Marks and Spencer 2013 Annual Report Download - page 86

Financial statements Marks and Spencer Group plc Annual report and financial statements 2013 84
Notes to the financial statements continued
1 Accounting policies continued
Taxation continued
Deferred tax is accounted for using a temporary difference
approach, and is the tax expected to be payable or recoverable
on temporary differences between the carrying amount of
assets and liabilities in the statement of financial position and the
corresponding tax bases used in the computation of taxable
profit. Deferred tax is calculated based on the expected manner
of realisation or settlement of the carrying amount of assets and
liabilities, applying tax rates and laws enacted or substantively
enacted at the end of the reporting period.
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.