Marks and Spencer 2012 Annual Report Download - page 83

Financial statements Marks and Spencer Group plc Annual report and financial statements 2012 81
Overview Strategic review Financial review Governance Financial statements and other information
1 Accounting policies continued
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 the income statement. Gains and
losses from remeasuring the derivative, or for non-derivatives
the foreign currency component of the carrying amount, are
recognised in the income statement.
C. Net investment hedges Changes in the fair value of
derivative or non-derivative financial instruments that are
designated and effective as hedges of net investments are
recognised 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.
D. Discontinuance of hedge accounting 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 comprehensive income
is transferred to net profit or loss for the period.
The Group does not use derivatives to hedge income
statement translation exposures.
Embedded derivatives
Derivatives embedded in other financial instruments or other
host contracts are treated as separate derivatives when their
risks and characteristics are not closely related to those of
the host contracts and the host contracts are not carried at
fair value, with unrealised gains or losses reported in the
income statement. Embedded derivatives are carried in the
statement of financial position at fair value from the inception
of the host contract.
Changes in fair value are recognised within the income
statement during the period in which they arise.
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:
A. Impairment of goodwill and brands The Group is
required to test, at least annually, whether the goodwill or
brands have 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. Where there is a non-
controlling interest, goodwill is tested for the business as a
whole. This involves a notional increase to goodwill, to reflect
the non-controlling shareholders’ interest. Actual
outcomes could vary from those calculated. See note 14
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 14
and 15 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 14 and 15 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 of assumptions and note 12 for critical
judgements associated with the Marks & Spencer UK
Pension Scheme interest in the Marks and Spencer Scottish
Limited Partnership.
E. Refunds and loyalty scheme accruals Accruals for
sales returns and loyalty scheme redemptions 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 underlying 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 underlying 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:
– profits and losses on the disposal of properties;
–significant and one-off impairment charges that distort
underlying trading;
– costs relating to strategy changes that are not considered
normal operating costs of the underlying business;
–one-off pension credits arising on changes of the defined
benefit pension scheme rules; and
–non-cash fair value movements in financial instruments.