Marks and Spencer 2010 Annual Report Download - page 89

Directors’ report p01 
Financial statements 
Other information p117 
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1 Accounting policies continued
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 comprehensive income 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 comprehensive income 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
comprehensive income 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 comprehensive income 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 comprehensive income 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 and computer
software Property, plant and equipment and computer software
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 notes 13 and 14
for further details.
C. Depreciation of property, plant and equipment and amortisation of
computer software Depreciation and amortisation is provided so as
to write down the assets to their residual values over their estimated
useful lives as set out above. The selection of these residual values
and estimated lives requires the exercise of management judgement.
See notes 13 and 14 for further details.
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.
E. Refunds and loyalty scheme accruals Accruals for sales returns
and loyalty scheme redemption are estimated on the basis of
historical returns and redemptions and these are recorded so as
to allocate them to the same period as the original revenue is
recorded. These accruals are reviewed regularly and updated to
reflect management’s latest best estimates, however, actual returns
and redemptions could vary from these estimates.
Non-GAAP performance measures
The directors believe that the adjusted profit and earnings per share
measures provide additional useful information for shareholders on
the underlying performance of the business. These measures are
consistent with how underlying business performance is measured
internally. The adjusted profit before tax measure is not a recognised
profit measure under IFRS and may not be directly comparable with
adjusted profit measures used by other companies. The adjustments
made to reported profit before tax are to exclude the following:
– exceptional income and charges – These are one-off in nature
and therefore create significant volatility in reported earnings; and
– profits and losses on the disposal of properties – These can
vary significantly from year to year, again creating volatility in
reported earnings.