Vtech 2003 Annual Report Download - page 36

VTech Holdings Ltd34
Principal Accounting Policies
B BASIS OF CONSOLIDATION (continued) Associates are those
companies, not being subsidiaries, in which the Group has an
attributable interest of 20% or more of the voting rights held for
the long term or over which the Group exercises significant
influence, but not control. The consolidated financial statements
include the Group’s share of the total recognized gains and losses
of associates under the equity method, from the date that
significant influence commences until the date that significant
influences ceases. When the Group’s share of losses exceeds the
carrying amount of the associate, the carrying amount is reduced
to nil and recognition of further losses is discontinued except to
the extent that the Group has incurred obligations in respect of
that associate. Investments in associates are stated at cost less
provision for impairment losses (refer to note L) in the Company’s
balance sheet.
C GOODWILL Goodwill arising on acquisition represents the
excess of the cost of an acquisition over the fair value of the
Group’s share of the net identifiable assets of the acquired
subsidiary or associate. Goodwill is stated at cost less
accumulated amortization and impairment losses (refer to note
L). Amortization of goodwill is calculated using the straight-line
method over its estimated useful life not exceeding five years.
The profit or loss on disposal of a subsidiary or an associate is
calculated by reference to the net assets at the date of disposal
including the attributable amount of goodwill which remains
unamortized.
D NEGATIVE GOODWILL Negative goodwill arising on the
acquisition represents the excess fair values of the net
identifiable assets and liabilities acquired over the cost of the
acquisition.
To the extent that negative goodwill relates to an expectation
of future losses and expenses that are identified in the plan of
acquisition and can be measured reliably, but which do not
represent identifiable liabilities at the date of acquisition,
that portion of negative goodwill will be recognized as income in
the income statement when the future losses and expenses are
recognized.
To the extent that negative goodwill does not relate to
identifiable expected future losses and expenses at the date of
acquisition, negative goodwill will be recognized as income in
the income statement on a systematic basis over the remaining
useful life of the identifiable acquired depreciable/amortizable
assets. The amount of any negative goodwill in excess of the fair
values of acquired identifiable non-monetary assets is recognized
immediately in the income statement.
The gain or loss on disposal of a subsidiary or an associate
includes the unamortized balance of negative goodwill relating
to the subsidiary or associate disposed of.
E FOREIGN CURRENCIES Transactions denominated in foreign
currencies are translated into United States dollars at the foreign
exchange rates ruling at the transaction dates. Monetary assets
and liabilities denominated in foreign currencies are translated
into United States dollars at the rates of exchange ruling at the
balance sheet date. Income statements of foreign entities are
translated into the Group’s reporting currency at average
exchange rates for the year and balance sheets are translated
at the exchange rates ruling at the balance sheet date.
Net exchange differences arising from the translation of the
financial statements of subsidiaries and associates expressed in
foreign currencies are taken directly to exchange reserve.
All other exchange differences are dealt with in the consolidated
income statement.
F REVENUE RECOGNITION Revenue from the sale of goods
is recognized in the income statement when the significant
risks and rewards of ownership have been transferred to
the buyer. Revenue is stated net of sales taxes and discounts,
after eliminating sales within the Group.
Revenue from the provision of services is recognized when the
services are rendered.
Interest income is recognized on a time-apportioned basis that
takes into account the effective yield on the asset. Dividend
income is recognized when the Group’s right to receive payment
is established.
G RESEARCH AND DEVELOPMENT Research and development
costs comprise all costs that are directly attributable to research
and development activities or that can be allocated on a
reasonable basis to such activities.
Expenditure on research activities is recognized as an expense
in the period in which it is incurred.
Expenditure on development activities is capitalized only if the
product or process is clearly defined, technically and
commercially feasible, the attributable expenditure is separately
identifiable and the Group has sufficient resources and the
intention to complete development. The expenditure capitalized
includes the cost of materials, direct labour and an appropriate
proportion of overheads which are directly attributable to
development activities. Capitalized development costs are stated
at cost less accumulated amortization and impairment losses
(refer to note L). Development expenditure that does not meet
the above criteria is recognized as an expense in the period in
which it is incurred.
Amortization is calculated to write off capitalized development
costs on a straight-line basis over their estimated useful lives,
commencing from the date when the products are put into
commercial production.