108 John Lewis Partnership plc Annual Report and Accounts 2016 Notes to the consolidated financial statements (continued)


1 Accounting information (continued) 1.1 Accounting principles and policies (continued)


1.1.5 Restatement During the year, the Directors reviewed the accounting for certain cash in transit balances and determined that, because outgoing payments have been instructed but not completed at the balance sheet date, it is more appropriate to retain the associated payables balance than to recognise an overdraft. In addition, it was determined that certain outstanding payments are more appropriately recognised as a reduction in cash than in overdrafts, in line with the Partnership’s cash pooling arrangements. This has resulted in a reclassification of the overdraft balance into current trade and other payables of £58.5m and into cash of £2.9m at 31 January 2015. Net debt, borrowings and overdrafts, segmental net assets, opening cash balances, trade and other payables, analysis of financial assets and liabilities, management of financial risks and working capital movements in the cash flow have been re-stated. Net assets are unchanged.


1.1.6 Significant accounting policies Other operating income


Other operating income is income that does not satisfy the definition of revenue in that it is not related to the main trading operations of the Partnership. Other operating income includes commission income, backhauling income and income from other services.


Financial instruments


The Partnership uses derivative financial instruments to manage its exposure to fluctuations in financial markets, including foreign exchange rates, interest rates and certain commodity prices. Derivative financial instruments used by the Partnership include forward currency and commodity contracts. Hedge accounting has been adopted for derivative financial instruments where possible. Such derivative financial instruments are measured at fair value. The fair value of a derivative financial instrument represents the difference between the value of the outstanding contracts at their contracted rates and a valuation calculated using the forward rates of exchange and interest rates prevailing at the balance sheet date.


In order to qualify for hedge accounting, the relationship between the item being hedged and the hedging instrument is documented in advance of entering into the hedge, and assessed to show that the hedge will be highly effective on an ongoing basis. This effectiveness testing is also then performed at each financial period end to ensure that the hedge remains highly effective.


Hedge accounting is discontinued when the hedging instrument matures, is terminated or exercised, the designation is revoked or it no longer qualifies for hedge accounting. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the income statement.


A cash flow hedge is a hedge of the exposure to variability of cash flows that are either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecast transaction. The effective portion of changes in the intrinsic fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. All other changes in fair value are recognised immediately in the income statement within other gains or losses. Amounts accumulated in equity are recycled to the income statement in the periods when the hedged item affects profit or loss. Derivative financial instruments qualifying for cash flow hedge accounting are principally forward currency contracts.


The table below sets out the Partnership’s accounting classification of each class of its financial assets and liabilities:


Note Classification Measurement


Financial assets: Trade receivables 4.2 Loans and receivables Amortised cost Other receivables 4.2 Loans and receivables Amortised cost


Short-term investments


Cash and cash equivalents


Financial liabilities:


Borrowings and overdrafts


Trade payables Other payables Accruals


5.5 Financial liabilities Amortised cost 4.3 Financial liabilities Amortised cost 4.3 Financial liabilities Amortised cost 4.3 Financial liabilities Amortised cost


Partnership Bonus 4.3 Financial liabilities Amortised cost Finance leases


Derivative financial instruments


Offsetting


Balance sheet netting only occurs to the extent that there is the legal ability and intention to settle net. As such, bank overdrafts are presented in current liabilities to the extent that there is no intention to offset with any cash balances.


Foreign currencies


Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges. On translation of assets and liabilities held at branches in foreign currencies, movements go through the foreign currency translation reserve.


7.2


Financial assets or liabilities at fair value through profit or loss*


Fair value*


* Cash flow hedges designated as being in a hedged relationship upon initial recognition are measured at fair value with the effective portion of any changes in the intrinsic value recognised in equity.


5.6 Financial liabilities Amortised cost 5.3 Loans and receivables Amortised cost 5.4 Loans and receivables Amortised cost


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