31. Selected accounting policies
31.1. Basis of consolidation
i) Subsidiaries
Subsidiaries are entities controlled by the Parent. Control exists when the Parent has the power, directly or indirectly, to govern financial and operating policies. Subsidiaries are consolidated by aggregating the total amount of assets, liabilities, income, expenses and cash flows, after carrying out the adjustments and eliminations relating to intra-Group transactions. The results of subsidiaries acquired during the year are included in the consolidated annual accounts from the date that control commences. Details of subsidiaries and jointly-controlled entities are provided in Appendix I. Net identifiable assets acquired, liabilities and contingent liabilities assumed as part of a business combination are stated at their acquisition date fair value, providing this acquisition took after 1 January 2004, the date of transition to EU-IFRSs.
For business combinations subsequent to that date, any consideration given plus the value assigned to non-controlling interests that is in excess of the net assets acquired and liabilities assumed is recognized as goodwill. Any shortfall determined between the consideration given, the value assigned to non-controlling interests and identifiable net assets acquired is recognized in profit and loss.
Acquisitions of shares in businesses subsequent to gaining control and partial disposals that do not result in a loss of control are recognized as transactions with shareholders in equity.
Non-controlling interests in the consolidated statement of changes in equity are presented separately from the consolidated equity attributable to equity holders of the Parent.
The results and each item of other comprehensive income are allocated to equity attributable to equity holders of the Parent and to non-controlling interests in proportion to their investment, even if this gives rise to a balance receivable from non-controlling interests. Agreements entered into between the Group and non-controlling interests are recognized as a separate transaction.
The share of non-controlling interests shareholders of the equity and results of subsidiaries are presented under “Equity attributable to non-controlling interests” and “Net profit attributable to non-controlling interests”, respectively. Details of subsidiaries and jointly-controlled entities are provided in Appendix I.
ii) Joint ventures
Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement. The consolidated annual accounts include, in each individual caption of the balance sheet and income statement, the Group’s proportionate share in these entities’ assets, liabilities, revenue, expenses and cash flows from the date that joint control commences until the date that joint control ceases to exist.
iii) Harmonization of criteria
Each of the entities included in the consolidated Group prepares its annual accounts and other accounting records in accordance with the accounting policies and legislation applicable in the country of origin. When these accounting criteria and policies are different to those adopted by Inditex in the preparation of its consolidated annual accounts, they have been adjusted in order to present the consolidated annual accounts using homogenous accounting policies.
iv) Intra-Group eliminations
All intra-Group receivables, payables and transactions, and any unrealized gains or losses arising from transactions with third parties, are eliminated in the consolidation process. In the case of jointly controlled entities, receivables, payables, income and expenses between Group companies, and any unrealized gains or losses arising from transactions with third parties, are eliminated in the consolidation process to the extent of the Group’s interest in the entity.
v) Translation of annual accounts denominated in foreign currencies
The Group has applied the exemption relating to accumulated translation differences from IFRS 1 First-time Adoption of International Financial Reporting Standards and, therefore, any translation differences recognized in the consolidated annual accounts generated prior to 1 January 2004 are recorded under reserves. Since that date, the financial statements of entities with a functional currency other than the euro are translated as follows:
- Assets and liabilities are translated to euro at the exchange rates prevailing at the balance sheet date.
- Items that comprise the equity of these entities are translated to euros at historical exchange rates (or, for retained earnings, at the average exchange rates for the year in which they were generated).
- Income and expenses are translated into euros at the exchange rates prevailing on the date on which they were recognized, while average exchange rates are used in the cases in which the application of this simplifying criterion does not generate significant differences.
Differences arising from the application of these exchange rates are included in consolidated equity under “Translation differences”.
However, exchange differences deriving from trade balances payable and receivable and financing operations between group companies, with foreseeable settlement, are recognized in the consolidated income statement for the year.
vi) Annual accounts in hyperinflationary countries
The financial statements of foreign operations in countries considered to have hyperinflationary economies have been adjusted prior to translation to euros to account for the effect of changes in prices.
vii) Companies with a reporting date that differs from that of the Group
Companies with a reporting date which differs from that of the consolidated annual accounts were consolidated with the financial statements at their closing date (31 December 2011, see Appendix I). Significant operations carried out between the reporting date of these subsidiaries and that of the consolidated annual accounts are subject to a temporary unification process.
viii) Changes in the consolidated Group
The following entities were incorporated or acquired by the Group and consolidated for the first time during the year:
| Fashion C. Neuhauser Strabe 33, GmbH | Zara Home Canada, Inc |
|---|---|
| Oysho Macau, Ltd | Zara Home Taiwxan, B.V. |
| Massimo Dutti Magyarorxzág KFT | ITX USA, LLC |
| Massimo Dutti Taiwan, B.V | ITXR Macedonaia Dooel Skopje |
| Massimo Dutti Taiwan, B.V. Taiwan Branch | ITX E-commerce (Shanghai) Co. Ltd |
| Plataforma Cabanillas, S.A. | ITX Financien II, B.V. |
| Pull & Bear Taiwan, B.V. | ITX Canada, Inc. |
| Bershka Taiwan, B.V. | P&B Gmbh |
| Zara Home Japan Corp. | Zara Home Taiwan, B.V. TW Branch |
In 2012 Jema Creaciones Infantiles, S.L. was merged by absorption with Indipunt, S.L.
The inclusions in the consolidated Group referred to above did not have a material impact on the consolidated annual accounts for 2012.
31.2. Accounting policies
Certain standards, amendments and interpretations recently came into force for years beginning on or after 1 January 2012.
It should be noted in this regard that the new legislation with a potential impact on the Group is as follows:
- Amendments to IFRS 7 Financial Instruments.
The application of these amendments did not have a material effect on the Group’s consolidated annual accounts.
At the date of formal preparation of these consolidated annual accounts the following standards and interpretations with a potential impact on the Group had been issued by the IASB and adopted by the European Union, although they were not applied early:
- IFRS 10 Consolidated Financial Statements, mandatorily applicable for annual reporting periods beginning on or after 1 January 2014 under EU-IFRSs
- IFRS 11 Joint Arrangements, mandatorily applicable for annual reporting periods beginning on or after 1 January 2014 under EU-IFRSs
- IFRS 12 Disclosure of Interests in Other Entities, mandatorily applicable for annual reporting periods beginning on or after 1 January 2014 under EU-IFRSs
- Amendments to IAS 12 Income Taxes
The Company’s directors consider that, taking into account the business activities carried on by the Group companies, the future application of the new legislation will not have a material effect on the consolidated annual accounts.
a) Foreign currency translation
Foreign currency transactions are translated to euros using the exchange rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to euros at the exchange rates prevailing at that date. Exchange differences arising on translation are recognized in the income statement as financial results.
Cash flows from transactions in foreign currency are translated into euros in the consolidated cash flow statement at the exchange rates prevailing at the transaction date. The effect of fluctuations in exchange rates on cash and cash equivalents expressed in foreign currencies is presented separately in the consolidated cash flow statement under “Effect of exchange rate fluctuations on cash and cash equivalents”.
b) Property, plant and equipment
Items of property, plant and equipment are stated at cost, including any additional costs incurred until the assets are ready for their intended use, less accumulated depreciation and any impairment losses or write-downs that have to be recognized.
Depreciation is taken on a straight-line basis over the estimated useful lives of the assets.
The estimated average useful lives are as follows:
| Asset description | Useful life |
|---|---|
| Buildings | 25 to 50 years |
| Fixtures, furniture and machinery * | 7 - 13 years |
| Other property, plant and equipment | 4 - 13 years |
The Group reassesses property, plant and equipment residual values, useful lives and depreciation methods at each reporting date. Modifications to initially established criteria are recognized as changes in estimates.
After initial recognition of an asset, only costs that will generate future economic benefits that can be classified as probable and be reliably estimated are capitalized.
Periodic maintenance, upkeep and repair costs are expensed as they are incurred.
c) Rights over leased premises
“Rights over leased premises” mainly comprises the cost of leasehold assignment rights, access premiums or tenancy right waivers paid to the former tenants of commercial premises.
These assets are recognized at cost of acquisition. After initial recognition, they are stated at cost less accumulated amortization and any impairment losses and are amortized over the term of the lease contract, except when, for legal reasons, the rights do not lose value, in which case they are determined to be intangible assets with indefinite useful lives and are therefore systematically tested for impairment.
In order to assess the possible existence of impairment of these assets, the Group uses the procedures described in Note 31.2.g.
d) Other intangible assets
- Intellectual property: intellectual property is charged for the amounts paid for the acquisition of title to or the right to use the related items, or for the expenses incurred in registration of the rights developed by the Group and is amortized on a straight-line basis over a maximum period of ten years.
- Software: software is stated at cost and is amortized on a straight-line basis over a five-year period.
- Industrial designs: these items are reflected at their cost of production, which includes the cost of samples, personnel costs and other directly or indirectly attributable costs, and are amortized on a straight-line basis over an estimated useful life of two years.
The Group reviews the intangible asset residual values, useful lives and amortization methods at the end of each reporting period. Modifications to initially established criteria are recognized, where applicable, as changes in estimates.
e) Financial investments
Marketable securities which represent less than 20% of the share capital of the related investee are stated at cost net of any impairment losses that have to be recognized.
f) Investment property
Investment property is made up of assets held to generate rental income of for capital appreciation or both, and is stated at cost of acquisition less accumulated depreciation and any impairment losses that have to be recognized. Depreciation is calculated on a straight-line basis over the useful lives of the corresponding assets.
Details of the market value of investment property are shown in note 12.
g) Impairment of non-current assets
The Group periodically assesses the possible existence of indications that its non-current assets (including goodwill and intangible assets with indefinite useful lives) might have become impaired in order to determine whether their recoverable amount is lower than their carrying amount (impairment loss). In the case of goodwill and intangible assets with indefinite useful lives the impairment tests are performed at least once a year, or more frequently if there are indications of impairment.
In order to do this, the Group has developed a general, systematic procedure for carrying out these impairment tests based on the monitoring of certain events or circumstances such as the performance of a store, operating decisions regarding the continuity of a particular location, or other circumstances which indicate that the value of an asset may not be recovered in full.
Calculation of recoverable amount
The recoverable amount of assets is the higher of fair value less costs to sell and value in use. Value in use is determined on the basis of the expected future cash flows for the period in which these assets are expected to generate revenue, forecast variations in the amount or distribution of the cash flows over time, the time value of money, the risk premium attached to the risk of uncertainty attached to the asset, and other factors which a market participant would consider in valuing the cash flows from the asset.
The Group uses the budgets and business plans of the various cash-generating units to which the assets are assigned. These budgets and business plans generally encompass a period of between three and five years. The cash flows projected for the period are extrapolated to the period not covered by the aforementioned plans on the basis of the growth forecast for comparable stores.
The discount rate applied is usually a pre-tax measurement based on the risk-free rate for 10-year bonds (or similar instruments, if no 10-year bonds have been issued) issued by the governments of the corresponding countries, adjusted by a risk premium to reflect the increase in the risk of the investment per country and the systematic risk of the Group.
Recoverable amount is determined for each individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. For assets that do not generate cash inflows individually, the recoverable amount is determined for the cash-generating unit (CGU) to which the asset belongs.
Based on the actual management of operations, the Group has defined each of the commercial premises in which it carries out its activities (stores) as basic cash-generating units, although these basic units can be aggregated to concept-country level, or even to all the companies located in the same country. Group assets which are not clearly assignable under this scheme (for example industrial or logistics assets) are treated separately within the context of this general policy according to their specific nature.
Goodwill acquired through a business combination is allocated to the group of basic cash-generating units corresponding to the company acquired, since this is the lowest level at which this goodwill is controlled for internal management purposes.
Reversals of impairment losses
Reversals of impairment losses on non-current assets are recognized with a credit to “Amortization and depreciation” in the consolidated income statement, up to the limit of the carrying amount that the asset would have had, net of depreciation or amortization, had the impairment loss never been recognized, solely in cases in which, once the internal and external factors have been assessed, it can be concluded that the indications of impairment that led to the recognition of the impairment losses have ceased to exist or have been partially reduced.
The reversal of an impairment loss on a cash-generating unit is distributed among its assets, except for goodwill, which is distributed in accordance with its carrying amount and taking into account the limitation set out in the preceding paragraph.
An impairment loss recognized for goodwill must not be reversed in a subsequent period.
h) Trade and other receivables
Trade receivables are initially recognized at fair value. After initial recognition, they are stated at amortized cost in accordance with the effective interest rate method, less any impairment losses recognized.
Impairment losses are recognized on trade receivables when there is objective evidence that the Group will not be able to collect the entire amount owed by the debtor in accordance with the terms of the debt. These losses are calculated as the difference between the carrying amount and the present value of future estimated cash flows discounted at the original interest rate and are recognized in the consolidated income statement.
i) Inventories
Inventories are measured at the lower of acquisition or production cost and net realizable value.
Cost comprises all the costs incurred in acquiring and transforming the inventories.
Transformation costs comprise the costs directly related to the units produced and a systematically calculated portion of indirect, variable and fixed costs incurred during the transformation process.
Cost is calculated on a FIFO basis and includes the cost of materials consumed, labor and manufacturing expenses.
The cost of inventories is adjusted through the caption “Cost of merchandise” in the consolidated income statement when cost exceeds net realizable value. Net realizable value is considered as the following:
- Raw materials and other supplies: replacement cost. However, materials are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost;
- Goods for resale: estimated selling price in the normal course of business;
- Work in progress: the estimated selling price for the corresponding finished products, less estimated costs of completion.
j) Cash and cash equivalents
Cash and cash equivalents include cash on hand and demand deposits at financial institutions. They also include other short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Investments which mature in less than three months from the acquisition date are also included.
In the statement of cash flows, bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents. Bank overdrafts are recognized in the consolidated balance sheet as financial liabilities from bank borrowings.
The Group classifies cash flows relating to interest and dividends paid and received as cash flows used in and obtained from investing and financing activities, respectively.
k) Current financial investments
Current financial investments include bank deposits and investments in investment funds that are not available at short term or that mature at between three and twelve months from acquisition.
The Group classifies cash flows relating to the amounts invested and received as cash flows from investing activities.
l) Employee benefits
Obligations acquired with Group personnel to be settled in the long term are estimated based on the dates on which they vest through the application, where appropriate, of actuarial assumptions. The Group has created a provision to cover the actuarial liability of the estimated portion vested at 31 January 2013.
Personnel expenses accrued during the year are determined based on the best estimate of how far the conditions of payment have been met and the period that has elapsed since the plan started.
Personnel expenses accrued by the beneficiaries of the plans referred to in note 26 to the consolidated annual accounts are recognized with a credit to liability accounts during the period in which the expenses accrue.
m) Provisions
Provisions are recognized in the balance sheet when:
- the Group has a present legal or constructive obligation as result of a past event;
- it is probable that an outflow of economic benefits will be required to settle the obligation; and
- the amount can be reliably estimated.
Provisions are based on the best information available at the date of preparation of the annual accounts and are revised at each balance sheet date.
If it is more likely than not that an outflow of resources will no longer be required to settle the obligation, the provision is reversed. The provision is reversed against the consolidated income statement item where the corresponding expense was recognized.
n) Financial liabilities
Financial liabilities, including trade and other payables, are initially recognized at fair value less any transaction costs that are directly attributable to the issue of the financial liability. After initial recognition, the Group’s financial liabilities are measured at amortized cost using the effective interest method.
o) Derivatives and hedging operations
Financial instruments acquired by the Group to hedge forecast transactions in foreign currencies are initially recognized at fair value plus any transaction costs directly attributable to acquiring the instrument.
Foreign currency hedges relating to forecast transactions are treated as cash flow hedges, and therefore any gains or losses derived from measuring the instrument at fair value which correspond to the effective portion of the hedge are recognized in equity. The ineffective portion is taken to financial income or expenses, as appropriate.
Amounts recognized in equity are taken to income when the forecast transaction takes place with a charge or credit to the account in which it was recognized. Also, gains or losses recognized in equity are reclassified to finance income or expenses when the forecast transaction is not expected to occur. The fair value of the hedges is recognized, depending on whether it is positive or negative, under “Other financial assets” or “Other financial liabilities” in the accompanying consolidated balance sheet.
In order for financial instruments to qualify for hedge accounting, they are initially designated as such and the hedging relationship is documented. Also, the Group verifies initially and periodically over the life of the hedge, using “effectiveness tests” that the hedging relationship remains effective, i.e., that it is prospectively foreseeable that changes in the fair value or cash flows from the hedged item (attributable to the hedged risk) are offset almost completely by changes in the fair value or cash flows of the hedging instrument and that, retrospectively, the gain or loss on the hedge was within a range of 80-125% of the gain or loss on the hedged item. Also, the ineffective portion of the hedging instrument is recognized immediately in the consolidated income statement.
The fair value of the various derivative financial instruments is calculated by discounting the expected cash flows based on the spot and futures market conditions at the calculation date. All the methods used are generally accepted by financial instrument analysts.
p) Revenue recognition
The sale of goods is recognized when the significant risks and rewards of ownership of the goods are transferred.
Sales to franchises are recognized when the aforementioned conditions are met and when revenue can be reliably determined and collection is considered probable.
The Group sells certain assets with the right for the buyers to return the goods. In these cases, the sale of the goods is recognized when the above conditions are met and it is possible to reliably estimate future returns based on experience and other relevant factors. Estimated returns are recognized against revenue and with a credit to the provision for sales returns. The estimated cost of returned goods is recognized as inventories, net of the effect of any reduction in value.
Rental income is recognized on a straight-line basis over the term of the lease.
Revenue from royalties is recognized using the accrual principle based on the substance of the contracts, providing collection is considered probable and the amount can be reliably estimated.
q) Leases
Lease contracts in which the significant risks and rewards inherent to ownership of the asset are substantially transferred to third parties are classified as finance leases, and are otherwise recorded as operating leases.
Assets acquired through a finance lease are recognized as non-current assets at the lower of the present value of the future lease payment and the fair value of the leased asset, while the corresponding debt with the lessor is recognized as a liability. Lease payments are apportioned between the reduction of the outstanding liability and the finance charge, which is recorded as a financial expense during the year.
In the case of operating leases, non-contingent or fixed rent payments are charged to the income statement on a straight-line basis over the term of the lease. Contingent rent is recognized in the period in which payment is probable, as are variable rent increases linked to the consumer price index.
Incentives received from shopping center developers or owners of commercial premises are recognized as non-current liabilities under “Other non-current liabilities – Lease incentives” and are booked as a reduction in rental expense under “Other operating expenses” on a straight-line basis over the term of the respective lease contracts.
r) Financial income and expenses
Finance income and expenses are recognized on an accrual basis using the effective interest method. Dividend income is recognized when the right to receive payment is established.
s) Income taxes
The income tax expense for the year comprises current tax and deferred tax. Income tax comprises current and deferred tax and is recognized in the income statement and included in the determination of net profit or loss for the year, except to the extent that it relates to a transaction which has been recognized in equity in the same or previous years, in which case it is charged or credited to equity, or to a business combination.
Current tax is the tax expected to be paid or recovered in the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable or recoverable in respect of previous years.
Deferred tax is calculated using the balance sheet liability method, which provides for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Deferred tax liabilities comprise income tax amounts payable in the future on account of taxable temporary differences while deferred tax assets are amounts recoverable due to the existence of deductible temporary differences, tax loss or tax credit carryforwards.
The Group recognizes deferred tax assets and liabilities derived from temporary differences, except those relating to the initial recognition of an asset or liability in a transaction which is not a business combination and which did not affect either accounting or taxable profit (losses), or in the case of deferred taxes, where temporary differences are related to the initial recognition of goodwill. Deferred tax assets and liabilities are also recognized for temporary differences relating to investments in subsidiaries, except when the Parent can control their reversal and the temporary differences will probably not reverse in the foreseeable future.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the years when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantially enacted by the balance sheet date and reflecting the tax consequences that would follow from the manner in which the Group expects to recover or settle the carrying amount of its assets or liabilities.
Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred tax assets, whether recognized or not, are reviewed at each balance sheet date.
The Group only offsets current tax assets and liabilities if it has a legally enforceable right to set off the recognized amounts and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
Deferred tax assets and liabilities are recognized in the consolidated balance sheet under non-current assets or liabilities, irrespective of the expected date of realization or settlement.
t) Current and non-current assets and liabilities
The Group classifies assets and liabilities as current and non-current. Assets and liabilities are classified as current when they are expected to be realized or settled within twelve months of the balance sheet date, and are otherwise classified as non-current.
Assets and liabilities are not netted unless there are specific requirements to the contrary or a standard or interpretation so permits.
u) Treasury shares
Treasury shares acquired by the Group have been presented separately at cost as a reduction in equity in the consolidated balance sheet, and no gains or losses have been recorded as a result of transactions carried out with treasury shares.
Costs incurred in treasury share transactions are recorded as a reduction in equity, after consideration of any tax effect.
