to ensure the
instrument remains an effective hedge of the transaction.
In order to qualify for hedge accounting, the following
conditions must be met:
• formal designation and documentation at inception of
the hedging relationship, detailing the risk management
objective and strategy for undertaking the hedge;
• the hedge is expected to be highly effective in achieving
offsetting changes in fair value or cash flows attributable
to the hedged risk;
• for a cash flow hedge, a forecast transaction that is
the subject of the hedge must be highly probable;
• the effectiveness of the hedge can be reliably measured; and
• the hedge is assessed on an ongoing basis and determined
actually to have been highly effective throughout its life.
A Cash flow hedges
Changes in the fair value of derivative financial instruments
that are designated and effective as hedges of future cash
flows are recognised directly in equity and any ineffective portion
is recognised immediately in the income statement. If the firm
commitment or forecast transaction that is the subject of a
cash flow hedge results in the recognition of a non-financial
asset or liability, then, at the time the asset or liability is
recognised, the associated gains or losses on the derivative
that had previously been recognised in equity are included in
the initial measurement of the asset or liability. For hedges that
do not result in the recognition of an asset or a liability, amounts
deferred in equity are recognised in the income statement in the
same period in which the hedged items affect net profit or loss.
B Fair value hedges
For an effective hedge of an exposure to changes in the fair
value, the hedged item is adjusted for changes in fair value
attributable to the risk being hedged with the corresponding
entry in profit or loss. Gains and losses from re-measuring the
derivative, or for non-derivatives the foreign currency component
of its carrying amount, are recognised in profit or loss.
C Net investment hedges
Changes in the fair value of derivative or non-derivative
financial instruments that are designated and effective as
hedges of the net investments are recognised directly in
equity and any ineffective portion is recognised immediately
in the income statement.
Changes in the fair value of derivative financial instruments
that do not qualify for hedge accounting are recognised in
the income statement as they arise.
Hedge accounting is discontinued when the hedging
instrument expires or is sold, terminated or exercised, or
no longer qualifies for hedge accounting. At that time, any
cumulative gain or loss on the hedging instrument recognised
in equity is retained in equity until the forecast transaction
occurs. If a hedged transaction is no longer expected to
occur, the net cumulative gain or loss recognised in equity
is transferred to net profit or loss for the period.
The Group does not use derivatives to hedge income
statement translation exposures.
Critical accounting estimates and judgements
The preparation of consolidated financial statements requires
the Group to make estimates and assumptions that affect
the application of policies and reported amounts. Estimates
and judgements are continually evaluated and are based on
historical experience and other factors including expectations
of future events that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates.
The estimates and assumptions which have a significant risk
of causing a material adjustment to the carrying amount of
assets and liabilities are discussed below:
A Impairment of goodwill
The Group is required to test, at least annually, whether
goodwill has suffered any impairment. The recoverable amount
is determined based on value in use calculations. The use of
this method requires the estimation of future cash flows and
the choice of a suitable discount rate in order to calculate the
present value of these cash flows. Actual outcomes could vary.
B Impairment of property, plant and equipment
Property, plant and equipment are reviewed for impairment if
events or changes in circumstances indicate that the carrying
amount may not be recoverable. When a review for impairment
is conducted, the recoverable amount is determined based on
value in use calculations prepared on the basis of management’s
assumptions and estimates.
C Depreciation of property, plant and equipment
Depreciation is provided so as to write down the assets to their
residual values over their estimated useful lives as set out on
page 61. The selection of these residual values and estimated
lives requires the exercise of management judgement.
D Post-retirement benefits
The determination of the pension cost and defined benefit
obligation of the Group’s defined benefit pension schemes
depends on the selection of certain assumptions which include
the discount rate, inflation rate, salary growth, mortality and
expected return on scheme assets. Differences arising from
actual experiences or future changes in assumptions will be
reflected in subsequent periods. See note 11 for further details.