Notes forming part of the financial statements (continued)
1.
Summary of significant
accounting policies
continued
A liability or asset in respect of the defined
benefit superannuation plan is recognised
in the balance sheet, and is measured as
the present value of the defined benefit
obligation at the reporting date less the fair
value of the superannuation fund’s assets
as at the date and any unrecognised past
service cost. The present value of the
defined benefit obligation is based on
expected future payments which arise
from membership of the fund to the
reporting date, calculated annually by
independent actuaries using the projected
unit credit method. Consideration is given
to expected future wage and salary levels,
experience of employee departures and
periods of service.
Contributions to the defined contribution
fund are recognised as an expense as they
become payable. Prepaid contributions are
recognised as an asset to the extent that a
cash refund or a reduction in the future
payments is available.
(v) Termination benefits
Liabilities for termination benefits are
recognised when a detailed plan for
the terminations has been developed,
approved and the company has become
demonstratively committed and a valid
expectation has been raised in those
employees affected that the terminations
will be carried out. The liabilities for
termination benefits are recognised in
other creditors unless the amount or timing
of the payments is uncertain, in which
case they are recognised as provisions.
Liabilities for termination benefits expected
to be settled within twelve (12) months are
measured at the amounts expected to
be paid when they are settled. Amounts
expected to be settled later than twelve
(12) months from the reporting date are
measured as the estimated cash outflows,
discounted using market yields at the
reporting date on national government
bonds with terms to maturity and
currency that match, as closely as
possible, the estimated future payments,
where the effect of discounting is material.
(vi) Employee benefit on-costs
Employee benefit on-costs, including
payroll tax, are recognised and included in
employee benefit liabilities and costs when
the employee benefits to which they relate
are recognised as liabilities.
(vii) Share-based payments
Share-based compensation benefits
are provided to employees via the Wattyl
Executive Option Scheme, the Wattyl
Executive Stock Ownership Plan and an
employee share scheme. Information
relating to these schemes is set out in
notes 27 and 29.
No expense is recognised in respect
of share options granted before
7 November 2002, or options granted
after 7 November 2002 which have vested
before 1 January 2005. The shares are
recognised when the options are exercised
and the proceeds received allocated to
share capital.
The fair value of performance rights and
options granted after 7 November 2002
and vested after 1 January 2005 under
the Wattyl Employee Share Option Plan
is recognised as an employee benefit
expense with a corresponding increase in
equity. The fair value is measured at grant
date and recognised over the period
during which the employees become
unconditionally entitled to the options.
The fair value at grant date is
independently determined using a
binominal option pricing model that takes
into account the exercise price, the term of
the option, the vesting and performance
criteria, the impact of dilution, the non-
tradeable nature of the option, the share
price at grant date and expected price
volatility of the underlying share, the
expected dividend yield and the risk-free
interest rate for the term of the option.
The fair value of the performance rights
and options granted excludes 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 performance rights and
performance rights and options that are
expected to become exercisable. At each
balance sheet date, the entity revises its
estimate of the number of performance
rights and options that are expected to
become exercisable. The employee benefit
expense recognised each period takes into
account the most recent estimate.
Upon the exercise of performance rights
and options, the balance of the share
based payments reserve relating to
those performance rights and options
is transferred to share capital and the
proceeds received, net of any directly
attributable transaction costs, are
credited to share capital.
(o) Leases
A distinction is made between finance
leases which effectively transfer from the
lessor to the lessee substantially all the
risks and benefits incidental to ownership
of leased assets, and operating leases
under which the lessor effectively retains
substantially all such risks and benefits.
Assets acquired under finance leases are
capitalised and amortised over the shorter
of the asset’s estimated useful life and
the lease term. Operating lease payments
are expensed in the year incurred which
reflects the pattern in which economic
benefits from the leased asset
are consumed.
(p) Borrowings
Borrowings are initially recognised at fair
value, net of transaction costs incurred.
Borrowings are subsequently measured
at amortised cost. Any difference
between the proceeds (net of transaction
costs) and the redemption amount 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 date.
Borrowing costs include interest on bank
overdrafts, short term borrowings, finance
leases and costs of arranging the
borrowing. Interest expense is recognised
on an effective interest method.
(q) Business combinations
The purchase method of accounting is used
to account for all business combinations,
including business combinations involving
entities or businesses under common
control, regardless of whether equity
instruments or other assets are acquired.
Cost is measured as the fair value of the
assets given, shares issued or liabilities
incurred or assumed at the date of
exchange plus costs directly attributable to
the acquisition. Where equity instruments
are issued in an acquisition, the fair value of
the instruments is their published market
price at the date of exchange unless, in rare
circumstances, it can be demonstrated that
the published price at the date of exchange
is an unreliable indicator of the fair value
and that other evidence and valuation
methods provide a more reliable measure of
fair value. Transaction costs arising on the
issue of equity instruments are recognised
directly in equity.
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. The excess of the
cost of acquisition over the fair value of
the Group’s share of the identifiable net
assets acquired is recorded as goodwill
(refer to note 1(l)). If the cost of
acquisition is less than the Group’s
share of the fair value of the identifiable
net assets of the subsidiary acquired,
the difference is recognised directly in
the income statement, but only after a
reassessment of the identification and
measurement of the net assets acquired.
Where settlement of any part of cash
consideration is deferred, the amounts
payable in future are discounted to their
present value as at the date of exchange.
The discount rate used is the entity’s
incremental borrowing rate, being the rate
at which a similar borrowing could be
obtained from an independent financier
under comparable terms and conditions.
(r) Trade and other creditors
Trade and other creditors represent
liabilities for goods and services provided
to the consolidated entity prior to the end
of the financial year and which remain
unpaid. The amounts are unsecured and
are normally settled within the terms of
trade of the relevant transactions.
(s) Earnings per share
Basic earnings per share is determined
by dividing the operating profit or loss after
income tax attributable to members of
Wattyl Limited by the weighted average
number of ordinary shares outstanding
during the financial year, adjusted for
ordinary shares issued or bought back
during the year. Diluted earnings per
share adjusts the figures used in the
determination of basic earnings per share
to take into account the weighted average
number of shares assumed to have been
issued for no consideration in relation to
the dilutive potential ordinary shares.
(t)
Research and development
Research expenditure is recognised as
an expense as incurred. Costs incurred
on development projects (relating to the
design and testing of a new or improved
product) are recognised as intangible
assets when it is probable that the
project will be a success considering
its commercial and technical feasibility
and its costs can be measured reliably.
(u) Cash and cash equivalents
Cash and short-term deposits in the
balance sheet comprise cash at bank and
in hand and short-term deposits with an
original maturity of three months or less.
For purposes of the Cash Flow Statement,
cash and cash equivalents consist of cash
and cash equivalents as defined above,
net of outstanding bank overdrafts.
(v) Restructuring costs
Liabilities arising directly from undertaking a
restructuring programme, not in connection
with acquisition of an entity or operations,
are recognised when a detailed plan of the
restructuring activity has been developed
and implementation of the restructuring
programme as planned has commenced,
by either entering into contracts to
undertake the restructuring activities or
making a detailed announcement such
that affected parties are in no doubt the
restructuring programme will proceed.
The cost of restructurings provided for,
other than related employee termination
benefits, is the estimated cash flows,
discounted using market yields at balance
date on national government guaranteed
bonds with terms to maturity and currency
that match, as closely as possible, the
expected future payments, where the
effect of discounting is material.
Liabilities for employee termination benefits
associated with restructurings are brought
to account on the basis described in the
accounting policy note for employee
benefits (Note 1(n)).
(w) Dividends
Provision is only made for the amount of
any dividend declared, determined or
publicly recommended by the directors on
or before the end of the financial year but
not distributed at balance date.
(x) Government grants
Grants from the government are
recognised at their fair value where there is
reasonable assurance that the grant will be
received and the Group will comply with all
attached conditions.
Government grants relating to costs are
deferred and recognised in the income
statement over the period necessary to
match them with the costs that they are
intended to compensate.
Government grants relating to the purchase
of property, plant and equipment are
included in non-current liabilities as deferred
income and are credited to the income
statement on a straight line basis over the
expected lives of the related assets.
(y) Derivatives
Derivatives are initially recognised at fair
value on the date a derivative contract
is entered into and are subsequently
remeasured to their fair value at each
reporting date. The accounting for
subsequent changes in fair value depends
on whether the derivative is designated as
a hedging instrument, and if so, the nature
of the item being hedged. The Group
designates certain derivatives as either:
•
hedges of the fair value of recognised
assets or liabilities or a firm
commitment (fair value hedge); or
•
hedges of the cash flows of
recognised assets and liabilities and
highly probable forecast transactions
(cash flow hedges).
The Group documents at the inception
of the hedging transaction the relationship
between hedging instruments and hedged
items, as well as its risk management
objective and strategy for undertaking
various hedge transactions. The Group
also documents its assessment, both at
hedge inception and on an ongoing basis,
of whether the derivatives that are used in
hedging transactions have been and will
continue to be highly effective in offsetting
changes in fair values or cash flows of
hedged items.
The fair values of various derivative financial
instruments used for hedging purposes are
disclosed in Note 10. Movements in the
hedging reserve in shareholders' equity are
shown in Note 25. The full fair value of a
hedging derivative is classified as a noncurrent
asset or liability when the remaining
maturity of the hedged item is more than
12 months; it is classified as a current
asset or liability when the remaining
maturity of the hedged item is less than
12 months. Trading derivatives are
classified as a current asset or liability.
(i)
Fair value hedge
Changes in the fair value of derivatives that
are designated and qualify as fair value
hedges are recorded in the income
statement, together with any changes in the
fair value of the hedged asset or liability that
are attributable to the hedged risk. The gain
or loss relating to the effective portion of
interest rate swaps hedging fixed rate
borrowings is recognised in the income
statement within finance costs, together
with changes in the fair value of the hedged
fixed rate borrowings attributable to interest
rate risk. The gain or loss relating to the
ineffective portion is recognised in the
income statement within other income
or other expenses.
Go to top
