Disclosure non-financial assets and liabilities example

Disclosure non-financial assets and liabilities example

The guidance for this disclosure example is provided here.

8 Non-financial assets and liabilities

This note provides information about the group’s non-financial assets and liabilities, including:

  • specific information about each type of non-financial asset and non-financial liability
    • property, plant and equipment (note 8(a))
    • leases (note 8(b))
    • investment properties (note 8(c))
    • intangible assets (note 8(d))
    • deferred tax balances (note 8(e))
    • inventories (note 8(f))
    • other assets, including assets classified as held for sale (note 8(g))
    • employee benefit obligations (note 8(h))
    • provisions (note 8(i))
  • accounting policies
  • information about determining the fair value of the assets and liabilities, including judgements and estimation uncertainty involved (note 8(j)).

8(a) Property, plant and equipment

Amounts in CU’000

Freehold land

Buildings

Furniture, fittings and equipment

Machinery and vehicles

Assets under construction

Total

At 1 January 2019

Cost or fair value

11,350

28,050

27,510

70,860

137,770

Accumulated depreciation

-7,600

-37,025

-44,625

Net carrying amount

11,350

28,050

19,910

33,835

93,145

Movements in 2019

Exchange differences

-43

-150

-193

Revaluation surplus

2,700

3,140

5,840

Additions

2,874

1,490

2,940

4,198

3,100

14,602

Assets classified as held for sale and other disposals

-424

-525

-2,215

3,164

Depreciation charge

-1,540

-2,030

-4,580

8,150

Closing net carrying amount

16,500

31,140

20,252

31,088

3,100

102,080

At 31 December 2019

Cost or fair value

16,500

31,140

29,882

72,693

3,100

153,315

Accumulated depreciation

-9,630

-41,605

-51,235

Net carrying amount

16,500

31,140

20,252

31,088

3,100

102,080

Movements in 2020

Exchange differences

-230

-570

-800

Revaluation surplus

3,320

3,923

7,243

Acquisition of subsidiary

800

3,400

1,890

5,720

11,810

Additions

2,500

2,682

5,313

11,972

3,450

25,917

Assets classified as held for sale and other disposals

-550

-5,985

-1,680

-8,215

Transfers

950

2,150

-3,100

Depreciation charge

-1,750

-2,340

-4,380

-8,470

Impairment loss (ii)

-465

-30

-180

-675

Closing net carrying amount

22,570

38,930

19,820

44,120

3,450

128,890

At 31 December 2020

Cost or fair value

22,570

38,930

31,790

90,285

3,450

187,025

Accumulated depreciation

-11,970

-46,165

-58,135

Net carrying amount

22,570

38,930

19,820

44,120

3,450

128,890

(i) Non-current assets pledged as security

Refer to note 24 for information on non-current assets pledged as security by the group.

(ii) Impairment loss and compensation

The impairment loss relates to assets that were damaged by a fire – refer to note 4(b) for details. The whole amount was recognised as administrative expense in profit or loss, as there was no amount included in the asset revaluation surplus relating to the relevant assets. [IAS 36.130(a)]

An amount of CU300,000 (2019 – nil) was received by the group from an insurance company as compensation for damage to a building caused by the fire and recognised as other income. [IAS 16.74(d)]

(iii) Revaluation, depreciation methods and useful lives [IAS 1.117]

Land and buildings are recognised at fair value based on periodic, but at least triennial, valuations by external independent valuers, less subsequent depreciation for buildings. A revaluation surplus is credited to other reserves in shareholders’ equity (note 9(c)). All other property, plant and equipment is recognised at historical cost less depreciation. [IAS 16.73(a)]

Depreciation is calculated using the straight-line method to allocate the cost or revalued amounts of the assets, net of their residual values, over their estimated useful lives as follows: [IAS 16.50, IAS 16.73(b)(c)]

  • Buildings 25-40 years
  • Machinery 15 years
  • Vehicles 3-5 years
  • Furniture, fittings and equipment 3-8 years

Furniture, fittings and equipment include assets received in the form of free store fit outs are recognised at their fair value. These assets and other leasehold improvements are depreciated over the shorter of their useful life or the lease term, unless the entity expects to use the assets beyond the lease term.

See note 25(r) for the other accounting policies relevant to property, plant and equipment.

(iv) Significant estimates – valuations of land and buildings

Information about the valuation of land and buildings is provided in note 8(j) below.

(v) Carrying amounts that would have been recognised if land and buildings were stated at cost

If freehold land and buildings were stated on the historical cost basis, the amounts would be as follows: [IAS 16.77(e)]

Amounts in CU’000

2020

2019

Freehold land

Cost

16,100

13,350

Accumulated depreciation

Net book amount

16,100

13,350

Buildings

Cost

37,322

27,790

Accumulated depreciation

-3,715

-1,850

Net book amount

33,607

25,940

8(b) Leases

This note provides information for leases where the group is a lessee. For leases where the group is a lessor, see note 8(c).

(i) Amounts recognised in the balance sheet

The balance sheet shows the following amounts relating to leases: [IFRS 16.54]

Amounts in CU’000

2020

2019

Right-of-use assets [IFRS 16.47(a)]

Buildings [IFRS 16.53(j)]

3,846

2,994

Equipment [IFRS 16.53(j)]

4,678

5,264

Vehicles [IFRS 16.53(j)]

1,232

1,250

9,756

9,508

Lease liabilities [IFRS 16.47(b)]

Current

3,008

2,777

Non-current

8,493

8,514

11,501

11,291

Additions to the right-of-use assets during the 2020 financial year were CU2,152,000 (2019 – CU3,000,000). [IFRS 16.53(h)]

(ii) Amounts recognised in profit or loss

The statement of profit or loss shows the following amounts relating to leases: [IFRS 16.54]

Amounts in CU’000

Notes

2020

2019

Depreciation charge of right-of-use assets [IFRS 16.53(a)]

Buildings

-348

-366

Equipment

-1,236

-681

Vehicles

-320

-153

5(c)

-1,904

-1,200

Interest expense (included in finance cost) [IFRS 16.53(b)]

5(d)

-527

-505

Expense relating to short-term leases (included in cost of goods sold and administrative expenses) [IFRS 16.53(c)]

5(c)

-120

-98

Expense relating to leases of low-value assets that are not shown above as short-term leases (included in administrative expenses) [IFRS 16.53(d)]

5(c)

-85

-69

Expense relating to variable lease payments not included in lease liabilities (included in administrative expenses) [IFRS 16.53(e)]

5(c)

-941

-750

The total cash outflow for leases in 2020 was CU3,615,000 (2019 – CU2,760,000). [IFRS 16.53(g)]

(iii) The group’s leasing activities and their accounting [IAS 1.117]

The group leases various offices, warehouses, retail stores, equipment and vehicles. Rental contracts are typically made for fixed periods of 6 months to 8 years but may have extension options as described in (v) below. [IFRS 16.59(a),(c)]

Contracts may contain both lease and non-lease components. The group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices. However, for leases of real estate for which the group is a lessee, it has elected not to separate lease and non-lease components and instead accounts for these as a single lease component. [IFRS 16.15]

Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: [IAS 1.117, IFRS 16.27]

  • fixed payments (including in-substance fixed payments), less any lease incentives receivable
  • variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date
  • amounts expected to be payable by the group under residual value guarantees
  • the exercise price of a purchase option if the group is reasonably certain to exercise that option, and
  • payments of penalties for terminating the lease, if the lease term reflects the group exercising that option.

Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. [IFRS 16.18]

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. [IFRS 16.26]

To determine the incremental borrowing rate, the group: [IAS 1.112(c)]

  • where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received
  • uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by RePorting Co. Retail Limited, which does not have recent third-party financing, and
  • makes adjustments specific to the lease, eg term, country, currency and security.

If a readily observable amortising loan rate is available to the individual lessee (through recent financing or market data) which has a similar payment profile to the lease, then the group entities use that rate as a starting point to determine the incremental borrowing rate.

The group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset. [IFRS 16.38]

Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Right-of-use assets are measured at cost comprising the following: [IAS 1.117, IFRS 16.24]

  • the amount of the initial measurement of lease liability
  • any lease payments made at or before the commencement date less any lease incentives received
  • any initial direct costs, and
  • restoration costs.

Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. If the group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life.

While the group revalues its land and buildings that are presented within property, plant and equipment, it has chosen not to do so for the right-of-use buildings held by the group. [IFRS 16.35]

Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss.

Short-term leases are leases with a lease term of 12 months or less without a purchase option. Low-value assets comprise IT equipment and small items of office furniture. [IFRS 16.60]

(iv) Variable lease payments

Some property leases contain variable payment terms that are linked to sales generated from a store. For individual stores, up to 100% of lease payments are on the basis of variable payment terms with percentages ranging from 5% to 20% of sales.

Variable payment terms are used for a variety of reasons, including minimising the fixed costs base for newly established stores. Variable lease payments that depend on sales are recognised in profit or loss in the period in which the condition that triggers those payments occurs. [IFRS 16.59(b)(i), IFRS 16.B49]

A 10% increase in sales across all stores in the group with such variable lease contracts would increase total lease payments by approximately CU93,000 (2019 – CU75,000).

(v) Extension and termination options

Extension and termination options are included in a number of property and equipment leases across the group. These are used to maximise operational flexibility in terms of managing the assets used in the group’s operations.

The majority of extension and termination options held are exercisable only by the group and not by the respective lessor. [IFRS 16.59(b)(ii), IFRS 16.B50]

Critical judgements in determining the lease term

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option.

Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). [IFRS 16.59(b)(ii), IFRS 16.B50]

For leases of warehouses, retail stores and equipment, the following factors are normally the most relevant:

  • If there are significant penalty payments to terminate (or not extend), the group is typically reasonably certain to extend (or not terminate).
  • If any leasehold improvements are expected to have a significant remaining value, the group is typically reasonably certain to extend (or not terminate).
  • Otherwise, the group considers other factors including historical lease durations and the costs and business disruption required to replace the leased asset.

Most extension options in offices and vehicles leases have not been included in the lease liability, because the group could replace the assets without significant cost or business disruption.

As at 31 December 2020, potential future cash outflows of CU3,000,000 (undiscounted) have not been included in the lease liability because it is not reasonably certain that the leases will be extended (or not terminated) (2019 – CU3,570,000).

The lease term is reassessed if an option is actually exercised (or not exercised) or the group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this assessment, and that is within the control of the lessee.

During the current financial year, the financial effect of revising lease terms to reflect the effect of exercising extension and termination options was an increase in recognised lease liabilities and right-of-use assets of CU150,000 (2019 – decrease of CU57,000). [IFRS 16.20]

(vi) Residual value guarantees

To optimise lease costs during the contract period, the group sometimes provides residual value guarantees in relation to equipment leases. [IFRS 16.59(b)(iii), IFRS 16.B51(a),(c)]

Estimating the amount payable under residual value guarantees

The group initially estimates and recognises amounts expected to be payable under residual value guarantees as part of the lease liability. Typically the expected residual value at lease commencement is equal to or higher than the guaranteed amount, and so the group does not expect to pay anything under the guarantees. [IFRS 16.59(b)(iii), IFRS 16.B51(b),(d)]

At the end of each reporting period, the expected residual values are reviewed to reflect actual residual values achieved on comparable assets and expectations about future prices. As at 31 December 2020, CU220,000 is expected to be payable and is included in calculating the lease liabilities while CU350,000 (undiscounted) is not expected to be payable and has hence been excluded from the lease liabilities (2019 – CU250,000 and CU307,000 respectively).

8(c) Investment properties

Amounts in CU’000

2020

2019

Non-current assets – at fair value

Opening balance at 1 January [IAS 40.76]

10,050

8,205

Acquisitions [IAS 40.76(a)]

1,900

Capitalised subsequent expenditure [IAS 40.76(a)]

810

Classified as held for sale or disposals [IAS 40.76(c)]

-112

Net gain/(loss) from fair value adjustment [IAS 40.76(d)]

1,350

1,397

Transfer (to)/from inventories and owner-occupied property [IAS 40.76(f)]

-250

Closing balance at 31 December [IAS 40.76]

13,300

10,050

(i) Investment properties related amounts recognised in profit or loss [IAS 40.76(f)]

Amounts in CU’000

2020

2019

Rental income from operating leases [IAS 40.75(f)(i), IFRS 16.90(b)]

6,180

5,165

Direct operating expenses from property that generated rental income[IAS 40.75(f)(ii)]

-807

-606

Direct operating expenses from property that did not generate rental income [IAS 40.75(f)(iii)]

-903

-503

Fair value gain recognised in other income [IAS 40.75(f)(iv)]

1,350

1,397

(ii) Measuring investment property at fair value

Investment properties, principally office buildings, are held for long-term rental yields and are not occupied by the group. They are carried at fair value. Changes in fair values are presented in profit or loss as part of other income. [IAS 40.75(a)]

(iii) Significant estimate – fair value of investment property

Information about the valuation of investment properties is provided in note 8(j) below.

(iv) Non-current assets pledged as security

Refer to note 24 for information on non-current assets pledged as security by the group. [IAS 40.75(g)]

(v) Contractual obligations

Refer to note 18 for disclosure of contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements. [IAS 40.75(h)]

(vi) Leasing arrangements

The investment properties are leased to tenants under operating leases with rentals payable monthly. Lease payments for some contracts include CPI increases, but there are no other variable lease payments that depend on an index or rate. Where considered necessary to reduce credit risk, the group may obtain bank guarantees for the term of the lease. [IFRS 16.92]

Although the group is exposed to changes in the residual value at the end of the current leases, the group typically enters into new operating leases and therefore will not immediately realise any reduction in residual value at the end of these leases. Expectations about the future residual values are reflected in the fair value of the properties.

Minimum lease payments receivable on leases of investment properties are as follows: [IFRS 16.97]

Amounts in CU’000

2020

2019

Within 1 year

4,265

4,245

Between 1 and 2 years

2,580

2,520

Between 2 and 3 years

2,490

2,470

Between 3 and 4 years

2,070

2,050

Between 4 and 5 years

1,980

2,010

Over 5 years

2,370

2,550

15,775

15,845

8(d) Intangible assets

The following intangible assets are classified as non-current assets and recorded the following movements:

Amounts in CU’000

Goodwill

Patents, trademarks and other rights

Internally developed software

Customer contracts

Total

At 1 January 2019

Cost

9,700

9,410

2,255

21,365

Accumulated amortisation and impairment

-250

-205

-455

Net book amount

9,700

9,160

2,050

20,910

Year ended 31 December 2019

Opening net book amount

9,700

9,160

2,050

20,910

Additions – internal development

720

720

Exchange differences

45

45

Amortisation charge **

-525

-205

-730

Closing net book amount

9745

8,635

2,575

20,945

At 31 December 2019

Cost

9,745

9,410

2,975

22,130

Accumulated amortisation and impairment

-775

-410

-1,185

Net book amount

9,745

8,635

2,566

20,945

Year ended 31 December 2020

Opening net book amount

9,745

8,635

2,566

20,945

Additions – internal development

880

880

Acquisition of business (note 14)

1,115

3,020

3,180

7,315

Exchange differences

-145

-145

Impairment charge ***

-2,410

-2,410

Amortisation charge **

-525

-300

-1,210

-2,035

Closing net book amount

8,305

11,130

3,145

1,970

24,550

At 31 December 2020

Cost

10,715

12,430

3,855

3,180

30,180

Accumulated amortisation and impairment

-2,410

-1,300

-710

-1,210

-5,630

Net book amount

8,305

11,130

3,145

1,970

24,550

* Software consists of capitalised development costs being an internally generated intangible asset. [IAS 38.118(e)(i)]

** Amortisation expenses are included in cost of sales of goods (CU1,050,000; 2019 – CU450,000), cost of providing services (CU475,000; 2019 – CU125,000), marketing expense (CU310,000; 2019 – CU45,000) and administration expenses (CU200,000; 2019 – CU110,000). [IAS 38.118(d)]

*** The carrying amount of the furniture manufacturing and wholesale CGU in Europe has been reduced to its recoverable amount through recognition of an impairment loss against goodwill. This loss is included in cost of sales of goods in the statement of profit or loss. [IAS 36.126(a), IAS 36.130(c)(i),(d)(i)]

RePorting Co. Electronics Group is researching new devices that could replace the current suite of smartphones and tablets. It has incurred research and development expenses of CU1,215,000 (2019 – CU1,010,000), which are included in administration cost in the statement of profit or loss. [IAS 38.126]

(i) Amortisation methods and useful lives [IAS 1.117]

The group amortises intangible assets with a limited useful life, using the straight-line method over the following periods: [IAS 38.118(a),(b)]

  • Patents, trademarks and licences 3-5 years
  • IT development and software 3-5 years
  • Customer contracts 1-3 years

See note 25(t) for the other accounting policies relevant to intangible assets, and note 25(j) for the group’s policy regarding impairments.

(ii) Customer contracts

The customer contracts were acquired as part of a business combination (see note 14 for details). They are recognised at their fair value at the date of acquisition and are subsequently amortised on a straight-line based on the timing of projected cash flows of the contracts over their estimated useful lives. [IAS 1.119]

(iii) Significant estimate: useful life of IT division’s intangible assets [IAS 1.125]

The group has recently completed the development of software that is used to analyse business processes by the IT consulting division. As at 31 December 2020, the carrying amount of this software was CU722,000 (2019 – nil). The group estimates the useful life of the software to be at least five years based on the expected technical obsolescence of such assets.

However, the actual useful life may be shorter or longer than five years, depending on technical innovations and competitor actions. If it were only three years, the carrying amount would be CU702,000 as at 31 December 2020. If the useful life were estimated to be eight years, the carrying amount would be CU732,000.

(iv) Impairment tests for goodwill

Goodwill is monitored by management at the level of the six operating segments identified in note 2. [IAS 36.134]

A segment-level summary of the goodwill allocation is presented below: [IAS 36.134(a)]

Amounts in CU’000

Neverland

US

China

Europe

Total

2020

IT consulting

4,200

2870

7,070

Furniture – manufacturing and wholesale

120

120

Electronic equipment

1,115

1,115

1,235

4,200

2870

8,305

2019

IT consulting

4,200

3015

7,215

Furniture – manufacturing and wholesale

120

2,410

2,530

120

4,200

2,410

3,015

9,745

(v) Significant estimate: key assumptions used for value-in-use calculations

The group tests whether goodwill has suffered any impairment on an annual basis. For the 2020 and 2019 reporting periods, the recoverable amount of the cash-generating units (CGUs) was determined based on value-in-use calculations which require the use of assumptions. The calculations use cash flow projections based on financial budgets approved by management covering a five-year period. [IAS 36.134(c), IAS 36.134(d)(i),(iii),(iv)]

Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. These growth rates are consistent with forecasts included in industry reports specific to the industry in which each CGU operates.

The following table sets out the key assumptions used in the value-in-use calculations for those CGUs that have significant goodwill allocated to them: [IAS 36.134(d)(i)]

[IAS 36.130(g), IAS 36.134(d)(i),(iv),(v)]

Furniture – manufacturing and wholesale

IT consulting

Electronic equipment

China

US

Europe

Neverland

2020

Sales volume (% annual growth rate)

2.7%

3.2%

4.1%

2.9%

Sales price (% annual growth rate)

1.4%

1.7%

1.8%

1.8%

Budgeted gross margin (%)

47.0%

60.0%

55.5%

40.0%

Other operating costs (CU’000)

9,500

8,400

5,600

1,650

Annual capital expenditure (CU’000)

`1900

500

230

150

Long-term growth rate (%)

3.5%

2.2%

2.0%

3.1%

Pre-tax discount rate (%)

14.7%

14.0%

14.8%

16.0%

2019

Sales volume (% annual growth rate)

2.5%

3.0%

3.9%

Sales price (% annual growth rate)

1.3%

1.6%

1.8%

Budgeted gross margin (%)

44.0%

60.0%

54.0%

Other operating costs (CU’000)

9,300

8,300

4,350

Annual capital expenditure (CU’000)

1850

580

225

Long-term growth rate (%)

3.2%

2.2%

1.8%

Pre-tax discount rate (%)

14.3%

14.4%

15.1%

Management has determined the values assigned to each of the above key assumptions as follows: [IAS 36.134(d)(ii), (iv)]

Assumption

Method used to determining values

Sales volume

Average annual growth rate over the five-year forecast period; based management’s expectations of market development combined with past performance.

Sales price

Average annual growth rate over the five-year forecast period; based on current industry trends and including long-term inflation forecasts for each territory.

Budgeted gross margin

Based on past performance and management’s expectations for the future.

Other operating costs

Fixed costs of the CGUs, which do not vary significantly with sales volumes or prices. Management forecasts these costs based on the current structure of the business, adjusting for inflationary increases but not reflecting any future restructurings or cost-saving measures. The amounts disclosed above are the average operating costs for the five-year forecast period.

Annual capital expenditure

Expected cash costs in the CGUs. This is based on the historical experience of management, and the planned refurbishment expenditure. No incremental revenue or cost savings are assumed in the value-in-use model as a result of this expenditure.

Long-term growth rate

This is the weighted average growth rate used to extrapolate cash flows beyond the budget period. The rates are consistent with forecasts included in industry reports.

Pre-tax discount rates [IAS 36.55]

Reflect specific risks relating to the relevant segments and the countries in which they operate.

Customer concentration/dependency – IT consulting CGU – Europe

The IT consulting CGU in Europe generates 20% of its total revenues for each financial year from a key customer in France. The customer contract is for a five-year term, and the customer has been trading with the CGU since 2001. Management has included the renewal of this key customer contract in the value-in-use calculations to determine the recoverable amount of the CGU. [IAS 36.134(d)(ii)]

(vi) Significant estimate – impairment charge [IAS 36.134(f)]

The impairment charge of CU2,410,000 arose in the furniture manufacturing and wholesale CGU in China following a decision to reduce the manufacturing output allocated to these operations. This was a result of a redefinition of the group’s allocation of manufacturing volumes across all CGUs in order to benefit from advantageous market conditions.

Following this decision, the group reassessed the depreciation policies of its property, plant and equipment in this country and estimated that their useful lives will not be affected following this decision. No class of asset other than goodwill was impaired. [IAS 36.129(a), IAS 36.130(a),(b),(d),(e), IAS 36.130(e)]

As at 31 December 2020, the recoverable amount of the entire CGU was CU45,789,000.

(vii) Significant estimate: impact of possible changes in key assumptions

Furniture manufacturing and wholesale CGU – China [IAS 36.134(f)]

If the budgeted gross margin used in the value-in-use calculation for the furniture manufacturing and wholesale CGU in China had been 5% lower than management’s estimates at 31 December 2020 (42% instead of 47%), the group would have had to recognise an impairment against the carrying amount of property, plant and equipment of CU1,300,000.

The reasonably possible change of 5% reduction in budgeted gross margin represents a reasonably possible reduction in sales price of 0.2% (i.e. annual growth rate of 1.2% instead of 1.4%). [IAS 1.129(b), IAS 36.134(f)]

If the pre-tax discount rate applied to the cash flow projections of this CGU had been 1% higher than management’s estimates (15.7% instead of 14.7%), the group would have had to recognise an impairment against property, plant and equipment of CU600,000.

In the prior year, there were no reasonably possible changes in any of the key assumptions that would have resulted in an impairment write-down in the Chinese furniture manufacturing and wholesale CGU.

IT consulting CGU – Europe

The recoverable amount of the IT consulting CGU in Europe is estimated to exceed the carrying amount of the CGU at 31 December 2020 by CU388,000 (2019 – CU463,000). [IAS 36.134(f)(i), IAS 1.38]

The recoverable amount of this CGU would equal its carrying amount if the key assumptions were to change as follows: [IAS 36.134(f)(ii), (iii), IAS 1.38]

2020

2019

From

To

From

To

Sales volume (% annual growth rate)

4.1%

3.5%

3.9%

2.5%

Budgeted gross margin (%)

55.5%

49.0%

54.0%

46.0%

Long-term growth rate (%)

2.0%

1.5%

1.8%

1.3%

Pre-tax discount rate (%)

14.8%

15.5%

15.1%

15.9%

The directors and management have considered and assessed reasonably possible changes for other key assumptions and have not identified any instances that could cause the carrying amount of the European IT consulting CGU to exceed its recoverable amount.

8(e) Deferred tax balances

(i) Deferred tax assets

Amounts in CU’000

Notes

2020

2019

The balance comprises temporary differences attributable to: [IAS 12.81(g)(i)]

Lease liabilities

8(b)

3,450

3,387

Tax losses

3,170

2,245

Defined benefit pension obligations

8(h)

1,317

783

Provisions for warranties, restructurings, refunds, make good obligations and legal claims

8(i)

1,137

786

9,074

7,201

Other

Employee benefits

914

822

Finance leases

8(a)

232

Cash flow hedges

12(a)

230

234

Loss allowances for financial assets

12(c)

215

121

Derivatives held for trading

12(a)

183

186

Contract liabilities – customer loyalty programme

3(b)

166

161

Contingent liability

8(i)

143

Write-down of building

4

140

Refund liabilities

7(f)

148

71

Other

65

18

Subtotal other

2,204

1,613

Total deferred tax assets

11,278

8,814

Set-off of deferred tax liabilities pursuant to set-off provisions [IAS 12.74]

(ii)

-3,429

-3,290

Net deferred tax assets

7,849

5,524

Significant estimates

The deferred tax assets include an amount of CU1,378,000 which relates to carried-forward tax losses of RePorting Co. Manufacturing Limited. The subsidiary has incurred the losses over the last two financial years following the acquisition of the manufacturing operations in Springfield. They relate to the one-off costs of integrating the operations and will not recur in future.

The group has concluded that the deferred assets will be recoverable using the estimated future taxable income based on the approved business plans and budgets for the subsidiary. The subsidiary is expected to generate taxable income from 2022 onwards. The losses can be carried forward indefinitely and have no expiry date. [IAS 1.125. IAS 12.82]

Amounts in CU’000

Lease liabilities

Tax losses

Pension obligation

Provisions

Other

Total

At 1 January 2019

2,888

1,300

551

610

1,201

6,550

(Charged)/credited

– to profit or loss [IAS 12.81(g)(ii)]

499

945

-41

176

108

1,687

– to other comprehensive income

273

304

577

At 31 December 2019

3,387

2,245

783

786

1,613

8,814

(Charged)/credited

– to profit or loss [IAS 12.81(g)(ii)]

63

-600

-4

351

194

4

– to other comprehensive income

-36

77

41

– directly to equity

60

60

Acquisition of subsidiary

1,525

574

260

2,359

At 31 December 2020

3,450

3,170

1,317

1,137

2,204

11,278

(ii) Deferred tax liabilities

Amounts in CU’000

Notes

2020

2019

The balance comprises temporary differences attributable to: [IAS 12.81(g)(i)]

Property, plant and equipment

8(a)

6,243

4,125

Right-of-use assets

8(b)

2,927

2,852

Intangible assets

8(d)

2,375

770

Investment property

8(c)

1,124

719

12,669

8,466

Other

Convertible notes

7(g)

955

Financial assets at fair value through profit or loss

7(d)

804

441

Cash flow hedges

12(a)

649

639

Financial assets at fair value through other comprehensive income

7(c)

173

142

Investments in associates

11316(e)

131

113

Prepayments

-7(a)

125

118

Inventories

8(f)

120

Non-current asset recognised for costs to fulfil a contract

3(b)

94

156

Share-based payments (deferred shares)

21(b)

51

22

Other

114

13

Subtotal other

3,216

1,644

Total deferred tax liabilities

15,885

10,110

Set-off of deferred tax liabilities pursuant to set-off provisions [IAS 12.74]

(i)

-3,429

-3,290

Net deferred tax liabilities

12,456

6,820

Offsetting within tax consolidated group

RePorting Co. Plc and its wholly-owned Neverland subsidiaries have applied the tax consolidation legislation, which means that these entities are taxed as a single entity. As a consequence, the deferred tax assets and deferred tax liabilities of these entities have been offset in the consolidated financial statements.

Amounts in CU’000

Property, plant and equipment

Right-of-use assets

Intangible assets

Investment property

Other

Total

At 1 January 2019

2,150

2,312

615

300

1,291

6,668

(Charged)/credited

– to profit or loss [IAS 12.81(g)(ii)]

223

540

155

419

62

1,399

– to other comprehensive income

1752

291

2,043

At 31 December 2019

4,125

2,852

770

719

1,644

10,110

(Charged)/credited

– to profit or loss [IAS 12.81(g)(ii)]

-379

75

-255

405

-23

-177

– to other comprehensive income

2173

425

2,598

– directly to equity

1,050

1,050

Acquisition of subsidiary

324

1,860

120

2,304

At 31 December 2020

6,243

2,927

2,375

1,124

3,216

15,885

8(f) Inventories

Amounts in CU’000

2020

2019

Current assets

Raw materials and stores [IAS 1.77, IAS 2.36(b)]

6,200

4,800

Work in progress [IAS 2.36(b)]

5,600

5,400

Finished goods – at cost [IAS 2.36(b)]

6,663

8,452

Finished goods – at fair value less cost to sell [IAS 2.36(c)]

1,290

1,020

Land held for development and resale [IAS 2.36(b)]

2,400

22,153

19,672

(i) Assigning costs to inventories [IAS 1.117]

The costs of individual items of inventory are determined using weighted average costs. The exception is land held for development and resale, where costs are assigned by specific identification and include the cost of acquisition, development and borrowing costs incurred during the development. See note 25(m) for the group’s other accounting policies for inventories. [IAS 2.23, IAS 2.25, IAS 2.36(a)]

(ii) Amounts recognised in profit or loss

Inventories recognised as an expense during the year ended 31 December 2020 amounted to CU55,540,000 (2019 – CU34,244,000). These were included in cost of sales and cost of providing services (except for CU535,000 of inventories damaged by a fire which are recognised in administrative expense – refer to note 4). [IAS 2.36(d)]

Write-downs of inventories to net realisable value amounted to CU950,000 (2019 – CU750,000). These were recognised as an expense during the year ended 31 December 2020 and included in cost of sales in the statement of profit or loss. [IAS 2.36(e), IAS 36.126(a)]

The group reversed CU160,000 of a previous inventory write-down in July 2020, as the group sold the relevant goods that had been written down to an independent retailer in Argentina at original cost. The amount reversed has been included in cost of sales in the statement of profit or loss. [IAS 2.36(f),(g)]

8(g) Other assets and assets classified as held for sale

Amounts in CU’000

2020

2019

Other current assets

Prepayments [IAS 1.77]

500

475

Right to returned goods (see note 3(b)) [IAS 1.77]

76

38

576

513

Non-current assets held for sale

Land

250

250

(i) Land held for sale

In November 2020, the directors of RePorting Co. Manufacturing Limited decided to sell a parcel of vacant land which was originally acquired for an expansion of the Nicetown factory. There are several interested parties and the sale is expected to be completed before the end of June 2021.

The asset is presented within total assets of the Neverland Furniture – manufacturing and wholesale segment in note 2. [IFRS 5.41(a),(b),(d)]

Refer to note 15(d) for information about assets and liabilities of a disposal group that were classified as held for sale at 31 December 2019.

(ii) Non-recurring fair value measurements

Land classified as held for sale during the reporting period was measured at the lower of its carrying amount and fair value less costs to sell at the time of the reclassification, resulting in the recognition of a write-down of CU22,000 as administrative expenses in the statement of profit or loss.

The fair value of the land was determined using the sales comparison approach, as described in note 8(j) below. This is a level 2 measurement as per the fair value hierarchy set out in note 7(h) above. [IFRS 13.91(a), IFRS 13.93(b),(d), IFRS 5.41(c)]

8(h) Employee benefit obligations

Amounts in CU’000

2020

2019

Current

Non-current

Total

Current

Non-current

Total

Leave obligations (i)

690

2,220

2,910

470

2,270

2,740

Share appreciation rights (note 21(d))

138

138

Defined pension benefits (ii)

3,684

3,684

1,900

1,900

Post-employment medical benefits (iii)

707

707

711

711

Total employee benefit obligations

690

6,749

7,439

470

4,881

5,351

(i) Leave obligations

The leave obligations cover the group’s liabilities for long service leave and annual leave which are classified as either other long-term benefits or short-term benefits, as explained in note 25(y).

The current portion of this liability includes all of the accrued annual leave, the unconditional entitlements to long service leave where employees have completed the required period of service, and also for those employees who are entitled to pro-rata payments in certain circumstances. [IAS 1.61]

The entire amount of the provision of CU690,000 (2019 – CU470,000) is presented as current, since the group does not have an unconditional right to defer settlement for any of these obligations.

However, based on past experience, the group does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken or paid within the next 12 months.

Amounts in CU’000

2020

2019

Current leave obligations expected to be settled after 12 months

344

272

(ii) Defined benefit pension plans

The group operates defined benefit pension plans in Neverland and the US under broadly similar regulatory frameworks. All of the plans are final salary pension plans, which provide benefits to members in the form of a guaranteed level of pension payable for life.

The level of benefits provided depends on members’ length of service and their salary in the final years leading up to retirement. In the Neverland plans, pensions in payment are generally updated in line with the retail price index, whereas in the US plans, pensions generally do not receive inflationary increases once in payment. With the exception of this inflationary risk in Neverland, the plans face broadly similar risks, as described below. [IAS 19.139(a), IAS 1.112(c)]

The majority of benefit payments are from trustee-administered funds; however, there are also a number of unfunded plans where the group meets the benefit payment obligation as it falls due. Plan assets held in trusts are governed by local regulations and practice in each country, as is the nature of the relationship between the group and the trustees (or equivalent) and their composition.

Responsibility for governance of the plans – including investment decisions and contributions schedules – lies jointly with the group and the board of trustees. The board of trustees must be composed of representatives of the group and plan participants in accordance with the plan’s regulations.

The group also operates a couple of defined contribution plans which receive fixed contributions from group companies. The group’s legal or constructive obligation for these plans is limited to the contributions. The expense recognised in the current period in relation to these contributions was CU2,425,000 (2019 – CU2,075,000). [IAS 19.53]

Balance sheet amounts

The amounts recognised in the balance sheet and the movements in the net defined benefit obligation over the year are as follows: [IAS 19.140(a)(i), (ii), IAS 19.141]

Amounts in CU’000

Present value of obligation

Fair value of plan assets

Total

Impact of minimum funding requirement/ asset ceiling

Net amount

At 1 January 2019

3,479

-2,264

1,215

120

1,335

Current service cost

319

319

319

Past service cost

179

179

179

Interest expense/(income)

214

-156

58

5

63

Total amount recognised in profit or loss

712

-156

556

5

561

Remeasurements

– Return on plan assets, excluding amounts included in interest (income)

-85

-85

-85

– Loss from change in demographic assumptions

20

20

20

– Loss from change in financial assumptions

61

61

61

– Experience losses

641

641

641

– Change in asset ceiling, excluding amounts included in interest expense

80

80

Total amount recognised in other comprehensive income

722

-85

637

80

717

Exchange differences

-324

22

-302

302

Contributions:

– Employers

-411

-411

-411

– Plan participants

30

-30

Benefit payments

-127

127

At 31 December 2019

4,492

-2,797

1,695

205

1,900

Current service cost

751

751

751

Past service cost

65

65

65

Interest expense/(income)

431

-308

123

9

132

Total amount recognised in profit or loss

1,247

-308

939

9

948

Remeasurements

– Return on plan assets, excluding amounts included in interest (income)

-187

-187

-187

– Loss from change in demographic assumptions

32

32

32

– Loss from change in financial assumptions

121

121

121

– Experience losses

-150

-150

-150

– Change in asset ceiling, excluding amounts included in interest expense

100

100

Total amount recognised in other comprehensive income

3

-187

-184

100

-84

Exchange differences

-61

-25

-86

86

Contributions:

– Employers

-908

-908

-908

– Plan participants

55

-55

Payments from plan:

– Benefit payments

-566

566

– Settlements

-280

280

Acquired in business combination (see note 14)

3,691

-1,777

1,914

1,914

At 31 December 2020

8,581

-5,211

3,370

314

3,684

One of our Neverland plans has a surplus that is not recognised, on the basis that future economic benefits are not available to the entity in the form of a reduction in future contributions or a cash refund. [IAS 19.141]

In connection with the closure of a factory, a curtailment loss was incurred and a settlement arrangement agreed with the plan trustees, effective 31 December 2020, which settled all retirement benefit plan obligations relating to the employees of that factory. In the prior year, the group made minor amendments to the terms of the plan, resulting in past service cost of CU179,000. [IAS 19.139(c)]

The net liability disclosed above relates to funded and unfunded plans as follows: [IAS 19.138(e)]

Amounts in CU’000

2020

2019

Present value of funded obligations

6,155

2,943

Fair value of plan assets

-5,211

-2,797

Deficit of funded plans

944

146

Present value of unfunded obligations

2,426

1,549

Total deficit of defined benefit pension plans (before asset ceiling)

3,370

1,695

The group has no legal obligation to settle the deficit in the funded plans with an immediate contribution or additional one off contributions. The group intends to continue to contribute to the defined benefit section of the plan at a rate of 14% of salaries, in line with the actuary’s latest recommendations. [IAS 1.112(c)]

The following table shows a breakdown of the defined benefit obligation and plan assets by country: [IAS 19.138(a)]

Amounts in CU’000

2020

2019

Neverland

US

Total

Neverland

US

Total

Present value of obligation

4,215

4,366

8,581

1,050

3,442

4,492

Fair value of plan assets

-2,102

-3,109

-5,211

-394

-2,403

-2,797

2,113

1,257

3,370

656

1,039

1,695

Impact of minimum funding requirement/asset ceiling

314

314

205

205

Total liability

2,427

1,257

3,684

861

1,039

1,900

As at the last valuation date, the present value of the defined benefit obligation included approximately CU3,120,000 (2019 – CU1,371,000) relating to active employees, CU3,900,000 (2019 – CU2,115,000) relating to deferred members and CU1,561,000 (2019 – CU1,006,000) relating to members in retirement. [IAS 19.137(a)]

(iii) Post-employment medical plans

The group operates a number of post-employment medical benefit schemes, principally in the US. The majority of these plans are unfunded. The method of accounting, significant assumptions and the frequency of valuations are similar to those used for the defined benefit pension schemes set out above with the addition of actuarial assumptions relating to the long-term increase in healthcare costs of 8.0% (2019 – 7.6%) and claim rates of 6% (2019 – 5.2%). [IAS 19.138, IAS 19.139(a), IAS 1.112(c), IAS 19.144]

Balance sheet amounts

The amounts recognised in the balance sheet and the movements in the net defined benefit obligation over the year are as follows: [IAS 19.140(a)(i), (ii), IAS 19.141]

Amounts in CU’000

Present value of obligation

Fair value of plan assets

Net amount

At 1 January 2019

708

-207

501

Current service cost

107

107

Interest expense/(income)

25

-13

12

Total amount recognised in profit or loss

132

-13

119

Remeasurements

– Return on plan assets, excluding amounts included in interest (income)

-11

-11

– Loss from change in demographic assumptions

3

3

– Loss from change in financial assumptions

7

7

– Experience losses

194

194

Total amount recognised in OCI

204

-11

193

Exchange differences

-31

2

-29

Employer contributions/premiums paid

-73

-73

Benefit payments from plan

-8

8

At 31 December 2019

1,005

-294

711

Current service cost

153

153

Interest expense/(income)

49

-18

31

Total amount recognised in profit or loss

202

-18

184

Remeasurements

– Return on plan assets, excluding amounts included in interest (income)

-33

-33

– Loss from change in demographic assumptions

4

4

– Loss from change in financial assumptions

10

10

– Experience losses

-16

-16

Total amount recognised in OCI

-2

-33

-35

Exchange differences

37

-5

32

Employer contributions/premiums paid

-185

-185

Benefit payments from plan

-7

7

At 31 December 2020

1,235

-528

707

The net liability disclosed above relates to funded and unfunded plans as follows: [IAS 19.138(e)]

Amounts in CU’000

2020

2019

Present value of funded obligations

650

350

Fair value of plan assets

-528

-294

Deficit of funded plans

122

56

Present value of unfunded obligations

585

655

Total deficit of post-employment medical plans

707

711

(iv) Post-employment benefits (pension and medical)

Significant estimates: actuarial assumptions and sensitivity

The significant actuarial assumptions were as follows: [IAS 19.144]

2020

2019

Neverland

US

Neverland

US

Discount rate

5.1%

5.2%

5.5%

5.6%

Salary growth rate

4.0%

4.5%

4.5%

4.0%

Pension growth rate

3.0%

0.0%

3.1%

0.0%

Long-term increase in health care costs

8.0%

7.6%

Claim rates

6.0%

5.2%

Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience in each territory. These assumptions translate into an average life expectancy in years for a pensioner retiring at age 65:

2020

2019

Neverland

US

Neverland

US

Retiring at the end of the reporting period:

– Male

22

20

22

20

– Female

25

24

25

24

Retiring 20 years after the end of the reporting period:

– Male

24

23

24

23

– Female

27

26

27

26

The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is: [IAS 19.145(a)]

Change in assumption

Impact on defined benefit obligation

Increase in assumption

Decrease in assumption

2020

2019

2020

2019

2020

2019

Discount rate

0.50%

0.30%

Decrease by

8.2%

6.6%

Increase by

9.0%

7.2%

Salary growth rate

0.50%

0.70%

Increase by

1.8%

2.3%

Decrease by

1.7%

2.1%

Pension growth rate

0.25%

0.30%

Increase by

4.7%

5.2%

Decrease by

4.4%

5.1%

Life expectancy

+/- 1 year

Increase by

2.8%

2.5%

Decrease by

2.9%

2.7%

Long-term increase in health care costs

0.50%

0.40%

Increase by

5.5%

5.2%

Decrease by

4.8%

4.3%

Claim rates

0.50%

0.40%

Increase by

6.3%

5.9%

Decrease by

6.8%

6.4%

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated.

When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the defined benefit liability recognised in the balance sheet. [IAS 19.145(b)]

The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period. [IAS 19.145(c)]

Balance sheet amounts

The major categories of plan assets are as follows: [IAS 19.142]

Amounts in CU’000

At 31 December 2020

At 31 December 2019

Quoted

Un-quoted

Total

in %

Quoted

Un-quoted

Total

in %

Equity instruments

1,824

32%

1,216

39%

– Information technology

502

502

994

994

– Energy

557

557

– Manufacturing

746

746

194

194

– Other

19

19

28

28

Debt instruments

2,161

38%

571

19%

– Government

916

916

321

321

– Corporate bonds (investment grade)

900

900

99

99

– Corporate bonds (non-investment grade)

68

277

345

41

110

151

Property

1,047

18%

943

31%

– In US

800

800

697

697

– In Neverland

247

247

246

246

Qualifying insurance policies

419

419

7%

190

190

6%

Cash and cash equivalents

177

177

3%

94

94

3%

Investment funds

111

111

2%

77

77

2%

Total

3,977

1,762

5,739

100%

1,820

1,271

3,091

100%

The assets set out in the above table include ordinary shares issued by RePorting Co. Plc with a fair value of CU530,000 (2019 – CU410,000) and land and buildings occupied by the group with a fair value of CU550,000 (2019 – CU580,000). [IAS 19.143]

Risk exposure

Through its defined benefit pension plans and post-employment medical plans, the group is exposed to a number of risks, the most significant of which are detailed below: [IAS 19.139(b)]

Risk

Considerations

Asset volatility

The plan liabilities are calculated using a discount rate set with reference to corporate bond yields; if plan assets underperform this yield, this will create a deficit. Both the Neverland and US plans hold a significant proportion of equities, which are expected to outperform corporate bonds in the long term while providing volatility and risk in the short term.

As the plans mature, the group intends to reduce the level of investment risk by investing more in assets that better match the liabilities. The first stage of this process was completed in FY2020 with the sale of a number of equity holdings and purchase of a mixture of government and corporate bonds.

The government bonds represent investments in Neverland and US government securities only. The corporate bonds are global securities with an emphasis on Neverland and the US.

However, the group believes that, due to the long-term nature of the plan liabilities and the strength of the supporting group, a level of continuing equity investment is an appropriate element of the group’s long-term strategy to manage the plans efficiently. See below for more details on the group’s asset-liability matching strategy.

Changes in bond yields

A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings.

Inflation risks

Some of the group’s pension obligations are linked to salary inflation, and higher inflation will lead to higher liabilities (although, in most cases, caps on the level of inflationary increases are in place to protect the plan against extreme inflation). The majority of the plan’s assets are either unaffected by (fixed interest bonds) or loosely correlated with (equities) inflation, meaning that an increase in inflation will also increase the deficit.

In the US plans, the pensions in payment are not linked to inflation, so this is a less material risk.

Life expectancy

The majority of the plans’ obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plans’ liabilities. This is particularly significant in the Neverland plan, where inflationary increases result in higher sensitivity to changes in life expectancy.

In the case of funded plans, the group ensures that the investment positions are managed within an asset-liability matching (ALM) framework that has been developed to achieve long-term investments that are in line with the obligations under the pension schemes.

Within this framework, the group’s ALM objective is to match assets to the pension obligations by investing in long-term fixed interest securities with maturities that match the benefit payments as they fall due and in the appropriate currency. [IAS 19.146]

The group actively monitors how the duration and the expected yield of the investments are matching the expected cash outflows arising from the pension obligations. The group has not changed the processes used to manage its risks from previous periods.

The group does not use derivatives to manage its risk. Investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets.

A large portion of assets in 2020 consists of equities and bonds, although the group also invests in property, bonds, cash and investment (hedge) funds. The group believes that equities offer the best returns over the long term with an acceptable level of risk.

The majority of equities are in a globally diversified portfolio of international blue chip entities, with a target of 60% of equities held in Neverland and Europe, 30% in the US, and the remainder in emerging markets.

(v) Defined benefit liability and employer contributions

The group has agreed that it will aim to eliminate the pension plan deficit over the next nine years. Funding levels are monitored on an annual basis, and the current agreed contribution rate is 14% of pensionable salaries in Neverland and 12% in the US.

The next valuation is due to be completed as at 31 December 2021. The group considers that the contribution rates set at the last valuation date are sufficient to eliminate the deficit over the agreed period and that regular contributions, which are based on service costs, will not increase significantly. [IAS 19.147(a)]

Expected contributions to post-employment benefit plans for the year ending 31 December 2021 are CU1,150,000. [IAS 19.147(b)]

The weighted average duration of the defined benefit obligation is 25.2 years (2019 – 25.8 years). The expected maturity analysis of undiscounted pension and post-employment medical benefits is as follows: [IAS 19.147(c)]

Amounts in CU’000

Less than a year

Between 1 – 2 years

Between 2 – 5 years

Over 5 years

Total

At 31 December 2020

Defined benefit obligation

628

927

2,004

21,947

25,506

Post-employment medical benefits

127

174

614

4,775

5,690

Total

755

1,101

2,618

26,722

31,196

[IAS 1.38]

At 31 December 2019

Defined benefit obligation

314

450

1,103

12,923

14,790

Post-employment medical benefits

69

88

388

2,591

3,136

Total

383

538

1,491

15,514

17,926

8(i) Provisions

Amounts in CU’000

2020

2019

Current

Non-current

Total

Current

Non-current

Total

Make good provision (i)

225

1,573

1,798

1,382

1,382

Restructuring costs (i)

900

900

Service warranties (i)

635

635

920

920

Legal claim (i)

460

460

320

320

Contingent liability (note 14)

477

477

2,697

1,573

4,270

1,240

1,382

2,622

(i) Information about individual provisions and significant estimates

Make good provision

RePorting Co. Retail Limited is required to restore the leased premises of its retail stores to their original condition at the end of the respective lease terms. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease and the useful life of the assets. [IAS 37.85(a),(b)]

Restructuring

The reduction in output in the furniture manufacturing and wholesale division (see note 8(d) above) resulted in the loss of 155 jobs at two factories. An agreement was reached with the local union representatives in October 2020, which specifies the number of staff involved and the voluntary redundancy compensation package offered by the group, as well as amounts payable to those made redundant.

The total estimated staff restructuring costs to be incurred are CU1,050,000. Other direct costs attributable to the restructuring, including costs incurred in relation to the cancellation of supply contracts, are CU327,000. These costs were fully provided for in the current reporting period. The remaining provision of CU900,000 is expected to be fully utilised over the next 12 months. [IAS 37.85(a),(b)]

Service warranties

Provision is made for estimated warranty claims in respect of products sold which are still under warranty at the end of the reporting period. These claims are expected to be settled in the next financial year. [IAS 37.85(a),(b)]

The group generally offers 12-month warranties for its personal computer products. Management estimates the related provision for future warranty claims based on historical warranty claim information, as well as recent trends that might suggest that past cost information may differ from future claims.

The assumptions made in relation to the current period are consistent with those in the prior year. Factors that could impact the estimated claim information include the success of the group’s productivity and quality initiatives, as well as parts and labour costs.

As at 31 December 2020, this particular provision had a carrying amount of CU330,000 (2019 – CU450,000). If claims costs were to differ by 10% from management’s estimates, the warranty provisions would be an estimated CU33,000 higher or lower (2019 – CU45,000 higher/lower). [IAS 1.125, IFRS 15.119(e)]

Legal claim

In October 2020, an unfavourable judgment was handed down against the group in respect of a legal claim made by a customer of the IT consulting segment. However, after taking appropriate legal advice, the directors have decided to appeal against the decision.

No payment has been made to the claimant pending outcome of the appeal. If upheld, payment of CU860,000 will be required. The recognised provision reflects the directors’ best estimate of the most likely outcome. The court of appeal is expected to consider this matter in August 2021. [IAS 37.85(a),(b)]

See note 25(x) for the group’s other accounting policies relevant to provisions.

(ii) Movements in provisions

Movements in each class of provision during the financial year are set out below: [IAS 37.84]

Amounts in CU’000

Make good provision

Restructuring obligations

Service warranties

Contingent liability

Legal claim

Total

At 1 January 2020

1,382

920

320

2,622

Acquired through business combination

450

450

Additional provision charged to plant and equipment [IAS 37.84(b)]

350

350

Charged/(credited) to profit or loss

– additional provisions recognised [IAS 37.84(b)]

1,377

268

140

1,785

– unused amounts reversed [IAS 37.84(d)]

-330

-330

– unwinding of discount [IAS 37.84(e)]

66

27

93

Amounts used during the year [IAS 37.84(c)]

-477

-223

-700

at 31 December 2020

1,798

900

635

477

460

4,270

8(j) Recognised fair value measurements

(i) Fair value hierarchy

This note explains the judgements and estimates made in determining the fair values of the non-financial assets that are recognised and measured at fair value in the financial statements.

To provide an indication about the reliability of the inputs used in determining fair value, the group has classified its non-financial assets and liabilities into the three levels prescribed under the accounting standards. An explanation of each level is provided in note 7(h).

Table: [IFRS 13.93(a),(b), IAS 1.38]

Amounts in CU’000

Notes

Level 1

Level 2

Level 3

Total

At 31 December 2020

Investment properties

– Office buildings – West Harbourcity

8(c)

13,300

13,300

Land and buildings

– Manufacturing sites – Neverland

8(a)

43,750

43,750

– Manufacturing sites – China

17,750

17,750

Land held for sale

8(g)

250

250

Total non-financial assets

250

74,800

75,050

At 31 December 2019

Investment properties

– Office buildings – West Harbourcity

8(c)

5,135

4,915

1,050

Land and buildings

– Manufacturing sites – Neverland

8(a)

32,487

32,487

– Manufacturing sites – China

15,153

15,153

Total non-financial assets

5,135

52,555

57,690

The group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period. [IFRS 13.95]

There were no transfers between levels 1 and 2 for recurring fair value measurements during the year. For transfers into and out of level 3 measurements see (iv) below. [IFRS 13.93(c)]

(ii) Valuation techniques used to determine level 2 and level 3 fair values

The group obtains independent valuations for its investment properties at least annually and for its freehold land and buildings related to manufacturing sites (classified as property, plant and equipment) at least every three years. [IFRS 13.91(a), IFRS 13.93(d), IAS 16.77(a), IAS 40.75(e)]

At the end of each reporting period, the directors update their assessment of the fair value of each property, taking into account the most recent independent valuations. The directors determine a property’s value within a range of reasonable fair value estimates.

The best evidence of fair value is current prices in an active market for similar properties. Where such information is not available the directors consider information from a variety of sources including:

  • current prices in an active market for properties of a different nature or recent prices of similar properties in less active markets, adjusted to reflect those differences
  • discounted cash flow projections based on reliable estimates of future cash flows
  • capitalised income projections based on a property’s estimated net market income, and a capitalisation rate derived from an analysis of market evidence.

All resulting fair value estimates for properties are included in level 3 except for land held for resale. The level 2 fair value of land held for resale has been derived using the sales comparison approach.

The key inputs under this approach are the price per square metre from current year sales of comparable lots of land in the area (location and size).

(iii) Fair value measurements using significant unobservable inputs (level 3)

The following table presents the changes in level 3 items for the periods ended 31 December 2019 and 31 December 2020 for recurring fair value measurements: [IFRS 13.93(e)]

Amounts in CU’000

Manufacturing sites

Office buildings

Neverland

China

Total

Opening balance 1 January 2019 [IAS 1.38]

3,470

27,043

12,357

42,870

Acquisitions

810

2,584

1,780

5,174

Disposals

-112

-424

-536

Reclassification to inventory

-250

-250

Amounts recognised in profit or loss

– Depreciation and impairment

-1,100

-440

-1,540

– Gains recognised in other income *

997

997

Gains recognised in other comprehensive income

4,384

1,456

5,840

Closing balance 31 December 2019

4,915

32,487

15,153

52,555

Disclosure non-financial assets and liabilities example

Transfer from level 2

5,135

5,135

Acquisitions

1,900

7,135

2,247

11,282

Disposals

-550

-550

Amounts recognised in profit or loss

– Depreciation and impairment

-1,360

-855

-2,215

– Gains recognised in other income *

1,350

1,350

Gains recognised in other comprehensive income

6,038

1,205

7,243

Closing balance 31 December 2020

1,330

43,750

17,750

74,800

* Note: includes unrealised gains or (losses) recognised in profit or loss attributable to balances held at the end of the reporting period, as follows: [IFRS 13.93(f)]

2020 Disclosure non-financial assets and liabilities example

1,350

1,350

2019 Disclosure non-financial assets and liabilities example

907

907

(iv) Transfers between levels 2 and 3 and changes in valuation techniques

The group commenced redevelopment of an office building in Neverland during the year. The redevelopment will greatly expand the net lettable area of the building and is expected to be completed in early 2021. Prior to redevelopment, the building was valued using the sales comparison approach based on recent sales of comparable properties in the area.

This resulted in a level 2 fair value. Upon redevelopment, the group had to revise its valuation technique for the property under construction. The revised valuation technique uses significant unobservable inputs. Accordingly, the fair value measurement was reclassified to level 3. [IFRS 13.93(d)]

The revised valuation technique for the building under construction estimates the fair value of the completed office building and deducts: [IFRS 13.93(d)]

  • estimated construction and other costs to completion that would be incurred by a market participant, and
  • estimated profit margin that a market participant would require to hold and develop the property to completion, based on the state of the property as at 31 December 2020.

Other than described above, there were no changes in valuation techniques during the year.

(v) Valuation inputs and relationships to fair value

The following table summarises the quantitative information about the significant unobservable inputs used in recurring level 3 fair value measurements (see (ii) above for the valuation techniques adopted): [IFRS 13.93(d), IFRS 13.99]

Table: [IFRS 13.91(a), IFRS 13.93(d), IFRS 13.93(h)(i)]

Description

Fair value at

Unobservable inputs *

Range of inputs (probability-weighted average)

Relationship of unobservable inputs to fair value

31/12/20

31/12/19

2020

2019

Leased office buildings

Disclosure non-financial assets and liabilities example

Disclosure non-financial assets and liabilities example

Disclosure non-financial assets and liabilities example

Disclosure non-financial assets and liabilities example

7,765

4,915

Discount rate

4% – 5% (4.8%)

3% – 4% (3.6%)

The higher the discount rate and terminal yield, the lower the fair value

Terminal yield

6% – 7% (6.6%)

5.5% – 6% (5.8%)

Capitalisation rate

4% – 4.5% (4.4%)

4% – 4.5% (4.2%)

The higher the capitalisation rate and expected vacancy rate, the lower the fair value

Expected vacancy rate

9% – 10% (9.2%)

8% – 10% (8.7%)

Rental growth rate

3% – 3.6% (3.2%)

2% – 2.5% (2.2%)

The higher the rental growth rate, the higher the fair value

Office building under re-development

Disclosure non-financial assets and liabilities example

Disclosure non-financial assets and liabilities example

5,535

n/a – Level 2 fair value

Estimated cost to completion

CU3,230,000 – CU3,510,000 (CU3,395,000)

n/a

The higher the estimated costs, the lower the fair value

Estimated profit margin required to hold and develop property to completion

12.5% of property value

n/a

The higher the profit margin required, the lower the fair value Disclosure non-financial assets and liabilities example Disclosure non-financial assets and liabilities example

Manufacturing sites – Neverland

Disclosure non-financial assets and liabilities example

43,750

32,487

Discount rate

6% – 7% (6.7%)

8% – 9% (7.7%)

The higher the discount rate and terminal yield, the lower the fair value Disclosure non-financial assets and liabilities example Disclosure non-financial assets and liabilities example

Terminal yield

8% – 9% (8.2%)

9.5% – 10% (9.7%)

Manufacturing sites – China

17,750

15,153

Discount rate

10% – 12% (11%)

9% – 10% (9.4%)

The higher the discount rate and terminal yield, the lower the fair value

Terminal yield

14% – 15% (14.3%)

13% – 14% (13.2%)

* Note: There were no significant inter-relationships between unobservable inputs that materially affect fair values. [IFRS 13.93(h)(i)] Disclosure non-financial assets and liabilities example

(vi) Valuation processes

[IFRS 13.93(g)] Disclosure non-financial assets and liabilities example Disclosure non-financial assets and liabilities example

The group engages external, independent and qualified valuers to determine the fair value of the group’s investment properties at the end of every financial year, and for other land and buildings at least every three years. As at 31 December 2020, the fair values of the investment properties have been determined by ABC Property Surveyors Limited. [IAS 40.75(e), IAS 16.77(a),(b)] Disclosure non-financial assets and liabilities example

A directors’ valuation has been performed for the land and buildings classified as property, plant and equipment as at 31 December 2020. The last independent valuation of these land and buildings was performed as at 31 December 2019.

The main level 3 inputs used by the group are derived and evaluated as follows:

  • Leased office buildings – discount rates, terminal yields, expected vacancy rates and rental growth rates are estimated by ABC Property Surveyors Limited or management based on comparable transactions and industry data. Disclosure non-financial assets and liabilities example
  • Office building under redevelopment – costs to completion and profit margin are estimated by ABC Property Surveyors Limited based on market conditions as at 31 December 2020. The estimates are consistent with the budgets developed internally by the group based on management’s experience and knowledge of market conditions. Disclosure non-financial assets and liabilities example

Changes in level 2 and level 3 fair values are analysed at each reporting date during the half-yearly valuation discussion between the CFO, AC and the valuation team. As part of this discussion, the team presents a report that explains the reason for the fair value movements.

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