3.4 Working capital

Accounting policies

Inventories

Inventories comprise goods held for resale, fuel and other consumable goods made up principally of spares. Inventories are valued at the lower of cost and net realisable value. Goods held for resale and consumables are initially valued on a current cost basis and adjustments are made at the financial period end to bring this to an average cost basis. Fuel stocks are valued at calculated average cost. Costs include all direct expenditure and other appropriate attributable costs incurred in bringing inventories to their present location and condition.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Group's loans and receivables comprise "Trade and other receivables", "Short-term investment" and "Cash and cash equivalents" in the balance sheet.

Trade and other receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within administrative expenses. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against administrative expenses in the income statement.

Other receivables are non-interest bearing and are recognised initially at fair value, and subsequently at amortised cost, reduced by appropriate allowances for estimated irrecoverable amounts.

Short-term investments

Short-term investments comprises treasury deposits with a maturity of greater than three months at balance sheet date.

Cash and cash equivalents

Cash and cash equivalents comprise cash at bank and in hand, demand deposits with banks, short-term deposits with a maturity of three months or less at the balance sheet date and bank overdrafts. Bank overdrafts are repayable on demand and form an integral part of the Group's cash management. They are therefore included as a component of cash and cash equivalents.

Financial liabilities and equity instruments

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that gives a residual interest in the assets of the Group after deducting all of its liabilities.

Trade and other payables

Trade and other payables are initially recognised at fair value and subsequently at amortised cost, using the effective interest rate method.

3.4.1 Inventories


27 November
2011
£'000
28 November
2010
£'000
Goods for resale 12,391 11,113
Consumables 1,919 1,367

14,310 12,480
Write down of inventories 5,045 3,652

No security has been granted over inventories.

3.4.2 Trade and other receivables


Notes27 November
2011
£'000
28 November
2010
£'000
Trade receivables
12,142 7,190
Less: provision for impairment of trade receivables 4.5.2 (270) (234)
Net trade receivables
11,872 6,956
Other receivables
19,112 7,260
Prepayments
6,264 3,634
Accrued income
637 719


37,885 18,569

No security has been granted over trade and other receivables.

Included in other receivables is £9.8 million (2010: £5.4 million) due from suppliers in relation to supplier funded promotional activity.

The ageing analysis of trade and other receivables (excluding prepayments), including the provision for impairment, is set out below:

27 November 201128 November 2010
Gross
£'000
Impairment
£'000
Gross
£'000
Impairment
£'000
Not past due 30,224 13,222
Past due 0–3 months 1,459 (90) 1,681 (96)
Past due 3–6 months 118 (92) 192 (86)
Past due over 6 months 90 (88) 74 (52)
31,891 (270) 15,169 (234)

The provisions account for trade receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point, the amounts considered irrecoverable are written off against trade receivables directly. Impairment losses are included within administrative expenses in the income statement.

Trade receivables that were past due but not impaired amounted to £1.4 million (2010: £1.7 million) and relate to a number of suppliers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:


27 November
2011
£'000
28 November
2010
£'000
Past due 0–3 months 1,369 1,585
Past due 3–6 months 26 106
Past due over 6 months 2 22

1,397 1,713

3.4.3 Short-term investment


27 November
2011
£'000
28 November 2010
£'000
Treasury deposit 30,000

The short-term investment relates to a £30 million treasury deposit which matured on 26 July 2011.

3.4.4 Cash and cash equivalents


27 November
2011
£'000
28 November
2010
£'000
Cash at bank and in hand 92,102 124,780
Bank overdraft (141)

92,102 124,639

In January 2011, the Group cancelled the bank overdraft facility of Ocado Limited and replaced it with a Group composite account facility with a gross limit of £5 million and net limit of £nil.

Cash and cash equivalent balances of the Group do not include treasury deposits with maturity dates of over three months. In the prior period, a treasury deposit of £30 million held by the Group was classified as a short-term investment.

£0.6 million of the Group's cash and cash equivalents are held by the Group's captive insurance company to maintain its solvency requirements. Therefore, these funds are deemed to be restricted and are not available to circulate within the Group on demand.

3.4.5 Trade and other payables


27 November
2011
£'000
28 November
2010
£'000
Trade payables 50,771 34,645
Taxation and social security 4,361 3,851
Accruals 17,774 14,801
Deferred income 2,649 2,194

75,555 55,491

Deferred income represents the value of delivery income received under the "Ocado Delivery Pass" scheme allocated to future periods, as well as media income from suppliers which relate to future periods.