Peachtree 2015 Annual Report Download - page 114

The Sage Group plc | Annual Report & Accounts 2015
112
Basis of preparation and critical accounting estimates and judgements continued
1 Basis of preparation and critical accounting estimates and judgements continued
Foreign currency transactions are recorded at the rates of exchange prevailing on the dates of the transactions. Foreign currency
monetary items are translated at the rates prevailing at the end of the reporting period. Non-monetary items carried at fair value that are
denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary
items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlements of monetary items and on the retranslation of monetary items are included in profit or loss
for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for
the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised in
equity. For such non-monetary items, any exchange component of that gain or loss is also recognised in equity.
The assets and liabilities of the Group’s subsidiaries outside of the UK are translated into sterling using period end exchange rates. Income
and expense items are translated at the average exchange rates for the period. Where differences arise between these rates, they are
recognised in other comprehensive income and the translation reserve.
When a foreign operation is partially disposed of or sold, exchange differences that were recorded in other comprehensive income are
recycled in the income statement as part of the gain or loss on sale, with the exception of exchange differences recorded in equity prior
to the transition to IFRS on 1 October 2004, in accordance with IFRS 1, “First-time Adoption of International Financial Reporting Standards”.
Critical accounting estimates and judgements
The preparation of financial statements requires the use of accounting estimates and assumptions by management. It also requires
management to exercise its judgement in the process of applying the accounting policies. We continually evaluate our estimates,
assumptions and judgements based on available information. The areas involving a higher degree of judgement or complexity are
described below.
The judgements and management’s rationale in relation to these accounting estimates and judgements are assessed and where material
in value or in risk, are discussed with the Audit Committee.
Revenue recognition
Approximately 30% of the company’s revenue is generated from sales to partners rather than to end users. The key judgement in accounting
for the three principal ways in which our business partners are remunerated is determining whether the business partner is a customer of
the Group in respect of the initial product sale. The key criteria in this determination is whether the business partner has paid for and taken
on the risks and rewards of ownership of the software product from Sage. At this point the business partner is able to sell on the licence to
the end user at a price of its determination and consequently bears the credit risk of the onward sale.
Where the business partner is a customer of Sage, there are two ways in which they can be remunerated. Firstly, there are discounts
granted as a discount from the list price. These discounts are negotiated between the company and the business partner prior to
the sale and invoices are raised, and revenue booked is based on the discounted price. Secondly, there are further discounts given to
business partners for subsequent renewals or increased sales to the end user. These discounts are recognised as a deduction from the
incremental revenue earned.
Where the business partner is not a customer of Sage and their part in the sale has simply been in the form of a referral, they are
remunerated in the form of a commission payment. These payments are treated as a cost within selling and administrative costs.
An additional area of judgement is the recognition and deferral of revenue on bundled products, for example the sale of a perpetual licence
with an annual maintenance and support contract. When products are bundled together for the purpose of sale, the associated revenue, net
of all applicable discounts, is allocated between the constituent parts of the bundle on a relative fair value basis. The Group has a systematic
basis for allocating relative fair values in these situations, based upon published list prices.
Goodwill impairment
There are two key judgement areas in relation to goodwill impairment.
The first is the ongoing appropriateness of the cash-generating units (“CGUs”) for the purpose of impairment testing. In the current year
CGUs were assessed in the context of the Group’s evolving business model, the Sage 2020 initiative and the shift to global product
development. As management continues to monitor goodwill at a country level and product cash flows are still predominantly generated
by the existing product base within each country, it was determined that the existing CGUs remain appropriate.
The other key judgement area relates to the assumptions applied in calculating the value in use of the CGUs being tested for impairment.
The key assumptions applied in the calculation relate to the future performance expectations of the business – average medium-term
revenue growth, long term operating margin and long term growth rate – as well as the discount rate to be applied in the calculation.
These key assumptions used in performing the impairment assessment are disclosed in note 6.1.