Accounting policies
Year ended 31 March 2009
Basis of preparation
The consolidated and Company financial statements are presented in sterling and all values are rounded to the nearest 0.1 million
(£ million) except where otherwise indicated.
The consolidated financial statements of Dairy Crest Group plc have been prepared in accordance with IFRS as adopted by the European Union (‘EU’). The Company financial statements have been prepared in accordance with IFRS as adopted by the EU and as applied in accordance with the provisions of the Companies Act 1985. The Company has taken advantage of the exemption provided under section 230 of the Companies Act 1985 not to publish its individual income statement and related notes.
The key sources of estimation uncertainty that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year are the measurement of the impairment of goodwill and measurement of defined benefit assets and obligations. The Group determines whether goodwill
is impaired on an annual basis and this requires an estimation of
the value in use of the cash generating units to which goodwill is allocated. This requires estimation of future cash flows and the selection of a suitable discount rate. Measurement of defined
benefit obligations requires estimation of future changes in salaries and inflation, mortality rates, the expected return on plan assets
and the choice of a suitable discount rate. Further analysis of the key sources of estimation uncertainty and sensitivities are included in the relevant notes to the accounts.
The IASB and IFRIC have issued the following standards (with an effective date after the date of these accounts) and interpretations:
International Accounting Standards (IAS/IFRS)
IFRS 1 & IAS 27 (amendment): Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (effective from 1 January 2009)
IFRS 8: Operating segments (effective from 1 January 2009)
IAS 23 (amendment): Borrowing Costs (effective from 1 January 2009)
IAS 1 (amendment): Presentation of Financial Statements (effective from 1 January 2009)
IFRS 2 (amendment): Share-based Payments – Vesting conditions and cancellations (effective from 1 January 2009)
IFRS 3 (amendment): Business Combinations (effective from 1 July 2009)
IAS 27 (amendment): Consolidated and Separate Financial Statements (effective from 1 July 2009)
IFRS 7 (amendment): Financial instruments: Disclosures (effective from 1 January 2009)
IAS 32 & IAS 1 (amendment): Puttable Financial Instruments and Obligations Arising from Liquidation (effective from 1 January 2009)
IAS 39 (amendment): Eligible Hedged Items (effective from 1 January 2009).
International Financial Reporting Interpretations Committee (IFRIC)
IFRIC 15: Agreements for the Construction of Real Estate (effective from 1 January 2009). Currently not applicable to the Group
IFRIC 16: Hedges of a Net Investment in a Foreign Operation (effective from 1 July 2009). Applicable to the Group but no impact
IFRIC 17: Distributions of Non-Cash Assets to Owners (effective from 1 July 2009). Currently not applicable to the Group
IFRIC 18: Transfers of Assets from Customers (effective from 1 July 2009). Currently not applicable to the Group.
Upon adoption of IFRS 8 the number of segments reported by the Group will increase from 2 to 3 as disclosures will more closely follow the ‘management approach’. The reportable segments will be Dairies, Cheese and Spreads. Upon the amendment to IAS 23 the Group will capitalise all borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset. Upon the amendment to IFRS 2 the Group will accelerate the share based payment charge resulting from participants leaving the sharesave scheme (treating their leaving as a cancellation rather than a forfeiture). The fair value factor used at grant will be amended to reflect likely future exits. Upon the amendment to IFRS 3 the Group will charge fees relating to a business acquisition to profit and loss and not to goodwill, furthermore, any contingent consideration will
be measured at fair value with changes being credited/charged to profit and loss.
Apart from these, the Directors do not anticipate the adoption of these standards and interpretations will have a material impact on the Group’s accounts in the period of initial application.
Consolidation
The Group financial statements consolidate the accounts of Dairy Crest Group plc and its subsidiaries drawn up to 31 March each year using consistent accounting policies. All intercompany balances and transactions, including unrealised profits and losses arising from intra-group transactions, have been eliminated in full.
Subsidiaries acquired during the year are consolidated from the
date on which control is transferred to the Group. At 31 March 2009, minority interests represent the 20% interest in Wexford Creamery Limited not held by the Group.
Interest in joint ventures
The Group’s investments in joint ventures are accounted for under the equity method of accounting. Joint ventures are entities over which the Group has joint control under contractual agreement and which are not subsidiaries. The company and joint ventures both use consistent accounting policies. The investment in joint ventures is carried in the balance sheet at cost plus post-acquisition changes
in the Group’s share of net assets of the joint ventures, less any impairment in value and any distributions received. The income statement reflects the share of the results of the joint ventures. Where there has been a change recognised directly in the joint ventures’ equity, the Group recognises its share of any changes
and discloses this, when applicable in the consolidated statement
of recognised income and expense.
Foreign currency translation
The functional and presentational currency of Dairy Crest Group plc and its United Kingdom (‘UK’) subsidiaries is pound sterling (£).
The functional currency of Wexford Creamery Limited and St Hubert SAS, subsidiary companies incorporated in Ireland and France respectively, is the Euro.
Transactions in foreign currency are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Sterling at the balance sheet date. Exchange differences on monetary items are taken to the income statement, except where deferred in equity as qualifying cash flow hedges and qualifying net investment hedges.
On consolidation, assets and liabilities of foreign subsidiaries are translated into sterling at year end exchange rates. The results of foreign subsidiaries are translated into sterling at average rates of exchange for the year (being an approximation of actual exchange rates). Exchange differences arising from the retranslation of the net investment in foreign subsidiaries at year end exchange rates, less exchange differences on borrowings, which finance or provide a hedge against those undertakings are taken to a separate component of equity as long as IFRS hedge accounting conditions are met. Exchange differences relating to foreign currency borrowings that provide a hedge against a net investment in a foreign entity remain in equity until the disposal of the net investment, at which time they are recognised in the consolidated income statement. Tax charges and credits attributable to exchange differences on those borrowings are also dealt with in equity.
Property plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment losses. Cost comprises the purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation is calculated to write off the cost (less residual value) of property, plant and equipment, excluding freehold land, on a straight-line basis over the estimated useful lives of the assets as follows:
Freehold buildings: 25 years
Leasehold land and buildings: 25 years or, if shorter, the period of the lease
Office equipment: 4 to 6 years
Factory plant and equipment: 6 to 20 years
Vehicles: 4 to 10 years
The carrying value of property, plant and equipment is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds the estimated recoverable value, the asset is written down to its recoverable amount. The recoverable amount of plant and equipment is the greater of the fair value less costs to sell or value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are charged to the consolidated income statement.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset is included in the consolidated income statement in the year that it is derecognised.
Borrowing costs
Borrowing costs are recognised as an expense when incurred in accordance with IAS 23: Borrowing Costs.
Investments
The Company recognises its investments in subsidiaries at cost being the fair value of consideration paid. Income is recognised
from these investments only in relation to distributions received from post-acquisition profits. Distributions received in excess of
post-acquisition profits are deducted from the cost of investment.
Goodwill
Goodwill recognised under UK GAAP prior to the date of transition to IFRS is stated at the net book value as at this date and is not subsequently amortised. Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the Group’s (acquirer’s) interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. All goodwill was tested for impairment at the time of transition to IFRS and no impairment was identified.
As at the acquisition date, any goodwill acquired is allocated to the cash-generating unit or groups of cash-generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of
the operation disposed of and the portion of the cash-generating unit retained.
The Group’s cash-generating units, for the purpose of considering goodwill, are ‘Dairies’, ‘UK Spreads’, ‘St Hubert’, ‘Speciality Cheese’ and ‘Cheese excluding Speciality Cheese’. These represent the lowest level at which goodwill is monitored for management purposes and are no larger than the segments being ‘Dairies’ and ‘Foods’.
Goodwill arising on acquisitions before 1 April 1998 has been charged against the merger reserve and will remain set off against reserves even if the related investment becomes impaired or the business sold.
The Group has not restated business combinations prior to the transition date of 1 April 2004. Acquisitions prior to this date are recorded under previous accounting rules. IFRS 1 requires that an impairment review of goodwill should be conducted in accordance with IAS 36 at the date of transition and at the balance sheet date. This review was performed and no adjustment was required.
Intangible assets
Intangible assets acquired as part of an acquisition of a business are capitalised at fair value separately from goodwill if the fair value can be measured reliably on initial recognition and the future expected economic benefits flow to the Group. Following initial recognition, the carrying amount of an intangible asset is its cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Currently, all the Group’s intangible assets have finite useful lives and are amortised over 3 to 25 years. The significant acquired brands have useful lives as follows:
St Hubert 25 years
Le Fleurier 15 years
Valle 15 years
Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis.
Intangible assets acquired separately from business combinations include software development expenditure. Software is carried at cost less accumulated amortisation. Software is amortised over five years. Intangible assets that are not yet available for use are tested for impairment annually either individually or at the cash generating unit level or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
Research and development
Expenditure on research is written off as incurred. Development expenditure is also written off as incurred unless the future recoverability of this expenditure can reasonably be assured as required by IAS 38: Intangible Assets.
Recoverable amount of non-current assets
At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. The recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost includes the purchase price of raw materials (on a first in
first out basis), direct labour and a proportion of manufacturing overheads based on normal operating capacity incurred in bringing each product to its present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and selling costs.
Trade and other receivables
Trade and other receivables are recognised and carried at original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the Consolidated cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank overdrafts.
Interest bearing loans
All loans and borrowings are initially recognised at the fair value of
the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking
into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised in net profit or loss when the liabilities are derecognised.
Net debt
The Group and Company define net debt as cash and cash equivalents, interest bearing loans and finance leases. The calculation of net debt excludes the fair value of derivative financial instruments with the exception of cross currency swaps to fix foreign currency debt in Sterling where they are designated as cash flow hedges. In this case the fixed Sterling debt, not the underlying foreign currency debt retranslated, is included in net debt.
Classification of shares as debt or equity
When shares are issued, any component that creates a financial liability of the Group is presented as a liability in the balance sheet; measured initially at fair value net of transaction costs and thereafter at amortised cost until extinguished on conversion or redemption. The corresponding dividends relating to the liability component are charged as interest expense in the income statement. The initial fair value of the liability component is determined using a market rate for an equivalent liability without a conversion feature. The remainder of the proceeds on issue is allocated to the equity component and included in shareholders’ equity, net of transaction costs.
The carrying amount of the equity component is not re-measured in subsequent years.
Transaction costs are apportioned between the liability and equity components of the shares based on the allocation of proceeds to the liability and equity components when the instruments are first recognised.
Retirement benefit obligations
The asset or liability in respect of defined benefit schemes is the present value of the relevant defined benefit obligation at the balance sheet date less the fair value of plan assets and an adjustment for past service costs not yet recognised. The independent actuary completes a full actuarial valuation of the Dairy Crest Group pension fund and the Wexford Creamery plan triennially. The obligation is updated annually for financial reporting purposes by the actuary using the projected unit credit method. The present value of the obligation is determined by the estimated future cash outflows using interest rates of high quality corporate bonds which have terms to maturity approximating the terms of the related liability.
The current service costs are recognised in operating costs in the consolidated income statement. Past service costs are included in operating costs where the benefits have vested, otherwise they are amortised on a straight-line basis over the vesting period. The expected return on assets of funded defined benefit schemes and the interest on pension scheme liabilities comprise the finance element of the pension cost and the difference between these amounts are included in other finance income or costs. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in full and are charged or credited to the consolidated statement of recognised income and expense in the period in which they arise.
IFRIC 14 has been implemented in the year ended 31 March 2008. The recognition of any retirement benefit surplus as calculated by the actuary as part of the annual update for reporting purposes, is limited to the present value, using an appropriate discount rate, of any real cash benefit the Company will obtain in the future through either reduced potential reduced contributions or cash on a winding up
of the scheme. In order to calculate the potential future benefits consideration is given to any minimum funding requirements agreed between the Company and the Pension Trustee.
Share based payments
Equity based performance payments
The Group and Company has issued equity-settled share based payment schemes for which they receive services from employees
in consideration for the equity instrument. Equity-settled share based payment schemes are measured at fair value at the grant date by an external valuer using a Monte Carlo option-pricing model. The costs of equity settled transactions are recognised on a straight-line basis over the vesting period. The cumulative expense recognised for equity settled transactions at each reporting date until vesting reflects the expired vesting period and the number of awards that, in the opinion of the directors, will eventually vest (after adjusting for the expected achievement of non-market performance conditions).
The amount charged to the consolidated income statement is credited to reserves.
No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional on market conditions, which are treated as vesting irrespective of whether the market conditions are satisfied.
The Group also provides employees with the ability to purchase the Group’s ordinary shares at 80% of the fair value at the grant date (Sharesave Scheme). The Group records an expense, based on the estimate of the 20% discount related to the shares expected to vest on a straight-line basis over the vesting period using a Black-Scholes option pricing model.
The Company adopted IFRIC 11 in the year ended 31 March 2008. Rights granted to employees of subsidiary undertakings over equity instruments of the Company are treated as an investment in the Company’s balance sheet.
Employees’ Share Ownership Plan (‘ESOP’)
The shares in the Company held by the Dairy Crest Employees’ Share Ownership Plan Trust to satisfy Long Term Incentive Share Plan awards are presented as a deduction from equity in arriving at shareholders’ equity. Consideration received from the sale of such shares is also recognised in equity with no gain or loss recognised in the Consolidated income statement.
The Group and Company have not adopted the exemption to apply IFRS 2 Share-based payments only to awards made after 7 November 2002.
Leased assets
Assets acquired under finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at fair value of the leased asset or, if lower, the present value of the minimum lease payments. The net present value of future lease rentals is included as a liability on the balance sheet. The interest element of lease rentals is charged to the Consolidated income statement in the year. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease rentals are charged to the Consolidated income statement on a straight-line basis over the lease term.
Revenue
Revenue on sale of food and dairy products is recognised on delivery. Revenue comprises the invoiced value for the sale of goods net of value added tax, rebates and discounts and after eliminating sales within the Group.
Dividend income is recognised when the Company’s right to receive payment is established.
Other income
Other income comprises the profit on disposal of closed sites and household depots.
Exceptional items
Certain items are recorded separately in the consolidated income statement as exceptional. Only items of a material, one-off nature, which result from a restructuring of the business or some other event or circumstance are disclosed in this manner in order to give a better understanding of the underlying operational performance of the Group. The profits arising on disposal of closed sites, other than
as a result of depot rationalisation, are reported within exceptional items. Exceptional items are not excluded from the basic earnings per share calculation.
Government and other grants
Government grants are initially recognised at their fair value where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates
to an expense item, it is recognised as income over the periods necessary to match the grant on a systematic basis to the costs
that it is intended to compensate. Where the grant relates to an asset, the fair value is credited to a deferred income account and is released to the consolidated income statement over the expected useful life of the relevant asset in equal annual instalments.
Income tax
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates and laws that are enacted or substantively enacted at the balance sheet date.
Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, except as indicated below.
Deferred income tax liabilities are recognised for all taxable temporary differences except:
• where the deferred income tax liability arises from initial recognition of goodwill or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, the carry-forward of unused tax assets and unused tax losses can be utilised except:
• where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income tax relating to items recognised directly in equity are recognised in equity and not in the income statement.
Financial assets
The Group and Company classifies financial assets that are within the scope of IAS 39 as financial assets at fair value through profit and loss; loans and receivables; held-to-maturity investments; or as available-for-sale financial assets, as appropriate. The Group and Company determines the classification of financial assets at initial recognition and re-evaluates this designation at each financial year-end. When financial assets are recognised initially, they are measured at fair value.
Derivative instruments
The Group and Company use derivative financial instruments such as forward currency contracts, cross-currency swaps and interest rate swaps to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are initially recognised at fair value andsubsequently re-measured to fair value at the reported balance sheet date.
The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap and cross-currency swap contracts is determined by reference to market values for similar instruments and specific valuations performed by counterparties at the period end.
For the purpose of hedge accounting, hedges are classified as either:
• fair value hedges where they hedge the exposure to changes
in the fair value of a recognised asset or liability;
• cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction, or a firm commitment in relation to foreign exchange exposure; or
• net investment hedges where they hedge the exposure to variability in the translated net assets of an overseas operation.
Neither the Group nor the Company has entered into any fair value hedges during the year.
Cash flow hedges
In relation to cash flow hedges which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion is recognised in the Consolidated income statement.
When the hedged firm commitment (in relation to foreign exchange exposure) or the highly probable forecast transactions results in the recognition of a non-monetary asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the Consolidated income statement in the same year in which the hedged item affects the net profit and loss, for example when the future sale actually occurs, interest payments are made or when debt matures. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the Consolidated income statement for the year.
Hedges of net investments in foreign operations
Where the Group hedges net investments in overseas entities through currency borrowings, the gains and losses on retranslation of those borrowings are recognised in equity. If the Group uses derivatives as the hedging instrument, the effective portion of the hedge is recognised in equity, with any ineffective portion being recognised in the Consolidated income statement whenever applicable. Gains and losses accumulated in equity are recycled through the consolidated income statement on disposal of the foreign entity.
In order to satisfy hedge accounting, the Group (or Company) documents in advance the relationship between the item being hedged and the hedging instrument. The Group (or Company) also documents and demonstrates an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge has been and will be highly effective on an ongoing basis. The effectiveness testing is re-performed on a regular basis (being at least half-yearly) to ensure that the hedge remains highly effective.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the highly probable forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement for the period.
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts, and the host contracts are not carried at fair value with unrealised gains or losses reported in the income statement. When the contracts are closely related and hedge accounting is adopted, they are designated at inception and treated as described above.