Vtech 2007 Annual Report Download - page 37

VTech Holdings Ltd
Annual Report 2007 35
PRINCIPAL ACCOUNTING POLICIES (continued)
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 fi nancial
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 profi ts 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 Benefi ts
The Group operates a number of defi ned contribution
retirement schemes throughout the world, including Hong
Kong, and a defi ned benefi t retirement scheme in Hong
Kong. The assets of all schemes are held separately from
those of the Company and its subsidiaries.
(i) Defi ned contribution plans
Contributions to the defi ned contribution schemes are
at various funding rates that are in accordance with the
local practice and regulations. Contributions relating to
the defi ned contribution schemes are charged to the
income statement as incurred.
(ii) Defi ned benefi t plans
For long-term employee benefi ts, pension costs arising
under the defi ned benefi t 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 qualifi ed 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 fl ows of benefi ts 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 benefi ts
The fair value of share options granted to employees is
recognised as an employee cost with a corresponding
increase in a capital reserve within equity. The fair
value is measured at grant date using the Black-Scholes
option pricing model, taking into account the terms
and conditions upon which the options were granted.
Where the employees have to meet vesting conditions
before becoming unconditionally entitled to the share
options, the total estimated fair value of the share
option is spread over the vesting period, taking into
account the probability that the options will vest.
During the vesting period, the number of share options
that is expected to vest is reviewed. Any adjustment
to the cumulative fair value recognised in prior years is
charged/credited to the consolidated income statement
for the year of the review, unless the original employee
expenses qualify for recognition as an asset, with a
corresponding adjustment to the capital reserve. On
vesting date, the amount recognised as an expense
is adjusted to refl ect the actual number of share
options that vest (with a corresponding adjustment
to the capital reserve) except where forfeiture is only
due to not achieving vesting conditions that relate to
the market price of the Company’s shares. The equity
amount is recognised in the capital reserve until either
the option is exercised (when it is transferred to the
share premium account) or the option expires (when it is
released directly to revenue reserves).
U Financial Instruments
The Group’s activities expose it to fi nancial 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 fi nancial derivatives is governed by the Group’s
policies approved by the Board of Directors, which provide
written principles on the use of fi nancial derivatives.
Derivative fi nancial 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 fi rm commitment
(cash fl ow hedge), or a hedge of a net investment in a
foreign entity.
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