VI Critical accounting policies

VI Critical accounting policies

(a) Property, plant, and equipment

Property, plant and equipment is recorded at fair value on acquisition less accumulated depreciation and any recognised impairment loss. Cost includes professional fees and, for assets constructed by the Group, any related works to the extent that these are directly attributable to the acquisition or construction of the asset. Amounts incurred in connection with capital projects that are not directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended (which the Group refers to as ‘commissioning costs’ and which include expenses such as initial operating losses incurred while technical deficiencies on new plant are rectified and incremental operating costs that are incurred while the new plant is operating at less than full capacity) are written off to profit and loss as incurred. Advances paid for acquisition or construction of an item of property, plant and equipment are initially recognised as capital advance and transferred to asset under construction when transfer of risk and reward of the asset takes place and an identifiable asset is created. Assets in the course of construction are depreciated from the date on which they are ready for their intended use.

The gain or loss arising on disposal of an asset is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognised in profit and loss.

Included in property, plant and equipment are loose plant and tools which are stated at cost less amounts written off related to their expected useful lives and estimated scrap value and also spares, against which impairment provisions are made where necessary to cover slow moving and obsolete items.

Subsequent costs are included in the carrying value of an asset when it is probable that additional future economic benefits will flow to the Group and the cost of the item can be measured reliably. All other repairs and renewals are charged to profit and loss as incurred.

(b) Depreciation, amortisation and impairment of property, plant and equipment and other intangible assets (including goodwill)

Depreciation or amortisation is provided to write off, on a straight-line basis, the cost of property, plant and equipment and other intangible assets, including right-of- use assets, to their residual value. These charges are commenced from the dates the assets are available for their intended use and are spread over their estimated useful economic lives or, in the case of leased assets, over the lease period if shorter.

Useful lives: the estimated useful lives of assets and residual values are reviewed regularly and, when necessary, revised. Accelerated depreciation or amortisation is provided where an asset is expected to become obsolete before the end of its normal useful life or if events or changes in circumstances indicate that an impairment loss needs to be recognised, as discussed below. No further charges are provided in respect of assets that are fully written down but are still in use.

The estimated useful lives for the main categories of property, plant and equipment and other intangible assets are:

At each reporting period end, the Group reviews the carrying amounts of its property, plant, and equipment and other intangible assets to determine whether there is any indication that the carrying amount of those assets may not be recoverable through continuing use.

If any such indication exists, the recoverable amount of the asset is reviewed to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. Other intangible assets (including goodwill) with indefinite useful lives are tested for impairment annually and whenever there is an indication that the asset may be impaired.

Impairment: assessments are performed using either a value in use (“VIU”) or a fair value less costs of disposal (“FVLCD”) methodology, in accordance with IAS 36. The choice of methodology reflects the nature of the asset or cash‑generating unit and the extent to which recoverable amount is best reflected by entity‑specific cash flows or by a market‑participant perspective. Both VIU and FVLCD calculations incorporate assumptions that are relevant to TSN’s decarbonisation strategy, regulatory environment and expected transition pathways, to the extent required under the applicable measurement basis.

The key assumptions applied represent management’s best estimate, at the reporting date, of the most likely impact of decarbonisation based on information currently available. However, these assumptions are subject to change over time as regulatory requirements, transition pathways, market conditions or other relevant factors evolve. Such changes could result in different value in use or fair value less costs of disposal calculations in future periods and may affect the outcome of impairment assessments.

VIU calculations are based on entity‑specific future cash flows expected to arise from the continuing use of the assets in their current condition. These cash flows exclude the effects of future restructurings or capital expenditure that are not yet committed at the reporting date. VIU cash flows are discounted to their present value using a pre‑tax discount rate based upon the Group’s long term weighted average cost of capital (‘WACC’).

FVLCD calculations adopt a market‑participant perspective and estimate the price that would be received to sell the asset or CGU in an orderly transaction, less costs of disposal. FVLCD cash flows are discounted using a post‑tax discount rate, based upon the Group’s long term weighted average cost of capital (‘WACC’), which also recognises the comparative WACCs of its European peers, with appropriate adjustments for risks associated with the relevant units.

If the recoverable amount of an asset (or CGU) is estimated to be lower than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

Where an impairment loss recognised in prior periods subsequently reverses, the carrying amount of the asset (or CGU) 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 (or CGU) in prior years. A reversal of an impairment loss is recognised as income immediately. Impairment losses recognised on goodwill are not subject to subsequent reversal.

(c) Taxation

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

Deferred tax payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences. In contrast, deferred tax assets are only recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Liabilities are not recognised for taxable temporary differences arising on investments in subsidiaries, joint ventures and associates where the Group is able to control the reversal of the temporary difference, and it is probable that the temporary difference will not reverse in the foreseeable future.

The tax effects of income tax losses available for carry-forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised and are reflected as a Non-current tax asset.

To evaluate the deferred tax position, an analysis is made of the expected future taxable profits. The key assumptions of this analysis are aligned with those used for the impairment assessments. These assumptions represent management’s best estimate, at the reporting date, of the most likely impact of decarbonisation based on information currently available. However, these assumptions are subject to change over time as regulatory requirements, transition pathways, market conditions or other relevant factors evolve. Such changes could result in a different level of available future taxable profits and consequently may affect the resulting value of the deferred tax asset.

Both current and deferred tax items are calculated using the tax rates that are expected to apply in the period when the liability is settled, or the asset is realised. This means using tax rates that have been enacted or substantially enacted by the end of the reporting period. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

Deferred tax assets and liabilities are offset to the extent that they relate to taxes levied by the same tax authority, and they are in the same taxable entity, or a group of taxable entities where the tax losses of one entity are used to offset the taxable profits of another and there are legally enforceable rights to set off current tax assets and current tax liabilities within that jurisdiction.

(d) Retirement benefit costs

The group operates a number of defined benefit and a number of defined contribution pension plans for its employees. Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due.

For defined benefit retirement schemes the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each reporting period end. The Group applies IAS 19 ‘Employee Benefits’ to recognise all actuarial gains and losses directly within retained earnings, presenting those arising in anyone reporting period as part of the relevant statement of comprehensive income.

In applying IAS 19, in relation to retirement benefits costs, the current service cost and net interest cost have been treated as a net expense within employment costs.

Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested.

The retirement benefit liability recognised in the balance sheet represents the fair value of scheme assets less the present value of the defined benefit obligation as adjusted for unrecognised past service cost. Any asset resulting from this calculation is limited to unrecognised past service cost, plus the present value of available refunds and reductions in future contributions to the plan.

(e) Provisions

Provisions for rationalisation and related measures, environmental remediation and legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. This involves a series of management judgements and estimates that are based on past experience of similar events and third party advice where applicable. Where appropriate and relevant those provisions are discounted to take into consideration the time value of money.

In particular, redundancy provisions are made where the plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been made at the end of the reporting year. These provisions also include charges for any termination costs arising from enhancement of retirement or other post-employment benefits for those employees affected by these plans.

Provisions are also created for long term employee benefits that depend on the length of service, such as long service and sabbatical awards, disability benefits and long-term compensated absences such as sick leave. The amount recognised as a liability is the present value of benefit obligations at the end of the reporting period, and all movements in the provision (including actuarial gains and losses or past service costs) are recognised immediately within profit and loss.

TSN participates in the EU Emissions Trading Scheme, initially measuring any rights received or purchased at cost, and recognises a liability in relation to carbon dioxide allowances if there is any anticipated shortfall in the level of allowances received or purchased when compared with actual emissions in each period. Any surplus is only recognised once it is realised in the form of an external sale. Further information can be found in note 8.