Accounting Policies and Critical Accounting Judgements

for the year ended 30 September 2009

 

 

ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of these financial statements are set out below.  These policies have been consistently applied to all the years presented, unless otherwise stated.

 

BASIS OF PREPARATION

These financial statements have been prepared in accordance with EU Endorsed International Financial Reporting Standards (IFRS) and IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS.  The financial statements have been prepared under the historical cost convention.

 

The preparation of financial statements in conformity with IFRSs requires the use of certain critical accounting estimates.  It also requires management to exercise its judgement in the process of applying the Group’s accounting policies.  The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed below.

 

 

RESTATEMENT OF COMPARATIVES

Note 1, Segment information, has been restated as a result of the early adoption of IFRS8, “Operating segments”.

 

Central costs, previously apportioned to the operating segments, are now shown as unallocated.

 

RECENT ACCOUNTING DEVELOPMENTS

The following standards, amendments and interpretations have been issued by the International Accounting Standards Board or by the International Financial Reporting Interpretations Committee (IFRIC). The Group’s approach to these is as follows:

 

(a)         Standards, amendments and interpretations effective in 2009.

 

The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 October 2008 but are not relevant to the Groups operations, or have no significant impact:

 

·           IFRIC 11, “IFRS 2 – Group and treasury share transactions”.

·           IFRIC 12, “Service concession arrangements”.

·           IFRIC 13, “Customer loyalty programmes”.

(b)        Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group.

 

The following new standards, amendments to standards and interpretations have been issued, but are not effective for the financial year beginning 1 October 2008 and have not been adopted early:

 

·            IAS 23 (amendment), “Borrowing costs”, effective for annual periods beginning on or after 1 January 2009. This amendment is not relevant to the Group.

 

·           IFRS 2 (amendment) “Share-based payment”, effective for annual periods beginning on or after 1 January 2009. Management is assessing the impact of changes to vesting conditions and cancellations on the Group’s SAYE schemes.

·           IFRS 3 (amendment), “Business combinations” and consequential amendments to IAS 27, “Consolidated and separate financial statements”, IAS 28, “Investments in associates” and IAS 31, “Interests in joint ventures”, effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. Management is assessing the impact of the new requirements regarding acquisition accounting, consolidation and associates on the Group.

·       IAS 1 (amendment), “Presentation of financial statements”, effective for annual periods beginning on or after 1 January 2009. Management is in the process of developing pro forma accounts under the revised disclosure requirements of this standard.

·       IAS 32 (amendment), “Financial instruments: presentation”, and consequential amendments to IAS 1, “Presentation of financial statements”, effective for annual periods beginning on or after 1 January 2009. This is not relevant to the Group, as the Group does not have any puttable instruments.

• IFRIC 15 Agreements for the Construction of Real Estate.

 

• IFRIC 16 Hedges of a Net Investment in a Foreign Operation.

 

• IFRIC 17 Distributions of Non-Cash Assets to Owners.

 

• IFRIC 18 Transfers of Assets from Customers.

The Directors anticipate that the adoption of these standards and interpretations in future periods will have no material impact 

on the net assets or results of the Group.

 

(c)    Standards, amendments and interpretations to existing standards that have been adopted early by the Group.

 

·           IFRS 8, “Operating segments”, effective for annual periods beginning on or after 1 January 2009. IFRS 8 replaces IAS 14, “Segment reporting”, and requires a “management approach” under which segment information is presented on the same basis as that used for internal reporting purposes.

BASIS OF CONSOLIDATION

The consolidated financial statements incorporate the financial results and position of the Group and its subsidiaries.

 

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights.

 

Subsidiaries are fully consolidated from the date on which control is transferred to the Group.  They are de-consolidated from the date that control ceases.

 

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group.  The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition.  Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest.  Intra-group transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless costs cannot be recovered.  Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group.

 

FOREIGN CURRENCIES

The Group’s presentational currency is sterling.  The results and financial positional of all subsidiaries and associates that have a functional currency different from sterling are translated into sterling as follows:

 

Ÿ   assets and liabilities are translated at the closing rate at the  balance sheet date;

 

Ÿ   income and expenses are translated at average rates and all resulting exchange differences are recognised as a separate component of equity.

 

Foreign currency transactions are initially recorded at the exchange rate ruling at the date of the transaction.  Foreign exchange gains and losses resulting from settlement of such transactions and from the transaction at exchange rates ruling at the balance sheet date of monetary assets or liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying hedges.

 

REVENUE

Revenue comprises the fair value of the consideration received for the sale of goods and services, net of trade discounts and sales related taxes.  Revenue is recognised when the risks and rewards of the underlying sale have been transferred to the customer, and when collectability of the related receivables is reasonably assured, which is usually when title passes or a separately identifiable phase of a contract or development has been completed and accepted by the customer.

 

SEGMENTAL REPORTING

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments.  Segments are identified based on management information provided to the Chief Executive. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments.  The Group’s primary segment is by business as this is the dominant source and nature of Avon’s risks and returns.  The secondary reporting format is the geographic segment.

 

EMPLOYEE BENEFITS

Pension obligations and post-retirement benefits

The Group has both defined benefit and defined contribution plans.

 

The defined benefit plan’s asset or liability as recognised in the balance sheet is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets.

 

The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method.  The present value of the defined benefit obligation is determined by discounting the estimated cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.  Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in full in the period in which they occur, outside of the income statement and are presented in the statement of recognised income and expense.  Past service costs are recognised immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period).  In this case, the past service costs are amortised on a straight-line basis over the vesting period.  The scheme is now closed to new entrants and was closed to future accrual of benefit from 1 October 2009.

 

For the defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis.  Contributions are expensed as incurred.

 

The balance sheet includes post retirement obligations in respect of overseas subsidiaries where differed arrangements are adopted to provide post retirement benefits.

 

Share based compensation

The Group operates a number of equity-settled, share-based compensation plans.  The fair value of the employee services received in exchange for the grant of the options is recognised as an expense.  The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets).  Non-market vesting conditions are included in assumptions about the number of options that are expected to vest.  At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest.  It recognises the impact of the revision to original estimates, if any, in the income statement with a corresponding adjustment to equity.  The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.

 

INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable net assets of the acquired subsidiary at the date of acquisition.  Identifiable net assets include intangible assets other than goodwill.  Any such intangible assets are amortised over their expected future lives unless they are regarded as having an indefinite life, in which case they are not amortised, but subjected to annual impairment testing in a similar manner to goodwill.

 

Since the transition to IFRS, goodwill arising from acquisitions of subsidiaries after 3 October 1998 is included in intangible assets, is not amortised but is tested annually for impairment and carried at cost less accumulated impairment losses.  Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

 

Goodwill arising from acquisitions of subsidiaries before 3 October 1998, which was set against reserves in the year of acquisition under UK GAAP, has not been reinstated and is not included in determining any subsequent profit or loss on disposal of the related entity.

 

Goodwill is tested for impairment at least annually or whenever there is an indication that the asset may be impaired.  Goodwill is allocated to cash-generating units for the purpose of impairment testing.  The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.  Any impairment is recognised immediately in the income statement.  Subsequent reversals of impairment losses for goodwill are not recognised.

 

Patents and distribution networks

Patents and distribution networks, recognised as identifiable net assets of acquired subsidiaries are included in intangible assets.  Patents are amortised over their expected useful lives.  Distribution networks are tested for impairment at least annually or whenever there is an indication that the asset may be impaired.

 

Development Expenditure

In accordance with IAS 38 “Intangible Assets”, expenditure in respect of the development of new products where the outcome is assessed as being reasonably certain as regards viability and technical feasibility, is capitalised and amortised over the expected useful life of the development.  The capitalised costs are amortised over the estimated period of sale for each product, commencing in the year sales of the product are first made.  Development costs capitalised are tested for impairment at least annually or whenever there is an indication that the asset may be impaired.  Any impairment is recognised immediately in the income statement.  Subsequent reversals of impairment losses for research and development are not recognised.

 

PROPERTY PLANT AND EQUIPMENT

Property, plant and equipment is stated at historical cost or deemed cost where IFRS 1 exemptions have been applied, less accumulated depreciation and any recognised impairment losses.

 

Land is not depreciated.  Depreciation is provided on other assets estimated to write off the depreciable amount of relevant assets by equal annual instalments over their estimated useful lives.

 

In general, the rates used are:

 

·            Freehold and long leasehold buildings – 2%

 

·            Short leasehold property – over the period of the lease

 

·            Plant, machinery etc. – 6% to 50%.

 

The residual values and useful lives of the assets are reviewed, and adjusted if appropriate, at each balance sheet date.

 

An asset’s carrying amount is written down immediately to its recoverable amount if it’s carrying amount is greater than its estimated net realisable value.  Gains and losses on disposal are determined by comparing proceeds with carrying amounts.  These are included in the income statement.

 

FIXED ASSET INVESTMENTS

For investments in joint ventures, the Group’s share of the aggregate gross assets and liabilities of the investment is included in the balance sheet and the Group’s share of the profit or loss of the joint venture is included in the income statement.

 

LEASES

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases.  Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.  Leases in which a significant portion of the risks and rewards of ownership are passed to the lessee are classified as finance leases.

 

The sale and lease back of property, where the sale price is at fair value and substantially all the risks and rewards of ownership are transferred to the purchaser, is treated as an operating lease.  The profit or loss on the transaction is recognised immediately and lease payments charged to the income statement on a straight-line basis over the lease term.

 

INVENTORIES

Inventories are stated at the lower of cost and net realisable value.  Cost is determined using the first-in, first-out (FIFO) method.  The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity).  It excludes borrowing costs.  Net realisable value is the estimated selling price in the ordinary course of business, less applicable incremental selling expenses.

 

TRADE AND OTHER RECEIVABLES

Trade and other receivables are stated at cost after deducting provisions for impairment of receivables.

 

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash at bank and in hand, highly liquid interest-bearing securities with maturities of three months or less, and bank overdrafts.  Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.

 

PROVISIONS

Provisions are recognised when:

Ÿ the Company has a legal or constructive obligation as a result of a past event;

Ÿ it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated.

 

Where there are a number of similar obligations, for example where a warranty has been given, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.  A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligation may be small.

 

Where a leasehold property, or part thereof, is vacant, or sub-let under terms such that the rental income is insufficient to meet all outgoings, provision is made for the anticipated future shortfall up to termination of the lease, or the termination payment, if smaller.

 

TAXATION

Income tax on the profit or loss for the year comprises current and deferred tax.

 

Current tax is the expected tax payable on the taxable income for the year, using tax rates, substantially enacted at the balance sheet date, and any adjustments to tax payable in respect of prior years.

 

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements.  However, the deferred income tax is not accounted for, if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.  Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

 

Deferred income tax assets are recognised to the extent that is probable that future taxable profit will be available against which the temporary differences can be utilised.

 

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

 

Income tax is charged or credited in the income statement, except where it relates to items recognised in equity, in which case it is dealt with in equity.

 

DIVIDENDS

Final dividends are recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by shareholders, while interim dividends are recognised in the period in which the dividends are paid.

 

SHARE CAPITAL

Ordinary shares are classified as equity.

 

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the

proceeds.

 

Where any Group company purchases the Company equity share capital (treasury shares), the consideration paid, including any

directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company’s equity holders

until the shares are cancelled, reissued or disposed of.  Where such shares are subsequently sold or reissued, any consideration

received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity

attributable to the Company’s equity holders.