The Group is often required to make estimates and assumptions regarding the future. The estimates will, by definition, rarely equal the actual results achieved. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below. Estimates and judgements are continually re-assessed and are based on historical experience as well as other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Depreciation, amortisation rates and residual values

The Group depreciates or amortises its assets over their estimated useful lives, as more fully described in the accounting policies for property, plant and equipment and intangible assets. The estimation of the useful lives of assets is based on historic performance as well as expectations about future use and therefore requires a significant degree of judgement to be applied by management. The actual lives of these assets can vary depending on a variety of factors, including technological innovation, product life cycles and maintenance programmes.

Significant judgement is applied by management when determining the residual values for intangible assets and property, plant and equipment. In the event of contractual obligations in terms of which a termination consideration is payable to the Group, management will apply a residual value to the intangible asset. When determining the residual value for property, plant and equipment, the following factors are taken into account:

• external residual value information (if applicable); and
• internal technical assessments for complex plant and machinery.

Refer to notes 1 and note 3 of the Group financial statements, and notes 1 and note 2 of the Company financial statements.

Indefinite useful life intangible assets

Judgement is applied when assessing whether an intangible asset has a finite or an indefinite useful life.

Significant judgement is needed by management when determining the classification of intangible assets as indefinite useful life assets. The following factors are taken into account when this classification is made:

• the ability to use the asset efficiently. Historical product sales, volume and profitability trends as well as the expected uses for the asset, further evident from budgets, future growth and plans to invest in each of the assets over the long term are taken into account when this is being assessed;
• estimates of useful lives of similar assets – historical trends, market sentiment and/or the impact of any competitive activity will be taken into account;
• the strategy (2010 budget, specific marketing plans, specific enhancement plans and the identification of new markets) for obtaining maximum economic benefit from the asset;
• the stability of the industry and economy in which the asset will be deployed;
• expected actions by competitors and potential competitors;
• the willingness and ability of the entity to commit resources to maintain the performance of the asset;
• the period of the entity’s control over the asset and any legal or other restriction on its ability to use the asset;
• redundancy of a similar medication/device due to changes in market preferences; and
• development of new drugs treating the same disease.

Refer to notes 3 of the Group financial statements and note 2 of the Company financial statements.

Impairment of assets

Property, plant and equipment, goodwill and intangible assets are assessed for impairment at least on an annual basis, as more fully described in the accounting policy in respect of impairment and note 39 of the Group financial statements. The future cash flows are assessed, taking into account forecast market conditions and the expected lives of these assets. The present value of these cash flows is compared to the current net asset value.

Refer to notes 1, note 2 and note 3 of the Group financial statements and notes 1 and note 2 of the Company financial statements.

Valuation of derivative financial instruments

The valuation of derivative financial instruments is based on the market situation at year-end. The net market value of all forward exchange contracts at year-end was calculated by comparing the forward exchange contracted rates to the equivalent yearend market foreign exchange rates. The present value of these net market values were then discounted using the appropriate currency specific discount curve. The fair value of interest rate swaps and cross currency swaps is calculated as the present value of estimated future cash flows. The value of these derivative instruments fluctuates on a daily basis and the actual amounts realised may differ materially from the value at which they are reflected on the statement of financial position.

Refer to notes 10 and note 23 of the Group financial statements.

Allowance account for losses

The Group insures private market customers where possible and provision is made for the uninsured balance of long outstanding trade receivables where it considers the recoverability to be doubtful.

A significant degree of judgement is applied by management when considering whether a trade receivable is recoverable or not.

The following factors are taken into account when considering whether a trade receivable is impaired:

• default of payments;
• history of the specific customer with the Group;
• indications of financial difficulties of the specific customer;
• credit terms specific to the customer; and
• general economic conditions.

Refer to note 9 of the Group financial statements.

Calculation of IFRS 2 charge

The valuation of the share-based payment expense requires a significant degree of judgement to be applied by management. The calculation of the share-based payment expense in respect of share options and share appreciation rights is based on the valuation of instruments at grant date, determined with the use of the binomial model. This model requires the use of several assumptions, among which the expected volatility of the Aspen share price, expected dividend yield and assumptions regarding percentages of instruments expected to vest. These assumptions are reviewed on an annual basis to take account of changes in circumstances.

Refer to note 14 of the Group financial statements.

Recognition of deferred tax assets in respect of assessed losses

Deferred tax assets have been recognised for the carry forward amount of unused tax losses relating to the Group’s operations where, among other things, tax losses can be carried forward indefinitely and there is evidence that it is probable that sufficient taxable profits will be available in the future to utilise all tax losses carried forward. Deferred tax assets are not recognised for carry forward of unused tax losses when it cannot be demonstrated that it is probable that taxable profits will be available against which the deductable temporary difference can be utilised.

The likelihood of a deferred tax asset being recognised is based on the future profitability of the underlying business. In determining whether a business will have future taxable profits to utilise against assessed losses, management will take into account budgets as well as updated forecasts for future periods.

Refer to note 7 of the Group financial statements and note 6 of the Company financial statements.

Determination of net realisable value of inventories

Net realisable value is the estimate of the selling price of inventories in the ordinary course of business, less the costs of completion and applicable variable selling expenses. Management is required to exercise considerable judgement in the determination of this estimate, specifically relating to the forecasting of demand.

Management is also required to exercise significant judgement in estimating the provision for obsolete stock. Such judgement would take into account the following:

• change in technology;
• regulatory requirements; and
• stock nearing expiry dates.

Refer to note 8 of the Group financial statements.

Fair value determination in business combinations

IFRS 3 requires all assets, liabilities and contingent liabilities to be measured at fair value when accounting for business combinations. Aspen makes use of various valuation methodologies in determining these fair values, including the use of reputable independent valuers. Valuations are inherently subjective, and require the use of judgement. Judgement is applied in determining the allocation of goodwill to different CGU’s. The allocation is done based on the expected benefit arising from synergies due to the business combinations.

Initial accounting for business combination determined provisionally

The initial accounting for the acquisitions in the current year were only determined provisionally by the time of the publication of the Group results for 2009.

Refer to note 37 of the Group financial statements.

Determination of contingent consideration in respect of deferred-payables and deferred-receivables

This relates to amounts that are only to be settled in the future based on the underlying contractual obligations. Management is required to exercise considerable judgement in determining the estimate of the amount payable or receivable, specifically relating to the forecasting of future financial information as well as determining an appropriate discount rate.

Refer to notes 9 and note 18 of the Group financial statements.

Determination of average translation rates

Income and expenditure transactions are translated using the average rate of exchange for the year. Management considers the average rate to approximate the actual rates prevailing on the dates on which these transactions occur.

Fair value determination

The carrying values of financial assets and liabilities with a maturity of less than one year are assumed to approximate their fair values.