Marks and Spencer 2009 Annual Report Download - page 88

Marks and Spencer Group plc Annual report and financial statements 2009 Financial statements
Notes to the financial statements
continued
84
1 Accounting policies continued
G. Equity instruments Equity instruments issued by the Company
are recorded at the consideration 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);
– 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 remeasuring 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 from those calculated. See note 13 for further details.
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.
See note 14 for further details.