Vtech 2004 Annual Report Download - page 35

33
Principal
Accounting Policies
VTech Holdings Ltd Annual Report 2004
less at acquisition. Bank overdrafts that are repayable on demand
and form an integral part of the Group’s cash management are also
included as a component of cash and cash equivalents.
For the purpose of the balance sheet, cash and cash equivalents
are cash on hand, deposits with banks and other financial
institutions, which are not restricted in its use. Bank overdrafts are
included in borrowings in current liabilities.
Q TRADE CREDITORS Trade and other creditors are stated
at their cost.
R PROVISIONS A provision is recognised in the balance
sheet when the Group has a legal or constructive obligation as a
result of past events, and it is probable that an outflow of
economic benefits will be required to settle the obligation, and a
reliable estimate of the amount of the obligation can be made.
The Group recognises the estimated liability on expected return
claims with respect to products sold. This provision is calculated
based on past experience of the level of repairs and returns.
The Group provides for expenses related to closure of business
locations and reorganisations of the Group’s operations which are
subject to detailed formal plans that are under implementation or
have been communicated to those affected by the plans.
The Group recognises the expected costs of accumulating
compensated absences when employees render a service that
increases their entitlement to future compensated absences,
measured as the additional amount that the Group expects to pay
as a result of the unused entitlement that has accumulated at the
balance sheet date.
S INCOME TAX Income tax comprises current and deferred
tax. Current tax is calculated on taxable income by applying the
applicable tax rates. Deferred tax is provided using the balance
sheet liability method in respect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for taxation purpose. Deferred tax
is calculated on the basis of the enacted tax rates that are expected
to apply in the period when the asset is being realised or the
liability is settled. The effect of any changes in tax rate is charged
or credited to the income statement. Deferred tax assets and
liabilities are not discounted.
A deferred tax asset is recognised only to the extent that it is
probable that future taxable profits will be available against which
the asset can be utilised.
Provision for withholding tax which could arise on the remittance
of earnings retained overseas is only made where there is a current
intention to remit such earnings.
T EMPLOYEE BENEFITS The Group operates a number of
defined contribution retirement schemes throughout the world,
including Hong Kong, and a defined benefit retirement scheme in
Hong Kong. The assets of all schemes are held separately from
those of the Company and its subsidiaries.
(i) Defined contribution plans Contributions to the defined
contribution schemes are at various funding rates that are in
accordance with the local practice and regulations. Contributions
relating to the defined contribution schemes are charged to the
income statement as incurred.
(ii) Defined benefit plans For long-term employee
benefits, pension costs arising under the defined benefit scheme
are assessed using the projected unit credit method. Under this
method, the cost of providing pensions is charged to the income
statement so as to spread the regular cost over the service lives
of employees in accordance with the advice of qualified actuaries
who carry out a full valuation of the plan every year. Plan assets
are measured at fair value. Pension obligations are measured as
the present value of the estimated future cash flows of benefits
derived from employee past service, with reference to market
yields on high quality corporate bonds which have terms to
maturity approximating the terms of the related liability. All
actuarial gains and losses are spread forward over the average
remaining service lives of employees. The net assets or liabilities
resulting from the valuation of the plan are recognised in the
Group’s balance sheet.
(iii) Equity and equity related compensation benefits The
Company has a number of share option schemes which may grant
options to certain employees of the Company and subsidiaries of
the Group. No compensation cost of the obligation is recognised at
the date of the grant. The option exercise prices are set out in note
18 on the financial statements. When the options are exercised,
shareholders’ equity is increased by the amount of the proceeds
received.
U FINANCIAL INSTRUMENTS The Group’s activities expose
it to financial risks of changes in foreign currency exchange rates
and interest rates. The Group uses foreign exchange forward
contracts and interest rate swap contracts to hedge certain
exposures.
The use of financial derivatives is governed by the Group’s policies
approved by the Board of Directors, which provide written
principles on the use of financial derivatives.
Derivative financial instruments are initially recognised in the
balance sheet at cost and subsequently are remeasured at their fair
value. The method of recognising the resulting gain or loss is
dependent on the nature of the item being hedged. On the date a
derivative contract is entered into, the Group designates certain
derivatives as either a hedge of the fair value of a recognised asset
or liability (fair value hedge), a hedge of a forecasted transaction or
of a firm commitment (cash flow hedge), or a hedge of a net
investment in a foreign entity.
Changes in the fair value of derivatives that are designated and
qualifies as fair value hedges and that are highly effective, are
recorded in the consolidated income statement, along with any
changes in the fair value of the hedged asset or liability that is
attributable to the hedged risk.