1、CORPORATE FINANCE MANUAL This updated manual focuses on the IFRS accounting policies relevant to IHG. Guidance and interpretation is also provided on the key policies. US GAAP is not covered as the technical US GAAP issues are all dealt with by the Controllers Group. SectionContents1General2Updates 2、and resolving queries3Accounting policies4Policy applicationSectionDescriptionPage1general52updates and resolving queries7SectionDescriptionPage3.1basis of accounting103.2consolidation113.2.1subsidiary undertakings113.2.2minority interest123.2.3associates and joint ventures133.2.4off balance sheet i3、tems143.2.5acquisition of subsidiary undertakings143.2.6disposals of subsidiary undertakings153.2.7translation of overseas subsidiaries153.2.8consolidation adjustments163.3foreign currencies173.4prior period adjustments183.5post balance sheet events193.6tangible fixed assets203.6.1tangible fixed ass4、ets203.6.2capital expenditure and initial measurement213.6.3capitalisation of own labour223.6.4depreciation223.6.5disposal / sale of fixed assets233.6.6licences243.6.7impairment reviews243.7intangible assets253.7.1software costs253.7.2research and development263.7.3inducement payments263.7.4manageme5、nt contracts273.8associates, joint ventures and other equity investments283.8.1fixed asset investments283.8.2associates and joint ventures283.8.3other equity investments293.9other non-current financial assets303.10inventory313.11cash and cash equivalents323.11.1cash equivalents323.12provisions for l6、iabilities333.13contingencies343.14revenue recognition353.15revenue expenditure363.15.1research and development363.15.2repairs and maintenance363.15.3advertising, sponsorship and promotions373.15.4pre-opening expense373.16pensions, holiday pay and employee benefits383.16.1defined benefit pension sch7、eme costs383.16.2defined contribution pension scheme costs383.16.3Holiday / vacation pay / long term service awards383.16.4Severance / termination / redundancy payments393.17share based payments403.18leases413.18.1finance leases413.17.2operating leases413.18.3other lease issues413.19segmental report8、ing423.20assets held for sale and discontinued operations443.20.1assets held for sale443.20.2discontinued operations44SectionDescriptionPage4.1identification of subsidiaries464.1.1principles and definitions464.2acquisitions and disposals474.2.1principles and definitions474.2.2acquisitions484.2.3disp9、osals534.2.4key information to be gathered and retained534.3foreign currencies574.3.1principles and definitions574.3.2approach to foreign currency translation584.4tangible fixed assets594.4.1principles and definitions594.4.2carrying value594.4.3categorisation of tangible fixed assets604.4.4propertie10、s614.4.5fixtures, fittings and equipment624.4.6payments on account and assets in the course of construction624.5capital and revenue expenditure634.5.1principles and definitions634.5.2initial measurement644.5.3capital retirements654.6depreciation664.6.1principles and definitions664.6.2timing of depre11、ciation and depreciation base664.6.3accelerated depreciation674.6.4depreciation rates684.6.5standard depreciation assumptions704.6.6illustration of assets and asset components714.7sales / disposals of fixed assets754.7.1principles and definitions754.7.2disclosure764.7.3accounting treatment764.8impai12、rment of fixed assets and goodwill774.8.1overview774.8.2key concepts774.8.3impairment review794.8.4allocation of impairment losses804.8.5subsequent monitoring of cash flows804.9associates, joint ventures and other equity investments814.9.1principles and definitions814.9.2consolidated accounts834.9.313、checklist for qualification of an investment as an associate844.9.4disclosure required in consolidated financial statements854.10non-current financial assets864.10.1principles and definitions864.10.2accounting864.11provisions for liabilities and charges874.11.1definition874.11.2recognition of provis14、ion874.11.3measurement of provision874.11.4future operating losses884.11.5onerous contracts884.11.6restructuring costs884.11.7disclosures894.12contingencies904.12.1principles and definitions904.12.2normal uncertainties904.12.3contingent assets914.12.4identification of contingent liabilities914.12.5a15、ccounting treatment of contingent liabilities924.13revenue recognition934.13.1principles and definitions934.13.2treatment of franchise fees934.13.3treatment of management fees944.13.4technical service fees944.13.5supplier incentives and rebates954.14pension costs964.14.1principles and definitions96416、.14.2group income statement974.14.3balance sheet accounts974.14.4disposal of a subsidiary984.14.5acquisition of a subsidiary984.15leases994.15.1principles and definitions994.15.2accounting for finance leases1004.15.3operating leases1024.15.4sale and leaseback transactions1024.15.5lease incentives10317、4.15.6other lease issues1031.0 GeneralA. ContextThe system of financial reporting within IHG is designed to ensure that the Group publishes accounting information in the public domain which is consistent and complies with best accounting practice. In order to achieve these objectives Group accountin18、g polices and procedures are established which should be consistently applied throughout the Group for the purposes of Group reporting. These policies and procedures should also be applied to individual entitys financial statements unless to do so would contravene local legislation or standards. The19、 preparation of accounting information for release into the public domain is ultimately the responsibility of the IHG PLC directors. It is their responsibility to review this information and to ensure that the financial statements give a true and fair view of the company and comply with appropriate 20、legislation. Quality control for accounting information is effectively achieved by the main board delegating the responsibility for preparing the underlying financial statements to the Finance Director. Ultimately it is the Board which must ensure that appropriate control procedures are adopted in o21、rder to achieve the group objectives. Information contained in this Manual is strictly confidential and for use only by IHG Group personnel and the Groups professional advisers. It is not to be distributed or otherwise published outside the Group. Any external advisers using the manual are not permi22、tted to copy any material or to remove the Manual from the premises.B. ControlControl is exercised at three levels, namely:1. Controllers Group (Global)2. Regional and Functional Finance Director (divisional level)3. Business Service Centres (global and divisional)4. Project managementAt the corpora23、te level, information supplied by divisions is consolidated into a Group total and reviewed for compliance against published reporting standards. At the divisional level control is exercised by monitoring performance against specific operating targets. The BSCs are responsible for transaction proces24、sing.C. StructureFinancial control and reporting recognises two related structures within the Group - the management structure and the legal structure. The management structure is based on the Groups operating divisions plus those companies not falling naturally within a division. It links to the se25、gments used for external reporting. The legal structure represents the legally recognised entities (companies and branches) which comprise the total Group. For the sake of convenience, financial reporting is concentrated into certain reporting units (components) though still greater in number than d26、ivisions. 2.0 Updates and resolving queriesTo:See DistributionFrom:Ralph WheelerRef:Date:Cc:Page:1 of 3PROCEDURES FOR ESTABLISHING/AMENDING ACCOUNTING POLICIESDecision RightsDecision Rights for establishing and amending accounting policies resides with the Controller. What is in scope?All accounting27、 policies and interpretations. At a high level, Policies include all the accounting policies followed in the preparation of the Group Financial statements (IFRS and US GAAP). At a more detailed level the Controller responsibility extends to all interpretations of Group policies for specific local/re28、gional application. Interpretation includes, as required, establishing the accounting for specific transactions or types of transaction to enable a consistent global approach to be followed within the boundaries of Group policies. What is not in scope?In some circumstances local GAAP or statutory re29、quirements will necessitate variations to Group policies. In these instances, those responsible for the preparation of local accounts should agree an interpretation with the local auditors and ensure a consistent regional application. The Controller Group should be advised of all material deviations30、 and can be involved in local discussions if technical support is required.This document deals only with accounting policies and interpretations and not with issues related to Delegation of Authority, Chart of Accounts or Standard Reporting.Proceduresi) New policies required because of changes in GA31、APThe need for new policies will generally arise because of changes to the statutory environment in which the Group operates. In most cases the need for a new policy will be driven by the introduction of new Accounting Standards in the UK.Within three months of the issue of a new Standard, the Contr32、oller Group will summarise the key points of the Standard and issue this summary, together with a timetable for establishing a new policy, to the Regional Finance Directors and the BSC Global Process Owners. When possible, the timetable will target finalisation of the new policy at least three month33、s ahead of implementation date to ensure that systems changes and impact can be properly assessed. For Standards with accelerated implementation dates this may not be possible. The process will include interpretation of the Standard, Industry view, Technical view, Auditor input, assessment of impact34、, policy recommendation, Business Unit and BSC input.The final policy will be drafted by the Controller Group and circulated to the Regional Finance Directors and BSC Global Process Owners for comment, prior to finalisation and submission to the Executive Committee, if appropriate. ii) New policies 35、required because of changes in the business operating environment; andiii) Amendments to existing policies and interpretationsIn most cases, requests for amendments will come from the Regions or Global Functions in conjunction with the BSC, in light of experience of the application of existing polic36、ies or changes in business processes. BSC requests must be in a globally agreed format before submission.All requests for amendments must be sent to the Controller indicating: reason for change financial impact of change requested timetable for implementation potential impact on CoA, RCoA and Standa37、rd Reports potential impact on other policies (non-accounting policies) requesting Business Unit/BSC sign off SVP Global BSC sign off if the request is driven from the BSC Within 2 weeks of receipt of a request for change, the Controller will assess whether the change requested appears acceptable un38、der relevant GAAP if not, then the request will be denied. If compliance is not an issue, the Controller will send the request to the Regional and Functional Heads of Finance, the BSC Global Process Owners and the SVP Global Business Service Centres (and tax if appropriate) for comment within 3 week39、s.Once all comments are received the Controller Group will summarise the responses and report to the originator any questions raised. Following receipt of clarification from the originator, the Controller will decide on approval/non-approval.Notification of changesOnce approved the Controller Group 40、will issue formal notification to the Executive Committee, if appropriate, Business Unit Finance Heads and the BSC Global Process Owners, who will then distribute as appropriateAll changes will be included in the next update version of the relevant accounting manual. 3.1 Basis of accountingA. Defini41、tionThe basis of accounting is the convention under which the Groups financial statements are expressed. The Group financial statements are prepared on a historic cost basis, except for certain items of property plant and equipment which are held at revalued amounts under the transitional rules of I42、FRS 1, and derivative financial instruments and available-for-sale financial assets that are measured at fair value. The consolidated financial statements are presented in sterling and all values are rounded to the nearest thousand (000) except when otherwise indicated.B. Group policyThe Groups cons43、olidated accounts are prepared on the basis of applicable IFRS, including all International Accounting Standards (IAS), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued by the International Accounting Standards Bo44、ard (IASB) as published.In 2005 IFRS 1, first-time Adoption of International Financial Reporting Standards, was applied in preparing the financial statements. The Group adopted the following exemptions available under IFRS 1:a) Not to restate the comparative information disclosed in the 2005 financi45、al statements in accordance with IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement.b) Not to restate business combinations before 1 January 2004.c) To recognise all actuarial gains and losses on pensions and other post-retirement 46、benefits directly in shareholders equity at 1 January 2004.d) To retain UK GAAP carrying values of property plant and equipment, including revaluations, as deemed cost at transition.e) Not to recognise separately cumulative foreign exchange movements up to the 1 January 2004.f) To apply IFRS 2 Share47、-based Payments to grants of equity instruments after 7 November 2002 that had not vested at 1 January 2004.The Group is registered with the Securities and Exchange Commission in the United States and so is required to prepare and file certain financial information in compliance with US GAAP.3.2 Con48、solidationA. DefinitionConsolidation is the process of adjusting and combining financial information from the individual accounts of a parent undertaking and its subsidiary undertakings to prepare financial statements that present financial information for the Group as a single economic entity. B. G49、roup policyIHG PLC prepares consolidated accounts incorporating the balance sheet, cash flows and results of the company and all of its subsidiary undertakings. The results of each subsidiary undertaking are incorporated between the dates of acquisition and disposal of that undertaking.All subsidiar50、y undertakings comply with Group accounting policies in the preparation of their financial pro formas. The majority of subsidiary undertakings have a year end coterminous with or no more than three months before that of IHG PLC. Where a subsidiary has a different year end, financial pro forma inform51、ation for the year to the Groups year end is produced.All intercompany balances and transactions are eliminated.3.2.1 Subsidiary undertakings (4.1)A. DefinitionA subsidiary of the Group is any undertaking (incorporated or unincorporated, partnership, joint venture, Trust or other vehicle) where the 52、Group has control or the ability to control the entity, either directly or indirectly through one or more intermediaries. Control is the power to govern the financial and operating policies of the investee so as to obtain benefits from its activities. B. Group policyAny entity meeting the above defi53、nition is classified as a subsidiary and all its activities are consolidated within the group financial statements.Owing to the broad nature of the definition of a subsidiary, guidance must be sought from Group Finance where there is any doubt as to the relationship between undertakings.3.2.2 Minori54、ty interestA. Definition Minority interest is defined as the interest in a subsidiary undertaking included in the consolidation that is attributable to the interest held by or on behalf of persons other than the parent undertaking and its subsidiary undertakings. B. Group policy Partly owned subsidi55、ary undertakings are fully consolidated by including their assets and liabilities at the latest balance sheet date. The percentage attributable to the minority is shown as minority interests and presented as an element of equity on the balance sheet. Loan capital issued by minority participants is t56、reated within the Group accounts as other external borrowings. Minority interests are debited in full with their share of any loss unless this results in a debit balance. If the minority has a binding obligation to fund a loss then a debit balance can be recognised, otherwise, the losses are attribu57、table to the parents interest. The results of a subsidiary undertaking down to and including profit after tax are fully consolidated. The results attributable to the minority are then shown on the face of the profit and loss account as an allocation of profit after tax for the period.The minoritys i58、nterest in transactions between Group undertakings represents a realised profit or loss from the perspective of the Group. Such profits or losses are not material to the results of the Group and so are eliminated in full.In general, for the purposes of quarterly financial packs, minority interest fi59、gures are calculated and reported by the partly owned subsidiary undertakings themselves from the perspective of IHG PLCs interest in the undertaking. Group Finance will inform the relevant reporting divisions of the approach to be adopted.3.2.3 Associates and joint ventures (4.9)A. Definition An as60、sociate is an entity, including an unincorporated entity, such as a partnership, over which the investor has the ability to exercise significant influence, but not control, and that is neither a subsidiary nor an interest in a joint venture.Significant influence is the power to participate in the fi61、nancial and operating policy decision of the investee but is not control, or joint control, over those policies.A joint venture is an entity which is jointly controlled by the Group and one or more other venturers under a contractual arrangement. B. Group policy The Group regards those undertakings 62、in which IHG PLC or its subsidiary undertakings own between 20% and 50% of the equity capital, but does not exert control, as associates. This includes all 50:50 joint ventures unless they are structured in such a way as to give the Group the ability to control or joint control. Where the Group has 63、the ability to control, such entities are accounted for as subsidiary undertakings. Where joint control exists, entities are accounted for as joint ventures.The Group accounts for its interests in associates under the equity method of accounting. The Groups interests in joint ventures are normally a64、ccounted for using the equity method. There may be circumstances where the Group must proportionately consolidate joint ventures. Group Finance will advise on the nature of any new undertaking.3.2.4 Off balance sheet itemsA. DefinitionOff-balance sheet items are expected to be extremely rare since, 65、when considering the accounting treatment of a transaction, the substance of the transaction must be reflected in the financial statements. A group or series of transactions that achieves or is designed to achieve an overall commercial effect should be viewed as a whole for this purpose. B. Group po66、licyIf there is any doubt as to the recognition, or otherwise, of an asset or liability Group Finance should be consulted. The following circumstances may indicate that an entity controls a special purpose entity (SPE) and consequently should consolidate the SPE even if it does not meet other consol67、idation requirements:a) Activities the activities of the SPE are conducted on behalf of the Group which created the SPEb) Decision making the Group has the decision-making powers to control or to obtain control of the SPEc) Benefits the Group has the rights to obtain a majority of the benefits of th68、e SPEd) Risks the Group has the majority of the risks of the SPE i.e. guarantees a return or gives credit protection.3.2.5 Acquisition of subsidiary undertakings (4.2.2)A. Definition The purchase of shares or other interest in a company or un-incorporated undertaking, bringing the control in the und69、ertaking to the point where it is consolidated within the Group financial statements.B. Group policy At acquisition the net assets of the acquired undertaking, adjusted to fair value, are consolidated into the Group balance sheet and from that date its results form part of the consolidated profit an70、d loss account and cash flow statement of the Group. At acquisition, adjustments are made to conform the accounting policies of the undertaking acquired to those of the Group and, when allowed by local Company legislation, the accounting reference date of the undertaking is changed to bring it into 71、line with the year end of the Group.The date for accounting for an undertaking becoming a subsidiary undertaking is the date on which control of that undertaking passes to its new parent undertaking. This triggering date is a matter of fact and cannot be backdated or otherwise altered.Guidance shoul72、d be obtained from Group Finance regarding acquisition accounting.3.2.6 Disposal of subsidiary undertakings (4.2.3)A. DefinitionThe disposal of shares or other interest in an undertaking such that the undertaking is no longer consolidated within the Group financial statements.B. Group policyThe date73、 for accounting for an undertaking ceasing to be a subsidiary undertaking is the date on which its former parent undertaking relinquishes its control over that undertaking. This triggering date is a matter of fact and cannot be backdated or otherwise altered.At disposal, the profit or loss recorded 74、is the disposal proceeds plus fair value of non-monetary assets received less the net assets disposed of, less associated costs and any goodwill related to the acquisition. Adequate provisions should be made for future costs arising as a result of the disposal such as warranty costs and future claim75、s.With regard to provisions for losses and costs arising as a consequence of a decision to sell or terminate an operation, provisions should only be established once an entity is committed to the sale or termination i.e. there is a binding sale agreement or the decision to terminate has created an e76、xpectation in those affected that the termination will occur.The definition encompasses the situation where a subsidiary undertaking becomes an associated undertaking i.e. on a part disposal of shares. The basic procedure for calculating any profit or loss on disposal is the same as a complete dispo77、sal however further complications can arise and Group Finance should be contacted in these circumstances.3.2.7 Translation of overseas subsidiariesA. Definition Translation is the process whereby financial data denominated in the currency of a reporting subsidiary undertaking is expressed in terms o78、f the currency of its parent undertaking.B. Group policy Assets and liabilities of overseas subsidiary undertakings are translated into sterling at the rate of exchange ruling on the balance sheet date. Items of revenue and expense are translated at appropriate average exchange rates. The average ra79、te of exchange is computed by taking the arithmetic mean for each period weighted by the operating profit in that period. Exchange differences arising on the retranslation of net assets of overseas subsidiary undertakings are presented as a separate component of equity.Cash flows are translated at a80、ppropriate average exchange rates.Where foreign currency borrowings have been used to finance, or provide a hedge against (as defined by IAS 39), equity investments in overseas subsidiary undertakings, exchange differences on the retranslation of the borrowings are taken to the cumulative translatio81、n adjustments reserve to the extent that they are an effective hedge. Where they relate to an ineffective hedge, the excess is included in operating profit.Where an overseas subsidiary undertaking is acquired or disposed of, the fair value of the net assets of that subsidiary undertaking are transla82、ted into sterling at the rate of exchange ruling on the transaction date for the purposes of determining the initial goodwill or the profit/loss on disposal. 3.2.8 Consolidation adjustmentsA. Definition Consolidation adjustments are those adjustments which are necessary in preparing consolidated gro83、up accounts and are not reflected in the accounts of the individual entities being consolidated. There are essentially four types of consolidation adjustment:(i) Elimination of inter-group transactions (e.g. turnover, profit on stock, etc.)(ii) Elimination of the cost of control (i.e. the eliminatio84、n of the cost of investment of an entity), recorded in a parent undertakings accounts, against the net assets at the date of acquisition of the subsidiary undertaking. (iii) Processing bank set-off adjustments (eliminating cash balances against overdrafts with the same bank where the Group has a set85、-off arrangement). (iv) Processing centrally required adjustments which cannot be allocated to a specific entity.B. Group policy Adjustments in respect of specific entities are pushed down and reflected in the individual entity accounts and not held as central consolidation adjustments. Only those a86、djustments defined above are made in the preparation of consolidated Group accounts and held outside the scope of an individual entitys accounts. Such adjustments can only be made by Group Finance following the governance procedures adopted by that Group.3.3 Foreign currencies (4.3)A. DefinitionsA f87、oreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency, including transactions arising when an entity buys or sells goods or services whose price is denominated in a foreign currency. Presentation currencyThe currency in which the financial stat88、ements are presentedFunctional currencyThe currency of the primary economic environment in which the entity operates.Foreign currencyA currency other than the functional currency of the entity.Monetary itemsCurrency and assets and liabilities that will be received or paid in a fixed amount of curren89、cy (balances to be settled by cash).RecognitionInitial recognitionForeign currency transactions shall be translated into the functional currency using the month end rate. Subsequent balance sheet datesMonetary itemsTranslated using the month end rate.Non-monetary itemsItems measured at historical co90、st (i.e. tangible assets) should be translated using the historical exchange rate.B. Group policyExchange differences on monetary assets and liabilities that are settled or retranslated at the end of the period shall be recognized as a component of operating profit in the profit or loss account.Fina91、ncial statements of foreign operations are translated for purpose of consolidation as follows: assets and liabilities are translated at the closing rate, revenues and expenses are translated at average rate and equity components are not translated.Use of Month End RateIAS 21 paragraph 21 and 22 stat92、e that the spot rate or an approximation i.e. weekly or monthly average rate should be used to translate foreign currency transactions. The Group has adopted a policy of using the previous month end balance sheet rate as the approximation for actual rate. The difference between the previous month en93、ding rate and average rate would not fluctuate significantly.3.4 Prior period adjustmentsA. DefinitionPrior period adjustments are required to either:a) account for changes in accounting policies; orb) correct material errors.An accounting policy can be changed only if the change is required by a ne94、w accounting standard or it results in the financial statements providing more reliable and relevant information.B. Group policy Prior period adjustments are accounted for by changing prior period comparatives so that the financial statements are presented as if the new accounting policy had always 95、been in place or as if the error had never occurred.Any accounting policy changes, together with the relevant accounting entries, will be advised by the Controller Group.Accounting errors should be brought to the attention of the Controller Group. The Controller Group will then advise on the appropr96、iate accounting treatment.3.5 Post balance sheet eventsA. DefinitionPost balance sheet events are those events, both favourable and unfavourable, which occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors. Adjusting events are pos97、t balance sheet events which provide additional evidence of conditions existing at the balance sheet date. They include events which because of statutory or conventional requirements are reflected in financial statements. Examples include evidence of impairment in value of an asset, insolvency of a 98、debtor or the discovery of an error or fraud.Non-adjusting events are post balance sheet events which concern conditions which did not exist at the balance sheet date. Examples include losses of assets as a result of catastrophe or the closure of a significant part of trading activities which was no99、t anticipated at the year end.B. Group policyIn the event of any material post balance sheet event Group Finance must be notified.The figures in the financial statements are changed in the case of an adjusting event or if it appears that the going concern concept is no longer appropriate. Non-adjust100、ing events are disclosed if non-disclosure would affect the ability of the users of the financial statements to reach a proper understanding of the financial position.Dividends declared after the balance sheet date are not recognised as a liability in the financial statements.3.6 Tangible fixed asse101、ts (4.4, 4.5, 4.6, 4.7, 4.8)3.6.1 Tangible fixed assetsA. DefinitionsTangible fixed assets are assets held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. The assets must have been acquired or constructed with the intention of being use102、d on a continuing basis and are not intended for sale in the ordinary course of businessTangible fixed asset are classified by assets having a similar nature, function or use in the business of the entity. Land and Buildings, and Fixtures, Fittings, Tools and Equipment are examples of classes of fix103、ed asset.Components of a tangible fixed asset may comprise two or more major components with substantially different useful economic lives. For example, a building may consist of the core of the building that might have a useful economic life of 50 years and long-lived fixtures and fittings, such as104、 central heating and/or air conditioning systems, that might only last for 25 years.Components of tangible fixed asset are analysed into further categories of asset with similar useful economic lives and residual values. There are a number of categories of Fixtures, Fittings, Tools and Equipment as 105、this class of asset covers a multitude of assets with varying useful economic lives. B. Group policyFor disclosure purposes, the classes of tangible fixed asset are: Properties Fixtures, fittings and equipmentProperties are further analysed between: Freehold, Long leasehold (50 years) or Short lease106、hold ( 50% likelihood) future economic benefits the Group has the ability (technical, financial and other resources) to complete the development and sell the product costs of development can be reliably measured there must be a active market for the productCosts of developing internally-generated in107、tangible assets such as brands must be expensed as incurred.Web site developed for advertising or promotional purposes are immediately expense.Other web sites expenditure can be capitalised if it meets the criteria of development costs.3.7.3 Inducement paymentsA. DefinitionInducement payments are ke108、y money paid to hotel owners to secure long term franchise or managed income streams.B. Group policyInducements are accounted for as identifiable intangible asset. They are initially recorded on the balance sheet at cost and are amortised over the shorter of 10 years or the life of the contract. If 109、a contract is terminated before the inducement has been fully amortised the remaining asset must be charged to operating profit immediately.The carrying value of each inducement must be regularly reviewed in the light of:i) solvency of the third party and their continuing ability to trade at a level110、 that sustains the on-going deferral and amortisation of the advance,ii) general state and condition of any other receivables, such as sales ledger balances etc., due to the Group as a whole, andiii) known intentions of the third party i.e. are they planning to cease paying the Group an income strea111、m by virtue of cancelling trading arrangements etc.If, as part of a normal business transaction in a region, inducement payments are made to, and other fees (other than application fees which are always netted) in excess of market rates are received from, the same third party or related parties then112、 the amounts paid and received must be netted and the resultant debit amortised in accordance with Group policy.3.7.4 Management contractsIntangibles associated with management contracts can be; acquired via a purchase of a management contract or transactions involving the exchange of one non-moneta113、ry asset for another non-monetary assetIn the circumstance of a hotel being sold to a purchaser who then enters into a management or franchise contract with the Group, the fair value of the contract entered into should be recorded as an intangible asset.3.8 Associates, Joint Ventures and Other Equit114、y Investments (4.9, 4.10)3.8.1 InvestmentsA. DefinitionInvestments that are intended to be held for use on a continuing basis in the activities of an enterprise and for which the intention to hold the investment for the long term can clearly be demonstrated.B. Group policyThe Group recognises three 115、categories of investments:(i) Joint Ventures (4.9.1)(ii) Associated undertakings (4.9.1)(iii) Other Equity Investments (4.9.1)For policy on (i), (ii) and (iii), see references below.3.8.2 Associates and Joint VenturesA. Definition An associate is an entity, including an unincorporated entity, such a116、s a partnership, over which the investor has the ability to exercise significant influence and that is neither a subsidiary nor an interest in a joint venture.Significant influence is the power to participate in the financial and operating policy decision of the investee but is not control, or joint117、 control, over those policies.A joint venture is an entity which is jointly controlled by the Group and one or more other venturers under a contractual arrangement. B. Group policy The Group regards those undertakings in which IHG PLC or its subsidiary undertakings own between 20% and 50% of the equ118、ity capital, but do not exert control, as associates. This includes all 50:50 joint ventures unless they are structured in such a way as to give the Group the ability to control or joint control. Where the Group has the ability to control, such entities are accounted for as subsidiary undertakings. 119、Where joint control exists, entities are accounted for as joint ventures.The Group accounts for its interests in associates under the equity method of accounting. The Groups interests in joint ventures are normally accounted for using the equity method. There may be circumstances where the Group mus120、t proportionately consolidate joint ventures. Group Finance will advise on the nature of any new undertaking.3.8.3 Other Equity Investments A. DefinitionOther equity investments are investments in an entity over which the Group does not have the ability to exercise significant influence as other inv121、estments.B. Group policyThe Group regards those undertakings in which IHG PLC or its subsidiary undertakings own between 1% and 19% of equity capital and do not have the ability to exercise significant influence as other investments.The Group accounts for its interests in other equity investments as122、 available-for-sale financial assets in accordance with IAS 39.3.9 Other Non-current Financial Assets (4.10)A. DefinitionA financial asset is any asset that is:a) cashb) equity instrument of another entityc) contractual right to receive cash from another entity or exchange financial assets/liabiliti123、esTo be classified as non-current the intended life of the asset must be greater than one year.B. Group policyThe Group regards the following as other financial assets:a) Restricted cashb) Depositsc) Long-term loans/special financial arrangementsNon-current financial assets are initially recorded at124、 fair value. At each reporting period the asset fair values are reviewed. There may be cases in which non-current financial assets are required to be discounted and carried at amortised cost.3.10 InventoryA. DefinitionInventories comprise the following categories:(i) Goods or other assets purchased 125、for resale(ii) Raw materials and components purchased for incorporation into products for sale (iii) Finished goods B. Group policyRaw materials, bought-in-goods and consumables are stated at the lower of cost and net realisable value on a first in, first out basis.Cost includes the necessary expend126、iture incurred to bring the product to its current location and condition and includes carriage in.Net realisable value represents estimated selling price less marketing and selling costs.3.11 Cash and cash equivalents3.11.1 Cash equivalentsA. DefinitionCash equivalents are short-term highly liquid 127、investments with a maturity of less than 90 days that are readily convertible to known amounts of cash and subject to insignificant risk of changes in value.B. Group policyRestricted cash (i.e. fixed deposits) is not to be classified as a cash equivalent and is to be reported as a financial asset.Ba128、nk overdrafts repayable on demand are a component of cash equivalents.On adoption of IAS 39, short term investments are recorded in the balance sheet at fair value. Accrued interest is recorded separately within sundry debtors and is not accumulated with the cost of investment. Short term investment129、s are subject to rules and guidelines set out by Group Treasury. Surplus cash should not be left in non-interest bearing accounts but reference should be made to the relevant Group Treasury guidelines prior to investment.3.12 Provisions for liabilities and charges (4.11)A. DefinitionA provision is d130、efined as a liability of uncertain timing or amount. Provisions can therefore be distinguished from other liabilities such as trade creditors and accruals, in that trade creditors are specific liabilities (containing no uncertainty) and, while accruals are often estimates, the uncertainty surroundin131、g them is much less than for provisions.A provision should be recognised only when:(a) An entity has a legal or constructive obligation as a result of a past event; and(b) It is more likely than not that an outflow of economic benefits will be required to settle the obligation; and(c) A reliable est132、imate of the amount of the obligation can be made.If any one of these conditions cannot be met, no provision should be recognised.B. Group policyThe Group recognises provisions where they are material and are likely to be expended over more than one year.Given the strict definition of a provision se133、t out under IAS 37, new provisions, other than for deferred taxation, are only to be created subject to prior approval by Group Finance.3.13 Contingencies (4.12)A. DefinitionA contingent liability is a liability of sufficient uncertainty (possible) that it does not qualify for recognition as a provi134、sion.Possible obligationexistence will be confirmed by the occurrence (or non-occurrence) of a future event, which is outside the entitys control.Obligationnot more likely than not that there will be an outflow of economic resources (generally less than 50%)Measurementthe amount cannot be estimated 135、reliably. It would be extremely rare to have an obligation that can not be measured reliably.A contingent asset is defined as a possible asset that arises from past events whose existence will only be confirmed by the occurrence (or non-occurrence) of a future event, which is outside the entitys con136、trol.Contingencies are distinct from commitments which are known liabilities which will arise at a known point in time. A common example is the commitment to make future payments under operating leases.B. Group policyContingent liabilities are disclosed in the accounts unless the outcome is remote, 137、in which case nothing is disclosed.Contingent assets should be disclosed where the outcome is probable and should only be recorded if the outcome is virtually certain to occur.3.14 Revenue recognition (4.13)A. GeneralRevenue is recognised if it is probable that future economic benefits will flow to 138、IHG and those benefits can be measured reliably.B. Group policyRevenue is only recognised when: all significant risks and rewards of ownership have been transferred; there is no continuing managerial involvement (loss of control); the revenue can be measured reliably; it is probable that any economi139、c benefits will flow to IHG; and the costs incurred (or to be incurred) can be reliably measured.Owned and leased revenue includes the rental of rooms and food and beverage sales. Recognised when rooms are occupied and food and beverage is sold.Management fees earned from hotels managed by the Group140、 under long-term contracts. These include a base fee, generally based on a percentage of hotel revenue, and an incentive fee generally based on the hotels profitability. Revenue is recognised when it is realised and earned (IHG has completed contractual obligation to entitle it to benefits and colle141、ctability is reasonably assured).Franchise fees received under long-term franchise contracts. They are charged as a percentage of room revenue and recognised when earned on an accrual basis.Revenue and costs that relate to the same transaction or event should be recognised simultaneously.Revenue for142、 the provision of services is recognised at the time of their provision and deferred to the extent that associated costs will be incurred in future periods.Rental and interest income is recognised on an accruals basis at the appropriate daily rate.Where payment for goods or services is received or a143、n invoice is raised before all costs related to these have been incurred, the relevant proportion of the revenue is deferred and matched against future costs.3.15 Revenue expenditure3.15.1 Research and developmentA. DefinitionInternally generated intangible asset is split into two phases:(i) researc144、h: experimental or theoretical work undertaken primarily to acquire new scientific or technical knowledge for its own sake rather than directed towards any specific aim or application; (iii) development: use of scientific or technical knowledge in order to produce new or substantially improved mater145、ials, devices, products or services, to install new processes or systems prior to the commencement of commercial production or commercial applications, or to improving substantially those already produced or installed. B. Group policyResearch expenditure is charged to profit as incurred.Development 146、expenditure is capitalised when a feasible project exists that can be completed with existing resources and that will produce future economic benefits for the Group. 3.15.2 Repairs and maintenanceA. DefinitionRepairs and maintenance expenditure is the recurring cost necessary to maintain the normal 147、quantity and quality of service from that asset. The expenditure does not add materially to the value of the asset, significantly prolong its expected useful life or give rise to significant rise in future economic benefits.B. Group policyAll expenditure in connection with the repair and maintenance148、 of fixed assets should be charged to the profit and loss account as incurred.For interim periods repairs and maintenance costs should be accounted for on a discrete basis.3.15.3 Advertising, sponsorship and promotionsA. DefinitionExternal costs related to advertising and promoting the name, product149、s or services of the Group in newspapers, periodicals, film or other advertising media, including sponsorship.B. Group policyAdvertising, sponsorship and promotional expenditure should be charged to the profit and loss account in the period to which it relates.Where expenditure relates to more than 150、one accounting period the charges should be spread in the most appropriate way in order to match cost with advertising activity. Any surplus or deficit of cash paid over expenditure charged should be treated as a prepayment or accrual. However, expenditure should not be deferred for more than one ye151、ar without the approval of Group Finance. Deferral will require demonstration that the life of the related advertising project, sponsorship or promotion does indeed exceed one year.For interim periods advertising, sponsorship and promotion costs should be accounted for on a discrete basis.3.15.4 Pre152、 opening expensesA. DefinitionPre-opening expenses are revenue costs incurred in advance of and in connection with the opening or re-opening after refurbishment of a business venture. Such expenses will typically include advertising, marketing, recruitment, training, project management, cleaning and153、 the payroll costs of operational / sales staff directly involved in the opening.B. Group policyPre-opening expenses should be charged to the profit and loss account as incurred.3.16 Pensions, holiday pay and employee benefits (4.14)3.16.1 Defined benefit pension scheme costsA. DefinitionA defined b154、enefit pension scheme (commonly referred to as a final salary scheme) is a pension scheme in which the rules specify the benefits to be paid and the scheme is financed accordingly. This means that the employer promises to pay the member a pension which is usually related to the members final salary 155、at retirement.B. Group policyThe cost of providing scheme benefits is determined by the scheme actuary, based on the current service cost of employees and assumptions on future rates of return on scheme assets and liabilities. Periodic valuations of the pension schemes are obtained to derive the amo156、unts chargeable to the profit and loss account; reflecting the costs arising as a consequence of valuation surpluses or deficits.3.16.2 Defined contribution pension scheme costsA. DefinitionA defined contribution pension scheme is a pension scheme in which the Group pays fixed contributions into a s157、eparate entity and will have no further obligation.B. Group policyThe contributions payable in an accounting period are charged to the profit and loss account. If the amount paid in the period is more or less than the amount payable, a prepayment or accrual will be included in the balance sheet. Oth158、erwise amounts paid will be charged to the profit and loss account when made.3.16.3 Holiday pay / Long term service awardsA. DefinitionHoliday (or vacation) pay is that element of an employees total emoluments paid in respect of the period during which an employee takes his/her holiday.B. Group poli159、cyGroup policy is to charge holiday pay as an operating expense of the period during which the holiday pay is paid.No accrual of holiday pay entitlement is made for the period during which the employee is working. However in any one financial year the charge to the profit and loss account in line wi160、th Group policy is broadly in line with the charge that would arise from using an accruals basis.In certain countries statute dictates that holiday pay must be accounted for on an accruals basis - in these countries only, an accrual may be established for outstanding holiday pay.Long term service aw161、ards should be accrued on a yearly basis.3.16.4 Severance / Termination / Redundancy PaymentsGenerally, employee benefits accrue over the service period. Termination payments arise from termination and not from service and therefore the obligation is not recognised until the entity is committed with162、out realistic possibility of withdrawal. To qualify for recognition the employees concerned, in most circumstances, must be aware of the likely termination.3.17 Share-based paymentsA. DefinitionTransactions settled in shares or other equity instruments are referred to as an equity-settled share-base163、d payment transaction. In a share-based transaction the Group receives goods or services and pays for those goods or services in either shares or equity instruments. Share-based transactions are generally measured based on the grant date fair value of the equity instruments issued.Transactions that 164、create an obligation to deliver cash or other assets are referred to as cash-settled transactions and result in a liability measured at the fair value of the liability at each balance sheet date.B. Group PolicyFair value is determined by an external valuer using option pricing models and the terms a165、nd conditions of the options schemes.RecognitionThe cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the 166、award (vesting date).Equity instruments vest immediately if there are no service or performance conditions.The income statement charge for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ult167、imately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied.The impact of service and non-market conditions are reflec168、ted in the original estimate of fair value at grant date and subsequently trued up for differences between the number of shares estimated to vest and the actual number of vested shares.Key termsService conditionusually a specified period of timePerformance conditionMarket related to the market price169、 of the Groups shares i.e. share price or total shareholder returnNon-market related to specific performance targets i.e. increases in internal key metricsGrant dateusually the date when the employee has been informed of the scheme and service has begunIf the employee has a choice of settlement (eit170、her cash or shares) the transaction is accounted for as a cash-settled transaction.3.18 Leases (4.15)General Lease accounting treatment (operating verse finance) should be determined at the inception of the lease while bookkeeping starts from date of commencement. Inception of a lease is the earlier171、 of the date of the lease agreement and the date of commencement.Commencement of a lease is the date when the lessee is entitled to exercise its right to use the leased asset.3.18.1 Finance leases (4.15.2)A. DefinitionA finance lease is a lease that transfers substantially all the risks and rewards 172、of ownership of an asset to the lessee. Title may or may not eventually be transferred. If it can be reasonable assumed that the lessor intends to earn his total return on the transaction with IHG then the lease should be accounted for as a finance lease.B. Group PolicyLeases that are greater than 5173、0 years or that transfer substantially all the risk and rewards of ownership should be accounted for as a finance lease. All other leases should be accounted for as operating leases.3.18.2 Operating leases (4.15.3)A. DefinitionAn operating lease is a lease other than a finance lease. B. Group policy174、Operating lease rentals are charged to the profit and loss account on a straight line basis over the lease term irrespective of when the payments are due.3.18.3 Other lease issues (4.15.4, 4.15.5, 4.15.6)A lease of land generally will be classified as an operating lease unless title transfers the le175、ase.A lease of land and a building should be treated as two separate leases. Lease classification can be different i.e. land operating lease and building finance lease.Incentives are generally recognised on a straight-line basis over the life of the lease.In general, if a sale and leaseback transact176、ion results in an operating lease the asset should be treated as having been sold and, if the sale was at fair value, the profit or loss on sale should be recognised immediately. If the sale was not at fair value the detailed requirements of IAS 17 should be referred to.If you believe that you have 177、a transaction that qualifies as a sale and leaseback, please contact the Controllers Group.3.19 Segmental reportingA. DefinitionSegmental reporting involves the reporting of disaggregated financial information about a business entity by both business and geographic segments. One basis of segmentatio178、n is primary and the other is secondary. The assessment is based on the dominant source and nature of an entitys risks and returns as well as the entitys internal reporting structure.B. Group policyThe Groups primary and secondary segmentation is virtually identical.BusinessGeographyAmericasUSARest 179、of AmericasEMEAEMEAAsia PacificAsia PacificCentralThe following information is disclosed for each business segment:RevenueOwned and leasedManagedFranchisedOtherSub-total Continuing operationsDiscontinued operationsTotalSegmental resultOwned and leasedManagedFranchisedOtherSub-total Continuing operat180、ionsDiscontinued operationsTotalSpecial ItemsOperating profitUnallocated items:Net finance costsIncome taxesAssets and liabilitiesSegmental assetsUnallocated assetsCorporate taxCurrent asset investmentsCash at bankTotal assetsSegmental liabilitiesUnallocated liabilitiesCorporation taxationDeferred t181、axationBorrowingsTotal liabilitiesOther segmental informationCapital expenditureTangible assetsInvestmentsDepreciation and amortisation3.20 Assets held for sale and discontinued operations3.20.1 Assets held for saleA. DefinitionNon-current assets (or disposal groups) are classified as held for sale 182、when their carrying value will be recovered principally through a sale transaction. B. Group policyTo be classified as held for sale an asset must be available for immediate sale in its present condition and its sale must be highly probable. To be highly probable the following conditions should be m183、et: commitment to a plan to sell e.g. Board approval active marketing at a reasonable price expectation that sale will be completed within one yearMeasurement on initial classification as HFSAsset should be measured at the lower of their: carrying amount fair value less costs to sellImpairment losse184、s are recorded as part of operating profit.Subsequent measurementMeasured as above and losses are recognised in profit/loss on disposal of assets.Classification as held for sale occurs at the end of the quarter in which the asset meets the criteria to be classified as held for sale.Assets are reclas185、sified from held for sale to held for use if they no longer meet the criteria to be classified as held for sale.C. DisclosureComparative balance sheet information is not restated.3.20.2 Discontinued operationsA. DefinitionThe presentation of an operation as a discontinued operation is limited to a c186、omponent of the Group that: represents a separate major line of business or geographical area of operations is part of a co-ordinated single plan to dispose of a separate major line of business or geographical area of operations is a subsidiary acquired exclusively with a view to resaleB. Group poli187、cyClassification as a discontinued operation occurs at the state of the next quarter after the date that: the Group disposed of the operation the operation meet the criteria to be classified as held for saleC. DisclosureThe results of discontinued operations are presented separately form continuing 188、operations on the face of the income statement as a single amount. An analysis of the amount must be presented either on the face of the income statement or in the notes to the financial statements. Certain cash flow information related to discontinued operations must be disclosed.Comparative income189、 statement and cash flow information is restated for all periods presented.4.1 Identification of subsidiaries (3.2.1)4.1.1 Principles and definitionsA. SubsidiaryA subsidiary is an entity, including an unincorporated entity such as a partnership, which is controlled or can be controlled by another e190、ntity (known as the parent).B. ControlControl is the power (whether actively demonstrated or not) to govern the financial and operating policies of an entity so as to obtain benefits from its activities.Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, m191、ore than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent owns half or less of the voting power of an entity when there is:a) power over more than half of th192、e voting rights by virtue of an agreement with other investors;b) power to govern the financial and operating policies of the entity under a statute or an agreement;c) power to appoint or remove the majority of the members of the board of directors or equivalent governing body and control of the ent193、ity is that by board or body;d) power to cast the majority of votes at a meeting of the board of directors or equivalent governing body and control of the entity is that by board or body.When assessing control any convertible share warrants, share call options, debt or equity instruments must be tak194、en into account. These potential voting rights must be considered where they are currently exercisable or convertible whether there is any intention to exercise or convert or not. C. ConsolidationAll subsidiaries must be consolidated.4.2 Acquisitions and disposals (3.2.5, 3.2.6)4.2.1 Principles and 195、definitionsA. Subsidiary undertakingA full definition is included in 4.1 Subsidiary undertakings. B. ConsolidationThe net assets, results and cash flows of a subsidiary undertaking are reflected in the financial statements of a group between the date of its acquisition and the date of its disposal.C196、. Acquisition and disposal dateThe date for accounting for an undertaking becoming a subsidiary undertaking is the date on which control of that undertaking passes to its new parent undertaking. The date for accounting for an undertaking ceasing to be a subsidiary undertaking is the date on which it197、s former parent undertaking relinquishes its control over that undertaking. The triggering date referred to above is a matter of fact and cannot be backdated or otherwise altered.D. Fair valueFair value is the amount for which an asset or a liability could be exchanged in an arms length transaction 198、between informed and willing parties, other than in a forced or liquidation sale. The use of acquisition accounting requires that the assets and liabilities of the acquired entity at the date of acquisition be recognised and measured at the fair values which reflect the conditions at the date of acq199、uisition. Where adjustments are necessary to conform the accounting policies of the acquired entity to those of the Group these are incorporated within the fair value adjustments. All such adjustments are reflected in the financial pro formas of the entity acquired and to the fullest extent possible200、 in the statutory accounts of that entity. Where it is not possible to reflect fair value adjustments in statutory accounts, due to local legislation or standards, those adjustments will be reconciling items between the statutory accounts and financial pro formas.E. GoodwillGoodwill represents a pay201、ment made by the acquirer in anticipation of future economic benefits from assets that are not capable of being individually identified.Purchased goodwill, established when a business combination is accounted for as an acquisition, is the difference between the fair value of the purchase considerati202、on and the fair value of the identifiable net assets acquired.F. Profit or loss on disposalThe profit or loss on disposal of an income producing asset is calculated as:Gross proceedsplus fair value of non-monetary assets received (includes fair value of contracts entered into)Less Costs of disposalL203、ess The carrying value of the net assets disposed which are attributable to the Group (i.e. not including minority interest)Less Any provisions made related to the disposalLess Goodwill which has not been charged to the profit and loss account as impairment.4.2.2 Acquisitions (3.2.5)A. Identifiable 204、net assets(i) DefinitionThe identifiable assets and liabilities of an acquired entity are the assets and liabilities that are capable of being disposed of or settled separately, without disposing of a business of the entity. (ii) Fair valueAssets and liabilities are valued on an individual basis in 205、accordance with the relevant individual IAS / IFRS, applying IHG accounting policies where applicable. The following notes provide basic guidelines for the main classes of assets.(iii) Intangible assetsAn intangible asset should be recorded at fair value if its value can be measured reliably and it 206、can be sold separately without disposing of the business. The intangible asset must be identifiable and IHG must have control over it. To be identifiable the intangible would normally arise from a contractual or legal right. Intangible assets would include items such as: management contracts franchi207、se agreements trademarks/brands concessions inducements software patentsIf an intangible asset cannot be measured reliably or cannot be sold separately from the business, it should be subsumed within goodwill.(iv) Tangible fixed assetsAll tangible fixed assets should be valued at their market value,208、 if assets of a similar type and condition are bought and sold on an active market.In identifying and valuing assets, relevant IHG accounting policies should be applied, for example in respect of the valuation of licences or capitalisation of interest.(v) AssociatesAcquired investments in associates209、 accounted for under the equity method should be fair valued at date of acquisition.(vi) Other investmentsQuoted investments should be valued at market price, adjusted if necessary for unusual price fluctuations or for the size of the holding. Unquoted investments should be valued at the amount they210、 could be exchanged at in an arms length transaction between informed and willing parties.(vii) InventoriesInventories should be valued at the lower of replacement cost and net realisable value. As with fixed assets, the replacement cost is from the perspective of the acquired entity. IHG accounting211、 policy should be applied if it is significantly different from that of the acquired entity in areas such as allocation of overheads. When assessing net realisable value, normal Group policy should be applied when assessing the value of write-downs.(viii) Monetary assets and liabilitiesFair values s212、hould take into account the amounts expected to be received or paid and their timing. As such, short-term debtors and creditors are simply valued at the amounts expected to be received or paid. Long-term monetary assets and liabilities may, however, require discounting if the fair value is materiall213、y different from the book value, for example if there is long-term debt with a fixed rate of interest that no longer reflects current rates. If discounting is applied, the choice of discount rate should be specific to the acquired company and reflect current lending rates, the credit standing of the214、 issuer, etc. The difference between the fair value and the ultimate amounts receivable or payable should be dealt with as interest payable or receivable in the profit and loss account by allocation to accounting periods at a constant rate over the term of the monetary amounts based on their carryin215、g value.(ix) Contingent assets and liabilitiesFair values are ascribed to contingent assets and liabilities to reflect the probable amount at which the contingent asset or liability will crystallise. Contingent assets should only be recognised if their realisation is virtually certain.(x) Operating 216、leasesOperating leases should be fair valued at acquisition. The accounting on this issue is complex and advice must be sought from the Controller Group.(xi) PensionsIf comparable, defined benefit pension schemes should be evaluated using the same actuarial assumptions as used by the Group for its d217、efined benefit schemes. Any surplus, to the extent that it is reasonably expected to be realised, or deficit identified should be recognised at the acquisition date as part of the fair value exercise (see 4.14).(xii) Deferred taxDeferred tax assets or liabilities to be recognised in the fair value e218、xercise should be determined by considering the enlarged Group including the acquired entity. Advice must be sought from the Controller Group and Group Tax.(xiii) ProvisionsIdentifiable liabilities should not include provisions or accruals for reorganisation or integration costs expected to be incur219、red as a result of the acquisition, or for future operating losses. Only if the acquired entity was demonstrably committed to the expenditure and unable to withdraw if the acquisition was not completed would a provision be classified as pre-acquisition. In such a case it would be necessary to demons220、trate that control had not passed to IHG at the time the provision was made (thus bringing forward the effective date of acquisition).Provisions may however be made for onerous contracts or commitments which existed at the acquisition date.(xiv) Contingent considerationA liability is recognised as s221、oon as payment becomes probable and the amount can be measured reliably.(xv) Minority interestIf the Group does not obtain all of the ownership interest in the acquiree, the minoritys portion should be recognised at fair value and not historical cost.(xiv) Business acquired for resaleIf a subsidiary222、 undertaking or business segment is acquired which is intended for disposal within one year of acquisition the fair value is the estimated net realisable value of the business segment rather than the sum of the fair values of its individual assets and liabilities.Such a subsidiary undertaking should223、 be excluded from consolidation. The investment should be recorded at the lower of cost and net realisable value.If such a situation arises the Controller Group must be notified of the names of the subsidiary undertakings involved.B. Consideration(i) Cost of acquisitionThe cost of acquisition is the224、 amount of cash paid and the fair value of other purchase consideration given by the acquirer, together with the expenses of the acquisition. (ii) Method of ascribing valueConsideration givenBasis of ascribing fair valueCapital instrumentsMarket value on the date on which the offer becomes unconditi225、onal. An average of prices over a reasonable period before the acquisition should be used to eliminate any short term fluctuations.Cash and otherThe amount payable in respect of each item, monetary items discounted to present value if deferred (see B(iii).Non-monetary itemsRealisable value at the ti226、me of transfer.(iii) Deferred considerationIf settlement is deferred the fair value of the consideration may be calculated by discounting the consideration payable in the future to its present value as at the acquisition date. The discount rate would be the rate at which IHG could obtain similar bor227、rowing. The difference between the fair value and the ultimate creditor would be dealt with as interest payable in the profit and loss account.(iv) Contingent considerationIf consideration is contingent on an uncertain future event the fair value is the probable amount of consideration payable, subj228、ect to the need for discounting. The cost of acquisition should be adjusted for revised estimates, with corresponding adjustments to goodwill, until the ultimate outcome is known.Where contingent consideration is in the form of shares, the credit should be disclosed within shareholders funds as shar229、es to be issued and analysed between equity and non-equity shares as appropriate.(v) Acquisition expensesAll costs (other than issue costs of capital instruments which must be accounted for in accordance with IAS 39) directly incurred in carrying out the acquisition are added to the cost of the inve230、stment and include inter alia: legal fees survey fees accountancy / consultancy fees bank fees but not fees of raising debt or raising equityOther expenses which cannot be directly attributed to the acquisition and internal costs which would have been incurred had the acquisition not taken place mus231、t be charged to the profit and loss account.(vi) Project costsPrior to contract completion, acquisition expenses will normally be maintained and controlled under one cost code. If at the half year or year end negotiations on a potential acquisition are ongoing, a decision will need to be made as to 232、the appropriate treatment for the accumulated costs. In general a prudent approach should be adopted, however the final treatment will be dependent upon the stage of negotiations. The Controller Group will make the decision on whether to defer such costs at a period end.C. Goodwill(i) CalculationGoo233、dwill is calculated as the difference between the identifiable net assets and consideration as discussed above.(ii) Accounting treatmentGoodwill arising on acquisitions should be capitalised in accordance with IFRS 3 and tested at least annually for impairment under IAS 36. (iii) Record keepingDetai234、led records of goodwill arising on acquisition are essential as goodwill forms a part of the calculation of any gain or loss arising on a subsequent sale.(iv) Hindsight periodThis is the period during which goodwill may be adjusted to reflect a reassessment of the fair values of the identifiable ass235、ets and liabilities. The hindsight period extends to the 12 month period immediately following the date of acquisition. It must be demonstrated that the new information provides better evidence of fair value at acquisition.Any adjustments to fair value after the hindsight period must be reflected in236、 the profit and loss account in arriving at operating profit.After this time the only adjustments to goodwill may be in respect of contingent consideration and deferred tax assets.4.2.3 Disposals (3.2.6)A. Date of disposalThis is as defined in 4.2.1 above.B. Profit or loss on disposalThis is as defi237、ned in 4.2.1 above.Gross proceeds should be valued as in 4.2.2 above.C. Deferred considerationWhere consideration is deferred, the current value of the consideration may be discounted to its present value as at the disposal date. The resulting receivable should be periodically restated by reference 238、to the discount rate originally applied.D. Acquisition provisionsAny unused provisions established at the time of acquiring the subsidiary undertaking now being disposed should be released and included in the calculation of gain or loss upon sale.E. GoodwillThe amount included in the consolidated pr239、ofit and loss account in respect of the profit or loss on disposal of a previously acquired business, subsidiary or associated undertaking should be determined by including, if material, the attributable goodwill which has not previously been charged in the profit and loss account.Group companies ar240、e required to maintain records that enable an appropriate estimate or apportionment to be made of the goodwill attributable to the disposal. Where, at disposal it is genuinely impractical to make a reasonable estimate of the purchased goodwill attributable, this will need explanation in the Groups f241、inancial statements. Attributable goodwill only includes goodwill capitalised in the Group Financial Statements. Goodwill write off under UK GAAP, prior to the introduction of IFRS, is not reinstated.4.2.4 Key information to be gathered and retainedA. Importance of retaining informationInformation a242、vailable and ascertainable at the time of an acquisition continues to have relevance throughout the period that the subsidiary undertaking forms part of the Group and is particularly important at the time of eventual disposal. This information is vital for tax purposes as well as for US GAAP reporti243、ng.B. Information required: acquisitions(i) GeneralCopy of sale and purchase agreementCopy of agency agreement (where applicable)Identity of sellerEffective date of acquisitionYear end of acquired companyType and percentage of shares acquiredCompany searchCopy of statutory booksCompany secretarial d244、etails e.g. auditors, bankers etc.(ii) AccountingGeneralAudited acquisition balance sheet together with supporting schedules.Most recently available audited accounts.Statement of pre-acquisitions reserves.Fair valueFair value of assets acquired together with supporting documentation e.g. property va245、luation certificate.Fair value of assets acquired.Fair value of consideration given.Details of any deferred or contingent consideration given and a summary of the events which will determine the outcome of the contingency.Details of any contingent assets and liabilities relating to the acquired comp246、any and justification for the opinion held regarding the likelihood of the final outcome.Details of developments in relation to contingencies during the periods subsequent to the acquisition.Details of the pension arrangements of the acquired company and, if necessary, a revised actuarial valuation 247、using assumptions applicable to the Group.ProvisionsDetails of provisions made upon acquisition, including the impact of adjustments to bring accounting policies in line with those of the group.Details of the utilisation during subsequent periods of provisions made upon acquisition, indicating futur248、e requirements for the remaining provision and the treatment adopted for any excess provision.GoodwillAmount of goodwill arising on each acquisition and the treatment adopted in each case.Any adjustments to fair values subsequent to the acquisition and details of the effects of such adjustments on r249、eported profits and goodwill.Details of acquisition costs added to the cost of the investment.Details of pre-acquisition dividends received from the acquired company and details of the assessment made to determine the need for provision for diminution in value.(iii) TaxationTax districts and referen250、ces of acquired companies.Tax computations and correspondence relating thereto, for the last three financial years.Cost, residue carried forward and annual allowances for all industrial buildings for Details of capital and revenue losses brought forward, together with correspondence indicating that 251、these will be able to be used following the acquisition.Details of corporation tax balances, showing the make up by year of all components, including tax charges and credits, payments for group relief, ACT, write offs.Details of deferred tax balances, showing the type of temporary differences provid252、ed for under IAS 12.Details of any tax treatment of income/expenditure and assets/liabilities (e.g. goodwill, pre-opening expenses, etc.).C. Information required: disposals(i) Purchase and sale agreementThe terms and conditions of a disposal are generally determined within a sale and purchase agreem253、ent. In preparing the document consideration should be given to all potential issues arising, including the following: accounting policies to be applied in the preparation of the disposal balance sheet; property located at the disposed site owned by other IHG group companies; post sale access requir254、ements for reporting purposes; treatment of group costs charged and chargeable; treatment of group insurance costs charged and chargeable and the closure of related insurance contracts; close out of group foreign exchange contracts; the role of the auditors - vendors auditor performs the audit, acqu255、irers auditor performs a review. This list is intended to be indicative not exhaustive.(ii) GeneralCopy of sale and purchase agreementIdentity of purchaserEffective date of disposal.Details of decision date and disposal date balance sheets.Goodwill not previously charged to the profit and loss accou256、nt.Calculation of gain (loss).(iii) AccountingAudited disposal date balance sheet together with supporting detailsFair value of consideration receivedDetails of any deferred consideration and a summary of events which will determine any contingent considerationDetails of any assets and liabilities r257、etainedDetails of pension arrangements, including treatment of any pension prepayment/accrual in the disposal balance sheet, employees and associated pension liabilities transferred, details of any transfer out of the pension fund, and if necessary an actuarial valuation of the effect on the pension258、 fund of the disposalDetails of any warranties givenDetails of any contingencies arising as a result of the sale(iv) TaxationOriginal acquisition cost of the company disposed to calculate tax liability on disposal proceedsDetails of capital and revenue losses brought forward, together with correspon259、dence indicating the tax treatment following the disposal.4.3 Foreign currencies (3.3)4.3.1 Principles and definitionsA foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency, including transactions arising when an entity buys or sells goods or260、 services whose price is denominated in a foreign currency. Presentation currencyThe currency in which the financial statements are presentedFunctional currencyThe currency of the primary economic environment in which the entity operates.Foreign currencyA currency other than the functional currency 261、of the entity.Monetary itemsCurrency and assets and liabilities that will be received or paid in a fixed amount of currency (balances to be settled by cash).RECOGNITIONInitial recognitionForeign currency transactions shall be translated into the functional currency using the month end rate. Subseque262、nt balance sheet datesMonetary itemsTranslated using the month end rate.Non-monetary itemsItems measured at historical cost (i.e. tangible assets) should be translated using the historical exchange rate.Exchange differences on monetary assets and liabilities that are settled or retranslated at the e263、nd of the period shall be recognized as a component of operating profit in the profit or loss account.B. Trading transactionsA transaction for the sale or purchase of goods or services. These include transactions relating to fixed assets.C. RetranslationThe process whereby financial data denominated264、 in one currency is expressed in terms of another currency. Exchange differences on retranslation arise when an asset or liability denominated in a foreign currency is retranslated at a balance sheet date at a different rate than that originally used to record the transaction.D. HedgingHedging is th265、e process by which a company mitigates foreign exchange risk associated with the assets, liabilities and earnings of a company by entering certain transactions (e.g. by taking out foreign currency borrowings)E. Realised/unrealised exchange differencesRealised exchange differences are those which ari266、se on the maturity of a contract or transaction. All other exchange differences are unrealised.4.3.2 Approach to foreign currency translationAll transactions that are not denominated in an entitys functional currency are foreign currency transactions. First these transactions are translated into the267、 entitys functional currency.The financial statements of the Groups individual entities are translated into the group presentation currency.At the transaction dateEach foreign currency transaction is recorded at the rate of exchange at the date of the transaction, or at rates that approximate the ac268、tual exchange rate.At the reporting dateAssets and liabilities denominated in a currency other then the entities functional currency are translated as follows:a) monetary items are translated at the exchange rate at the reporting dateb) non-monetary items measured at historical cost are not retransl269、ated but remain at the exchange rate at the date of the transactionThere are complex rules related to the retranslation of Intra-group transactions. Please contact the Treasury Department or the Controllers Group for further guidance.The financial statements of foreign operations are translated into270、 the group presentation currency as follows:a) assets and liabilities are translated at the exchange rate at the balance sheet dateb) items of revenue and expense are translated at exchange rates at the dates of relevant transactions, appropriate average rates may be usedc) the resulting exchange di271、fferences are recognised directly in equity as a separate component of equityd) cash flows are translated at exchange rates at the dates of the relevant transactions, appropriate average rates may be used4.4 Tangible fixed assets4.4.1 Principles and definitionsA. Tangible fixed assetsTangible fixed 272、assets are assets held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. The assets must have been acquired or constructed with the intention of being used on a continuing basis and are not intended for sale in the ordinary course of busi273、ness.B. Carrying valueFixed assets are carried at historic cost less cumulative depreciation. Under the transition rules (at 1 January 2004) of IFRS 1, properties are carried in the Group accounts at the previous UK GAAP carrying values including revaluations, as deemed cost at transition. C Initial274、 measurementThe amount at which an asset is initially recognised. D. Subsequent expenditureExpenditure on existing assets which may only be capitalised in certain circumstances.E Recoverable amountThe higher of net realisable value and value in use.F Value in useThe present value of the future cash 275、flows obtainable as a result of an assets continued use, including those resulting from its ultimate disposal.4.4.2 Carrying valueA. Initial measurementIHG initially measures fixed assets as the cost of bringing the asset into working condition for its intended use. Capital expenditure should be add276、ed to the gross carrying value of tangible fixed assets in the accounting period in which the goods are received or measured work completed. When property assets are acquired, the cost must be allocated across the asset classes, components and categories set out in 4.4.3. The basis of ascribing valu277、es would be the same as for a fair value exercise on acquisition (see 4.2). It is normally assumed that the consideration for a single property will generally equate to the fair value of that property and not include a payment for goodwill. If a significant number of properties are being acquired, t278、he value of the assets acquired and consideration given should be discussed with the Controller Group to determine whether any goodwill arises on acquisition.B. Subsequent expenditureSubsequent expenditure on existing assets may only be capitalised in certain circumstances (see 4.5).C. Recoverable a279、mountIf the amount recognised when a tangible fixed asset is acquired or constructed exceeds its recoverable amount, it should be written down to that recoverable amount (the higher of net realisable value and value in use).D. Historic cost and valuationIHG prepares its financial statements under th280、e historical cost convention.E DepreciationDepreciation is charged in respect of most fixed assets (see 4.6)F Impairment reviewsIHG reviews its fixed assets for impairment in accordance with IAS 36 (see 4.8).4.4.3 Categorisation of tangible fixed assetsA Class of assetFor the purpose of statutory ac281、counts disclosure, tangible fixed assets are analysed in accordance with IAS 16 between the following classes of asset: Properties Fixtures, fittings and equipmentAn analysis is also made of payments on account and assets in course of construction (where material).B. Components of fixed assetWhere a282、n asset comprises two or more major components with substantially different useful economic lives, each component should be accounted for separately for depreciation purposes. IHG policy is to split the value of properties valued on a trading basis between the following components:Components of prop283、erties valued as a business Class of assets for statutory reporting purposesLand PropertiesBuildings PropertiesLong-lived fixtures and fittings Fixtures, fittings and equipmentShort-lived fixtures and fittingsFixtures, fittings and equipmentC. Categories of fixed assetThere may be further categories of classes and components to identify assets with similar functions and similar useful economic lives and residual values in order to calculate the depreciation charge (see 4.6.5 and 4.6.6).4.4.4 PropertiesA. GeneralLand and buildings may be freehold or leasehold and if lea