Accounting Policies (Consolidated Financial Statements)

Premier Farnell plc (the “Company”) is a company incorporated and domiciled in the UK and is listed on the London Stock Exchange. The address of the Company’s registered office is Farnell House, Forge Lane, Leeds, LS12 2NE, England. The Company’s registered number is 876412.

These Consolidated Financial Statements have been approved by the Board of Directors on 17 April 2009.

Basis of preparation

These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and International Financial Reporting Interpretations Committee (IFRIC) interpretations endorsed by the European Union (EU) and with those parts of the Companies Act 1985 applicable to companies reporting under IFRSs. These Consolidated Financial Statements have been prepared under the historical cost convention with the exception of derivative financial instruments, post-retirement benefits and share-based payments which are recognised at fair value. A summary of the more important Group accounting policies adopted in the preparation of the Consolidated Financial Statements is set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

(a) Amendments to published standards and interpretations effective for the year ended 1 February 2009

IFRIC 14, ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’. This interpretation does not have any impact on the Group’s financial statements.
IFRIC 11, ‘IFRS 2 – Group and treasury share transactions’. This interpretation does not have any impact on the Group’s financial statements.

(b) Standards, amendments and interpretations effective for the year ended 1 February 2009 but not relevant

The following standards, amendments and interpretations to published standards are mandatory for accounting periods beginning on or after 1 January 2008 but have no material impact on the Group:

IFRIC 12, ‘Service concession arrangements’; and
IFRIC 13, ‘Customer loyalty programmes’.

(c) Standards and interpretations to existing standards that are not yet effective and have not been early adopted by the Group

The following standards and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2009 or later periods but which the Group has not early adopted.

IFRS 8, ‘Operating segments’ requires a ‘management approach’, under which segment information is presented on the same basis as that used for internal reporting purposes. IFRS 8 will be adopted from 2 February 2009 and will only have an impact on the Group’s segmental disclosure.
IAS 1 (revised), ‘Presentation of financial statements’ (effective for annual periods beginning on or after 1 January 2009). The revised standard will prohibit the presentation of items of income and expenses (that is, ‘non-owner changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner changes in equity. The Group will apply IAS 1 (revised) from 2 February 2009 which will only have a presentation impact.
IFRS 2 (amendment), ‘Share-based payment’ deals with vesting conditions and cancellations. The Group will apply IFRS 2 (amendment) from 2 February 2009. It is not expected to have a material impact on the Group’s financial statements.
IFRS 1 (amendment), ‘First time adoption of IFRS’, and IAS 27, ‘Consolidated and separate financial statements’.
IFRS 3 (revised), ‘Business combinations’. The revised standard continues to apply the acquisition method to business combinations, with some significant changes. The Group will apply IFRS 3 (revised) prospectively to all business combinations from 1 February 2010, subject to endorsement by the EU.
IAS 36 (amendment), ‘Impairment of assets’. The Group will apply the IAS 36 (amendment) and provide the required disclosure where applicable for impairment tests from 2 February 2009, subject to endorsement by the EU.
IAS 19 (amendment), ‘Employee benefits’. The amendment is part of the IASB’s annual improvements project published in May 2008. The Group will apply the IAS 19 (amendment) from 2 February 2009.
IAS 38 (amendment), ‘Intangible assets’. The Group will apply this standard from 2 February 2009, subject to its endorsement by the EU, but it will not have a significant impact on the Group’s financial results.
IAS 39 (amendment), ‘Financial instruments: Recognition and measurement’. The amendment is part of the IASB’s annual improvements project published in May 2008. The Group will apply the IAS 39 (amendment) from 2 February 2009. It is not expected to have an impact on the Group’s income statement.
There are a number of minor amendments to IFRS 7, ‘Financial instruments: Disclosures’, IAS 8, ‘Accounting policies, changes in accounting estimates and errors’, IAS 10, ‘Events after the reporting period’, IAS 18, ‘Revenue’, and IAS 34, ‘Interim financial reporting’, which are part of the IASB’s annual improvements project published in May 2008 (not addressed above). These amendments, subject to endorsement by the EU, are unlikely to have an impact on the Group’s financial statements and have, therefore, not been analysed in detail.
IFRIC 16, ‘Hedges of a net investment in a foreign operation’. IFRIC 16 clarifies the accounting treatment in respect of net investment hedging. The Group will apply IFRIC 16 from 2 February 2009. It is not expected to have a material impact on the Group’s financial statements.

The Directors anticipate that the adoption of the above Standards and Interpretations in paragraph (c) on the effective date will not have a significant impact on the Group’s financial results.

(d) Interpretations to existing standards that are not yet effective and not relevant for the Group’s operations

The following interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2009 or later periods but are not relevant for the Group’s operations:

IAS 23 (Amendment), ‘Borrowing costs’.
IAS 32 (amendment), ‘Financial Instruments: Presentation’, and IAS 1 (amendment), ‘Presentation of financial statements’ – ‘Puttable financial instruments and obligations arising on liquidation’.
IAS 27 (revised), ‘Consolidated and separate financial statements’.
IFRS 5 (amendment), ‘Non-current assets held-for-sale and discontinued operations’, (and consequential amendment to IFRS 1, ‘First-time adoption’).
IAS 28 (amendment), ‘Investments in associates’ (and consequential amendments to IAS 32, ‘Financial Instruments: Presentation’, and IFRS 7, ‘Financial instruments: Disclosures’).
IAS 1 (amendment), ‘Presentation of financial statements’.
IAS 16 (amendment), ‘Property, plant and equipment’ (and consequential amendment to IAS 7, ‘Statement of cash flows’).
IAS 27 (amendment), ‘Consolidated and separate financial statements’.
IAS 28 (amendment), ‘Investments in associates’ (and consequential amendments to IAS 32, ‘Financial Instruments: Presentation’ and IFRS 7, ‘Financial instruments: Disclosures’).
IAS 29 (amendment), ‘Financial reporting in hyperinflationary economies’.
IAS 31 (amendment), ‘Interests in joint ventures’, (and consequential amendments to IAS 32 and IFRS 7).
IAS 40 (amendment), ‘Investment property’ (and consequential amendments to IAS 16).
IAS 41 (amendment), ‘Agriculture’.
IAS 20 (amendment), ‘Accounting for government grants and disclosure of government assistance’.
The minor amendments to IAS 20 ‘Accounting for government grants and disclosure of government assistance’, and IAS 29, ‘Financial reporting in hyperinflationary economies’, IAS 40, ‘Investment property’, and IAS 41, ‘Agriculture’, which are part of the IASB’s annual improvements project published in May 2008.
IFRIC 15, ‘Agreements for construction of real estates’.
IFRIC 17, ‘Distributions of non-cash assets to owners’.
IFRIC 18, ‘Transfer of assets from customers’.

The financial statements of the Company, which have been prepared in accordance with UK GAAP, are presented on Company Balance Sheet (UK GAAP)

Key sources of estimation and uncertainty

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Information about such judgements and estimates is contained in the accounting policies and Notes to the Consolidated Financial Statements, and the key areas are summarised below:

The key sources of estimation uncertainty that have the most significant effect on the carrying value of assets and liabilities are:

The estimation of the cost of pensions and other post retirement benefits (note 27);
The estimation of the net realisable value of inventory; and
The estimation of the recoverable amount of goodwill used when assessing goodwill for impairment (note 8).

Basis of consolidation

The Consolidated Financial Statements incorporate the results of the Company and each of its subsidiaries for the financial year ended 1 February 2009, a 52 week period (financial year ended 3 February 2008: 53 week period). Subsidiaries are entities controlled by the Group where control is deemed to exist when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries are included in the Consolidated Financial Statements from the date the control commences until the date that control ceases.

Intra-group balances and transactions are eliminated on consolidation.

Business combinations and goodwill

All business acquisitions are accounted for by applying the purchase method.

Goodwill arises where the fair value of the consideration paid exceeds the fair value attributed to the net assets acquired. Goodwill arising on acquisitions after 1 February 1998 and prior to 2 February 2004, the transition date to IFRS, was capitalised and amortised over its estimated useful life. As a result of the transition to IFRS, such amortisation ceased on the transition date to IFRS. Goodwill arising on acquisitions made prior to 1 February 1998 was written off directly to reserves in the year of acquisition. Under IFRS 1 and IFRS 3 such goodwill will remain eliminated against reserves and will not be written back to the income statement in the event of a disposal.

Revenue recognition

Revenue comprises the fair value for the sale of goods to outside customers, excluding value added and sales taxes, and is recognised when the significant risks and rewards of ownership have been transferred to a third party.

Segment reporting

A segment is a distinguishable component of the Group that is engaged in providing products (business segment), or in providing products within a particular economic environment (geographic segment), and where the risks and returns are different between components.

Expense classification

Cost of sales comprises the cost of goods delivered to customers including the cost of freight, packaging and inventory adjustments.

Distribution costs represent all operating expenses including sales, marketing, product and purchasing, warehousing, information technology and electronic commerce.

Administrative expenses comprise the cost of central head office and the Group Board.

Non-recurring charges/credits that are considered to be sufficiently significant to have a material impact on the Group’s financial results are disclosed in the appropriate category on the face of the income statement.

Foreign currency translation

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (”the functional currency”). The Consolidated Financial Statements are presented in pounds sterling, which is the Group’s presentation currency.

Assets and liabilities are translated at the exchange rates ruling at the end of the financial period. Exchange profits or losses on trading transactions are included in the Group income statement except when deferred in equity as qualifying cash flow hedges or qualifying net investment hedges, which, along with other exchange differences arising from non-trading items are dealt with through reserves.

The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
income and expenses for each income statement are translated at the average exchange rate for the period; and
with effect from the transition date to IFRS all resulting exchange differences are recognised as a separate component of equity and included in the Group’s cumulative translation reserve.

When a foreign entity is sold, such translation differences are recognised in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Financial instruments

The Group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. In accordance with its treasury policy, the Group does not have or issue speculative derivative arrangements. All transactions in financial instruments are matched to an underlying business requirement.

Derivative financial instruments are recognised at fair value. At period ends, the gain or loss on re-measurement to fair value is recognised in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resulting gain or loss will depend upon the nature of the item being hedged (see accounting policy on hedging).

Hedging

Cash flow hedges

Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in equity. If a hedge of a forecast transaction subsequently results in the recognition of a financial asset or liability, the associated gains or losses that were recognised directly in equity are reclassified into profit or loss in the same period(s) during which the interest income/expense is recognised. For other cash flow hedges, the associated cumulative gain or loss is removed from equity and recognised in the income statement in the same period(s) as which the hedged forecast transaction affects profit or loss. The gain or loss on any ineffective part of the hedge, or when the hedge no longer meets the hedging criteria, is immediately recognised in the income statement.

Hedge of net investment in foreign operations

The portion of the gain or loss on an instrument used to hedge a net investment in a foreign operation that is determined as an effective hedge is recognised directly in equity. The gain or loss on any ineffective portion of the hedge is recognised immediately in the income statement.

Leases

The costs of operating leases are charged to the income statement as they fall due.

Dilapidation provisions

The Group is required to perform dilapidation repairs on leased properties prior to the properties being vacated at the end of their lease term. Provision for such costs are made where a legal obligation is identified and the liability can be reasonably quantified.

Property, plant and equipment

Property, plant and equipment are stated at cost. Depreciation is calculated to write off the cost of the individual assets, less the estimated residual value, from the time it becomes operational by equal annual instalments over their estimated useful lives. Asset lives and residual values are reviewed annually.

Depreciation rates are principally as follows:

Freehold land	not depreciated
Freehold buildings	50 years
Plant and equipment	between 5 and 10 years

Property, plant and equipment is reviewed for impairment when there are indications that the carrying value may not be recoverable.

Interest is not capitalised.

Intangible assets

Computer software is capitalised on the basis of the costs incurred to acquire and bring to use the specific software and includes capitalised internal labour where appropriate. These costs are amortised on a straight line basis over their estimated useful lives, between three and five years.

Other intangible assets acquired through business combinations are recognised at fair value on acquisition and amortised on a straight line basis over their estimated useful lives as follows:

Contractually-based customer relationships	10 or 20 years
Patents	18 years

Impairment

The carrying amounts of the Group’s goodwill and indefinite lived intangible assets are reviewed annually, or when there are indications that the carrying value may not be recoverable, to determine whether there is any indication of impairment. Goodwill is allocated to cash generating units for the purpose of impairment testing. If any such indication exists, the assets’ recoverable amount is estimated and if the carrying value exceeds the recoverable amount, a loss is recognised in the income statement. The recoverable amount is the greater of the assets’ net selling price and value in use where value in use is based on the present value of the estimated future cashflows arising from the asset.

A financial asset or a group of financial assets is impaired and impairment losses are incurred if there is objective evidence of impairment as a result of a past event subsequent to the asset’s initial recognition. The Group assesses whether objective evidence exists for each financial asset or group of financial assets at the balance sheet date to determine whether any impairment has arisen.

Post-retirement benefits

The Group accounts for pensions and other post-retirement benefits in accordance with IAS 19, Employee Benefits.

Pensions

The Group operates both defined benefit and defined contribution pension plans.

In respect of defined benefit plans (where the amount of pension is defined, usually based on factors such as age, years of service and compensation), the net asset or obligation of each plan at the balance sheet date is calculated by a qualified actuary using the projected unit credit method. The obligation is calculated by discounting the amount of future benefits that employees have earned in return for their service in the current and prior periods. An allowance is made for scheme expenses and non-service related benefits. Plan assets are recorded at fair value. The net income statement credit/charge comprises principally the service cost, and the finance income/costs, which are recognised in the period in which they arise. The net income statement impact is credited/charged in arriving at operating profit. The net pension deficit/surplus of each pension plan is recorded on the balance sheet.

All actuarial gains and losses at the date of transition to IFRS have been recognised in equity at that date. Actuarial gains and losses that arise subsequent to the transition date to IFRS in calculating the Group’s obligation in respect of each plan, are recognised in the Statement of Recognised Income and Expense.

Payments to defined contribution pension plans (where the Group pays fixed contributions into a separate entity) are charged as an expense as they fall due.

Share-based payments

The Group operates four equity settled, share-based incentive schemes: an Executive Share Option Scheme, a Performance Share Plan (previously referred to as the Long-Term Incentive Plan), a Restricted Share Plan and a Save As You Earn Scheme. These are accounted for in accordance with IFRS 2, Share-based Payment, which requires an expense to be recognised in the income statement over the vesting period. The expense is based on the fair value of each instrument at the grant date, using appropriate option pricing models. The expense is credited to retained earnings.

For share based incentives where the performance measure is non-market based (earnings per share growth) the Black Scholes or Binomial Lattice model is used and the value of the expense is adjusted to reflect expected and actual levels of vesting. Where the performance conditions are market-based (share price performance relative to the FTSE mid-250 Index), the Monte Carlo model is used and the expense is not adjusted except for forfeitures. The fair value of SAYE grants is calculated using the Black Scholes model and the expense is only adjusted to reflect forfeitures.

Share capital

Ordinary share capital is classified as equity. Interim ordinary dividends are recognised when paid and final ordinary dividends are recognised as a liability in the period in which they are approved.

The Group’s preference shares are split into debt and equity components, with the associated dividend being recognised on an accrual basis in the income statement as a finance cost. The fair value of the debt element is established on issue of the shares, based on the discounted cash flows of the instrument to the date of maturity, and is then increased each year on an amortised cost basis through the income statement in order to arrive at the redemption amount payable on maturity of the shares. On purchase and cancellation of preference shares by the Company, a gain or loss is recognised in the income statement based on the difference between the book value and fair value of the financial liability element of the instrument at the date of purchase. The difference between the book value and fair value of the equity element of the instrument is recognised as a movement in retained earnings. In addition, a transfer is made to non-distributable reserves from retained earnings in order to maintain the legal nominal value of share capital.

Inventories

Inventories are stated at the lower of cost and net realisable value on a first in first out basis. Cost comprises all expenditure, including related production overheads where appropriate, incurred in the normal course of business in bringing the inventory to its present location and condition at the balance sheet date. Net realisable value is the estimated selling price less any selling costs. Provision is made against slow moving and obsolete inventory where appropriate.

Taxation including deferred tax

Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend.

Investment in own shares

Trade and other receivables are initially recognised at fair value. A provision for impairment is made when there is objective evidence, for example default or delinquency in payments, that the full amount will not be collectible. Such amounts are written down to their estimated recoverable amounts, with the charge being made to operating expenses.

Trade and other receivables

Trade and other payables

Trade and other payables are stated at cost.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and short-term deposits repayable on demand and available within one day without penalty. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the cash flow statement, but shown separately within current liabilities in the balance sheet.

Research and development

Expenditure on research and development activities undertaken with the prospect of gaining new technical knowledge and understanding is expensed in the income statement as incurred.