Vodafone 2004 Annual Report Download - page 28

Vodafone Group Plc Annual Report 2004
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Operating and Financial Review and Prospects continued
present value of the future cash flows, certain assumptions are required to be made in
respect of highly uncertain matters, as noted below.
UK GAAP requires management to undertake a review for impairment if events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Group management currently undertake a review of goodwill, intangible
assets and investments in associated undertakings at least annually to consider
whether a full impairment review is required.
US GAAP
Under US GAAP, the requirements differ from UK GAAP and the principal differences
are:
•Annual impairment reviews are performed for goodwill and other indefinite-lived
intangible assets; and
• For finite-lived intangible assets and tangible assets, whenever events or changes
in circumstances indicate that their carrying amount may not be recoverable, the
carrying value is compared to undiscounted future cash flows.
Assumptions
There are a number of assumptions and estimates involved in calculating the net
present value of future cash flows from the Group’s businesses including:
•Management’s expectations of growth in revenues, including those relating to the
achievement the Group’s strategy on data products and services;
•Changes in operating margin;
•Timing and quantum of future capital expenditure;
• Uncertainty of future technological developments;
•Long term growth rates; and
•The selection of discount rates to reflect the risks involved.
Changing the assumptions selected by management, in particular, the discount rate
and growth rate assumptions used in the cash flow projections, could significantly
affect the Group’s results. The Group’s review includes the key assumptions related to
sensitivity in the cash flow projections.
Taxation
The Group’s tax charge on ordinary activities is the sum of the total current and
deferred tax charges. The calculation of the Group’s total tax charge necessarily
involves a degree of estimation and judgement in respect of certain items whose tax
treatment cannot be finally determined until a formal resolution has been reached with
the relevant tax authority or, as appropriate, through a formal legal process. The final
resolution of some of these items may give rise to material profit and loss and/or cash
flow variances. See “Liquidity and Capital Resources”.
The growth in complexity of the Group’s structure following its rapid expansion
geographically over the past few years has made the degree of estimation and
judgement more challenging. The resolution of issues is not always within the control
of the Group and it is often dependent on the efficiency of the legal processes in the
relevant taxing jurisdictions in which the Group operates. Issues can, and therefore
often do, take many years to resolve. Payments in respect of tax liabilities for an
accounting period result from payments on account and on the final resolution of open
items. As a result there can be substantial differences between the tax charge in the
profit and loss account and tax payments.
Recognition of deferred tax assets
The recognition of deferred tax assets is based upon whether it is more likely than not
that sufficient and suitable taxable profits will be available in the future, against which
the reversal of timing differences can be deducted. Recognition therefore involves
judgement regarding the future financial performance of the particular legal entity or
tax group in which the deferred tax asset has been recognised.
Historical differences between forecast and actual taxable profits have not resulted in
material adjustments to the recognition of deferred tax assets.
Non-discounting of deferred tax assets and liabilities
UK GAAP permits, and US GAAP prescribes, calculating deferred taxation assets or
liabilities on an undiscounted basis. It is the Group’s accounting policy to measure
deferred taxation on an undiscounted basis. If deferred taxation liabilities were
calculated using discounting techniques, the Group’s UK GAAP net deferred taxation
liability would be lower.
Revenue recognition and presentation
Turnover from mobile telecommunications comprises amounts charged to customers
in respect of monthly access charges, airtime charges, airtime usage, messaging, the
provision of other mobile telecommunications services, including data services and
information provision, fees for connecting customers to a mobile network, revenue
from the sale of equipment, including handsets, and revenues arising from the Group’s
Partner Network agreements.
Following the issuance of the Application Note to FRS 5, “Reporting the Substance of
Transactions”, in November 2003, the Group has amended its accounting policy on
revenue recognition in relation to the deferral of certain equipment, connection,
upgrade and tariff migration fees. The effect of the revised policy on the Group’s
turnover and results is not material in either the current or previous financial years.
Deferral period
Customer connection fees when combined with related equipment revenue, in excess
of the fair value of the equipment are deferred and recognised over the expected life
of the customer relationship. The life is determined by reference to historical customer
churn rates. An increase in churn rates would reduce the customer relationship life
and accelerate the revenue recognition. Historically, changes in churn rates have been
insufficient to impact the expected customer relationship life.
Any excess upgrade or tariff migration fees over the fair value of equipment provided
are deferred over the average upgrade or tariff migration period as appropriate. This
time period is calculated based on historical activity of customers who upgrade or
change tariffs. An increase in the time period would extend the period over which
revenue is recognised.
Presentation
When deciding the most appropriate basis for presenting revenue or costs of revenue,
both the legal form and substance of the agreement between the Group and its
business partners are reviewed to determine each party’s respective role in the
transaction.
Where the Group’s role in a transaction is that of principal, revenue is recognised on a
gross basis. This requires turnover to comprise the gross value of the transaction
billed to the customer, after trade discounts, with any related expenditure charged as
an operating cost.
Where the Group’s role in a transaction is that of a disclosed agent, revenue is
recognised on a net basis, with turnover representing the margin earned.
US GAAP
For the period to 30 September 2003, the Group applied US Staff Accounting Bulletin
(“SAB”) No. 101, “Revenue Recognition in Financial Statements”, which resulted in the
Group’s connection revenues being accounted for in a different way to that prescribed
under UK GAAP and described above. SAB 101 specifies that performance is viewed
from the perspective of the customer and takes place over the estimated life of the
customer relationship.