Vtech 2009 Annual Report Download - page 41

VTech Holdings Ltd Annual Report 2009 39
PRINCIPAL ACCOUNTING POLICIES (CONTINUED)
R 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.
S 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, the Group’s net
obligations arising under the defined benefit scheme
are assessed and calculated by a qualified actuary
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. When
the benefits of a plan are improved, the portion
of the increased benefit relating to past service by
employees is recognised as an expense in the profit
or loss on a straight-line basis over the average period
until the benefits become vested. If the benefits vest
immediately, the expense is recognised immediately in
profit or loss.
(iii) Equity and equity related compensation benefits
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 reflect 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).
T Derivative 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 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 recognised initially
at fair value. At each balance sheet date, the fair value is
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.