AVESCOGROUPPLC ANNUAL REPORT 2009 35
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d) Derivatives at fair value through profit or loss and accounted for at fair value through profit or loss
Certain derivative financial instruments do not qualify for hedge accounting. Changes in the fair value of any of these derivative financial instruments are
recognised immediately in the income statement within ‘Other gains/(losses)’.
2.11 Inventories
Inventories and work in progress are valued at the lower of cost and net realisable value. Cost is determined using the first-in, first-out (FIFO) method. Costs of
finished goods and work in progress comprises design costs, raw materials, direct labour and other direct costs and related production overheads. Cost
excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less applicable selling expenses. Provision is
made for obsolete, slow moving and defective stock. Work in progress contains costs in relation to jobs not yet complete at the year end.
2.12 Trade receivables
Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less provision for
impairment. A provision is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms
of the receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows,
discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the
loss is recognised in the income statement within ‘Operating expenses’. When a trade receivable is uncollectible, it is written off against the allowance account.
Subsequent recoveries of amounts previously written off are credited to ‘Operating expenses’ within the income statement.
2.13 Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three
months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
2.14 Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of equity instruments are shown in equity as a deduction from the
proceeds, net of tax.
Where any Group company purchases the Company’s 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 or reissued. Where
such shares are subsequently reissued, any consideration received, net of any directly attributable incremental costs (net of income taxes), is included in equity
attributable to the Company’s equity holders.
2.15 Trade payables
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
2.16 Borrowings
Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between
the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective
interest method.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the
balance sheet date.
Borrowing costs are expensed to the income statement unless used to fund a qualifying asset as described by IAS 23.
2.17 Current and deferred income tax
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the
Group’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to
situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be
paid to the tax authorities.
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, if the deferred income tax 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, it is not accounted for.
Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively 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 it 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 Group controls the timing of
the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
2.18 Employee benefits
a) Pension and post retirement benefits
Costs in respect of defined contribution type pension arrangements are charged to the income statement on an accruals basis in line with the amounts
payable in respect of the accounting period. The Group has no defined benefit pension arrangements other than statutory retirement benefits that accrue to
employees of Action SAM. The statutory retirement benefits relating to the employees of Action SAM, in substance, are similar to a defined benefit pension
arrangement and an accrual for the full potential liability is made at each reporting date. Action SAM has no pension scheme assets.
b) Long term incentive plan (LTIP) and employee share option scheme
The fair value of the employee services received in exchange for the grant of share options, LTIPs or shares is recognised as an expense. The total amount to
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