John Lewis Partnership Annual Report and Accounts 2015

Annual Report and Accounts 2015

John Lewis Partnership plc

129

1 Accounting policies (continued)

Borrowings Borrowings are initially recognised at fair value net of transaction costs and subsequently measured at amortised cost. Where there is an effective related fair value hedge, the movement in the fair value attributable to the hedged risk is separately disclosed.

Arrangement costs for bonds and loan facilities in respect of debt are capitalised and amortised over the life of the debt at a constant rate. Finance costs are charged to the income statement, based on the effective interest rate of the associated borrowings.

Financial instruments

The Partnership uses derivative financial instruments to manage its exposure to fluctuations in financial markets, including foreign exchange rates and interest rates. Derivative financial instruments used by the Partnership include forward currency 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 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 Financial assets:

Cash and cash equivalents

Trade receivables Other receivables

Financial liabilities: Finance leases

Borrowings and overdrafts

Trade payables Other payables Accruals

Partnership Bonus

Derivative financial instruments

15

13 13

19 17

18 18 18 18 22

Loans and receivables Amortised cost

Loans and receivables Amortised cost Loans and receivables Amortised cost

Financial liabilities Financial liabilities

Financial liabilities Financial liabilities Financial liabilities Financial liabilities

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

Impairment

Assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. Impairment testing is on cash generating units which are branches, being the lowest level of separately identifiable cash flows. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount, the latter being the higher of the asset’s fair value less costs to dispose and value in use. Value in use calculations are performed using cash flow projections, discounted at a pre-tax rate which reflects the asset specific risks and the time value of money.

Amortised cost Amortised cost

Amortised cost Amortised cost Amortised cost Amortised cost 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.

Measurement

Introduction

Partnership difference

Principles

Strategy

Performance

Governance

Financial statements

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