Marks and Spencer 2016 Annual Report Download - page 96

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MARKS AND SPENCER GROUP PLC
FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
CONTINUED
1 ACCOUNTING POLICIES CONTINUED
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 . Im pai rme nt of goo d wil l a nd bra n ds : The Group is required to
test annually or as triggering events occur, whether the goodwill
or brands are subject to 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. Determination of the appropriate period of future
cashfl ows is also necessary where it would be inappropriate to
assume the asset will continue into perpetuity. 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 notes 5 and 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 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 scheme accruals: 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 the 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 and provisioning: 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. Provisions are recognised
where the net realisable value is assessed to be lower than cost.
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 reported profi t before
tax are to exclude the following:
> Profi ts and losses on the disposal of properties or impairments of
properties where a 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; and
> Ex-gratia payment received from HSBC in relation to the
mis-selling of fi nancial products.