Vtech 2005 Annual Report Download - page 40

Notes to the Financial Statements
38 VTech Holdings Ltd Annual Report 2005
Principal Accounting Policies (continued)
P 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.
Q 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.
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.
R 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 19 on the financial
statements. When the options are exercised, shareholders’ funds
is increased by the amount of the proceeds received.