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Annual Report and Accounts 2014
Goodwill is initially measured at cost being the excess of the aggregate of the
acquisition-date fair value of the consideration transferred and the amount
recognised for the non-controlling interest (and where the business combination
is achieved in stages, the acquisition-date fair value of the acquirer’s previously
held equity interest in the acquiree) over the net identifiable amounts of the assets
acquired and the liabilities assumed for the business combination. Assets acquired
and liabilities assumed in transactions separate to the business combinations, such
as the settlement of pre-existing relationships or post-acquisition remuneration
arrangements are accounted for separately from the business combination in
accordance with their nature and applicable IFRSs. Identifiable intangible assets are
recognised separately from goodwill. Contingent liabilities representing a present
obligation are recognised if the acquisition-date fair value can be reliably measured.
If the aggregate of the acquisition-date fair value of the consideration transferred
and the amount recognised for the non-controlling interest (and where the business
combination is achieved in stages, the acquisition-date fair value of the acquirer’s
previously held equity interest in the acquiree) is lower than the fair value of the
assets, liabilities and contingent liabilities and the fair value of any pre-existing
interest held in the business acquired, the difference is recognised in profit and loss.
After initial recognition, goodwill is measured at cost less any accumulated
impairment losses. For the purpose of impairment testing, goodwill acquired in a
business combination is, from the acquisition date, allocated to each of the Group’s
cash-generating units (or groups of cash-generating units) that are expected to
benefit from the combination, irrespective of whether other assets or liabilities of
the acquiree are assigned to those units. Each unit or group of units to which
goodwill is allocated shall represent the lowest level within the entity at which
the goodwill is monitored for internal management purposes and not be larger
than an operating segment before aggregation.
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 based on the relative values of the
operation disposed of and the portion of the cash-generating unit retained.
L. Intangible assets
Intangible assets are further sub-divided in the notes to these accounts between
acquired intangible assets and non-acquired intangible assets. Amortisation
of acquired intangible assets is treated as an exceptional item as described in
accounting policy D of these accounting policies, because of its inherent volatility.
The accounting policy for goodwill is described in accounting policy K.
i. Research and development
Expenditure on research activities, undertaken with the prospect of gaining
new scientific or technical knowledge and understanding, is recognised in the
income statement as an expense as incurred.
Expenditure on development activities, whereby research findings are applied to
a plan or design for the production of new or substantially improved products
and processes, is capitalised provided benefits are probable, cost can be
reliably measured and if, and only if, the product or process is technically and
commercially feasible and the Group has sufficient resources and intention
to complete development. The expenditure capitalised includes the cost of
materials, direct labour and directly attributable overheads. Other development
expenditure is recognised in the income statement as an expense as incurred.
Capitalised development expenditure is stated at cost less accumulated
amortisation (see below) and impairment losses (see accounting policy
‘Impairment’) and is included in the other acquired or other non-acquired
category of intangible assets depending on its origin.
ii. Software development costs
Software applications and systems that are not an integral part of their host
computer equipment are capitalised on initial recognition as intangible assets
at cost. Cost comprises the purchase price plus external costs incurred on
development of the asset to bring it into use. Following initial recognition,
software development costs are carried at cost less any accumulated
amortisation (see below) and accumulated impairment losses (see accounting
policy ‘Impairment’) and are included in the other acquired or other non-
acquired category of intangible assets depending on their origin.
iii. Customer relationships and other acquired intangible assets
Customer relationships and other intangible assets that are acquired by
the Group as part of a business combination are stated at their fair value
calculated by reference to the net present value of future benefits accruing to
the Group from utilisation of the asset, discounted at an appropriate discount
rate. Expenditure on other internally generated intangible assets is recognised
in the income statement as an expense as incurred.
iv. Amortisation of intangible assets other than goodwill
Amortisation is charged to the income statement on a straight-line basis
(other than for customer relationships and order book, which are charged
on a sum of digits basis) over the estimated useful lives of the intangible
assets. Amortisation commences from the date the intangible asset becomes
available for use. The estimated useful lives for:
• capitalised development costs are the life of the intangible asset (usually a
maximum of 10 years)
• software development costs are the life of the intangible asset (up to 10 years)
• customer relationships are the life of the intangible asset (up to 10 years)
• other intangible assets are the life of the intangible asset (up to 10 years)
M. Property, plant and equipment
Freehold land and assets in the course of construction are not depreciated.
Items of property, plant and equipment are stated at cost less accumulated
depreciation (see below) and impairment losses (see accounting policy
‘Impairment’).
Where an item of property, plant and equipment comprises major components
having different useful lives, they are accounted for as separate items of
property, plant and equipment. Costs in respect of tooling owned by the Group
for clearly identifiable new products are capitalised net of any contribution
received from customers and are included in plant and equipment.
Depreciation is charged to the income statement on a straight-line basis (unless
such a basis is not aligned with the anticipated benefit) so as to write down the
cost of assets to residual values over the period of their estimated useful lives
within the following ranges:
• freehold buildings - 25 to 50 years
• plant and equipment - 3 to 20 years
N. Leased assets
Leases where the Group assumes substantially all the risks and rewards of
ownership are classified as finance leases.
Plant and equipment acquired by way of finance lease is stated at an amount
equal to the lower of its fair value and the present value of the minimum lease
payments at inception of the lease, less accumulated depreciation (see above)
and impairment losses (see accounting policy ‘Impairment’).
Payments made under operating leases are recognised in the income statement
on a straight-line basis over the term of the lease.
Lease incentives received are recognised in the income statement over the
period of the lease unless a different systematic method is more appropriate
under the terms of the lease. The majority of leasing transactions entered into
by the Group are operating leases.
O. Inventories
Inventories are valued at the lower of cost and net realisable value. Because
of the varying nature of the Group’s operations, both first in, first out (‘FIFO’)
and weighted average methodologies are employed. In respect of work in
progress and finished goods, cost includes all direct costs of production
and the appropriate proportion of production overheads.
