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consolidation was appropriate. As referred to in Section 4.5.2, during the year the
IMI Pension Fund commenced winding up procedures and the relevant liabilities
were transferred to one of two new funds, IMI 2014 Deferred Fund and IMI 2014
Pensioner Fund (together ‘the Funds’). The interest in the SLP is now held jointly
by the Funds.
There are certain conditions under which the Group can defer the amounts
payable to the Funds, in particular, the Partnership Agreement includes a clause
under which the payments in the year are deferred in the event that the Group
has not paid a dividend in the preceding year. Because the Group has the
ability to defer such payments indefinitely and is in control of the circumstances
under which the arrangement can be terminated, the payments envisaged by
the agreement are discretionary and therefore do not constitute a liability under
IAS32. As such the Funds’ interests in this SLP have been recorded as
non-controlling interests, as a component of equity.
ii. Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation
uncertainty at the reporting date that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next
financial year are described below. The Group bases its assumptions and
estimates on information available when the consolidated financial statements
are prepared. Market changes or circumstances arising beyond the control
of the Group are reflected in the assumptions when they occur. Revisions to
accounting estimates are recognised in the period in which the estimate is
revised and in any future periods affected.
Impairment of non-financial assets
Impairment exists when the carrying value of an asset or cash generating unit
exceeds its recoverable amount, which is the higher of its fair value less costs
to sell and its value in use. The value in use is based on a discounted cash flow
model. Cash flows are derived from the Group’s long-term forecasts for the
next three to five years. The principal assumptions in these calculations are the
long-term growth rates and the discount rate applied to forecast cash flows in
addition to the achievement of the forecasts themselves. Further information
on this process and the assets affected is included in Section 3.2.
Disposed businesses
The Group has over the years disposed of a number of businesses. The sale
agreements contained various warranties and indemnities. In some cases,
the agreements also include the potential for adjustment to the purchase price,
sometimes contingent on future events. At the time of disposal, the accounts
reflect the best estimate of the likely future impact of these agreements.
These estimates are then regularly reviewed and provisions are recognised
where necessary.
Share-based payments
The Group measures the cost of equity-settled transactions with employees by
reference to the fair value of the equity instruments at the date at which they are
granted. Estimating fair value for share-based payment transactions requires
determination of the most appropriate valuation model, which is dependent on
the terms and conditions of the grant. This estimate also requires determination
of the most appropriate inputs to the valuation model including the expected
life of the share option, volatility and dividend yield and related assumptions.
These assumptions and the models used for estimating fair value for share-
based payment transactions are disclosed in Section 4.7.
Taxes
Uncertainties exist with respect to the interpretation of complex tax regulations,
changes in tax laws, and the amount and timing of future taxable income.
Given the wide range of international business relationships and the long-term
nature and complexity of existing contractual agreements, differences arising
between the actual results and the assumptions made, or future changes to
such assumptions, could necessitate future adjustments to the tax income
and expense already recorded. The Group establishes provisions, based
on reasonable estimates, for possible consequences of audits by the tax
authorities of the respective countries in which it operates. The amount of such
provisions is based on various factors, such as experience of previous tax
audits and differing interpretations of tax regulations by the taxable entity and
the responsible tax authority. Such differences of interpretation may arise on a
wide variety of issues depending on the conditions prevailing in the respective
domicile of the Group companies.
Deferred tax assets are recognised for unused tax losses to the extent that it
is probable that taxable profit will be available against which the losses can be
utilised. Significant management judgement is required to determine the amount
of deferred tax assets that can be recognised, based upon the likely timing and
the level of future taxable profits.
Trading provisions
The Group sells a wide range of highly technical products and whilst its
products are designed and engineered to a high degree of precision and
to customer specifications, there will always be a risk of products requiring
modification, which can lead to warranty claims as well as excess or obsolete
inventory, collection risk regarding receivables and other trading provisions.
Provisions are held against these risks, which are estimated based on past
experience of claims and by measuring the likely use of inventory in the future
against past usage. The degree of dependence on future events makes these
estimates inherently subjective.
Employee benefits
The present value of the Group’s defined benefit pension plans and other
post-employment benefits are determined using actuarial valuations. An
actuarial valuation involves making various assumptions that may differ from
actual developments in the future. These include the determination of the
discount rate, inflation, future salary increases, mortality rates and future
pension increases. These assumptions, accompanied by sensitivity analysis
thereon, are included in Section 4.5. Due to the complexity of the valuation
and its long-term nature, a defined benefit obligation is highly sensitive to
changes in these assumptions.
In particular, although only constituting a minor proportion of the assets,
the valuation of the UK Funds’ interests in the Scottish Limited Partnership
is a highly subjective area because their valuation depends on an actuarial
assessment of the amount a third party might be willing to pay for the asset,
taking into account the risk that the associated income stream could either
cease in the event that the two UK Pension Funds both became fully funded or
become deferred in any year in which no dividend was paid to the shareholders.
Development costs
Development costs are capitalised in accordance with the criteria set out
in IAS38:
‘Intangible Assets’.
Initial capitalisation of costs is based on
management’s judgement regarding the technological and commercial feasibility
of the asset, and only when a product development project has reached a
point where such determinations can be made. In testing these assets for
impairment, management makes assumptions regarding the expected future
cash generation of the project, discount rates to be applied and the expected
period of benefits. Further detail is provided in Section 3.2.
C. Revenue recognition
Revenue is recognised to the extent that it is probable that the economic
benefits will flow to the Group and that the revenue can be reliably measured.
The nature of the equipment, valve and other contracts into which the Group
enters means that:
• the contracts usually contain discrete elements, each of which transfers risks
and rewards to the customer. Where such discrete elements are present,
revenue is recognised on each element in accordance with the policy on
the sale of goods.
• the service element of the contract is usually insignificant in relation to the
total contract value and is often provided on a short-term or one-off basis.
Where this is the case, revenue is recognised when the service is complete.
As a result of the above, the significant majority of the Group’s revenue is
recognised on a sale of goods basis.
SECTION 5 – OTHER NOTES
Continued
