Marks and Spencer 2012 Annual Report Download - page 82

Financial statements Marks and Spencer Group plc Annual report and financial statements 2012 80
Notes to the financial statements continued
1 Accounting policies continued
Taxation continued
Deferred tax liabilities are generally recognised for all taxable
temporary differences. Deferred tax liabilities are recognised
for taxable temporary differences arising on investments in
subsidiaries, associates and joint ventures, except where the
reversal of the temporary difference can be controlled by the
Group and it is probable that the difference will not reverse in
the foreseeable future.
Deferred tax liabilities are not recognised on temporary
differences that arise from goodwill which is not deductible for
tax purposes.
Deferred tax assets are recognised to the extent it is
probable that taxable profits will be available against which
the deductible temporary differences can be utilised. The
carrying amount of deferred tax assets is reviewed at the
end of each reporting period and reduced to the extent that
it is no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are not recognised
in respect of temporary differences that arise on initial
recognition of assets and liabilities acquired other than
in a business combination.
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 are 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-sale’
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 or loss’. Financial assets held at fair
value through profit or 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 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.
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 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 using 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 end of the reporting period. 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.
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. 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.
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 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.