Marks and Spencer 2015 Annual Report Download - page 99

97
ANNUAL REPORT AND FINANCIAL STATEMENTS 2015
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
OUR BUSINESSOUR PERFORMANCE
GOVERNANCEFINANCIAL STATEMENTS
1 ACCOUNTING POLICIES CONTINUED
Derivative fi nancial instruments and hedging activities
continued
B. Fair value hedges The changes in the fair value of a derivative
instrument designated in a fair value hedge, or for non-derivatives
the foreign currency component of carrying value, are recognised in
profi t or loss. The hedged item is adjusted for changes in fair value
attributable to the risk being hedged with the corresponding entry
in profi t or loss.
C. Net investment hedges Changes in the fair value of derivative
or non-derivative fi nancial instruments that are designated and
e ective as hedges of net investments are recognised in
comprehensive income in the hedging reserve and any ine ective
portion is recognised immediately in the income statement.
Changes in the fair value of derivative fi nancial instruments that
do not qualify for hedge accounting are recognised in the income
statement as they arise.
D. Dis continuan c e of h e d g e accounting Hedge accounting is
discontinued when the hedging instrument expires or is sold,
terminated or exercised, or no longer qualifi es 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 profi t or loss
for the period.
The Group does not use derivatives to hedge income statement
translation exposures.
Embedded derivatives
Derivatives embedded in other fi nancial 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 fi nancial 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 fi nancial statements requires
the Group to make estimates and assumptions that a ect 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 di er from these estimates. The estimates and
assumptions which have a signifi cant risk of causing a material
adjustment to the carrying amount of assets and liabilities are:
A . Impairment of go o d w i l l and b r a n ds The Group is required to
test annually or as triggering events occur, whether the goodwill
or brands have su ered any impairment. The recoverable amount
is determined based on value in use calculations. The use of this
method requires the estimation of future cash fl ows and the choice
of a suitable discount rate in order to calculate the present value of
these cash fl ows. Where there is a non-controlling interest, goodwill
is tested for the business as a whole. This involves a notional increase
to goodwill, to refl ect 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
amor tisation 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 benefi ts The determination of the pension
cost and defi ned benefi t obligation of the Group’s defi ned benefi t
pension schemes depends on the selection of certain assumptions
which include the discount rate, infl ation rate, salary growth,
mortality and expected return on scheme assets. Di erences
arising from actual experiences or future changes in assumptions
will be refl ected 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, gift cards and loyalty schemes Accruals for sales
returns, deferred income in relation to loyalty scheme redemptions
and gift card and credit voucher redemptions are estimated on the
basis of historical returns and redemptions. These are recorded so as
to allocate them to the same period as that in which original revenue
is recorded. These balances are reviewed regularly and updated to
refl ect management’s latest best estimates. However, actual returns
and redemptions could vary from those estimates.
F. Inventory valuation Inventories are stated at the lower of cost
and net realisable value, on a weighted average cost basis which
requires the estimation of the eventual sales price of goods to
customers in the future.
Non-underlying items
The directors believe that the underlying profi t 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 profi t before
tax measure is not a recognised profi t measure under IFRS and may
not be directly comparable with adjusted profi t measures used by
other companies. The adjustments made to repor ted profi t before
tax are to exclude the following:
> Profi ts and losses on the disposal of properties or impairments of
properties where commitment to close has been demonstrated.
> One-o pension credits arising on changes to the defi ned benefi t
schemes’ rules and practices.
> Interest relating to signifi cant and one-o repayments from tax
litigation claims.
> Restructuring costs.
> Signifi cant and one-o impairment charges and provisions that
distort underlying trading.
> Fair value movement in fi nancial instruments.
> Costs relating to strategy changes that are not considered
normal operating costs of the underlying business.
> Adjustment in income 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 fi nancial products.
> Ex-gratia payment received from HSBC in relation to the mis-
selling of fi nancial products.