Consolidated Financial Statements and Consolidated Management ...

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4.4. Intangible assets Intangible assets are considered to be any specifically identifiable non-monetary assets which have been acquired from third parties or developed by the Group. Only those whose cost can be estimated in an objective way and from which future economic profits are expected are recognised. Any assets deemed to contribute indefinitely to the generation of profits are considered to have an indefinite useful life. The remaining intangible assets are considered have a “specific useful life”. Intangible assets with an indefinite useful life are not depreciated and are hence subjected to the “impairment test” at least once a year (see Note 4.3). Intangible assets with a definite useful life are depreciated according to the straight-line method on the basis of the estimated years of useful life of the asset in question. The following are the main items recorded under the “Intangible assets” heading: i) Rights of use: This item reflects the right of operating Hotel NH Plaza de Armas in Seville acquired in 1994, whose depreciation has been caused by consolidated comprehensive profit/loss over the thirty years of the term of the agreement at a growing rate of 4% per year. ii) “Rental agreement premiums” reflect the amounts paid as a condition to obtain certain hotel lease agreements. They are depreciated on a straight-line basis depending on the term of the lease. iii) “Concessions, patents and trademarks” basically reflect the disbursements made by Gran Círculo de Madrid, S.A. for the refurbishment and remodelling works of the building where the Casino de Madrid is located. The depreciation of such works is calculated on a straight-line basis by taking into account the term of the concession for operating and managing the services provided in the building where the Casino de Madrid is located, which finalises on 1 January 2037. iv) “Software applications” include different computer programs acquired by different consolidated companies. These programs are valued at their original cost price and depreciated at 25% per year on a straight-line basis. 4.5. Impairment in the value of tangible and intangible assets excluding goodwill The Group assesses the possible existence of a loss of value each year that would oblige it to reduce the book values of its tangible and intangible assets. A loss is deemed to exist when the recoverable value is less than the book value. The recoverable amount is either the net sale value or the value in use, whichever is higher. The value in use is calculated on the basis of estimated future cash flows discounted at an after tax discount rate that reflects the current market valuation with respect to the cost of money and the specific risks associated with the asset. The discount rates used by NH Hoteles Group for these purposes range between 8.2% and 12%, depending on the different risks associated with each specific asset. If the recoverable amount of an asset is estimated to be lower than its book value, the latter is reduced to the recoverable amount by recognising the corresponding write-off using the consolidated comprehensive profit and loss statement. If an impairment loss is subsequently reversed, the book value of the asset is increased to the limit of the original value at which such asset was booked before the loss of value was recognised. Information on impairment losses detected in the financial year appears in Note 8 of this consolidated annual report. 4.6. Leases The Group generally classifies all leases as operating leases. Only those leases which substantially transfer to the lessee the liabilities and advantages arising from the property and under the terms of which the lessee holds an acquisition option on the asset at the end of the agreement under conditions that could be clearly deemed as more advantageous than market conditions are classified as financial leases. 4.6.1. Operating leases In operating lease transactions, ownership of the leased asset and substantially all the risks and advantages arising from the ownership of the asset remain with the lessor. When the Group acts as the lessor, it recognises the income from operating leases according to the straight-line method in keeping with the terms of the agreements entered into. These assets are depreciated in accordance with the policies adopted for similar own use tangible assets. When the Group acts as the lessee, lease expenses are charged to the consolidated comprehensive profit and loss statement on a straight-line basis. 4.6.2. Financial leases The Group recognises financial leases as assets and liabilities in the consolidated balance sheet at the start of lease term at the market value of the leased asset or at the actual value of the minimum lease instalments, should the latter be lower. The interest rate established in the agreement is used to calculate the actual value of the lease instalments. The cost of assets acquired through financial leasing agreements is booked in the consolidated balance sheet according to the nature of the asset described in the agreement. The financial expenses are distributed over the period of the lease in accordance with a financial criterion. 4.7. Financial instruments 4.7.1 Financial assets Financial assets are recognised in the consolidated balance sheet when they are acquired and initially booked at their fair value. The financial assets held by Group companies are classified as follows: - Marketable financial assets: These include any assets acquired by the companies with the aim of taking short-term advantage of any changes their prices may undergo or any existing differences between their purchase and sale price. This item also includes any financial derivatives that are not considered accounting hedges. - Financial assets at maturity: These are assets subject to a fixed or determinable redemption amount which mature over time. The Group declares its intention and its capacity to keep these in its power from the date of acquisition to their maturity date. 72 REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS
- Outstanding loans and accounts receivable generated by the Company: These are financial assets generated by the companies in exchange for deliveries of cash or the supply of goods or services. Marketable financial assets are valued after their acquisition at fair value, and any changes are included in the net profit/loss for the financial year. Fair value of a financial instrument on a given date is construed as the amount for which it could be bought or sold on that same date by two knowledgeable parties acting freely and prudently under conditions of mutual independence. Financial assets at maturity and accounts receivable issued by the Group are valued at their depreciated cost and any interest accrued is recognised in the consolidated comprehensive profit and loss statement on the basis of their effective interest rate. Depreciated cost is construed as the initial cost minus any charges or depreciation of the principal, taking into account any potential reductions arising from impairment or default. As regards valuation corrections made to trade and other accounts receivable in particular, the criterion used by the Group to calculate the corresponding valuation corrections, if any, generally consists of provisioning for any balances expired at more than 180 days. 4.7.2. Cash and cash equivalents This item of the consolidated balance sheet reflects the position of cash, demand accounts and other highly liquid short-term investments that can be quickly converted into cash and which are not subject to any value change risks. 4.7.3. Financial liabilities Bank loans Any loans received from banking institutions are booked at the amount received, net of any costs incurred in the transaction. They are subsequently valued at depreciated cost. Financial expenses are booked on an accrual basis in the consolidated comprehensive profit and loss statement using the effective interest rate method, and their amount is added to liabilities to the extent to which they are not settled in the period they were produced. Trade creditors and other accounts payable Trade accounts payable are initially booked at fair value and are subsequently valued at depreciated cost using the effective interest rate method. Derivative financial instruments and hedge accounting Derivatives used to hedge against the risks the Group’s operations are exposed to, mainly exchange and interest rate risks, are valued at market value on the date they are contracted. Any subsequent changes in their market value are booked as follows: - Concerning fair value hedges, the differences produced in both the hedging elements as well as in the hedged elements (regarding the kind of risk hedged) are directly recognised in the consolidated comprehensive profit and loss statement. - For cash flow hedges, valuation differences in the effective part of the hedge elements are temporarily booked in the equity item “Equity valuation adjustments” and not recognised as results until the losses or gains of the hedged element are booked in profit or loss or until the hedged element matures. The ineffective part of the hedge is directly entered into the consolidated comprehensive profit and loss statement. Hedge accounting is interrupted when the hedging instrument expires or is sold or finalised or exercised, or when it no longer meets the hedge accounting criteria. At that time, any cumulative gain or loss corresponding to the hedging instrument that has been booked in equity is kept there until the expected transaction is undertaken. When the transaction covered by the hedge is not expected to take place, the net cumulative gains or losses recognised in equity are transferred to the profit or loss for the period. Any changes in the fair value of derivative financial instruments which fail to meet hedge accounting criteria are recognised in the consolidated comprehensive profit and loss statement as they arise. The derivatives involved in other financial instruments or in other important agreements are booked separately as derivatives only when their risks and characteristics are not closely related to those of the important agreement and as long as such important agreements are not valued at fair value through the recognition of any changes occurred to fair value in the consolidated comprehensive profit and loss statement. Valuation techniques and hypotheses that apply to the measurement of fair value The fair values of financial assets and liabilities are determined as follows: • The fair value of financial assets and liabilities under standard terms and conditions which are traded in active liquid markets are based on the prices listed on the market. • The fair value of other financial assets and liabilities (excluding derivatives) is determined in accordance with generally accepted valuation models on the basis of cash flow discounting using the price of observable market transactions and contributor listings of similar instruments. • In order to determine the fair value of interest rate derivates, cash flow discounting is used based on the implicit flow determined by the interest rate curve according to market conditions. In order to determine the fair value of options, the Group uses the Black & Scholes valuation model and its variants, using for this purpose market volatilities for the strike and maturity prices of said options. Any financial instruments valued after their initial recognition at fair value are classified as level 1 to 3 based on the extent to which fair value can be observed: • Level 1: Includes any instruments indexed to listed prices (without adjustment) of identical assets or liabilities in active markets. • Level 2: Includes any instruments indexed to other observable inputs (which are not the listed prices included under Level 1) for assets or liabilities, be it directly (i.e., prices) or indirectly (i.e., derived from prices). • Level 3: Includes any instruments indexed to valuation techniques, which include inputs for assets or liabilities that are not based on observable market data (unobservable inputs). 4.7.4. Equity instruments An equity instrument represents a residual interest in the equity of the Parent Company once all its liabilities are subtracted. Equity instruments issued by the Parent Company are booked in equity for the amount received, net of the issue expenses. REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS 73
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ANNUAL REPORT 2011 CONSOLIDATED FIN
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