Interim Results - Part 2
Kingfisher PLC
15 September 2005
KINGFISHER PLC
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
For the half year ended 30 July 2005
Half year ended Half year ended Year ended
30 July 2005 31 July 2004 29 January 2005
£ millions Notes
Revenue 2 4,079.4 3,947.9 7,649.6
Cost of sales (2,635.5) (2,501.3) (4,785.7)
Gross profit 1,443.9 1,446.6 2,863.9
Selling and distribution expenses (992.0) (932.3) (1,833.0)
Administrative expenses (198.1) (186.3) (370.7)
Other income 3 10.7 8.5 21.0
Other expenses 3 - - (17.7)
Share of post tax results of joint ventures and 5.5 5.9 14.6
associates
Operating profit 2 270.0 342.4 678.1
Analysed as:
Retail profit 289.1 367.3 742.0
Central costs (16.0) (18.6) (37.3)
Exceptional items 3 1.9 - (13.7)
Share of joint venture and associate interest and (5.0) (6.3) (12.9)
taxation
Financing
Total finance costs (23.2) (21.2) (43.9)
Total finance income 9.4 8.1 15.2
(Loss)/gain on retranslation of intercompany balances (5.4) (41.7) 12.0
Net finance costs 4 (19.2) (54.8) (16.7)
Profit before taxation 250.8 287.6 661.4
Income tax expense 6 (85.1) (94.1) (205.2)
Profit for the period 165.7 193.5 456.2
Attributable to:
Equity shareholders of parent company 165.5 193.6 455.7
Minority interest 0.2 (0.1) 0.5
165.7 193.5 456.2
Earnings per share (pence) 7
Basic 7.1 8.4 19.7
Diluted 7.1 8.3 19.6
All results relate to continuing operations.
Adjusted earnings per share information is provided in note 7.
KINGFISHER PLC
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE (UNAUDITED)
For the half year ended 30 July 2005
£ millions Notes Half year ended Half year ended Year ended
30 July 2005 31 July 2004 29 January 2005
Actuarial gains/(losses) on defined benefit pension 11 7.3 (48.9) (79.3)
schemes
Currency translation differences 11 10.0 51.5 47.0
Hedging items
- First time adoption of IAS39 11 (3.9) - -
- Current period movement 11 11.5 - -
Tax on items taken directly to equity 11 (5.8) 10.6 29.1
Net income/(loss) recognised directly in equity 19.1 13.2 (3.2)
Profit for the financial period 165.7 193.5 456.2
Total recognised income and expense for the period 184.8 206.7 453.0
Attributable to:
Equity holders of the parent 184.5 206.8 452.9
Minority interests 0.3 (0.1) 0.1
184.8 206.7 453.0
KINGFISHER PLC
CONSOLIDATED BALANCE SHEET (UNAUDITED)
As at 30 July 2005
£ millions Notes 30 July 2005 31 July 2004 29 January 2005
Non-current assets
Intangible assets 10 2,624.9 2,528.7 2,533.0
Property, plant and equipment 3,262.4 2,819.3 3,031.8
Investment property 20.3 19.0 18.7
Investments accounted for using equity method 184.3 170.9 176.6
Available for sale financial assets - 0.2 -
Other receivables 68.5 25.7 26.6
6,160.4 5,563.8 5,786.7
Current assets
Inventories 1,421.8 1,216.7 1,320.0
Trade and other receivables 442.0 412.7 453.9
Income tax 7.2 - 8.8
Cash and cash equivalents 129.9 327.1 162.1
2,000.9 1,956.5 1,944.8
Total assets 8,161.3 7,520.3 7,731.5
Current liabilities
Short-term borrowings (364.9) (220.9) (184.9)
Trade and other payables (1,864.1) (1,727.7) (1,696.2)
Current tax liabilities (70.3) (102.5) (113.6)
(2,299.3) (2,051.1) (1,994.7)
Net current liabilities (298.4) (94.6) (49.9)
Total assets less current liabilities 5,862.0 5,469.2 5,736.8
Non-current liabilities
Long-term borrowings (859.0) (775.6) (818.3)
Other payables (8.8) (17.1) (8.6)
Deferred income tax liabilities (223.0) (190.8) (192.7)
Post employment benefits (322.3) (297.3) (325.7)
(1,413.1) (1,280.8) (1,345.3)
Total liabilities (3,712.4) (3,331.9) (3,340.0)
Net assets 4,448.9 4,188.4 4,391.5
Capital and reserves
Share capital 2,442.9 2,401.2 2,434.9
Other reserves 11 1,982.3 1,784.4 1,953.9
Minority interests 23.7 2.8 2.7
Total equity 4,448.9 4,188.4 4,391.5
Approved by the Board
Duncan Tatton-Brown
Director
14 September 2005
KINGFISHER PLC
CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)
For the half year ended 30 July 2005
Half year ended Half year ended Year ended
£ millions Notes 30 July 2005 31 July 2004 29 January 2005
Net cash flows from operating activities 8 339.7 475.9 531.5
Cash flows from investing activities
Purchase of subsidiary and business undertakings 10 (152.1) - (0.4)
Sale of subsidiary and business undertakings - 6.5 10.4
Purchase of associates and joint ventures (2.2) - (3.4)
Sale of associates and joint ventures - - 4.8
Payments to acquire property, plant and equipment (256.5) (207.7) (413.3)
and intangible assets
Receipts from sale of property, plant and equipment 17.2 2.1 20.9
and intangible assets
Sale of available for sale financial assets - - 0.4
Dividends received from joint ventures and - - 2.3
associates
Net cash used in investing activities (393.6) (199.1) (378.3)
Cash flows from financing activities
Interest paid (4.5) (12.2) (37.5)
Interest element of finance lease (3.0) (3.0) (5.9)
Interest received 9.7 16.5 25.2
Exceptional finance receipt - 23.9 23.9
Proceeds from issue of share capital 3.3 7.7 18.0
Receipts from sale of own shares 3.0 1.4 14.0
Increase in loans 201.2 15.7 94.8
Capital element of finance lease rental payments (5.6) (5.1) (11.3)
Receipts from sale of current investments - 9.4 7.9
Dividends paid to Group shareholders (157.9) (136.1) (204.8)
Dividends paid to minority interests - - (0.7)
Net cash generated/(used) in financing activities 46.2 (81.8) (76.4)
Net (decrease)/increase in cash and cash equivalents (7.7) 195.0 76.8
Cash and cash equivalents at beginning of period 105.9 28.1 28.1
Currency translation differences 1.7 (2.8) 1.0
Cash and cash equivalents at end of period 99.9 220.3 105.9
For the purposes of the cash flow statement, cash and cash equivalents are
included net of overdrafts repayable on demand. These overdrafts are excluded
from the definition of cash and cash equivalents disclosed on the balance sheet.
KINGFISHER PLC
NOTES TO THE INTERIM FINANCIAL REPORT (UNAUDITED)
For the half year ended 30 July 2005
1. General information
a) Basis of Preparation
The next annual financial statements of the Group will be prepared in accordance
with International Financial Reporting Standards (IFRS) as adopted for use in
the EU, whereas the Group has previously reported under UK GAAP. The interim
financial report has been prepared in accordance with the accounting policies
which the Group intends to adopt for the year ending 28 January 2006, which will
be in accordance with IFRS and with those parts of the Companies Act 1985
applicable to companies reporting under IFRS. There is, however, a possibility
that the directors may determine that some changes are necessary when preparing
the full annual financial statements for the first time in accordance with IFRS,
in particular as the IFRS standards and IFRIC interpretations that will be
applicable and adopted for use in the European Union at 28 January 2006 are not
known with certainty at the time of preparing this interim financial
information.
In particular, the Directors have assumed that the European Commission (EC) will
endorse the amendment to IAS 19 'Employee Benefits - Actuarial Gains and Losses,
Group Plans and Disclosures' issued by the IASB in December 2004. The EC's
Accounting Regulatory Committee has to date only recommended endorsement of this
amendment to IAS 19, but the Directors have assumed that it will be adopted for
use in the financial statements for the year ending 28 January 2006.
An amendment has been proposed to IAS 21 'The effects of Changes to Foreign
Exchange Rates' which may become effective before the end of the year. IAS 21
requires exchange differences arising on a monetary item that forms part of
parent company's net investment in a foreign operation be recognised in equity.
The application of this requirement is restricted to funding transacted directly
between the parent and the foreign operation. The proposed amendment clarifies
that exchange differences arising on a monetary item that forms part of a
reporting entity's net investment in a foreign operation should be recognised in
equity irrespective of whether it is the parent or a fellow subsidiary that
enters into the transaction with the foreign operation. If this amendment is
approved by the EU and can be adopted for the financial year ending 28 January
2006, the gains and losses on intercompany balances currently recognised in the
income statement of this interim financial report would no longer be recognised
in the income statement but rather directly in reserves which would offset the
equal and opposite amount in reserve movements on consolidation.
The disclosures required by IFRS 1 concerning the transition from UK GAAP to
IFRS are provided in note 13.
The Group has taken the option to defer the implementation of the standards IAS
32 'Financial Instruments: Disclosure and Presentation' and IAS 39 'Financial
Instruments: Recognition and Measurement' until the financial year ending 28
January 2006. In accordance with IFRS 1 paragraph 36A comparative information
for financial instruments for the half year ended 31 July 2004 and the year
ended 29 January 2005 has been prepared in accordance with UK GAAP. Details of
the Group's accounting policies, as defined under UK GAAP, can be found in the
accounting policies note of the annual report and accounts for the year ended 29
January 2005. Details of the accounting policy change are provided in note 14.
Kingfisher's significant accounting policies under IFRS are provided as
supplementary information in note 15.
b) Comparatives
The half year results are unaudited and were approved by the Board of Directors
on 14 September 2005. The results for the year ended 29 January 2005 included
in this report do not constitute statutory accounts for the purposes Section 240
of the Companies Act 1985. A copy of the statutory accounts for that year under
UK GAAP has been delivered to the Registrar of Companies on which an unqualified
report has been made by the auditors under Section 235 of the Companies Act
1985.
c) Use of adjusted measures
Kingfisher believes that retail profit*, adjusted profit before tax, adjusted
profit after tax and adjusted earnings per share provide additional useful
information on underlying trends to shareholders. These measures are used by
Kingfisher for internal performance analysis and incentive compensation
arrangements for employees. The terms 'retail profit', 'exceptional item' and '
adjusted' are not defined terms under IFRS and may therefore not be comparable
with similarly titled profit measures reported by other companies. It is not
intended to be a substitute for, or superior to GAAP measurements of profit. The
separate reporting of non-recurring exceptional items, which are presented as
exceptional within their relevant consolidated income statement category, helps
provide a better indication of the Group's underlying business performance. The
principal items that will be included as exceptional items are:
• Non trading items included in operating profit such as profits and
losses on the disposal of subsidiaries, associates and investments
which do not form part of the Group's trading activities;
• Gains and losses on the disposal of properties; and
• The costs of significant restructuring and incremental acquisition
integration costs.
* Retail profit is defined as operating profit before central costs (the costs
of the Corporate Centre), exceptional items and the share of joint venture and
associate interest and tax.
2. Segmental analysis
The Group's primary reporting segments are geographical, with the Group
operating in four main geographical areas.
The segment results for the half year ended 30 July 2005 are as follows:
£ millions United France Rest of Asia Total
Kingdom Europe
External Revenue 2,224.9 1,381.7 361.5 111.3 4,079.4
Segment result 150.5 101.9 32.4 (4.3) 280.5
Share of post tax results of joint ventures and associates - - 0.7 2.0 2.8 5.5
150.5 102.6 34.4 (1.5) 286.0
Unallocated central costs (16.0)
Operating profit 270.0
Net finance costs (19.2)
Profit before taxation 250.8
Income tax expense (85.1)
Profit for the period 165.7
The segment results for the half year ended 31 July 2004 are as follows:
£ millions United France Rest of Asia Total
Kingdom Europe
External Revenue 2,275.4 1,290.6 297.4 84.5 3,947.9
Segment result 225.1 102.0 32.2 (4.2) 355.1
Share of post tax results of joint ventures and associates - - 0.5 3.4 2.0 5.9
225.1 102.5 35.6 (2.2) 361.0
Unallocated central costs (18.6)
Operating profit 342.4
Net finance costs (54.8)
Profit before taxation 287.6
Income tax expense (94.1)
Profit for the period 193.5
The segment results for the year ended 29 January 2005 are as follows:
£ millions United France Rest of Asia Total
Kingdom Europe
External Revenue 4,277.3 2,546.7 613.9 211.7 7,649.6
Segment result 445.1 209.9 64.6 (2.3) 717.3
Share of post tax results of joint ventures and associates - - 0.7 9.9 4.0 14.6
445.1 210.6 74.5 1.7 731.9
Unallocated central costs (53.8)
Operating profit 678.1
Net finance costs (16.7)
Profit before taxation 661.4
Income tax expense (205.2)
Profit for the year 456.2
The Group's revenues, although not highly seasonal in nature, do increase over
the Easter period and during the summer months leading to slightly higher
revenues being recognised in the first half of the year.
3. Exceptional items
The following one-off items, as defined in note 1c), have been charged in
arriving at operating profit:
Half year ended Half year ended Year ended
£ millions 30 July 2005 31 July 2004 29 January 2005
Included within other income:
Profit on disposal of properties 1.9 - 3.1
Profit on disposal of fixed asset investments - - 0.9
1.9 - 4.0
Included within other expenses:
Loss on sale of operations - - (17.7)
- - (17.7)
Total exceptional items 1.9 - (13.7)
4. Finance costs
Half year ended Half year ended Year ended
£ millions 30 July 2005 31 July 2004 29 January 2005
Bank and other interest payable 21.7 21.6 42.6
Losses on financial instruments 0.1 - -
Net interest charge on pension schemes 3.0 1.7 5.1
Less amounts capitalised in the cost of qualifying assets (1.6) (2.1) (3.8)
Total finance costs 23.2 21.2 43.9
Bank and other interest receivable (8.5) (8.1) (15.2)
Gains on financial instruments (0.9) - -
Total finance income (9.4) (8.1) (15.2)
Loss/(gain) on retranslation of intercompany balances 5.4 41.7 (12.0)
Net finance costs 19.2 54.8 16.7
Exchange differences on retranslation of intercompany balances which do not meet
the requirements of IAS 21 are accounted for in the income statement rather than
as reserve movements, giving rise to a pre-tax unrealised loss of £5.4m (2004:
£41.7m) in net finance costs for the half year ended 30 July 2005. As these
amounts are generated by exchange movements they will vary from period to
period. However, there is an equal and opposite amount in reserve movements on
consolidation and net equity is therefore unaffected. The intercompany loans
causing these foreign exchange gains and losses were repaid during the current
period.
5. Dividends
Half year ended Half year ended Year ended
£ millions 30 July 2005 31 July 2004 29 January 2005
Amounts recognised as distributions to equity holders in the
period:
Interim dividend for the year ended 29 January 2005 of 3.85p - - 89.9
per share
Final dividend for the year ended 29 January 2005 of 6.8p 159.7 143.4 143.4
(2004: 6.15p) per share
Dividend paid to Employee Share Ownership Plan Trust (ESOP) (1.8) (1.9) (3.1)
shares
157.9 141.5 230.2
Proposed interim dividend for the half year to 30 July 2005
of 3.85p per share 90.5
At 30 July 2005 the 2005 interim dividend had not been approved by the Board and
as such was not included as a liability. Further details on the interim
dividend can be found in note 16.
6. Income tax expense
Half year ended Half year ended Year ended
£ millions 30 July 2005 31 July 2004 29 January 2005
Current tax:
UK Corporation tax 22.5 52.2 120.0
Foreign tax 37.5 35.8 74.1
60.0 88.0 194.1
Deferred tax 25.1 6.1 11.1
Total income tax expense 85.1 94.1 205.2
The effective tax rate for the interim period is 34.2% (2004: 32.7%)
representing the best estimate of the effective rate for the full financial
year. The reduction in the UK current tax charge is predominantly offset by the
increase deferred tax charge during the period.
7. Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to
ordinary shareholders by the weighted average number of ordinary shares in issue
during the year, excluding those held in the ESOP which are treated as
cancelled.
For diluted earnings per share, the weighted average number of ordinary shares
in issue is adjusted to assume conversion of all dilutive potential ordinary
shares. These represent share options granted to employees where the exercise
price is less than the average market price of the Company's shares during the
year.
The weighted average number of shares in issue during the period was 2,324.2
million (2004: 2,301.3 million) and the diluted weighted average number of
shares in issue during the period was 2,334.5 million (2004: 2,318.7 million).
For the year ended 29 January 2005, the weighted average number of shares in
issue was 2,307.5 million and the diluted average number of shares in issue was
2,324.4 million.
Supplementary earnings per share figures are presented. These exclude the
effects of exceptional items (disclosed in note 3) and gains and losses on the
retranslation of intercompany loan balances to allow comparison of underlying
trading performance.
The calculation of basic and diluted earnings per share for the total Group is
based on the profit on ordinary activities, after taxation and minority
interests of £165.5 million (2004: 193.6 million). For the year ended 29 January
2005, the profit on ordinary activites after taxation and minority interests was
£455.7 million.
Half year ended Half year ended Year ended
Pence per share 30 July 2005 31 July 2004 29 January 2005
Basic earnings per share 7.1 8.4 19.7
Profit on disposal of properties (0.1) - (0.2)
Loss on sale of operations - - 0.8
Loss/(gain) on retranslation of intercompany 0.2 1.8 (0.5)
balances
Tax impact arising on items above - (0.5) (0.1)
Basic adjusted earnings per share 7.2 9.7 19.7
Diluted earnings per share 7.1 8.3 19.6
Profit on disposal of properties (0.1) - (0.2)
Loss on sale of operations - - 0.8
Loss/(gain) of retranslation of intercompany 0.2 1.8 (0.5)
balances
Tax impact arising on items above - (0.5) (0.1)
Diluted adjusted earnings per share 7.2 9.6 19.6
8. Net cash flows from operating activities
Reconciliation of operating profit to net cash flows from operating activities:
Half year ended Half year ended Year ended
£ millions 30 July 2005 31 July 2004 29 January 2005
Group operating profit 270.0 342.4 678.1
Adjustments for:
Depreciation and amortisation 86.5 75.3 159.1
Share-based compensation charge 3.9 3.2 6.7
Loss on sale of operations - - 17.7
Share of post tax results of joint ventures and associates (5.5) (6.1) (14.6)
(Profit)/loss on disposal of property, plant and equipment (0.4) 0.9 1.9
and intangible assets
Operating cash flows before movements in working capital 354.5 415.7 848.9
Movements in working capital (excluding the effects of
acquisitions and disposals of subsidiaries and exchange
differences on consolidation):
Increase in inventories (90.2) (167.5) (246.6)
Decrease/(increase) in trade and other receivables 21.9 18.1 (72.9)
Increase in trade and other payables 152.9 276.6 173.7
(Decrease)/increase in post employment benefits 0.9 1.0 (4.3)
85.5 128.2 (150.1)
Cash generated by operations 440.0 543.9 698.8
Income taxes paid (100.3) (68.0) (167.3)
Net cash flows from operating activities 339.7 475.9 531.5
9. Reconciliation of net debt
Net debt incorporates the Group's borrowings (together with related fair value
movements of derivatives on the debt), bank overdrafts and obligations under
finance leases, less cash and cash equivalents.
Half year ended Half year ended Year ended
£ millions 31 July 2005 30 July 2004 29 January 2005
Net debt at start of period (841.1) (891.4) (891.4)
Net (decrease)/increase in cash and cash equivalents (7.7) 195.0 76.8
Decrease in short-term investments - (9.4) (7.9)
Amortisation of underwriting and issue costs of new debt (0.3) - -
(Increase)/decrease in debt and lease financing (195.6) 11.0 (30.4)
Currency translation differences and fair value (3.6) 25.3 11.8
adjustments on financial instruments
Net debt at end of period (1,048.3) (669.5) (841.1)
10. Acquisitions
During the period the Group acquired OBI AG's Chinese home improvement
operations. Goodwill of approximately £76m has been recognised based on
provisional fair values. The purchase price is also provisional as it is
subject to the finalisation of a completion accounts process.
11. Reserves
The movements in the Group's consolidated reserves in the period to 30 July 2005
and the comparative period are summarised as follows:
£ millions Hedging Translation Non-distributable Retained Total
reserve reserve reserves earnings
Balance at 30 January 2005 - 47.7 159.0 1,747.2 1,953.9
First time adoption adjustment in respect of IAS (3.7) - - (0.2) (3.9)
39
Restated balance at 30 January 2005 (3.7) 47.7 159.0 1,747.0 1,950.0
Actuarial gains on defined benefit pension - - - 7.3 7.3
schemes
Treasury shares disposed - - - (2.2) (2.2)
Share-based compensation charge - - - 3.9 3.9
Currency translation differences - 10.0 - - 10.0
Gains and losses deferred in equity 8.2 - - - 8.2
Transferred to initial carrying amount of asset 3.3 - - - 3.3
Tax on items taken from/transferred to equity (3.5) (0.2) - (2.1) (5.8)
Net gains and losses recognised directly in 8.0 9.8 - 6.9 24.7
equity
Profit for the period - - - 165.5 165.5
Total recognised income and expense for the 8.0 9.8 - 172.4 190.2
period
Dividends - - - (157.9) (157.9)
At 30 July 2005 4.3 57.5 159.0 1,761.5 1,982.3
Balance at 1 February 2004 - - 159.0 1,553.6 1,712.6
Actuarial losses on defined benefit pension - - - (48.9) (48.9)
schemes
Scrip dividend alternative - - - 5.4 5.4
Treasury shares disposed - - - (2.1) (2.1)
Share-based compensation charge - - - 3.2 3.2
Currency translation differences - 51.5 - - 51.5
Tax on items taken from/transferred to equity - (5.4) - 16.0 10.6
Net gains and losses recognised directly in - 46.1 - (26.4) 19.7
equity
Profit for the period - - - 193.6 193.6
Total recognised income and expense for the - 46.1 167.2 213.3
period -
Dividends - - - (141.5) (141.5)
At 31 July 2004 - 46.1 159.0 1,579.3 1,784.4
12. Critical accounting estimates and judgements
The Group makes estimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, seldom equal the related actual
results. The estimates and assumptions that have a significant risk of causing a
material adjustment to the carrying amount of assets and liabilities within the
next financial year are discussed below.
• Estimated impairment of goodwill
The Group is required to test whether goodwill has suffered any impairment. The
recoverable amounts of cash generating units have been determined based on
value-in-use calculations. These calculations require the use of estimates.
• Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant
judgment is required in determining the worldwide provision for income taxes.
There are many transactions and calculations for which the ultimate tax
determination is uncertain during the ordinary course of business. The Group
recognises liabilities for anticipated tax audit issues based on estimates of
whether additional taxes will be due. Where the final tax outcome of these
matters is different from the amounts that were initially recorded, such
differences will impact the income tax and deferred tax provisions in the period
to which such determination is made. See note 6 for further information.
• Post employment benefits
As disclosed in note 15, the Group operates various defined benefit arrangements
for its employees. The present value of the defined benefit liabilities
recognised in the balance sheet is dependent on interest rates of high-quality
corporate bonds. The net financing charge is dependent on both the interest
rates of high-quality corporate bonds and the assumed investment returns on
scheme assets. At the half year, the pensions scheme position has been updated
to reflect current market conditions for corporate bonds and to reflect actual
investment returns.
13. Explanation of transition to IFRS
Kingfisher plc reported under UK Generally Accepted Accounting Practice (UK
GAAP) in its previously published financial statements for the year ended 29
January 2005 and this is the first interim period that the company has presented
its interim report under IFRS. The analysis below shows a reconciliation of net
assets and profit as reported under UK GAAP as at 31 July 2004 to the revised
net assets and profit under IFRS as reported in that interim report. The
preliminary unaudited results for the year to 29 January 2005 and the Group's
restated balance sheets under IFRS were published on 18 March 2005 and can be
accessed on line at www.kingfisher.com within the 'Investors' section.
To aid comparability, the UK GAAP numbers presented below have been reformatted
using the new IFRS format rather than in the previously disclosed UK GAAP
format.
Reconciliation of the Consolidated Income Statement for the half year ended 31
July 2004
Effect of
transition to
£ millions Notes UK GAAP IFRS IFRS
Revenue 3,947.9 - 3,947.9
Cost of sales (e) (g) (2,499.7) (1.6) (2,501.3)
Gross profit 1,448.2 (1.6) 1,446.6
Selling and distribution expenses (b) (d) (e) (m) (929.2) (3.1) (932.3)
Administrative expenses (b) (d) (i) (181.5) (4.8) (186.3)
Other income 8.5 - 8.5
Share of post tax results of joint ventures and (f) (k) (l) 12.7 (6.8) 5.9
associates
Operating profit 358.7 (16.3) 342.4
Analysed as:
Retail profit 376.7 (9.4) 367.3
Central costs (18.4) (0.2) (18.6)
Acquisition goodwill amortisation (net) (f) 0.4 (0.4) -
Share of joint venture and associate interest (l) - (6.3) (6.3)
and taxation
Financing
Net finance costs before loss on retranslation of (b) (d) (l) (12.4) (0.7) (13.1)
intercompany balances
Loss on retranslation of intercompany balances (a) - (41.7) (41.7)
Net finance costs (12.4) (42.4) (54.8)
Profit before taxation 346.3 (58.7) 287.6
Income tax expense (k) (l) (109.1) 15.0 (94.1)
Profit for the period 237.2 (43.7) 193.5
Reconciliation of the Statement of Recognised Income and Expense for the half
year ended 31 July 2004
£ millions Notes UK GAAP Effect of IFRS
transition to
IFRS
Actuarial losses on defined benefit pension schemes (b) - (48.9) (48.9)
Currency translation differences (a) 10.9 40.6 51.5
Tax on items taken directly to equity (5.5) 16.1 10.6
Net income recognised directly in equity 5.4 7.8 13.2
Profit for the financial period 237.2 (43.7) 193.5
Total recognised income and expense for the period 242.6 (35.9) 206.7
Attributable to:
Equity holders of the parent 242.7 (35.9) 206.8
Minority interests (0.1) - (0.1)
242.6 (35.9) 206.7
Reconciliation of Consolidated Balance Sheet as at 31 July 2004
£ millions Notes UK GAAP Effect of transition IFRS
to IFRS
Non-current assets
Intangible assets (c) 2,455.3 73.4 2,528.7
Property, plant and equipment (c) (d) (n) 2,865.4 (46.1) 2,819.3
Investment property (n) 25.3 (6.3) 19.0
Investments accounted for using equity method (f) 152.1 18.8 170.9
Available for sale financial assets 0.2 - 0.2
Other receivables 25.7 - 25.7
5,524.0 39.8 5,563.8
Current assets
Inventories (g) 1,228.7 (12.0) 1,216.7
Trade and other receivables 411.6 1.1 412.7
Cash and cash equivalents 327.1 - 327.1
1,967.4 (10.9) 1,956.5
Total assets 7,491.4 28.9 7,520.3
Current liabilities
Short-term borrowings (d) (220.0) (0.9) (220.9)
Trade and other payables (b) (e) (i) (1,790.3) 62.6 (1,727.7)
(j)
Current tax liabilities (118.7) 16.2 (102.5)
(2,129.0) 77.9 (2,051.1)
Net current liabilities (161.6) 67.0 (94.6)
Total assets less current liabilities 5,362.4 106.8 5,469.2
Non-current liabilities
Long-term borrowings (d) (729.3) (46.3) (775.6)
Other payables (17.1) - (17.1)
Deferred income tax liabilities (k) (16.3) (174.5) (190.8)
Post employment benefits (b) (24.4) (272.9) (297.3)
(787.1) (493.7) (1,280.8)
Total liabilities (2,916.1) (415.8) (3,331.9)
Net assets 4,575.3 (386.9) 4,188.4
Capital and reserves
Share capital 2,401.2 - 2,401.2
Other reserves (b) (k) (n) 2,171.3 (386.9) 1,784.4
Minority interests 2.8 - 2.8
Total equity 4,575.3 (386.9) 4,188.4
Explanation of reconciling items between UK GAAP and IFRS
(a) FX gains and losses
Exchange differences on intercompany loan balances which do not meet the more
stringent requirements of IAS 21 'The Effects of Changes in Foreign Exchange
Rates' are shown in the income statement rather than as reserve movements,
giving rise to a pre-tax unrealised loss of £41.7m in net finance costs for the
half year ended 31 July 2004. As these amounts are generated by exchange
movements they will vary from period to period. However, there is an equal and
opposite amount in reserve movements on consolidation and net equity is
therefore unaffected.
(b) Post employment benefits
Under UK GAAP the Group applied the provisions of SSAP 24 which are
significantly different to IAS 19. The Group has elected to early adopt the
amendment to IAS 19 'Employment Benefits' issued by the IASB on 16 December 2004
which allows all actuarial gains and losses to be charged to equity. Other
differences include valuing pension scheme assets at bid value as opposed to mid
value and the split of the charge to the income statement between operating
(service charge) and financing (return on pension scheme assets and interest on
pension liabilities).
The Group's opening IFRS balance sheet reflects the assets and liabilities of
the Group's defined benefit schemes totalling a net liability of £245.7m. The
transitional adjustment of £220.6m to opening reserves comprises the reversal of
entries in relation to UK GAAP accounting under SSAP 24 less the recognition of
the net liabilities of the Group's defined benefit schemes. The incremental
charge arising from the adoption of IAS 19 on the Group's income statement in
the half year ended 31 July 2004 was £2.1m, being the total of £0.4m to
operating profit and £1.7m to net financing charges.
The actuarial loss before tax of £48.9m arising in the half year ended 31 July
2004 has been recorded in the statement of recognised income and expense. The
pension deficit under IFRS at 31 July 2004 was £297.3m.
(c) Intangible assets - computer software
Under UK GAAP all capitalised computer software was included within property,
plant and equipment on the balance sheet. Under IFRS, only computer software
that is integral to a related item of hardware should be included as property,
plant and equipment. All other computer software should be classified as an
intangible asset. Accordingly, a net balance sheet reclassification has been
made of £65.4m at the opening balance sheet date and £73.4m at 31 July 2004
between property, plant and equipment and intangible assets. There was no
impact on the income statement from this reclassification.
(d) Capitalisation of building leases
IAS 17 'Leases' requires that the land element of leases on land and buildings
is considered separately for the purposes of determining whether the lease is a
finance or operating lease. A majority of the Group's buildings are on leases
of 25 years or less which remain as operating under IFRS. There are a small
number of leases greater than 25 years where the building element of the lease
has been classified as a finance lease based on the criteria set out in IAS 17.
As a result, the Group's IFRS opening balance sheet at 1 February 2004 includes
additional property, plant and equipment of £30.6m and additional finance lease
obligations of £47.7m included within current and non-current borrowings. The
main impact on the income statement is that the operating lease payment charged
to operating profit under UK GAAP is replaced with a depreciation charge for the
asset (in operating profit) and an interest expense charge (in financing costs).
Whilst the total charge over the life of the lease will be the same under UK
GAAP and IFRS, the profile of the charge is different, with the charge being
more front loaded under IFRS. The net pre-tax impact on the income statement
for the half year ended 31 July 2004 was a further charge of £0.7m.
(e) Lease incentives
Under UK GAAP, lease incentives were recognised over the period to the first
market rent review. Under IFRS (SIC 15), lease incentives are required to be
recognised over the entire lease term. As a result, the Group's IFRS opening
balance sheet at 1 February 2004 includes additional deferred income of £21.7m
and operating profit for the year ended 31 July 2004 was reduced by £1.6m.
(f) Intangible assets - Goodwill
IFRS 3 'Business Combinations' requires that negative goodwill is recognised
immediately in the income statement as opposed to being amortised. The negative
goodwill that arose on the acquisition of the shares in Hornbach has been
credited back to opening reserves under IFRS and increases the Group's interest
in joint ventures and associates by £19.3m. The removal of the amortisation
credit in the half year ended 31 July 2004 reduced profit before tax by £0.5m.
(g) Inventories
IAS 2 requires the inclusion of certain elements of income from suppliers and
other similar items in the cost of inventories which is a more encompassing
requirement than UK GAAP. The value of inventories was reduced by £10.8m at 1
February 2004 and £12.0m at 31 July 2004.
(h) Cash
IAS 7 'Cash Flow Statements' defines cash equivalents as being 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. Cash
deposits with a maturity of less than 3 months have therefore been reclassified
at both balance sheet dates as cash.
(i) Share-based payment
IFRS 2 'Share-based Payment' requires that an expense for equity instruments
granted is recognised in the income statement based on their fair value at the
date of grant, with a corresponding increase in equity. This expense, which is
primarily in relation to employee option and performance share schemes, is
recognised over the vesting period of the scheme. Under UK GAAP, the income
statement charge, if any, was based on the difference between the exercise price
and the market price on the date of issue with a corresponding increase in
accruals.
The Group has elected to apply IFRS 2 only to relevant share-based payment
transactions granted after 7 November 2002. The additional pre-tax charge
arising from the adoption of IFRS 2 on the Group's income statement for the half
year ended 31 July 2004 was £0.5m. The impact from the adoption of this
standard is small as the Group ceased offering share options in 2003 and
replaced them with deferred shares for which a charge equating to the market
value of the deferred shares was recognised under UK GAAP.
(j) Post balance sheet events
IAS 10 'Events after the Balance Sheet Date' requires that dividends declared
after the balance sheet date should not be recognised as a liability at that
date as the liability does not represent a present obligation as defined by IAS
37 'Provisions, Contingent Liabilities and Contingent Assets'.
The final dividend declared in March 2004 in relation to the financial year
ended 31 January 2004 of £143.4m was reversed in the opening balance sheet and
charged to equity in the half year ended 31 July 2004. The interim dividend
accrued for the half year ended 31 July 2004 of £89.9m was reversed in the IFRS
balance sheet as at 31 July 2004.
(k) Deferred and current taxes
The scope of IAS 12 'Income Taxes' is wider than the corresponding UK GAAP
standards, and requires deferred tax to be provided on temporary differences
rather than just taxable timing differences as under UK GAAP.
As a result, the Group's IFRS opening balance sheet at 1 February 2004 included
an additional deferred tax liability of £189.4m. The majority of this
adjustment related to the deferred tax provided on the deemed cost of property
less the deferred tax asset recognised on the pension deficit at 1 February
2004.
The 'income tax expense' on the face of the consolidated income statement
comprises the tax charge of the Company and its subsidiaries under IFRS. The
Group's share of its joint venture and associated undertakings' tax charges is
shown as part of 'Share of post tax result of joint ventures and associates'
within operating profit.
(l) Presentation of joint ventures and associates
The presentation of the Group's share of the results of joint ventures and
associated undertakings in the Group's consolidated income statement has changed
under IFRS. Under UK GAAP the Group's share of joint venture and associated
undertaking operating profit, interest and tax were disclosed separately in the
consolidated income statement. In accordance with IAS 1 'Presentation of
Financial Statements', the results of joint venture and associated undertakings
have been presented net of interest and tax as a single line item. There is no
effect on the net result for the financial period from this adjustment.
(m) Short-term compensated benefits
IFRS is more prescriptive than UK GAAP in that when an employee has rendered
service during an accounting period, this must be recognised as an expense in
the income statement. Holiday pay balances as at the interim date must therefore
be accrued as per the employees' terms of employment. Most of the increase in
the accrual at the half year (£5.9m at July 2004) is expected to have reversed
by the end of the financial year, as the holiday pay and financial years are
generally coterminous.
(n) Valuation of properties
The Group has previously applied a policy of annual revaluations of property
under UK GAAP. The Group has now elected to treat the revalued amount of
operating properties at 1 February 2004 as deemed cost as at that date and will
not revalue for accounts purposes in future. The Group will continue to provide
the current market values as additional disclosure in its annual financial
statements. There is no impact as at 31 July 2004 as the revaluation exercise
was only undertaken on an annual basis.
Investment property was also previously revalued annually under UK GAAP.
Following the disposal of the Chartwell Land investment property portfolio in
2003/2004, the amount of investment property now held by the Group is
insignificant. The Group has elected to restate the remaining investment
property to historical cost under IFRS. There was no impact on the income
statement for the half year ended 31 July 2004 as no investment properties were
disposed during the period.
(o) Significant changes to the cash flow statement under IFRS are as
follows:
• Cash flows reported under IFRS and UK GAAP are defined differently -
under IFRS, cash flows, referred to as 'cash and cash equivalents', include bank
deposits repayable within 3 months. Under UK GAAP, these were treated as
short-term deposits.
• IFRS requires cash flows to be reported under the three headings of
operating, investing and financing activities whereas UK GAAP requires cash
flows to be reported in greater detail under the nine standard headings, such as
taxation and interest.
• IFRS requires foreign currency translation differences to be included
on the face of the cash flow statement in order that opening and closing cash
and cash equivalent balances may be reconciled. This is not a requirement under
UK GAAP.
14. First time adoption IAS 32 & 39
The adoption of IAS 32 'Financial Instruments: Disclosure and Presentation' and
IAS 39 'Financial Instruments: Recognition and Measurement' with affect from 30
January 2005 results in a change in the Group's accounting policy for financial
instruments. The impact of these standards on the Group's opening balance sheet
is shown below.
The principal impact of IAS 32/39 on the Group's financial statements relates to
the recognition of derivative financial instruments at fair value. Financial
assets and financial liabilities that arise on derivatives that do not qualify
for hedge accounting are held on the balance sheet at fair value with the
changes in value reflected through the income statement. The accounting
treatment of derivatives that qualify for hedge accounting depends on how they
are designated. The varying accounting treatments are explained below.
Fair value hedges
The Group uses interest rate and cross currency swaps to hedge the exposure to
interest rates and currency movements of it's issued debt. Under UK GAAP,
derivative financial instruments held for hedging were accounted for using hedge
accounting and were not recognised at fair value in the balance sheet.
Under IAS 39, derivative financial instruments that meet the 'fair value'
hedging requirements are recognised in the balance sheet at fair value with
corresponding fair value movements recognised in the income statement. For an
effective fair value hedge, the hedged item is adjusted for changes in fair
value attributable to the risk being hedged with the corresponding entry in the
income statement. To the extent that the designated hedge relationship is fully
effective, the amounts in the income statement offset each other. As a result,
only the ineffective element of any designated hedging relationship impacts the
financing line in the income statement.
Cash flow hedges
The Group hedges the foreign currency exposure on inventory purchases. Under UK
GAAP, foreign currency derivatives were held off balance sheet. Under IAS 39,
derivative financial instruments that qualify for cash flow hedging are
recognised on the balance sheet at fair value with corresponding fair value
changes deferred in equity.
Net investment hedges
The gains or losses on the translation of currency borrowings and cross currency
swaps used to hedge the Group's net investments in foreign entities are
recognised in equity. Provided the hedging requirements of IAS 39 are met and
the hedging relationship is fully effective, this treatment does not differ from
UK GAAP.
On the adoption of IAS32/39, there is no material impact for the Group of other
financial assets and liabilities that are not part of a designated hedge
relationship.
The adjustments to the opening balance sheet at 30 January 2005 are as follows:
Restated opening position
Opening balance sheet Effect of adoption of at
under IFRS IAS 32 and IAS 39 30 January 2005
Non-current assets
Other receivables 26.6 24.9 51.5
Current assets
Trade and other receivables 453.9 0.9 454.8
Current liabilities
Trade and other payables (1,696.2) (3.0) (1,699.2)
Non-current liabilities
Long-term borrowings (818.3) (28.4) (846.7)
Deferred tax liabilities (192.7) 1.7 (191.0)
Impact on net assets (3.9)
Hedging reserve - (3.7) (3.7)
Retained earnings 1,747.2 (0.2) 1,747.0
Impact on equity (3.9)
SUPPLEMENTARY INFORMATION
15. Accounting policies
The principal accounting policies applied in the preparation of this interim
financial report are set out below. These policies have been consistently
applied to the information presented, unless otherwise stated.
The interim financial report of the Company and it subsidiaries is made up to
the nearest Saturday to 31 July this year, except as disclosed in note 15 of the
2004/05 UK GAAP financial statements.
The consolidated interim financial report has been prepared under the historical
cost convention, as modified by the revaluation of available for sale
investments, financial assets and liabilities (including derivative instruments)
held at fair value through the income statement.
The preparation of the interim financial report requires the use of certain
critical accounting estimates. It also requires management to exercise its
judgements in the process of applying the Company's accounting policies. The
areas involving a higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the consolidated interim accounts,
are disclosed in note 12.
Basis of consolidation
The consolidated interim financial report incorporates the financial statements
of the Company, its subsidiary undertakings, joint ventures and associated
undertakings.
(a) Subsidiaries
Subsidiary undertakings are all entities over which the Group has the power to
govern the financial and operating policies generally accompanying a
shareholding of more than one half of the voting rights. Subsidiary
undertakings acquired during the year are recorded under the acquisition method
of accounting and their results included from the date of acquisition. The
results of subsidiary undertakings which have been disposed of during the year
are included up to the effective date of disposal.
The purchase method of accounting is used to account for the acquisition of
subsidiaries by the Group. The cost of an acquisition is measured as the fair
value of the assets given, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the
acquisition. Identifiable assets acquired and liabilities and contingent
liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date, irrespective of the extent of any minority
interest. The excess of the cost of acquisition over the fair value of the
Group's share of the identifiable net assets acquired is recorded as goodwill
and held as an intangible asset. If the cost of acquisition is less than the
fair value of the net assets of the subsidiary acquired, the difference is
recognised directly in the income statement.
Intercompany transactions, balances and unrealised gains on transactions between
Group companies are eliminated. Unrealised losses are also eliminated unless
the transaction provides evidence of an impairment of an impairment of the asset
transferred. Accounting policies of subsidiaries have been changed where
necessary to ensure consistency with the policies adopted by the Group.
(b) Associates and joint ventures
Associates are all entities over which the Group has the ability to exercise
significant influence but not control, generally accompanying a shareholding of
between 20% and 50% of the voting rights. Investments in associates are
accounted for by the equity method of accounting and are initially recognised at
cost. The Group's investment in associates includes goodwill (net of any
accumulated impairment loss) identified on acquisition.
The Group's share of its associates' post-acquisition profits or losses is
recognised in the income statement, and its share of post-acquisition movements
in reserves is recognised in reserves. The cumulative post-acquisition
movements are adjusted against the carrying amount of the investment. When the
Group's share of losses in an associate equals or exceeds its interest in the
associate, including any other unsecured receivables, the Group does not
recognise any further losses, unless it has incurred obligations or made
payments on behalf of the associate.
Unrealised gains on transactions between the Group and its associates are
eliminated to the extent of the Group's interest in the associates. Unrealised
losses are also eliminated unless the transaction provides evidence of an
impairment of the asset transferred. Accounting policies of associates have
been changed where necessary to ensure consistency with the policies adopted by
the Group.
The equity method is used to account for the Group's interest in joint ventures.
Foreign currency translation
(a) Functional and presentational currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates (the functional currency). The consolidated financial
statements are presented in Sterling, which is the Company's functional and
presentational currency.
(b) Transactions and balances
Transactions denominated in foreign currencies are translated into Sterling at
contracted rates or, where no contract exists, at average monthly rates.
Monetary assets and liabilities denominated in foreign currencies which are held
at the year end are translated into Sterling at year end exchange rates.
Exchange differences on monetary items are taken to the income statement, except
when deferred in equity as qualifying cash flow hedges or qualifying net
investment hedges.
Translation differences on non-monetary items, such as equities held at fair
value through the income statement, are reported as part of the fair value gain
or loss.
(c) Group companies
The balance sheets of overseas subsidiary undertakings are expressed in Sterling
at year end exchange rates. Profits and losses of overseas subsidiary
undertakings are expressed in Sterling at average exchange rates for the year.
Exchange differences arising on the retranslation of opening shareholders' funds
are recognised as a separate component of equity.
On consolidation, exchange differences arising from the retranslation of the net
investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to shareholders' equity.
When a foreign operation is sold, such exchange differences are recognised in
the income statement as part of the gain or loss on sale.
In accordance with the transitional provisions of IFRS 1 'First-time Adoption of
IFRS', the cumulative translation reserve by entity has been set to zero at the
date of transition to IFRS.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
Revenue recognition
Turnover comprises retail sales and services supplied, interest receivable and
other income from the provision of credit facilities, commission income and
rental income and income. Turnover excludes transactions made between companies
within the Group, Value Added Tax, other sales-related taxes and is net of
returns, staff and trade discounts.
Turnover relating to the sale of in-store product is earned at the point of cash
receipt. All other turnover is recognised when the product has been delivered
or, for installation income, when the service has been performed. Delivered
products and service income represent only a small component of the Group's
turnover as a majority of the Group's sales relate to in-store purchase of
product.
Cost of sales
Cost of sales is the expenditure incurred in the normal course of business in
bringing the product to the point of sale, including warehouse and
transportation costs.
Intangible assets
(a) Goodwill
Goodwill is carried at cost less accumulated impairment losses, is not amortised
and is tested annually for impairment by assessing the recoverable amount of
each cash generating unit to which the goodwill relates. When the recoverable
amount of the cash generating unit is less than the carrying amount, an
impairment loss is recognised immediately in the income statement and is not
subsequently reversed. Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
The Group has taken advantage of the exemption permitted by IFRS 1 and has not
restated goodwill on acquisitions prior to the date of transition to IFRS.
(b) Computer software
Acquired computer software licenses are capitalised on the basis of the costs
incurred to acquire and bring to use the specific software. These costs are
amortised over their estimated useful lives of two to four years.
Costs that are directly associated with the production of identifiable and
unique software products controlled by the Group, and that are expected to
generate economic benefits exceeding costs beyond one year, are recognised as
intangible assets. Direct costs include the software development employee and
consultancy costs and an appropriate portion of relevant overheads. Costs
associated with developing or maintaining computer software are recognised as an
expense as incurred.
Property, plant and equipment
(a) Cost or valuation
Land and buildings held for use in the business are stated in the balance sheet
at cost less accumulated depreciation and any provisions for impairment. Land
and buildings held at the date of transition to IFRS are held at deemed cost,
being the fair value of land and buildings at the date of transition to IFRS.
Plant and equipment is stated at cost less accumulated depreciation and any
provisions for impairment.
(b) Depreciation
Depreciation of property, plant and equipment is provided to reflect a reduction
from cost to estimated residual value over the estimated useful life of the
asset to the Group. Depreciation of property, plant and equipment is calculated
using the straight line method, the annual rates applicable to the principal
categories being:
Freehold and long leasehold buildings - between 2% and 5%
Short leaseholds - over remaining period of the lease
Tenants' fixtures - between 5% and 25%
Computers and electronic equipment - between 25% and 50%
Motor cars - 25%
Commercial vehicles - between 10% and 33 1/3%
Freehold land is not depreciated
(c) Impairment
Property, plant and equipment are reviewed for impairment if events or changes
in circumstances indicate that the carrying amount may not be recoverable. When
a review for impairment is conducted, the recoverable amount is assessed by
reference to the net present value of expected future post-tax cash flows of the
relevant cash generating unit or net realisable value if higher. The discount
rate is applied based upon the Group's weighted average cost of capital with
appropriate adjustments for the risks associated with the relevant business.
Any impairment in value is charged to the income statement in the year in which
it occurs.
(d) Disposal
The gain or loss arising on the disposal or retirement of an asset is determined
as the difference between the sales proceeds and the carrying amount of the
asset and is recognised in the income statement. Sales of land and buildings
are accounted for when there is an unconditional exchange of contracts.
(e) Subsequent costs
Subsequent costs are included in the related asset's carrying amount or
recognised as a separate asset, as appropriate, only when it is probable that
future economic benefits associated with the item will flow to the Group and the
cost of the item can be measured reliably. All other repairs and maintenance
are charged to the income statement during the financial period in which they
are incurred.
Leased assets
Where assets are financed by leasing agreements that give rights approximating
to ownership, the assets are treated as if they have been purchased outright.
The amount capitalised is the present value of the minimum lease payments during
the lease term at the inception of the lease. The assets are depreciated over
the shorter of the lease term or their useful economic life. Obligations
relating to finance leases, net of finance charges in respect of future periods,
are included as appropriate under creditors due within or after one year. The
finance charge element of rentals is charged to the income statement over the
period of the lease.
All other leases are operating leases and the rental payments are charged to the
income statement in the financial year to which the payments relate.
Where a lease is taken out for land and building combined, the building element
of the lease may be capitalised as a finance lease if it fits the criteria for a
finance lease, but the land element will always be classed as an operating
lease. If the contracted lease payments are not split between land and
buildings in the lease contract, the split is made based on the market value of
the land and buildings at the inception of the lease.
Incentives received to enter into lease agreements are released to the income
statement over the lease term.
Investment properties
The Group's investment properties were restated at original historic cost on
transition to IFRS and are held in the balance sheet at cost less accumulated
depreciation and accumulated impairment losses.
Capitalisation of interest and borrowing costs
Interest on borrowings to finance the construction of properties held as
non-current assets is capitalised from the date work starts on the property to
the date when substantially all the activities that are necessary to get the
property ready for use are complete. Where construction is completed in parts,
each part is considered separately when capitalising interest.
Interest is capitalised before any allowance for tax relief.
Borrowing costs are expensed in the period in which they are incurred, except to
the extent they are capitalised as indicated above.
Inventories
Inventories are stated at the lower of cost and net realisable value, on a
weighted average cost basis. Cost includes appropriate attributable overheads
and direct expenditure incurred in the normal course of business in bringing
goods to their present location and condition.
Costs of inventories include the transfer from equity of any gains or losses on
qualifying cash flow hedges relating to purchases.
Rebates received from suppliers
Volume related rebates receivable from suppliers are credited to the carrying
value of the stock to which they relate. Where a rebate agreement with a
supplier covers more than one year the rebates are recognised in the accounts in
the period in which they are earned.
Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with
banks, other short-term highly liquid investments with original maturities of
three months or less, and bank overdrafts. Bank overdrafts are shown within
borrowings in current liabilities on the balance sheet.
Employee benefits
(a) Pension obligations
The Group operates various defined benefit and defined contribution pension
schemes for its employees, some of which are required by local legislation. A
defined benefit plan is a pension plan that defines an amount of pension benefit
that an employee will receive on retirement. A defined contribution plan is a
pension plan under which the Group usually pays fixed contributions into a
separate entity. In all cases other than some of the legally required schemes,
a separate fund is being accumulated to meet the accruing liabilities. The
assets of each of these funds are either held under trusts or managed by
insurance companies, and are entirely separate from the Group's assets.
The Group has chosen to early adopt the Amendment to IAS 19 'Employee Benefits -
Actuarial Gains and Losses, Group Plans and Disclosures', the amendments only
being effective for annual periods beginning on or after 1 January 2006. The
EU's Accounting Regulatory Committee has to date only recommended endorsement of
this amendment to IAS 19, but the directors have assumed that it will be adopted
for use in the financial statements for the year ending 29 January 2006.
The liability recognised in the balance sheet in respect of defined benefit
pension plans is the present value of the defined benefit obligation at the
balance sheet date less the fair value of plan assets, together with adjustments
for actuarial gains or losses and past service costs. The defined benefit
obligation is calculated annually by independent actuaries using the projected
unit credit method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using interest
rates of high-quality corporate bonds that are denominated in the currency in
which the benefits will be paid, and that have terms to maturity approximating
to the terms of the related pension liability. An independent 'IAS 19'
actuarial valuation is carried out at each balance sheet date.
Actuarial gains and losses arising from experience adjustments and changes in
actuarial assumptions are charged or credited to the Statement of Recognised
Income and Expenditure as they arise.
Past service costs are recognised immediately in income, unless the changes to
the pension plan are conditional on the employees remaining in service for a
specified period of time (the vesting period). In this case, the past-service
costs are amortised on a straight line basis over the vesting period.
For defined contribution plans, the Group pays contributions to privately
administered pension plans on a contractual basis. The Group has no further
payment obligations once the contributions have been paid. The contributions
are recognised as an employee benefit expense when they are due. Prepaid
contributions are recognised as an asset to the extent that a cash refund or a
reduction in the future payments is available.
(b) Share-based payment compensation
The Group has applied the requirements of IFRS 2 'Share-based Payment'. In
accordance with the transitional provisions, IFRS 2 has been applied to all
grants of equity instruments after 7 November 2002 that were unvested as of 1
February 2004.
The Group operates several equity-settled, share-based compensation plans. The
fair value of the employee services received in exchange for the grant of
options or deferred shares is recognised as an expense, and is calculated using
the Black Scholes model. The value of the charge is adjusted to reflect expected
and actual levels of options vesting. The total amount to be expensed over the
vesting period is determined by reference to the fair value of the options or
deferred shares granted, excluding the impact of any non-market vesting
conditions. Non-market vesting conditions are included in assumptions about the
number of options that are expected to become exercisable.
At each balance sheet date, the Group revises its estimates of the number of
options that are expected to become exercisable. It recognises the impact of
the revision of original estimates, if any, in the income statement, and a
corresponding adjustment to equity over the remaining vesting period.
Taxation
The income 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. The
Group's liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax is the tax expected to be 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, and is accounted for using the balance sheet liability method. Deferred
tax liabilities are generally recognised for all taxable temporary differences,
and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences
can be utilised. Such assets and liabilities are not recognised if the temporary
difference arises from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a transaction that
affects neither the tax profit nor the accounting profit. The carrying amount
of deferred tax assets is reviewed at each balance sheet date and reduced to the
extent that it is no longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered.
Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interest in joint
ventures, except 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.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised.
Deferred tax assets and liabilities are offset against each other when they
relate to income taxes levied by the same tax jurisdiction and when the Group
intends to settle its current tax assets and liabilities on a net basis.
Current and 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 current or deferred tax is also dealt with in equity.
Financial instruments
Although earlier application is permitted, the Group has decided to first adopt
IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 '
Financial Instruments: Recognition and Measurement' for the year ending 28
January 2006, in accordance with the provisions prescribed in these standards.
The impact from this change in accounting policy is provided in note 14.
Financial assets and financial liabilities are recognised on the Group's balance
sheet when the Group becomes a party to the contractual provisions of the
instrument.
(a) Trade receivables
Trade receivables do not carry any interest and are stated at their nominal
value as reduced by appropriate allowances for estimated irrecoverable amounts.
(b) Investments
Investments are recognised and derecognised on a trade date where a purchase or
sale of an investment is under a contract whose terms require delivery of the
investment within the timeframe established by the market concerned, and are
initially measured at cost, including transaction costs.
Investments can be classified either as held-for-trading or available for sale,
and are measured at subsequent reporting dates at fair value. For available for
sale investments, gains and losses arising from changes in fair value are
recognised directly in equity, until the security is disposed of or is
determined to be impaired, at which time the cumulative gain or loss previously
recognised in equity is included in the income statement for the period.
(c) Bank borrowings
Interest bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including premiums
payable on settlement or redemption and direct issue costs, are accounted for on
an accruals basis to the income statement using the effective interest method,
and are added to the carrying amount of the instrument to the extent that they
are not settled in the period in which they arise.
(d) Trade payables
Trade payables are not interest bearing and are stated at their nominal value.
Equity instruments issued by the Company are recorded at the proceeds received,
net of direct issue costs.
(e) Derivative financial instruments and hedge accounting
Kingfisher's Treasury function is responsible for managing certain financial
risks to which the Group is exposed. The Board reviews the levels of exposure
regularly and approves Treasury policies covering the use of financial
instruments required to manage these risks. The Group does not use derivative
financial instruments for speculative purposes.
Derivatives are initially accounted and measured at fair value on the date a
derivative contract is entered into and subsequently measured at fair value. The
accounting treatment of derivatives classified as hedges depends on their
designation, which occurs on the date that the derivative contract is committed
to. The Group designates derivatives as:
• A hedge of the fair value of an asset or liability ('fair value
hedge')
• A hedge of the income/cost of a highly probable forecasted foreign
exchange transaction or commitment ('cash flow hedge')
• A hedge of a net investment in a foreign entity
Changes in the fair value of derivative financial instruments that are
designated and effective as hedges of future cash flows are recognised directly
in equity, and the ineffective portion is recognised immediately in the income
statement. If the cash flow hedge of a firm commitment or forecasted
transaction results in the recognition of an asset or a liability, then, at the
time the non-financial asset or liability is recognised, the associated gains or
losses on the derivative that had previously been recognised in equity are
included in the initial measurement of the non-financial asset or liability.
For hedges that do not result in the recognition of a non-financial asset or
liability, amounts deferred in equity are recognised in the income statement in
the same period in which the hedged item affects net profit or loss.
For an effective hedge of an exposure to changes in the fair value, the hedged
item is adjusted for changes in fair value attributable to the risk being hedged
with the corresponding entry in the income statement. Gains or losses from
re-measuring the corresponding hedging instrument are recognised in the income
statement.
Changes in the fair value of derivative financial instruments that do not
qualify for hedge accounting and any portion deemed ineffective are recognised
in the income statement as they arise.
Where the Group hedges net investments in foreign entities through currency
borrowings, the gains or losses on the retranslation of the borrowings are
recognised in equity. If the Group uses derivatives as the hedging instrument,
the effective portion of the hedge is recognised in equity with any ineffective
portion being recognised in the income statement. Gains and losses accumulated
in equity are recycled through the income statement on disposal of the foreign
entity.
In order to qualify for hedge accounting, the Group is required to document in
advance the relationship between the item being hedged and the hedging
instrument. The Group is also required to document and demonstrate an assessment
of the relationship between the hedged item and the hedging instrument, which
shows that the
hedge will be highly effective on an ongoing basis. The effectiveness testing is
re-performed at each period end to ensure that the hedge remains highly
effective.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated, or exercised, or no longer qualifies for hedge accounting. At that
time, any cumulative gain or loss on the hedging instrument recognised in equity
is retained in equity until the highly probably forecasted transaction occurs.
If a hedged transaction is no longer expected to occur, the net cumulative gain
or loss recognised in equity is transferred to the income statement for the
period.
Derivatives embedded in other financial instruments or other host contracts are
treated as separate derivatives when their risks and characteristics are not
closely related to those of host contracts, and the host contracts are not
carried at fair value with unrealised gains or losses reported in the income
statement.
16. Shareholder information
Copies of the results will be sent to shareholders on 7th October 2005 and
additional copies will be available from Kingfisher plc, 3 Sheldon Square,
Paddington, London W2 6PX.
The results can also be accessed on line at www.kingfisher.com as well as other
shareholder information.
Timetable of events
21st September 2005 Ex-dividend date for interim dividend
23rd September 2005 Record date for interim dividend
27th October 2005 Final date for receipt of Drip Mandate Forms by Registrars
11th November 2005 Date for payment of interim cash dividend
18th November 2005 Trade settlement date for the interim Drip dividend
If shareholders wish to elect for the Dividend Reinvestment Plan (Drip), and
have not already done so, for the forthcoming interim dividend, a letter or Drip
Mandate Form must be received by Kingfisher's Registrars, Computershare Investor
Services PLC, by 27th October 2005.
Copies of the Terms and Conditions of the Drip can be obtained from Kingfisher's
Registrars at the address below, by calling 0870 702 0129 or online at
www.kingfisher.com.
Computershare Investor Services PLC
PO Box 82
The Pavilions
Bridgwater Road
Bristol
BS99 7NH
INDEPENDENT REVIEW REPORT TO KINGFISHER PLC
Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 July 2005 which comprises the consolidated income
statement, the consolidated balance sheet, the consolidated statement of
recognised income and expense, the consolidated cash flow statement and the
related notes 1 to 14. We have read the other information contained in the
interim report and considered whether it contains any apparent misstatements or
material inconsistencies with the financial information.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The directors are
responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority.
As disclosed in note 1, the next annual financial statements of the Group will
be prepared in accordance with IFRS. This interim report has been prepared in
accordance with the basis set out in note 1.
The accounting policies are consistent with those that the directors intend to
use in the next annual financial statements. As explained in note 1, there is,
however, a possibility that the directors may determine that some changes are
necessary when preparing the full annual financial statements for the first time
in accordance with IFRS. The IFRS standards and IFRIC interpretations that will
be applicable and adopted for use in the European Union at 29 January 2006 are
not known with certainty at the time of preparing this interim financial
information.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/4
issued by the Auditing Practices Board for use in the United Kingdom. A review
consists principally of making enquiries of Group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the disclosed accounting policies have
been applied. A review excludes audit procedures such as tests of controls and
verification of assets, liabilities and transactions. It is substantially less
in scope than an audit and therefore provides a lower level of assurance.
Accordingly we do not express an audit opinion on the financial information.
This report, including the conclusion, has been prepared for and only for the
company for the purpose of the Listing Rules of the Financial Services Authority
and for no other purpose. We do not, in producing this report, accept or assume
responsibility for any other purpose or to any other person to whom this report
is shown or into whose hands it may come save where expressly agreed by our
prior consent in writing.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 July 2005.
PricewaterhouseCoopers LLP
Chartered Accountants
London
14 September 2005
This information is provided by RNS
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