Financial statements Accounting Policies continued For the 52 weeks ended 26 June 2021 Lease liabilities Financial assets with embedded derivatives are considered in At the commencement date of the lease, the Group their entirety when determining whether their cash flows are recognises lease liabilities measured at the present value of solely payment of principal and interest. the lease payments to be made over the lease term. Lease payments include fixed payments less any lease incentives Subsequent measurement of debt instruments depends receivable and variable lease payments that depend on on the Group’s business model for managing the asset and an index or rate. Any variable lease payments that do not the cash flow characteristics o tfhe asseTt. here are two depend on an index or rate are recognised as an expense in measurement categories into which the Group classifies its the period in which the event or condition that triggers the debt instruments: payment occurs. • Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent In calculating the present value of lease payments, the solely payments of principal and interest are measured at Group uses its incremental borrowing rate at the lease amortised cost. Interest income from these financial assets commencement date if the interest rate implicit in the lease is included in finance income using the effective interest is not readily determinable. The carrying amount of lease rate method. Any gain or loss arising on derecognition is liabilities is remeasured if there is a modification, a change recognised directly in the Consolidated Income Statement in the lease term or a change in the fixed lease payments. and presented in other gains/(losses) together with foreign Interest charges are included in finance costs in the exchange gains and losses. Consolidated Income Statement. • FVPL: All other financial assets that do not meet the criteria Short-term leases and leases of low-value assets for amortised cost are measured at FVPL, unless the Group has made an irrevocable election at the time of initial The Group has elected not to recognise right-of-use assets recognition to account for the equity investment at fair and lease liabilities for short-term leases of machinery and value through other comprehensive income (FVOCI). A gain equipment that have a lease term of less than 12 months or loss on a debt investment that is subsequently measured and leases of low-value assets (defined as assets with a at FVPL is recogn isedinthe Consolidated Income value, when new, of £5,000 or less). Lease payments relating Statement in the period in which it arises. to short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the Impairment of financial assets lease term. The Group uses a forward-looking approach to assess the Subsequent measurement expected credit losses associated with its debt instruments carried at amortised cost. Theimpairment methodology The lease liability and right-of-use asset is subsequently applied depends on whether there has been a significant remeasured to reflect changes in: increase in credit risk. • The lease term (using a revised discount rate); • The assessment of a purchase option (using a revised Derivatives discount rate); and Derivative financial instruments used are forward foreign • Future lease payments resulting from a change in an index exchange contracts. These are measured at fair value. The or a rate used to determine those payments (using an fair values are determined by reference to the market prices unchanged discount rate). available from the market on which the instruments are traded. Lease modifications may also prompt remeasurement of Certain derivative financial instruments are designated as the lease liability unless they are determined to be separate hedges in line with the Group’s treasury policy. These are leases. instruments that hedge exposure to variability in cash flows The payments related to leases are presented under cash that is attributable to a particular risk associated with a highly flow from financing activities in the Consolidated Cash Flow probable forecasted transaction. Statement. Any gains or losses arising from changes in fair value FINANCIAL INSTRUMENTS derivative financial instruments not designated as hedges are recognised in the Consolidated Income Statement. Recognition and measurement At initial recognition, the Group measures a financial asset The effective portion of changes in the fair value of derivatives at its fair value plus, in the case of a financial asset not at fair that are designated and qualify as cash flow hedges is value through profit or loss (FVPL), transaction costs that recognised in the cash flow hedge reserve within equity. The are directly attributable to the acquisition of the financial gain or loss relating to the ineffective portion is recognised asset. Transaction costs of financial assets carried at FVPL immediately in the Consolidated Income Statement, within are expensed in the Consolidated Income Statement. operating costs. 194 DUNELM GROUP PLCANNUAL REPORT & ACCOUNTS 2021