ANNUAL REPORT 2011 AVESCO GROUP PLC www.avesco.com


39


2.20 Revenue recognition


Revenue comprises the fair value of the consideration received or receivable for the rental of goods and sale of services in the ordinary course of the Group’s activities. Revenue is shown net of Value Added Tax and other sales taxes, net of customer discounts and after eliminating sales within the Group.


The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group’s activities as described below.


Revenue recognised in the income statement but not yet invoiced is held on the balance sheet within ‘Trade and other receivables’. Revenue invoiced but not yet recognised in the income statement is held on the balance sheet within ‘Trade and other payables’. Proceeds from the disposal of fixed assets are not treated as revenue.


Sales of services and the rental of goods are recognised proportionally over the duration of the service or hire period, provided a right to consideration has been established.


2.21 Leases


a) Finance lease contracts A significant proportion of the Group’s financing is provided by hire purchase contracts and finance leases. Throughout the annual report and financial statements the term finance lease refers to hire purchase contracts, finance leases and sale and leaseback arrangements with financial institutions and suppliers.


Where these arrangements result in substantially all the risks and rewards of ownership resting with the Group, the assets are included in the balance sheet at cost less depreciation and the present value of future payments is shown as a liability.


The interest element of these arrangements is charged to the income statement over the period of the arrangement in proportion to the balance of capital payments outstanding.


Finance leases are depreciated over their estimated useful life or the term of the lease, whichever being the shorter. Assets held under hire purchase contracts are depreciated over their useful lives.


b) Operating leases Rentals under operating leases are charged on a straight line basis over the lease term. Where operating lease incentives (such as a rent free period in respect of properties) are received they are considered as an integral part of the net payment agreed for the use of the leased asset and recognised over the period of the lease on a straight line basis.


2.22 Dividend distribution


Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. Interim dividends are recorded in the period in which they are approved and paid. 3. Financial risk management 3.1 Financial risk factors The Group’s activities expose it to a variety of financial risks:


a) Market risk b) Credit risk c) Liquidity risk


The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. The Group has used derivative financial instruments to hedge certain risk exposures but has not done this in the current financial year.


Risk management is carried out under policies approved by the Board of Directors. Group treasury identifies, evaluates and hedges financial risks in close co- operation with the Group’s operating units. Group treasury provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.


a) Market risk (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US Dollar, Euro, Hong Kong Dollar and Chinese Renminbi. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. Management has set up policies to manage foreign exchange risk.


The Group has investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group’s foreign operations is managed primarily through borrowings denominated in the relevant foreign currencies.


In general the Group does not hedge the foreign currency risk arising from sales by an operation denominated in a currency other than its functional currency. In the majority of cases, substantial deposits on such sales are received at the time of the order and the remaining balances are, to a large extent, matched by same currency costs. The exceptions to this policy are generally related to the purchase of property, plant and equipment or other large one-off transactions where the currency risk is usually hedged.


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