Significant Accounting Policies
1 BASIS OF PREPARATION
DMGT is a company incorporated in the United Kingdom under the Companies Act 1985. The address of the registered office is given on the Shareholder Information page.
These financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board as adopted by the European Union and with those parts of the Companies Act 1985 applicable to companies preparing their accounts under IFRS.
The principal accounting policies used in preparing this information are set out in note 2.
These financial statements have also been prepared in accordance with the accounting policies set out in the 2007 Annual Report and Accounts, as amended by the following new accounting standards.
Impact of new accounting standards
In the current year, the Group has adopted the following accounting standards:
IFRS 7, Financial Instruments: Disclosures and IAS 1, Presentation of Financial Statements (effective for periods beginning on or after 1st January, 2007). The impact of the adoption of IFRS 7 and the changes to IAS 1 has been to expand the disclosures provided in the Group’s financial statements regarding financial instruments and management of capital (see note 30).
IFRIC 11 IFRS 2 Group and Treasury Share Transactions (effective for periods beginning on or after 1st March, 2007). The adoption of this interpretation has not had any significant impact on the Group’s financial statements.
At the date of authorisation of these financial statements, the following standards have been issued but not applied to the information in these financial statements since they do not apply to this reporting period:
Amendment to IAS 1, Presentation of Financial Statements (effective for periods commencing on or after 1st January, 2009). This amendment introduces changes to the way in which movements in equity must be disclosed and requires an entity to disclose each component of other comprehensive income not recognised in profit or loss. The amendment also requires disclosure of the amount of income tax relating to each component of other comprehensive income as well as several other minor disclosure amendments.
Amendment to IAS 23, Borrowing Costs (effective for periods commencing on or after 1st January, 2009). This standard requires all borrowing costs which are directly attributable to an acquisition construction or production of a qualifying asset to form part of the cost of that asset. The Group does not expect a significant impact from the adoption of this standard.
Amendment to IAS 27, Consolidated and Separate Financial Statements (effective for periods commencing on or after 1st July, 2009). The amendment introduces changes to the accounting for partial disposals of subsidiaries, associates and joint ventures. Adoption of these amendments is not expected to significantly impact the measurement, presentation or disclosure of future disposals.
Amendments to IAS 32, Puttable financial instruments and obligations arising on liquidation (effective for periods beginning on or after 1st January, 2009). The amendments are relevant to entities that have issued financial instruments that are (i) puttable financial instruments or (ii) instruments, or components of instruments that impose on the entity an obligation to deliver to another party a pro-rata share of the net assets on liquidation only. As a result of the amendments, some financial instruments that currently meet the definition of a financial liability will be classified as equity because they represent the residual interest in the net assets of the entity. The amendments set out extensive detailed criteria to be met in order to be able to classify these instruments as equity. The impact of these amendments is restricted to specific cases and no analogies can be made. The Group does not expect a significant impact from the adoption of this standard.
Amendments to IAS 39, Financial instruments: Recognition and Measurement (effective for periods commencing on or after 1st July, 2009). The amendments clarify treatment of inflation in a financial hedged item and one-sided risks in a hedged item. The Group does not expect a significant impact from the adoption of this standard.
Amendment to IFRS 2, Share-based Payment (effective for periods commencing on or after 1st January, 2009). The amendments clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Group does not expect a significant impact from the adoption of this standard.
Amendment to IFRS 3, Business Combinations (effective for periods commencing on or after 1st July, 2009). The amendment introduces changes that will require acquisition related costs (including professional fees previously capitalised) to be expensed and adjustments to contingent consideration to be recognised in income and will allow the full goodwill method to be used when accounting for non-controlling interests. This will result in a change to the Group’s accounting policy for purchases of stakes in controlled entities.
IFRS 8, Operating Segments (effective for periods beginning on or after 1st January, 2009). IFRS 8 sets out disclosure requirements concerning an entity’s operating segments, products, services, geographical areas in which it operates and its major customers. IFRS 8 replaces IAS 14, Segmental Reporting. Adoption of this standard is not expected to change the disclosures already made in the DMGT Report and Accounts significantly.
2008 Annual Improvements (the majority of changes will effect periods beginning on or after 1st January, 2009). The standard makes 41 amendments to 25 IFRSs as part of the first annual improvements project. The amendments include: restructuring IFRS 1, mainly to remove redundant transitional provisions; an amendment to bring property under construction or development for future use as for future use as an investment property within the scope of IAS 40. Such property currently falls within the scope of IAS 16; and an amendment to clarify the circumstances in which an entity can recognise a prepayment asset for advertising or promotional expenditure. Recognition of an asset would be permitted up to the point at which the entity has access to the goods purchased or up to the point of receipt of services. The standard is not expected to have a significant impact on the Group. In relation to the amendment to IAS 38 regarding prepayments for advertising or promotional expenditure, the Group will be required to reassess its accounting approach to reflect the requirements of the standard.
The following interpretations have been issued which are not applicable to the Group since they are only effective for accounting periods beginning on or after 28th September, 2008. The adoption of these interpretations is not expected to have any significant impact on the Group’s financial statements.
IFRIC 12 Service Concession Agreements (effective for periods beginning on or after 1st January, 2008)
IFRIC 13 Customer Loyalty Programmes (effective for periods beginning on or after 1st July, 2008)
IFRIC 14 The Limit on a Defined Benefit Asset Minimum Funding Requirements and their Interaction (effective for periods beginning on or after 1st January, 2008)
IFRIC 15, Agreements for the Construction of Real Estate (effective for periods beginning on or after 1st January, 2009)
IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for periods beginning on or after 1st October, 2008)
2 SIGNIFICANT ACCOUNTING POLICIES
The Group financial statements incorporate the financial statements of the company and all of its subsidiaries together with the Group’s share of all of its interests in joint ventures and associates. The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments.
Accounting for subsidiaries
A subsidiary is an entity controlled by the Group. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the income statement from the effective date of acquisition or up to the date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.
All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Minority interests
Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein. Minority interests consist of the amount of those interests at the date of the original business combination and the minority’s share of changes in equity since the date of the combination. Losses attributable to the minority in excess of the minority’s share in equity are allocated against the interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover such losses. When the subsidiary subsequently reports profits, the minority does not participate until the group has recovered all of the losses of the minority it previously reported.
Business combinations
The acquisition of subsidiaries is accounted for using the purchase method. The cost of the acquisition is measured as the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities are recognised at their fair values at the acquisition date, other than non-current assets and liabilities of disposal groups which are recognised at fair value less costs to sell. Where an adjustment to fair values relating to previously held interests (including interests which were equity accounted under IAS 28, Investments in Associates) is required on achieving control, this is accounted for as an adjustment directly in equity.
Goodwill arising on acquisitions is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. Where control is achieved in more than one exchange transaction, goodwill is calculated separately for each transaction based on the cost of each transaction and the appropriate share of the acquiree’s net assets based on net fair values at the time of each transaction.
The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.
Purchase and sale of shares in a controlled entity
Where the Group’s interest in a controlled entity increases no adjustments are recorded to the fair values of the assets already held on the Balance Sheet. The Group calculates the goodwill arising as the difference between the cost of the additional interest acquired and the increase in the Group’s interest in the fair value of the subsidiary’s net assets at the date of the exchange transaction. Any difference between the cost of the additional interest, goodwill arising and the existing carrying value of the minority share of net assets is adjusted directly in equity.
Where the Group’s interest in a controlled entity decreases, which does not result in a change of control, the Group increases the minority interest’s share of net assets by the book value of the share of net assets disposed of. Any profit or loss on disposal of the share of net assets to the minority interest is calculated by reference to the consideration received, the book value of the share of net assets disposed and a proportion of any relevant goodwill in the Balance Sheet relating to the subsidiary.
Interests in joint ventures and associates
A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control, that is when the strategic financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control.
An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.
The post-tax results of joint ventures and associates are incorporated in the Group’s results using the equity method of accounting. Under the equity method, investments in joint ventures and associates are carried in the consolidated Balance Sheet at a cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the joint venture and associate, less any impairment in the value of investment. Losses of joint ventures and associates in excess of the of the Group’s interest in that joint venture or associate are not recognised. Additional losses are provided for, and a liability is recognised, only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture or associate.
Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the joint venture or associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment.
Foreign currencies
For the purpose of presenting Consolidated Financial Statements, the assets and liabilities of entities with a functional currency other than sterling are translated to using exchange rates prevailing on the Balance Sheet date. Income and expense items and cash flows are translated at the average exchange rates for the period and exchange differences arising are recognised directly in equity. On disposal of a foreign operation, the cumulative amount recognised in equity relating to that operation is recognised in the income statement as part of the gain or loss on sale.
The Group records foreign exchange differences arising on retranslation of foreign operations within the translation reserve in equity.
In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency are recorded at the exchange rate prevailing on the date of the transaction. At each Balance Sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the Balance Sheet date.
Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rate prevailing on the date when fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the period.
Goodwill, intangible assets and fair value adjustments arising on the acquisition of foreign operations after transition to IFRS are treated as part of the assets and liabilities of the foreign operation and are translated at the closing rate. Goodwill which arose pre-transition to IFRS is not translated.
In respect of all foreign operations, any cumulative exchange differences that have arisen before 4th October, 2004, the date of transition to IFRS, were reset to nil and will be excluded from the determination of any subsequent profit or loss on disposal.
Intangible assets
Goodwill
Goodwill and intangible assets acquired arising on the acquisition of an entity represents the excess of the cost of acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity recognised at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is tested annually for impairment. Negative goodwill arising on an acquisition is recognised directly in the income statement.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the closing exchange rates on the Balance Sheet date.
On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss recognised in the income statement on disposal.
Goodwill arising before the date of transition to IFRS, on 4th October, 2004, has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.
Impairment of goodwill
Goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment either annually or more frequently if events or changes in circumstances indicate a possible decline in the carrying value.
For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows, known as cash-generating units. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit, pro-rated on the basis of the carrying amount of each asset in the unit, but subject to not reducing any asset below its recoverable amount. An impairment loss recognised for goodwill is not reversed in a subsequent period.
The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset or cash-generating unit.
Licences
Radio licences are stated at cost less accumulated amortisation. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives from the commencement of service of the network, estimated by management to be 20 years.
Computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised over their estimated useful lives, being three to five years.
Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that are expected to generate economic benefits exceeding costs and directly attributable overheads are capitalised as intangibles.
Computer software which is integral to a related item of hardware equipment is accounted for as property, plant and equipment.
Costs associated with maintaining computer software programmes are recognised as an expense as incurred.
At each Balance Sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired.
Research and development expenditure
Expenditure on research activities is recognised as an expense in the period in which it is incurred.
An internally-generated intangible asset arising from the Group’s development activity, including software for internal use, is recognised only if the asset can be separately identified, it is probable the asset will generate future economic benefits, the development cost can be measured reliably, the project is technically feasible and the project will be completed with a view to sell or use the asset. Additionally, guidance in Standing Interpretations Committee (SIC) 32 has been applied in accounting for internally developed website development costs.
Internally-generated intangible assets are amortised on a straight-line basis over their estimated useful lives, when the asset is available for use, and are reported net of impairment losses. Where no internally-generated intangible asset can be recognised, development expenditure is charged to the income statement in the period in which it incurred.
Marketing costs
Marketing and promotional costs are charged to the income statement in the period in which they are incurred.
Other intangible assets
Other intangible assets with finite lives are stated at cost less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a reducing balance or straight-line basis over the estimated useful lives of the intangible assets from the date they become available for use. The estimated useful lives are as follows:
| Publishing rights, titles and exhibitions | 20 years |
|---|---|
| Radio licences | 20 years |
| Brands | 20 years |
| Market and customer related databases | 3 – 20 years |
| Customer relationships | 3 – 20 years |
| Computer software licences | 3 – 5 years |
Property, plant and equipment
Land and buildings held for use are stated in the Balance Sheet at their cost, less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
Assets in the course of construction are carried at cost, less any recognised impairment loss. Depreciation of these assets commences when the assets are ready for their intended use.
Fixtures and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease.
The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement.
Depreciation is charged so as to write off the cost of assets, other than property, plant and equipment under construction using the straight-line method, over their estimated useful lives as follows:
| Freehold buildings and long leasehold properties | 50 years |
|---|---|
| Short leasehold premises | the term of the lease |
| Plant and equipment | 3 – 25 years |
| Depreciation is not provided on freehold land | |
Inventory
Inventory is stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. The Group uses the Average Cost (AVCO) method in the Newspaper divisions and the First In First Out (FIFO) method in the remaining divisions.
Pre-publication costs
Pre-publication costs represent direct costs incurred in the development of titles prior to their publication. These costs are recognised as work in progress on the Balance Sheet to the extent that future economic benefit is virtually certain and can be measured reliably.
Cash and cash equivalents
Cash and cash equivalents shown in the Balance Sheet includes cash, short-term deposits and other short-term highly liquid investments with an original maturity of three months or less. For the purpose of the Group cash flow statement, cash and cash equivalents are as defined above, net of bank overdrafts.
Revenue
Group revenue comprises revenue of the Company and its subsidiary undertakings. Revenue is stated net of value added tax, trade discounts and commission where applicable and is recognised using several methods. Subscriptions revenue, including revenue from Information Services, is recognised over the period of the subscription or contract. Publishing and circulation revenue is recognised on issue of publication or report. Advertising is recognised on issue of publication, over the period of the online campaign or date of broadcast. Contract print revenue is recognised on completion of the print contract. Exhibitions, Training and Events revenues are recognised over the period of the event.
Operating profit before share of results of joint ventures and associates
The Group discloses as operating profit, profit before share of results from associates and joint ventures, other gains and losses, investment income and finance costs. The Directors believe that this measure is useful to readers as it shows the results of the Group’s operations before contribution from joint ventures and associates and because it excludes one-off gains and losses on disposal of businesses, properties and similar items of a non-recurring nature.
Other gains and losses
Other gains and losses comprise profit or loss on sale of trading investments, profit or loss on sale of property, plant and equipment, impairment of available-for-sale assets, profit or loss on sale of businesses and profit or loss on sale of joint ventures and associates.
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership of the asset to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments as determined at the inception of the lease. The corresponding liability to the lessor is included in the Balance Sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in the income statement.
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.
Dividends
Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. Dividends are recognised as a distribution in the period in which they are approved by the shareholders. Interim dividends are recorded in the period in which they are paid.
Borrowing costs
Unless capitalised under IAS 23 all borrowing costs are recognised in the income statement in the period in which they are incurred. Finance charges, including premiums paid on settlement or redemption and direct issue costs and discounts related to borrowings, are accounted for on an accruals basis and charged to the income statement using the effective interest method.
Retirement benefits
As permitted by IFRS 1, First-time adoption of International Financial Reporting Standards, the Group elected to recognise all cumulative actuarial gains and losses in the pension schemes operated by the Group at the date of transition to IFRS. Pension scheme assets are measured at market value at the Balance Sheet date. Scheme liabilities are measured using the projected unit credit method and discounted at a rate reflecting current yields on high quality corporate bonds having regard to the duration of the liability profiles of the schemes.
For defined benefit retirement plans, the difference between the fair value of the plan assets and the present value of the plan liabilities is recognised as an asset or liability on the Balance Sheet. Actuarial gains and losses arising in the year are taken to the statement of recognised income and expense. For this purpose, actuarial gains and losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because of differences between the previous actuarial assumptions and what has actually occurred. For defined benefit schemes, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out triennially. In accordance with the advice of independent qualified actuaries in assessing whether to recognise a surplus the Group has regard to the principles set out in IFRIC 14.
Other movements in the net surplus or deficit are recognised in the income statement, including the current service cost, any past service cost and the effect of any curtailment or settlements. The interest cost less the expected return on assets is also charged to the income statement. The amount charged to the income statement in respect of these plans is included within operating costs or in the Group’s share of the results of equity accounted operations as appropriate.
SInce the assets and liabilities of the Group’s defined benefit plans cannot be allocated to individual entities on a fair and reasonable basis, the scheme’s assets and liabilities are not attributed to reporting segments and the pension charge in each segment in the segmental analysis represents the contributions payable for the period.
The Group’s contributions to defined contribution pension plans are charged to the income statement as they fall due.
Taxation
Income tax expense represents the sum of the current tax payable and deferred tax for the year.
The current tax payable or recoverable is based on the taxable profit for the year. Taxable profit differs from profit as reported in the income statement because some items of income or expense are taxable or deductible in different years or may never be taxable or deductible. The Group’s liability for current tax is calculated using the UK and foreign tax rates that have been enacted or substantively enacted by the Balance Sheet date.
Current tax assets and liabilities are offset and stated net in the Balance Sheet when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they either relate to income taxes levied by the same taxation authority or on the same taxable entity or on different taxable entities which intend to settle the current tax assets and liabilities on a net basis.
Deferred tax is the tax expected to be payable or recoverable in the future arising from temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. It is accounted for using the Balance Sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary differences arise from the initial recognition of goodwill or from the initial recognition other than in a business combination of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising in investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Goodwill arising on business combinations also includes amounts corresponding to deferred tax liabilities recognised in respect of acquired intangible assets. A deferred tax liability is recognised to the extent that the fair value of the assets for accounting purposes exceeds the value of those assets for tax purposes and will form part of the associated goodwill on acquisition.
The carrying amount of deferred tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted by the Balance Sheet date, and is not discounted.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current assets and liabilities on a net basis.
Tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the tax is also recognised directly in equity.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s Balance Sheet when the Group becomes a party to the contractual provisions of the instrument.
Financial assets and liabilities are offset and the net amount reported in the Balance Sheet when there is a legally enforceable right to settle on a net basis, or realise the asset and liability simultaneously and where the Group intends to net settle.
Financial assets
Trade receivables
Trade receivables do not carry any interest and are stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.
Available-for-sale investments
Investments and financial assets are recognised and de-recognised on a trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the time frame established by the market concerned, and are measured at fair value, including transaction costs.
Investments are classified as either held-for-trading or available-for-sale. Where securities are held-for-trading purposes, gains and losses arising from changes in fair value are included in net profit or loss for the period. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net profit or loss for the period.
The fair value of listed securities is determined based on quoted market prices, and of unlisted securities on management’s estimate of fair value determined by discounting future cash flows to net present value using market interest rates prevailing at the year end.
Financial liabilities and equity instruments
Trade payables
Trade payables are not interest bearing and are stated at their nominal value.
Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below:
Capital market and bank borrowings
Interest bearing loans and overdrafts are initially measured at fair value (which is equal to net proceeds at inception), and are subsequently measured at amortised cost, using the effective interest rate method. A portion of the Group’s bonds are subject to fair value hedge accounting as explained below and this portion is adjusted for the movement in the hedged risk to the extent hedge effectiveness is achieved. Any difference between the proceeds, net of transaction costs and the settlement or redemption of borrowings is recognised over the term of the borrowing.
Equity instruments
Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.
Derivative financial instruments and hedge accounting
The Group’s activities expose it to the financial risks of changes in foreign exchange rates and interest rates.
The use of financial instruments is governed by the Group’s policies, which are set out in the Financial and Treasury Review and approved by the Finance Committee of the Board of Directors, which provide written principles on the use of financial instruments consistent with the Group’s risk management strategy. The Group does not use derivative financial instruments for speculative purposes.
Derivative financial instruments are measured at fair value at the date the derivatives are entered into and are subsequently re-measured to fair value at each reporting date. The fair value is determined by using market data and the use of established estimation techniques such as discounted cash flow and option valuation models. The Group designates certain derivatives as:
- Hedges of the change of fair value of recognised assets and liabilities (“fair value hedges”); or
- Hedges of highly probable forecast transactions (“cash flow hedges”); or
- Hedges of net investment in foreign operations (“net investment hedges”)
To qualify for hedge accounting, each individual hedging relationship must be expected to be effective, be designated and documented at its inception and throughout the life of the hedge relationship.
Fair value hedges
The Group’s policy is to use derivative financial instruments (primarily interest rate swaps) to convert a proportion of its fixed rate debt to floating rates in order to hedge the interest rate risk.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk to the extent that the hedge relationship is effective. When the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting, hedge accounting is discontinued.
Cash flow hedges
The Group’s policy is to use certain derivative financial instruments in order to hedge the foreign exchange risk arising from certain firm commitments or forecast highly probable transactions in currencies other than the functional currency of the relevant Group entity.
Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and the ineffective portion is recognised immediately in the income statement.
If a hedged firm commitment or forecast transaction results in the recognition of a non financial asset or liability, then, at the time that the asset or liability is recognised, the associated gains and losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability.
For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects the income statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, revoked, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss previously recognised in equity is included in the income statement for the period.
Net investment hedges
The Group seeks to manage the foreign currency exposure arising on retranslation of the reporting entity’s share of net assets of foreign operations at each reporting date by designating certain derivative financial instruments and foreign currency borrowings as net investment hedging instruments.
Exchange differences arising from the translation of the net investment in foreign operations are recognised directly in equity in the translation reserve. Gains and losses arising from changes in the fair value of the hedging instruments are recognised in equity to the extent that the hedging relationship is effective. Any ineffectiveness is recognised immediately in the income statement of the period.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. Gains and losses accumulated in the translation reserve are included in the income statement on disposal of the foreign operation.
Non-hedged derivatives
The Group uses forward contracts to provide a gain or loss equivalent to income tax payable or receivable on foreign exchange gains or losses incurred when intra group balances are translated to the closing rate at the year end. These contracts (“Tax Equalisation Swaps”) are marked to market with the movement in fair value taken to income. Tax Equalisation Swaps are not capable of being designated as hedging instruments under IAS 39.
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value, with gains and losses reported in the income statement.
Provisions
Provisions are recognised when the Group has a present obligation, legal or constructive, as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the Balance Sheet date, and are discounted to present value where the effect is material.
Share-based payments
The Group issues equity-settled and cash-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the shares that will eventually vest and adjusted for the effect of non-market-based vesting conditions.
Fair value is measured using a binomial pricing model which is calibrated using a Black-Scholes framework. The expected life used in the models has been adjusted, based on management’s best estimate, for the effect of non-transferability, exercise restrictions and behavioural considerations.
A liability equal to the portion of the goods or services received is recognised at the current fair value determined at each Balance Sheet date for cash-settled share-based payments.
The Group has applied the requirements of IFRS 2, Share-based Payments to all equity instruments granted after 7th September, 2002 but not fully vested at 4th October, 2004 the date of transition to IFRS.
Critical accounting judgements and key sources of estimation uncertainty
In addition to the judgement taken by management in selecting and applying the accounting policies set out above, management has made the following judgements concerning the amounts recognised in the Consolidated Financial Statements:
Impairment of goodwill and intangible assets
Determining whether goodwill and intangible assets are impaired requires an estimation of the value in use of the relevant cash generating units. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash generating unit and compare the net present value of these cash flows using a suitable discount rate to determine if any impairment has occurred. A key area of judgement is deciding the long-term growth rate of the applicable businesses and the discount rate applied to those cash flows. The carrying amount of goodwill and intangible assets at the Balance Sheet date was £1,503.5 million (2007 £1,480.1 million) after an impairment loss of £167.8 million (2007 £52.7 million) was recognised during the year (notes 17 and 18).
Acquisitions and intangible assets
The Group’s accounting policy on the acquisition of subsidiaries is to allocate purchase consideration to the fair value of identifiable assets, liabilities and contingent liabilities acquired with any excess consideration representing goodwill. In determining the fair value of assets, liabilities and contingent liabilities acquired significant estimates and assumptions, including assumptions with respect to cash flows and unprovided liabilities and commitments, particularly in respect to tax, are often used. The Group recognises intangible assets acquired as part of a business combination at fair values at the date of the acquisition. The determination of these fair values is based upon management’s judgement and includes assumptions on the timing and amount of future cash flows generated by the assets and the selection of an appropriate discount rate. Additionally, management must estimate the expected useful economic lives of intangible assets and charge amortisation on these assets accordingly.
Acquisition option commitments
Written put options to acquire further stakes in subsidiaries, associates and joint ventures written at the time of business combinations, unless so deeply in the money that they represent in-substance ownership interests, are considered financial instruments under IAS 32 and IAS 39. Put options over a minority stake in a subsidiary give rise to a financial liability under IAS 32. Put options over an associate are within the scope of IAS 39 and are accounted for as derivatives at fair value through profit and loss. Where put options over associates have a fair value of nil, no accounting is required. Written put options are classified within current liabilities if exercisable within one year.
The Group is party to a number of put and call options over the remaining minority interests in some of its subsidiaries. IAS 39 requires the fair value of these acquisition option commitments to be recognised as a liability on the Balance Sheet with a corresponding decrease in reserves. Subsequent changes in the fair value of the liability are reflected in the income statement. On exercise and settlement of the put option liability, cumulative amounts are removed from retained earnings along with the derecognition of the minority interest and recognition of additional goodwill. Key areas of judgement in calculating the fair value of the options are the expected future cash flows and earnings of the business and the discount rate. At 28th September, 2008 the fair value of these acquisition option commitments is £37.1 million (2007 £40.6 million).
Deferred consideration
Estimates are required in respect of the amount of deferred contingent consideration, which is determined according to formulae agreed at the time of the business combination, and normally related to the future earnings of the acquired business. The Directors review the amount of contingent consideration likely to become payable at each Balance Sheet date, the major assumption being the level of future profits of the acquired business. At 28th September, 2008 the Group has outstanding deferred consideration payable amounting to £37.6 million (2007 £55.9 million).
Deferred consideration is discounted to its fair value in accordance with IFRS 3 and IAS 37. The difference between the fair value of these liabilities and the actual amounts payable is charged to the income statement as notional finance costs.
Adjusted profits and exceptional items
The Group presents adjusted earnings by making adjustments for costs and profits which management believe to be exceptional in nature by virtue of their size or incidence or have a distortive effect on current year earnings. Such items would include one off gains and losses on disposal of businesses, properties and similar items of a non-recurring nature together with reorganisation costs and similar charges, tax and by adding back impairment of goodwill and amortisation and impairment of intangible assets. See note 11 for a reconciliation of profit before tax to adjusted profit.
Share-based payments
The Group makes share-based payments to certain employees. These payments are measured at their estimated fair value at the date of grant, calculated using an appropriate option pricing model. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the estimate of the number of shares that will eventually vest. The key assumptions used in calculating the fair value of the options are the discount rate, the Group’s share price volatility, dividend yield, risk free rate of return, and expected option lives. Management regularly perform a true-up of the estimate of the number of shares that are expected to vest, this is dependent on the anticipated number of leavers. See note 38 for further detail.
Taxation
Being a multinational Group with tax affairs in many geographic locations inherently leads to a highly complex tax structure which makes the degree of estimation and judgement more challenging. The resolution of issues is not always within the control of the Group and is often dependent on the efficiency of legal processes. Such issues can take several years to resolve. The Group takes a conservative view of unresolved issues, however the inherent uncertainty regarding these items means that the eventual resolution could differ significantly from the accounting estimates and therefore impact the Group’s results and future cash flows.
Retirement benefit obligations
The cost of defined benefit pension plans is determined using actuarial valuations prepared by the Group’s actuaries. This involves making certain assumptions concerning discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. The assumptions and the resulting estimates are reviewed annually and, when appropriate, changes are made which affect the actuarial valuations and, hence, the amount of retirement benefit expense recognised in the income statement and the amounts of actuarial gains and losses recognised in the statement of recognised income and expense. The carrying amount of the retirement benefit obligation at 28th September, 2008 was a deficit of £41.2 million (2007 surplus £80.6 million). Further details are given in note 31.