Accounting policies

Property, plant and equipment

Property, plant and equipment excluding land are stated at cost less accumulated depreciation and any recognised impairment loss. Cost includes the original purchase price of the asset, any costs attributable to bringing the asset to its working condition for its intended use and major spares. An item of property, plant and equipment is recognised as an asset if it is probable that future economic benefits associated with the asset will flow to the entity, and the cost of the asset can be measured reliably.

Property, plant and equipment represents 51% of the total asset base of the Group in 2014 (2013: 45%). The estimates and assumptions made to determine the carrying value of property, plant and equipment and related depreciation are important to the Group's financial position and performance. Management assess the estimates and assumptions based on available external information and historical experience.

In determining the cost of property, plant and equipment, certain costs that relate to the intangible element of an asset are separately disclosed within Intangible assets, Note 3.1. Management exercise judgement to review each material asset addition and consider whether the intangible asset element can be used for other property, plant and equipment additions in the current or future years. Software written for the Group's first CFC in Hatfield is identified as a standalone intangible asset, and has provided the foundation for software used in some areas of CFC2, and is expected to provide part of the foundation of software used in future centres.

For more information on the Group's policy on capitalisation of borrowings costs, see Note 4.1.

Depreciation on other property, plant and equipment is charged to distribution costs and administrative expenses and is calculated based on the useful lives indicated below:

Freehold buildings and leasehold properties25 years, or the lease term if shorter
Fixtures and fittings5–10 years
Plant and machinery3–20 years
Motor vehicles2–7 years

Land is held at cost and not depreciated.

Assets in the course of construction are carried at cost less any recognised impairment loss. Cost includes professional fees and other directly attributable costs. Depreciation of these assets commences when the assets are ready for their intended use, on the same basis as other property assets.

Gains and losses on disposal are determined by comparing proceeds with the asset's carrying amount and are recognised within operating profit.

Estimation of useful life

Depreciation is provided at rates estimated to write off the cost of the relevant assets less their estimated residual values by equal annual amounts over their expected useful lives. Residual values and expected useful lives are reviewed and adjusted, if appropriate, at the end of each reporting period.

The charge in respect of periodic depreciation is derived by estimating an asset's expected useful life and the expected residual value at the end of its life. Increasing an asset's expected life or its residual value would result in a reduced depreciation charge in the income statement. The useful lives of the Group's assets are determined by management at the time the asset is acquired and reviewed at least annually for appropriateness.

Management also assess the useful lives based on historical experience with similar assets as well as anticipation of future events which may impact their useful life, such as changes in technology. Historically, changes in useful lives have not resulted in material changes to the Group's depreciation charge.

Impairment of non-financial assets

An annual impairment review is performed and assets which do not have indefinite useful lives are subject to an annual depreciation or amortisation charge. Assets that are subject to an annual amortisation or depreciation charge are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating units).

Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at the end of each reporting period. When an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Given the Group's current operating structure the lowest level at which cash flows can reasonably be assessed is the Group as a whole. The Group prepares detailed forward projections which are constantly updated and refined. Based on these projections the Board does not consider that any further impairment of assets is required, other than that recognised in the income statement.

 Land and
buildings
£m
Fixtures, fittings,
plant and
machinery
£m
Motor
vehicles
£m
Total
£m
Cost
At 2 December 2012117.8257.434.1409.3
Additions5.1149.89.1164.0
Disposals1(80.6)(110.4)(4.3)(195.3)
At 1 December 201342.3296.838.9378.0
Additions13.267.212.693.0
Disposals1(0.3)(11.9)(4.1)(16.3)
At 30 November 201455.2352.147.4454.7
Accumulated depreciation and impairment
At 2 December 2012(15.2)(98.4)(15.4)(129.0)
Charge for the period(2.0)(24.2)(6.9)(33.1)
Impairment0.2(0.5)(0.3)
Disposals0.34.14.38.7
At 1 December 2013(16.7)(119.0)(18.0)(153.7)
Charge for the period(1.8)(30.0)(8.2)(40.0)
Impairment(0.3)(0.8)(1.1)
Disposals0.311.04.015.3
At 30 November 2014(18.5)(138.8)(22.2)(179.5)
Net book value
At 1 December 201325.6177.820.9224.3
At 30 November 201436.7213.325.2275.2

There were no capitalised borrowing costs in 2014 (2013: £1.9 million). The capitalisation rate for the prior period was the same as that incurred on the underlying borrowings, being LIBOR plus 3%. Borrowing costs were capitalised on specific borrowings which were wholly attributable to qualifying assets.

  1. During 2013, the Group entered into a sale and 25-year leaseback transaction of its MHE relating to CFC2 to MHE JV Co. Of the £16.3 million disposals, £0.9 million relates to the sale of assets to MHE JVCo, all of which were leased back and are included in total additions of £93.0 million. Of the prior period disposals of £195.3 million, £115.2 million relates to the sale of assets to MHE JV Co, £112.1 million of which were leased back and are included in total additions of £164.0 million.

Included within property, plant and equipment is capital work-in-progress for land and buildings of £15.4 million (2013: £0.1 million) and capital work-in-progress for fixtures, fittings, plant and machinery of £20.1 million (2013: £5.2 million).

Of the prior period impairment charge, a reversal of £0.2 million has been included within exceptional costs (see Note 2.7).

The net book value of non-current assets held under finance leases is set out below:

 Land and
buildings
£m
Fixtures, fittings,
plant and
machinery
£m
Motor
vehicles
£m
Total
£m
At 1 December 2013
Cost29.3171.938.1239.3
Accumulated depreciation and impairment(14.8)(56.6)(17.5)(88.9)
Net book value14.5115.320.6150.4
At 30 November 2014
Cost30.3203.746.5280.5
Accumulated depreciation and impairment(16.3)(73.9)(21.6)(111.8)
Net book value14.0129.824.9168.7

There were no assets reclassified from owned assets to assets held under finance leases following asset-based financing arrangements (2013: £1.7 million).

Property, plant and equipment with a net book value of £13.3 million (2013: £14.0 million) has been pledged as security for the secured loans (Note 4.1).