Marks and Spencer 2013 Annual Report Download - page 87

Financial statements Marks and Spencer Group plc Annual report and financial statements 2013 85
Overview Strategic review Financial review Governance Financial statements and other information
1 Accounting policies continued
A. Cash flow hedges continued
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 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 annually or as triggering events occur, 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 deferred income in relation to 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
balances are reviewed regularly and updated to reflect
management’s latest best estimates. However, actual returns
and redemptions could vary from those 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;
–restructuring costs;
–fair value movement in financial instruments; and
–reduction in income received from HSBC in relation to M&S
Bank due to a non recurring provision recognised by M&S
Bank for the cost of providing redress to customers in respect
of possible mis-selling of M&S Bank financial products.