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Mandarin Oriental International Limited - Mandarin Oriental Hotel ...

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Critical Accounting Estimates and Judgements<br />

Estimates and judgements used in preparing the financial statements are continually evaluated and are based on<br />

historical experience and other factors, including expectations of future events that are believed to be reasonable.<br />

The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and<br />

assumptions that have a significant effect on the carrying amounts of assets and liabilities are discussed below:<br />

i) Impairment of assets<br />

The Group tests annually whether goodwill and other assets that have indefinite useful lives suffered any<br />

impairment. Other assets are reviewed for impairment whenever events or changes in circumstances indicate<br />

that the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset or a cash<br />

generating unit is determined based on the higher of its fair value less cost to sell and its value in use, calculated on<br />

the basis of management’s assumptions and estimates. Changing the key assumptions, including the discount rates<br />

or the growth rate assumptions in the cash flow projections, could materially affect the value-in-use calculations.<br />

In determining when an investment is other-than-temporarily impaired, significant judgement is required. In<br />

making this judgement, the Group evaluates, among other factors, the duration and extent to which the fair value<br />

of an investment is less than its cost; and the financial health of and near-term business outlook for the investee,<br />

including factors such as industry and sector performance, changes in technology and operational and financing<br />

cash flow.<br />

ii) Property valuation<br />

In arriving at the fair value of the properties, which is determined by using the income capitalization approach for<br />

existing use basis, the independent valuers have to make assumptions that are mainly based on market conditions<br />

existing at the balance sheet date and appropriate capitalization rates. Should these assumptions and estimates<br />

change, or not be met, the valuation as adopted in the financial statements will be affected.<br />

iii) Tangible fixed assets and depreciation<br />

Freehold land and buildings, and the building component of owner-occupied leasehold properties are valued every<br />

three years by independent valuers. In the intervening years the Group reviews the carrying values and adjustment<br />

is made where there has been a material change. In arriving at the valuation of land and buildings, assumptions<br />

and economic estimates have to be made.<br />

Management determines the estimated useful lives and related depreciation charges for the Group’s tangible<br />

fixed assets. Management will revise the depreciation charge where useful lives are different to those previously<br />

estimated, or it will write-off or write-down technically obsolete or non-strategic assets that have been abandoned<br />

or sold.<br />

iv) Income taxes<br />

The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining<br />

the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax<br />

determination is uncertain during the ordinary course of business. Where the final tax outcome of these matters is<br />

different from the amounts that were initially recorded, such differences will impact the income tax and deferred<br />

tax provisions in the period in which such determination is made.<br />

Recognition of deferred tax assets, which principally relate to tax losses, depends on the management’s expectation<br />

of future taxable profit that will be available against which the tax losses can be utilized. The outcome of their<br />

actual utilization may be different.<br />

44 <strong>Mandarin</strong> <strong>Oriental</strong> <strong>International</strong> <strong>Limited</strong>

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