Notes to the Financial Statements for the Year Ended June 30, 2003
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notes to the financial statements for the year ended June 30, 2003 1. PRINCIPAL ACCOUNTING POLICIES (c) Associated companies The principal accounting policies adopted in the preparation of these financial statements An associated company is a company, not being a subsidiary, in which the Group has a are as follows: long-term equity interest, and over which the Group is in a position to exercise significant influence in management, including participation in commercial and financial policy decisions. (a) Basis of preparation The consolidated profit and loss account includes the Group’s share of the results of The financial statements have been prepared under the historical cost convention in associated companies for the year, and the consolidated balance sheet includes the Group’s accordance with accounting principles generally accepted in Hong Kong and comply with share of the net assets of the associated companies. accounting standards issued by the Hong Kong Society of Accountants. In the current year, the Group adopted the Statement of Standard Accounting Practice (d) Goodwill/negative goodwill (“SSAP”) No. 34 “Employee benefits” issued by the Hong Kong Society of Accountants Goodwill represents the excess of the cost of an acquisition over the fair value of the which is effective for accounting periods commencing on or after January 1, 2002. The Group’s share of the net assets of the acquired subsidiary at the date of acquisition. adoption of the new SSAP has no material effect on the results for the current and prior Goodwill on acquisitions occurring on or after July 1, 2001 is included in intangible accounting periods. Certain comparative figures have been reclassified to conform with the assets and is amortized using the straight-line method over its estimated useful life. Goodwill current year’s presentation. on acquisitions that occurred prior to July 1, 2001 was eliminated against reserves. Any impairment arising on such goodwill is accounted for in the profit and loss account. (b) Basis of consolidation Negative goodwill represents the excess of the fair value of the Group’s share of the net The consolidated financial statements include the financial statements of the Company and assets acquired over the cost of acquisition. For acquisitions after July 1, 2001, negative its subsidiaries made up to June 30. Subsidiaries are those entities in which the Group goodwill is presented in the same balance sheet classification as goodwill. To the extent controls the composition of the board of directors, controls more than half of the voting that negative goodwill relates to expectations of future losses and expenses that are identified power or holds more than half of the issued share capital. in the Group’s plan for the acquisition and can be measured reliably, but which do not The results of subsidiaries acquired or disposed of during the year are included in the represent identifiable liabilities at the date of acquisition, that portion of negative goodwill is consolidated profit and loss account from the effective date of acquisition or up to the recognized in the profit and loss account when the future losses and expenses are recognized. effective date of disposal, as appropriate. Any remaining negative goodwill, not exceeding the fair values of the non-monetary assets All significant intercompany transactions and balances within the Group are eliminated acquired, is recognized in the profit and loss account over the remaining weighted average on consolidation. useful life of those assets; negative goodwill in excess of the fair values of those non- The gain or loss on the disposal of a subsidiary represents the difference between the monetary assets is recognized in the profit and loss account immediately. For acquisitions proceeds of the sale and the Group’s share of its net assets together with any unamortized prior to July 1, 2001, negative goodwill was taken directly to reserves on acquisition. goodwill/negative goodwill or goodwill/negative goodwill taken to reserves and which was not previously charged or recognized in the consolidated profit and loss account, and the related accumulated foreign currency translation reserve up to the effective date of disposal. Minority interests represent the interests of outside shareholders and a non-affiliated partner in the operating results and net assets of subsidiaries and a limited partnership. In the Company’s balance sheet the investment in subsidiaries are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. 48 esprit holdings ltd notes to the financial statements 1. PRINCIPAL ACCOUNTING POLICIES continued Assets held under finance leases are depreciated over their estimated useful lives on the (e) Revenue recognition same basis as owned assets. Revenue from the sales of goods is recognized on the transfer of risks and rewards of The gain or loss on disposal of a fixed asset is the difference between the net sales ownership, which generally coincides with the time when the goods are delivered to customers proceeds and the carrying amount of the relevant asset, and is recognized in the profit and and title has been passed. loss account. Revenue from the operation of salon is recognized when services are rendered. Licensing income is recognized on an accruals basis in accordance with the substance (h) Impairment of assets of the licensing agreement. At each balance sheet date, both internal and external sources of information are considered Commission income and other income is recognized when services are rendered. to assess whether there is any indication that assets are impaired. If any such indication Interest income is recognized on a time proportion basis on the principal amounts exists, the recoverable amount of the asset is estimated and where relevant, an impairment outstanding and the interest rates applicable. loss is recognized to reduce the asset to its recoverable amount. Such impairment losses are recognized in the profit and loss account. (f) Trademarks Acquired trademarks are stated at cost and amortized using the straight-line method over (i) Assets under leases their estimated useful life subject to a presumed maximum life span of 20 years. (i) Finance leases Leases that substantially transfer to the Group all the risks and rewards of ownership of (g) Fixed Assets assets are accounted for as finance leases. Finance leases are capitalized at the inception of Fixed assets are stated at cost less accumulated depreciation and accumulated impairment the leases at the lower of the fair value of the leased assets or the present value of the losses. minimum lease payments. Each lease payment is allocated between the capital and finance Freehold land is not amortized. Leasehold land is amortized over the remaining period of charges so as to achieve a constant rate on the capital balances outstanding. The the lease. corresponding rental obligations, net of finance charges, are included in long-term liabilities. Improvements to leasehold properties and fixtures occupied by the Group under operating The finance charges are charged to the profit and loss account over the lease periods. leases are amortized over a period of the shorter of five years and their estimated useful lives on a straight-line basis. Major costs incurred in restoring fixed assets to their normal (ii) Operating leases working condition are charged to the profit and loss account. Leases where substantially all the risks and rewards of ownership of assets remain with the Other tangible fixed assets are depreciated at rates sufficient to write off their cost less leasing company are accounted for as operating leases. Payments made under operating accumulated impairment losses over their estimated useful lives on a straight-line basis after leases net of any incentives received from the leasing company are charged to the profit taking into account their estimated residual values. The principal annual rates are as follows: and loss account on a straight-line basis over the lease periods. 1 Buildings 3 /3 – 5% (j) Other investments Plant and machinery 30% Investments held for the long-term are stated at cost less provision for impairment losses. 1 Furniture and office equipment 10 – 33 /3% Profits or losses on disposal of other investments, representing the difference between the Motor vehicles and launch 30% net sales proceeds and the carrying amounts, are recognized in the profit and loss account as they arise. esprit holdings ltd 49 notes to the financial statements 1. PRINCIPAL ACCOUNTING POLICIES continued (o) Contingent liabilities (k) Stocks A contingent liability is a possible obligation that arises from past events and whose existence Stocks are stated at the lower of cost and net realisable value. Cost which comprises the will only be confirmed by the occurrence or non-occurrence of one or more uncertain future direct cost of materials, and where applicable, direct labour costs and those overheads that events not wholly within the control of the Group. It can also be a present obligation arising have been incurred in bringing the stocks to their present location and condition, is calculated from past events that is not recognized because it is not probable that outflow of economic using the weighted average cost method. Net realisable value is determined on the basis of resources will be required or the amount of obligation cannot be measured reliably. anticipated sales proceeds less estimated selling expenses. A contingent liability is not recognized but is disclosed in the notes to the financial statements. When a change in the probability of an outflow occurs so that the outflow is (l) Trade debtors probable, it will then be recognized as a provision. Provision is made against trade debtors to the extent they are considered to be doubtful. Trade debtors in the balance sheet are stated net of such provision.