Marks and Spencer 2010 Annual Report Download - page 88

Marks and Spencer Group plc Annual report and financial statements 2010 Financial statements 84
Notes to the financial statements continued
1 Accounting policies continued
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 statement of financial
position 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 in the Group’s
statement of financial position when the Group becomes a party to
the contractual provisions of the instrument.
A. Trade receivables Trade receivables recorded initially at fair value
and subsequently measured at amortised cost. Generally, this results
in their recognition at nominal value less any allowance for any
doubtful debts.
B. Investments and other financial assets Investments and other
financial assets are classified as either ‘available-for- ale’ or ‘fair
value through profit or loss’. They are initially measured at fair value,
including transaction costs, with the exception of ‘fair value through
profit and loss’. Financial assets held at fair value through profit and
loss are initially recognised at fair value and transaction costs are
expensed.
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 comprehensive income, until the security is disposed of or is
determined to be impaired, at which time the cumulative gain or loss
previously recognised in comprehensive income 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.
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 initially recorded at the fair value, which equals 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 initially measured at fair value
and are subsequently 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 recorded initially at fair value
and subsequently measured at amortised cost. Generally this results
in their recognition at their nominal value.
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.
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