Interim Results
Marks & Spencer Group PLC
08 November 2005
8 November 2005
Marks and Spencer Group plc
Interim Results 2005/06
26 weeks ended 1 October 2005
Highlights:
• UK sales at £3,302.3m down 0.2% (last year £3,307.6m); International sales
£348.5m up 8.6% (last year £321.0m);
• Group operating profit before exceptional items up 27.1% at £367.7m (last
year £289.4m);
• Group profit before tax and exceptional items up 19.6% at £308.2m (last
year £257.8m); Group profit before tax, after exceptional items, up 74.3% at
£308.2m (last year £176.8m);
• Adjusted* earnings per share from continuing operations 12.8p, up 70.7%
(last year 7.5p); Basic earnings per share 12.8p (last year 5.7p);
• Interim dividend of 4.8p per share, up 4.3% (last year 4.6p); and
• The Board announces the appointment of one executive director and two
non-executive directors
* adjusted for exceptional items
Outlook
When we updated the market on 11 October 2005, we said that the trading
environment remained very difficult. This view has not changed. We have the
important Christmas trading period ahead which was very promotionally driven
last year. We will continue to deliver outstanding quality and value. Customer
feedback on new product and pricing is positive.
Paul Myners, Chairman, commented:
'The Company has made progress in a difficult environment. The Board is
proposing an interim dividend of 4.8p, representing a 4.3% increase on last
year.
We are pleased to announce the appointment of Steven Sharp to the Board as
executive director Marketing, E-commerce, Store Design and Development.
We are also announcing the appointment of two additional non-executive
directors. Lady Patten and Jeremy Darroch will be joining as non-executive
directors in February 2006. I am delighted to welcome Louise and Jeremy to the
Board. We plan to appoint a further new non-executive director before the end of
this financial year'.
Chief Executive's Statement:
This is an encouraging first half performance with Group sales up 0.6% on the
year and an improvement of 27.1% in Group operating profit before exceptional
charges. We are pleased with the progress we are making but much remains to be
done.
Our focus on full price profitable sales, better buying, control of stock,
commitments and costs has enabled us to deliver the targets we set out in July
2004. Full price sales have continued to improve and in General Merchandise
were up 0.4% in the second quarter against a decrease of 2.4% in the first
quarter. Our plan is to continue to deliver outstanding Product, Environment
and Service.
Product
We will focus on delivering value, styling, quality and competitiveness in all
areas of the business. Customer perceptions on value are improving. Value will
continue to be a key driver across all price points.
Our buying is now much more flexible. We have opened sourcing offices in Hong
Kong, Turkey, Bangladesh and India and this will deliver further efficiencies.
The introduction of Open To Buy will mean more newness in stores and will
improve our ability to chase trends at speed. We continue to manage our stocks
and commitments tightly.
In September, we ran a TV advertising campaign for Womenswear. This was well
received, encouraging customers into store and driving improving perceptions on
styling and the brand.
In Food we have launched 140 new lines to our already successful 'Cook!' range
which is unique in being totally preservative and additive free. We have made
recipe changes to 450 lines within our ready meals food range to remove all
artificial flavourings, artificial colourings and hydrogenated fats: most of
these lines have no artificial preservatives. We have also extended the Eat Well
campaign into new recipes. Innovation and reacting to consumer trends will be a
key driver for the coming year. Our TV advertising campaign is reinforcing our
quality credentials with customers.
Environment
Five new stores were opened in retail parks. We have modernised 13 more stores
as part of our extended store modernisation trial. This programme will be
accelerated next year. Group capital expenditure for 2006/07 is expected to rise
to between £450m to £500m.
Our plans to broaden the reach of our Food business continues and six Simply
Foods were opened in the first half. Since the half year, we have opened six
trial stores on BP Connect forecourts: a further two stores open this week.
Initial performance has been encouraging. We are also opening a number of new
initiatives in some existing Food Halls offering 'Hot Food to Go', an eat-over
delicatessen counter and a new bakery concept.
Service
We launched a number of initiatives to improve service during the half. We have
overhauled pay rates for our customer assistants and introduced better career
progression plans. Around 40,000 store staff have attended a specially designed
training programme this half. We are starting to see improvements in customer
service, although with the increasing sales volumes we are now driving through
the business we still need to make further progress in this area.
Board and Organisational changes
In order to accelerate the pace of change and to better align responsibilities,
we are today announcing further changes to our Board, management and operations.
We have appointed one executive director and two additional non-executive
directors to the Board.
Steven Sharp is appointed executive director Marketing, E-commerce, Store Design
and Development, with immediate effect. In addition to his previous
responsibilities, Steven will now be responsible for the delivery of the store
modernisation programme and for the M&S Money relationship with HSBC.
There will now be three executive directors on the Board, Stuart Rose, Ian Dyson
and Steven Sharp. Ian Dyson is responsible for Finance, International, IT,
Logistics and Property. Stuart Rose will continue to manage buying and
merchandising in addition to his other responsibilities.
We are pleased to announce that George Davies will continue to run per una on a
full time basis until the end of June 2006. He will be working with us to
implement an orderly succession before becoming Chairman of per una from 1 July
2006, when it is expected he will devote at least two days a week to per una.
George is fully committed to working with us to further develop the successful
per una brand.
We are reorganising our Childrenswear business. Boyswear, Schoolwear and
Nightwear will now be managed by Menswear, while Girlswear and Babywear will be
managed by Womenswear. As a result of this restructure, Fiona Holmes, Business
Unit Director, Childrenswear, will leave the business.
In order to explore new opportunities to develop and broaden the reach of our
Food business we are forming a new Food development unit.
Lady Patten and Jeremy Darroch will be joining the Board as non-executive
directors in February 2006. Louise Patten is Chairman of Brixton plc and a
non-executive director of Bradford & Bingley plc, GUS plc and Somerfield plc, as
well as senior advisor to Bain & Co. She brings a wide range of consumer and
retail experience to the Board and will join the Remuneration Committee. Jeremy
Darroch, CFO of BSkyB plc, and ex-Group Finance Director of Dixons Stores Group
plc, brings consumer, retail and financial experience to the Board and will join
the Audit Committee.
The Board will now consist of three executive directors, six non-executive
directors and a Chairman.
Financial Review:
Summary of Results 2005/06 2004/05 % inc
£m £m
Total Revenue (excl. VAT) 3,650.8 3,628.6 0.6
UK 3,302.3 3,307.6 -0.2
International 348.5 321.0 8.6
Operating profit before exceptional charges 367.7 289.4 27.1
UK 335.2 260.2 28.8
International 32.5 29.2 11.3
Profit before tax and exceptional charges 308.2 257.8 19.6
Exceptional charges - (81.0) -
Adjusted EPS from continuing operations 12.8 7.5 70.7
Dividend per share 4.8 4.6 4.3
UK
UK sales for the 26 weeks ended 1 October 2005, were £3,302.3m, down 0.2% and
down 2.3% on a like-for-like basis. A breakdown by business area, by quarter is
shown below:
Sales Q1 (14 weeks) Q2 (12 weeks) H1%
Clothing -9.2 0.2 -4.9
Home -22.3 2.1 -11.2
General Merchandise -10.3 0.4 -5.5
Food 5.0 6.3 +5.6
Total -3.1 3.3 -0.2
Like-for-Like Sales Q1 (14 weeks) Q2 (12 weeks) H1%
General Merchandise -11.2 -0.2 -6.1
Food 0.7 2.7 +1.6
Total -5.4 1.3 -2.3
Clothing sales were down 4.9% in total for the half but the performance improved
substantially in the second quarter with sales up 0.2%. This was driven by
improvements in Womenswear, where we took action on opening price points to
restore our competitiveness. This more competitive stance, and focus on better
styling and quality, is starting to reflect in improving customer perceptions of
our offer. We also took action on opening price points in Lingerie and Menswear,
particularly on essentials. Childrenswear remains a difficult market, but our
schoolwear market share has remained stable. Home showed a significant
improvement through the course of the half, driven primarily by furniture. This
business has been refocused in terms of styling and value and is responding well
in a difficult market.
Food sales for the first half were up 5.6% on last year, up 1.6% on a
like-for-like basis with a similarly improving trend between quarter one and
quarter two. We continue to benefit from additional footage as we extend the
Simply Food format.
UK operating profit for the 26 weeks to 1 October 2005 was £335.2m, up 28.8%
(last year £260.2m). This growth reflects the benefits of the actions taken
last year to improve supplier terms and control stock and commitment, which have
contributed to an increase in the UK gross margin of 3.6 percentage points to
42.6% (last half year 39.0%).
UK operating costs of £1,073.4m, were up 4.3% on the year, reflecting the impact
of new space and the provision for a staff bonus of £29.7m. Excluding the bonus,
costs were up 1.4%.
The UK operating profit includes a contribution of £2.4m from Financial
Services, representing the Group's continuing economic interest in M&S Money
which was sold to HSBC in November 2004. We expect the full year contribution
from Financial Services to be around £11m. This is in line with our previous
guidance but excludes the profit contribution from our captive insurance
business which is now included within UK operating costs.
International
We continue to make progress with sales up 8.6% and operating profit up 11.3%.
Our first store in Moscow opened on 4 November and our existing franchisees are
continuing to invest in new footage.
In our wholly owned businesses, sales in the Republic of Ireland were ahead of
last year helped by store openings in the second half of last year in
Blanchardstown and Dundrum, and continued improvement in the performance of our
existing stores. Sales and profit in Hong Kong were affected by loss of space
following the surrender of leases to the landlord for redevelopment. Kings Super
Markets had a satisfactory half with sales up 0.3%.
Net interest expense
Net interest expense was £59.5m compared to £31.6m last year. This largely
reflects a significant increase in average net debt following the Tender Offer
last year. The average rate of interest on gross borrowings during the period
was 5.8% (last year 5.5%). The increase in other finance income has been driven
by additional contributions made into the Defined Benefit Pension Scheme of £64m
in 2004/05 and £51m at the beginning of 2005/06.
Taxation
The tax charge reflects an effective tax rate for the first half of 31%,
compared to 30.6% (before exceptional items) for the last full year.
Shareholder returns and dividends
Adjusted earnings per share from continuing operations, which excludes the
effect of exceptional items, has increased by 70.7% to 12.8p per share. The
average number of shares in issue during the period was 1,660.5m, reflecting the
impact of the Tender Offer last year.
The Board is proposing an interim dividend of 4.8p per share (last year 4.6p per
share), an increase of 4.3%.
Capital expenditure
Group capital additions for the half were £171.2m compared to £118.7m last year,
reflecting the trial store modernisation programme. Group capital expenditure
for the full year 2005/06, adjusted for IFRS, is expected to be between £350m
and £400m. For the full year we expect to add 1.4% to our total footage,
representing an increase of 1% in General Merchandise and 2.4% in Foods. Group
capital expenditure for 2006/07 is expected to rise to between £450m to £500m.
Cash flow and net debt
The Group generated a net cash inflow for the period of £246.3m compared with
£642.8m last year, a decrease of £396.5m. Last year's cashflow included £711.5m
from the now discontinued M&S Money business. Cash inflow from continuing
operations increased by £207.2m reflecting higher operating profits of £78.3m,
together with lower investment in working capital of £83.1m and lower
exceptional cash outflows of £35.8m. Stock levels were 11.4% down on the year,
reflecting the tighter stock controls across the business.
Free Cash Flow was £358.1m, compared to £778.5m last year. At the end of the
period, net debt was £2,025.5m, a decrease of £251.7m since the year end, giving
rise to gearing of 76.6% (last year end 75.6%).
Pensions
The Group paid £51m of additional contributions into the UK Defined Benefit
Pension Scheme in April 2005. These payments are reflected in the net
post-retirement liability of £778.4m at 1 October 2005 (last year £676.0m). The
£102.4m increase in the level of this liability since the year end has been
driven by movements in AA corporate bond rates.
Statements made in this announcement that look forward in time or that express
management's beliefs, expectations or estimates regarding future occurrences and
prospects are 'forward-looking statements' within the meaning of the United
States federal securities laws. These forward-looking statements reflect Marks &
Spencer's current expectations concerning future events and actual results may
differ materially from current expectations or historical results. Any such
forward-looking statements are subject to various risks and uncertainties,
including failure by Marks & Spencer to predict accurately customer preferences;
decline in the demand for products offered by Marks & Spencer; competitive
influences; changes in levels of store traffic or consumer spending habits;
effectiveness of Marks & Spencer's brand awareness and marketing programmes;
general economic conditions or a downturn in the retail or financial services
industries; acts of war or terrorism worldwide; work stoppages, slowdowns or
strikes; and changes in financial and equity markets.
For further information, please contact:
Investor Relations:
Amanda Mellor +44 (0)20 8718 3604
Sarah McGlyne +44 (0)20 8718 1563
Media enquiries:
Corporate Press Office: +44 (0)20 8718 1919
Investor & Analyst webcast:
There will be an investor and analyst presentation at 09.30 (GMT) on Tuesday 8
November 2005: This presentation can be viewed live on the Marks and Spencer
Group plc website on www.marksandspencer.com
Fixed Income Investor Conference Call:
This will be hosted by Ian Dyson at 14.30 (GMT) on Tuesday 8 November 2005:
Dial in number: +44 (0) 20 7162 0125
A recording of this call will be available until Tuesday 15 November 2005:
Dial in number: +44 (0) 20 7031 4064
Access Code: 682872
Consolidated income statement
26 weeks ended Year ended
1 Oct 2005 2 Oct 2004 2 Apr 2005
Notes £m £m £m
Revenue 2 3,650.8 3,628.6 7,710.3
Operating profit
Before exceptional charges 367.7 289.4 653.2
Exceptional operating charges 4 - (81.0) (50.6)
3 367.7 208.4 602.6
Interest expense and similar charges (71.9) (47.1) (121.3)
Interest income 12.4 15.5 28.1
Profit on ordinary activities before taxation 308.2 176.8 509.4
Analysed between:
Before exceptional operating charges 308.2 257.8 560.0
Exceptional operating charges - (81.0) (50.6)
Income tax expense 5 (95.6) (68.3) (150.5)
Profit on ordinary activities after taxation 212.6 108.5 358.9
Profit from discontinued operations 6 - 21.9 227.3
Profit for the period attributable
to shareholders 212.6 130.4 586.2
Earnings per share 7 12.8p 5.7p 29.1p
Diluted earnings per share 7 12.7p 5.6p 28.9p
Earnings per share from continuing operations 7 12.8p 4.7p 17.8p
Diluted earnings per share from
continuing operations 7 12.7p 4.7p 17.6p
Consolidated statement of recognised income and expense
26 weeks ended Year ended
1 Oct 2005 2 Oct 2004 2 Apr 2005
£m £m £m
Profit for the period attributable to
shareholders 212.6 130.4 586.2
Exchange differences on translation of
foreign operations 4.9 3.7 -
Actuarial losses on defined benefit pension
schemes (142.0) (114.4) (78.1)
Tax on items taken directly to equity 49.2 35.2 24.9
Hedging reserve - current period movement (6.1) - -
118.6 54.9 533.0
First time adoption of IAS 39 (net of tax) (1.9) - -
Total recognised income for the period 116.7 54.9 533.0
Consolidated balance sheet
As at As at As at
1 Oct 2005 2 Oct 2004 2 Apr 2005
£m £m £m
ASSETS
Non-current assets
Intangible assets 162.4 32.3 165.4
Property, plant and equipment 3,600.2 3,703.0 3,586.2
Investment property 38.5 38.6 38.6
Investments in joint ventures 8.6 8.5 8.7
Trade and other receivables 209.3 1,882.1 211.2
Other financial assets 79.3 0.6 0.3
Deferred tax asset 57.5 108.9 31.9
4,155.8 5,774.0 4,042.3
Current assets
Inventories 405.5 457.5 338.9
Trade and other receivables 197.6 1,092.9 213.8
Other financial assets 59.3 347.2 67.0
Cash and cash equivalents 321.1 850.2 212.6
983.5 2,747.8 832.3
TOTAL ASSETS 5,139.3 8,521.8 4,874.6
LIABILITIES
Current liabilities
Trade and other payables 837.8 2,007.9 717.9
Other financial liabilities 511.7 405.6 478.8
Current tax liabilities 62.9 50.1 15.5
Provisions 14.5 37.0 25.2
1,426.9 2,500.6 1,237.4
Non-current liabilities
Financial liabilities 1,967.5 2,114.7 1,948.5
Retirement benefit obligations 778.4 796.2 676.0
Other non-current liabilities 74.5 290.8 71.8
Provisions 20.1 20.1 19.7
2,840.5 3,221.8 2,716.0
TOTAL LIABILITIES 4,267.4 5,722.4 3,953.4
NET ASSETS 871.9 2,799.4 921.2
CAPITAL AND RESERVES
Called up share capital - equity 415.7 570.1 414.5
Called up share capital - non-equity - 73.3 65.7
Share premium account 117.9 78.3 106.6
Capital redemption reserve 2,108.1 1,936.3 2,102.8
Hedging reserve (6.0) - -
Other reserves (6,542.2) (6,542.2) (6,542.2)
Retained earnings 4,778.4 6,683.6 4,773.8
SHAREHOLDERS' FUNDS 871.9 2,799.4 921.2
Consolidated cash flow information
CASH FLOW STATEMENT
26 weeks ended Year ended
1 Oct 2005 2 Oct 2004 2 Apr 2005
Notes £m £m £m
Cash flows from operating activities
Profit on ordinary activities after
taxation 212.6 108.5 358.9
Taxation 95.6 68.3 150.5
Net finance expense 59.5 31.6 93.2
Exceptional operating charges - 81.0 50.6
Operating profit before exceptional
charges 367.7 289.4 653.2
(Increase)/decrease in working
capital 10A 10.4 (72.7) 20.4
Exceptional operating cash outflow (11.5) (47.3) (74.6)
Depreciation and amortisation 128.2 119.2 260.8
Share-based payments 11.5 10.5 23.4
Cash generated from operations -
continuing 506.3 299.1 883.2
Cash generated from operations -
discontinued operations - 711.5 718.6
Tax paid (23.6) (91.3) (166.7)
Net cash inflow from operating
activities 482.7 919.3 1,435.1
Cash flow from investing activities
Acquisition of subsidiary, net of
cash acquired - - (125.9)
Disposal of subsidiary, net of cash
disposed - - 477.0
Capital expenditure and financial
investment 10B (63.7) (145.6) (113.5)
Interest received 3.5 8.1 15.4
Net cash (outflow)/inflow from
investing activities (60.2) (137.5) 253.0
Cash flows from financing activities
Debt financing 10C (199.7) (196.6) 637.8
Equity financing 10D (111.8) (135.7) (2,502.0)
Net cash outflow from financing
activities (311.5) (332.3) (1,864.2)
Net cash inflow/(outflow) from
activities 111.0 449.5 (176.1)
Effects of exchange rate changes 1.2 0.9 1.1
Cash and cash equivalents at
beginning of the period 149.3 324.3 324.3
Cash and cash equivalents at end of
the period 261.5 774.7 149.3
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
26 weeks ended Year ended
1 Oct 2005 2 Oct 2004 2 Apr 2005
Notes £m £m £m
Opening net debt (2,147.7) (2,043.9) (2,043.9)
Reclassification on the adoption of IAS 32 and 39 (129.5) - -
Opening net debt - under IFRS (2,277.2) (2,043.9) (2,043.9)
Net cash inflow/(outflow) from activities 111.0 449.5 (176.1)
Cash (inflow)/outflow from (decrease)/increase in
current asset investments (17.2) 20.6 (11.0)
Cash outflow/(inflow) from decrease/(increase) in debt
financing 10C 152.5 172.7 (757.1)
Debt financing net of liquid resources disposed with
subsidiary - - 839.7
Exchange and other movements 5.4 1.3 0.7
Movement in net debt 251.7 644.1 (103.8)
Closing net debt (2,025.5) (1,399.8) (2,147.7)
1 General information and 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, and those parts of the Companies Act 1985 applicable to those companies
under IFRS. The financial information contained in these interim financial
statements has been prepared on the basis of IFRS that the Directors expect to
be applicable as at 1 April 2006. In particular the Directors have assumed that
the European Commission will endorse the amendment to IAS 19 - 'Employee
Benefits - Actuarial Gain and Losses, Group Plans and Disclosures' issued by the
IASB in December 2004. IFRS is subject to amendment and interpretation by the
International Accounting Standards Board (IASB) and there is an on-going process
of review and endorsement by the European Commission. For the reasons outlined
above, it is possible that the information presented here may be subject to
change before its inclusion in the 2006 Report and Accounts, which will be the
Group's first complete financial statements prepared in accordance with IFRS.
The accounting policies followed in the interim financial report are set out in
Appendix 1.
The results for the first half of the financial year have not been audited and
were approved by the Board of Directors on 7 November 2005. The summary of
results for the year ended 2 April 2005 does not constitute the full financial
statements within the meaning of s240 of the Companies Act 1985. The full
financial statements for that year, prepared under UK GAAP, have been reported
on by the Group's auditors and delivered to the Registrar of Companies. The
audit report was unqualified and did not contain a statement under s237(2) or
s237(3) of the Companies Act 1985.
The income statement, the cash flow statement and the statement of recognised
income and expense for the comparative period to 2 October 2004 and year ended 2
April 2005, as well as the balance sheets at 2 October 2004 and 2 April 2005,
and the related notes contained within this interim report have neither been
reviewed nor audited.
2 Revenue
26 weeks Year
ended ended
1 Oct 2 Oct 2 Apr
2005 2004 2005
£m £m £m
UK Retail 3,302.3 3,307.6 7,034.7
International Retail
Marks & Spencer branded1 239.2 212.0 455.8
Kings Super Markets 109.3 109.0 219.8
348.5 321.0 675.6
Total revenue 3,650.8 3,628.6 7,710.3
1Marks & Spencer branded businesses within International Retail consists of Republic of Ireland, Hong Kong and
franchise operations.
3 Operating profit
26 weeks Year
ended ended
1 Oct 2 Oct 2 Apr
2005 2004 2005
£m £m £m
UK Retail
Before exceptional operating charges 335.2 260.2 588.3
Exceptional operating charges - (81.0) (60.3)
335.2 179.2 528.0
International Retail
Marks & Spencer branded 30.1 27.7 60.4
Kings Super Markets 2.4 1.5 4.5
Exceptional operating income - European closure - - 9.7
32.5 29.2 74.6
Total operating profit 367.7 208.4 602.6
4 Exceptional items
26 weeks Year
ended ended
1 Oct 2 Oct 2 Apr
2005 2004 2005
£m £m £m
Head office relocation - (8.3) (8.8)
Head office restructuring programme - (3.8) (6.3)
Board restructure - (4.6) (8.4)
Closure of Lifestore - (29.3) (29.3)
Defence costs - (35.0) (38.6)
Sale of head office premises - - 31.1
Release of provision held against European closure - - 9.7
- (81.0) (50.6)
5 Taxation
The taxation charge for the 26 weeks ended 1 October 2005 is based on an
estimated effective tax rate before exceptional items of 31.0% (last full year
30.6%). Included in the tax charge for the period is a credit of £nil (last
half year £16.8m), which is attributable to exceptional operating charges.
6 Discontinued operations
26 weeks Year
ended ended
1 Oct 2 Oct 2 Apr
2005 2004 2005
£m £m £m
Profit before tax from discontinued operations - 23.4 31.2
Taxation on results from discontinued operations - (1.5) (2.0)
Profit after tax from discontinued operations - 21.9 29.2
Gain on disposal of subsidiary net assets - - 199.0
Taxation - - (0.9)
Net gain on disposal - - 198.1
Total - 21.9 227.3
On 9 November 2004, the Group completed the sale of Marks and Spencer Retail
Financial Services Holdings Limited to HSBC Holdings plc. The net sale proceeds
were £533.6m after accounting for a pre-sale dividend of £235.0m together with
the associated disposal costs. At the same time, the Group and HSBC entered
into a relationship under which the Group will continue to share in the success
of the business. Under this relationship, the Group will receive income in the
form of fees representing an amount equivalent to costs incurred, 50% of the
profits of M&S Money (after a notional tax charge and after deducting agreed
operating and capital costs) together with an amount relating to sales growth.
7 Earnings per share
The calculation of earnings per ordinary share is based on earnings after tax
(last year earnings after tax and non-equity dividends), and the weighted
average number of ordinary shares in issue during the period.
The adjusted earnings per share figures have been calculated in addition to the
earnings per share required by IAS 33 - 'Earnings per Share' and is based on
earnings excluding the effect of exceptional items. It has been calculated to
allow the shareholders to gain an understanding of the underlying trading
performance of the Group.
Details of the adjusted earnings per share are set out below:
26 weeks Year
ended ended
1 Oct 2 Oct 2 Apr
2005 2004 2005
£m £m £m
Earnings after tax and non-equity dividends 212.6 129.0 583.4
Profit from discontinued activities - (21.9) (227.3)
Earnings after tax and non-equity dividends - continuing 212.6 107.1 356.1
Exceptional operating charges (net of taxation) - 64.2 31.5
Adjusted earnings after tax and non-equity dividends - continuing 212.6 171.3 387.6
Weighted average number of ordinary shares in issue(millions) 1,660.5 2,274.1 2,006.2
Potentially dilutive share options under Group's share
option schemes(millions) 11.6 13.8 12.1
1,672.1 2,287.9 2,018.3
Basic earnings per share:
Weighted average number of ordinary shares in issue(millions) 1,660.5 2,274.1 2,006.2
Basic earnings per share 12.8 5.7 29.1
Profit from discontinued operations per share - (1.0) (11.3)
Basic earnings per share - continuing 12.8 4.7 17.8
Exceptional operating charges per share - 2.8 1.5
Adjusted basic earnings per share - continuing 12.8 7.5 19.3
Diluted earnings per share
Weighted average number of ordinary shares in issue (millions) 1,672.1 2,287.9 2,018.3
Diluted earnings per share 12.7 5.6 28.9
Profit from discontinued operations per share - (0.9) (11.3)
Diluted earnings per share - continuing 12.7 4.7 17.6
Exceptional operating charges per share - 2.8 1.6
Diluted adjusted basic earnings per share - continuing 12.7 7.5 19.2
8 Dividends
26 weeks Year
ended ended
1 Oct 2 Oct 2 Apr
2005 2004 2005
£m £m £m
Dividends on equity shares:
Ordinary : Final dividend of 7.5p per share (last half year 7.1p per share) 124.3 161.3 161.3
Ordinary : Interim dividend of 4.6p per share - - 75.6
124.3 161.3 236.9
Dividends on non-equity shares
B share : Interim dividend last half year at 3.36%1 - 1.4 1.4
B share : Final dividend last year at 3.78%1 - - 1.4
- 1.4 2.8
124.3 162.7 239.7
1Under IAS 32 - 'Financial Instruments' dividends on non-equity shares are now
treated as part of interest.
The Directors have approved an interim dividend of 4.8p per share (last half
year 4.6p per share) which, in line with the requirements of IAS 10 - 'Events
after the Balance Sheet Date', has not been recognised within these results.
This results in an interim dividend of £79.8m (last year £75.6m) which will be
paid on 13 January 2006 to shareholders whose names are on the Register of
Members at the close of business on 18 November 2005. The ordinary shares will
be quoted ex dividend on 16 November 2005. Shareholders may choose to take this
dividend in shares or in cash.
9 Changes in shareholders' funds
26 weeks Year
ended ended
1 Oct 2 Oct 2 Apr
2005 2004 2005
£m £m £m
Opening shareholders' equity 921.2 2,871.1 2,871.1
First time adoption of IAS 32 and 39 (see note 12) (67.6) - -
853.6 2,871.1 2,871.1
Profit for the period attributable to shareholders 212.6 130.4 586.2
Dividends (124.3) (162.7) (239.7)
Sales of shares held by employee trusts - 0.6 0.3
New share capital subscribed 12.5 36.9 68.4
Redemption of B shares - (11.5) (19.2)
Actuarial losses on defined benefit pension schemes (142.0) (114.4) (78.1)
Foreign currency translation 4.9 3.7 -
Charge for share based payments 11.5 10.1 22.2
Tax on items taken directly to equity 49.2 35.2 24.9
Loss on cashflow hedges deferred in equity (6.1) - -
Purchase of own shares - - (2,300.0)
Tender Offer expenses - - (14.9)
Closing shareholders' equity 871.9 2,799.4 921.2
10 Cash flow analysis
26 weeks Year
ended ended
1 Oct 2 Oct 2 Apr
2005 2004 2005
£m £m £m
A (Increase)/decrease in working capital - continuing
(Increase)/decrease in inventory (65.7) (63.8) 55.5
Increase in debtors 14.6 (5.2) (1.5)
Increase/(decrease) in creditors 61.5 (3.7) (33.6)
10.4 (72.7) 20.4
B Capital expenditure and financial investment
Purchase of property, plant and equipment (111.8) (119.3) (232.2)
Proceeds from sale of property, plant and equipment 37.5 - 117.8
Purchase of intangible fixed assets (3.6) (6.5) (10.9)
(Purchase)/sale of non-current financial assets (3.0) 0.8 0.8
Sale/(purchase) of current available for sale investments 17.2 (20.6) 11.0
(63.7) (145.6) (113.5)
C Debt financing
Cash (outflow)/inflow from borrowings (144.6) (50.5) 649.0
Drawdown of syndicated bank facility - - 200.0
Redemption of securitised loan notes (1.6) (1.2) (2.8)
Redemption of medium term notes - (125.8) (95.2)
Decrease in obligations under finance leases (1.0) (1.3) (1.6)
Redemption of B shares (5.3) - -
Movement in other creditors treated as financing - 6.1 7.7
Cash (outflow)/inflow from debt financing (152.5) (172.7) 757.1
Interest paid (47.2) (22.5) (116.5)
Non-equity dividends paid - (1.4) (2.8)
(199.7) (196.6) 637.8
D Equity financing
Equity dividends paid (124.3) (161.3) (236.9)
Shares issued under employee share schemes 12.5 36.9 68.4
Redemption of B shares - (11.5) (19.2)
Net sale of own shares held in employee trusts - 0.2 0.6
Purchase of own shares - - (2,300.0)
Tender Offer expenses - - (14.9)
(111.8) (135.7) (2,502.0)
11 Adoption of International Financial Reporting Standards
As at As at As at
2 Apr 2 Oct 3 Apr
2005 2004 2004
£m £m £m
Net assets under UK GAAP 521.4 2,466.1 2,454.0
Adjustments (after taxation)
IFRS 1 - 'Property Revaluation' a 388.2 391.3 390.5
IFRS 2 - 'Share Schemes' b 9.8 7.8 6.2
IAS 10 - 'Dividend Recognition' c 124.3 75.7 160.7
IAS 17 - 'Leasing'
Treatment of leasehold land d (72.4) (102.9) (102.4)
Finance leases e (1.8) (1.8) (1.7)
Lease incentives f (21.0) (17.9) (17.2)
Fixed rental uplifts g (13.5) (11.9) (10.3)
IAS 19 - 'Employee Benefits' h (27.2) (29.0) (30.7)
IAS 38 - 'Intangible Assets'
Software assets i 13.0 22.6 22.7
Goodwill and brands j 1.3 - -
Other (0.9) (0.6) (0.7)
Net assets under IFRS 921.2 2,799.4 2,871.1
26 weeks
Year ended ended
2 Apr 2005 2 Oct 2004
£m £m
Net income under UK GAAP 587.0 140.1
Adjustments (before taxation)
IFRS 1- 'Property Revaluation' a 1.1 0.6
IFRS 2 - 'Share Schemes' b (23.0) (10.5)
IAS 17 - 'Leasing'
Treatment of leasehold land d 29.9 (1.7)
Finance leases e (0.2) -
Lease incentives f (5.1) -
Fixed rental uplifts g (4.5) (2.2)
IAS 19 - 'Employee Benefits' h 5.3 2.4
IAS 38 - 'Intangible Assets'
Software assets i 1.4 1.0
Goodwill and brands j 0.5 -
Other (0.1) -
5.3 (10.4)
Taxation 4.6 1.4
Discontinued operations - software assets (10.7) (0.7)
586.2 130.4
a) IFRS 1 - 'Property Revaluation'
Under UK GAAP property was stated at historical cost, subject to certain
properties having been revalued as at 31 March 1988. A property revaluation was
prepared on an existing use basis by external valuers DTZ Debenham Tie Leung as
at 2 April 2004. The Group has elected under IFRS 1 to reflect this valuation,
in so far as it relates to freehold land and buildings, as deemed cost on
transition at 4 April 2004.
b) IFRS 2 - 'Share Schemes'
The Group operates a range of share-based incentive schemes. Under UK GAAP where
shares (or rights to shares) were awarded to employees, UITF 17 required that
the charge to the profit and loss account should be based on the difference
between the market value of shares at the date of grant and the exercise price
(i.e. an intrinsic value basis) spread over the performance period. Save As You
Earn (SAYE) schemes were exempt from this requirement and no charge was made.
IFRS 2 requires that all shares or options (including SAYE) awarded to employees
as remuneration should be measured at fair value at grant date, using an option
pricing model, and charged against profits over the period between grant date
and vesting date, being the vesting period. This treatment has been applied to
all awards granted but not fully vested at the date of transition.
c) IAS 10 - 'Events after the Balance Sheet Date'
Under UK GAAP dividends are recognised in the period to which they relate. IAS
10 requires that dividends declared after the balance sheet date should not be
recognised as a liability at that balance sheet date as the liability does not
represent a present obligation as defined by IAS 37 - 'Provisions, Contingent
Liabilities, and Contingent Assets'. Accordingly the final dividends for
2003/04 (£160.7m) and 2004/05 (£124.3m) are derecognised in the balance sheets
for April 2004 and April 2005 respectively.
d) IAS 17 - 'Treatment of Leasehold Land'
The Group previously recognised finance leases under the recognition criteria
set out in SSAP 21. IAS 17 Leases requires the land and building elements of
property leases to be considered separately, with leasehold land normally being
treated as an operating lease. As a consequence payments made to acquire
leasehold land, previously treated as fixed assets, have been re-categorised as
prepaid leases and amortised over the life of the lease. In addition the
revaluation previously attributed to the land element has been derecognised.
e) IAS 17 - 'Leases - Finance Leases'
Also under the provisions of IAS 17 the building elements of certain property
leases, classified as operating leases under UK GAAP, have been reclassified as
finance leases. The adjustments are to include the fair value of these leased
buildings within fixed assets and to set up the related obligation, net of
finance charges, in respect of future periods, within creditors.
f) IAS 17 ' Leases - Lease Incentives'
Under UK GAAP leasehold incentives received on entering into property leases
were recognised as deferred income on the balance sheet and amortised to the
profit and loss account over the period to the first rent review. Under IAS 17,
these incentives have to be amortised over the term of the lease. Consequently,
as the term of the lease is longer than the period to the first rent review,
amounts previously amortised to the profit and loss account are reinstated on
the balance sheet as deferred income and released over the term of the lease.
g) IAS 17 - 'Leasing - Fixed Rental Uplifts'
The Group has a number of leases that contain predetermined, fixed rental
uplifts. Recent comments by the International Financial Reporting
Interpretations Committee have indicated that under IFRS, it is necessary to
account for these leases such that the predetermined, fixed rental payments are
recognised on a straight line basis over the life of the lease. Under UK GAAP,
the Group accounted for these property lease rentals such that the increases
were charged in the year that they arose.
h) IAS 19 - 'Employee Benefits'
Previously no provision was made for holiday pay. Under IAS 19 - 'Employee
Benefits' the expected cost of compensated short term absences (e.g. holidays)
should be recognised when employees render the service that increases their
entitlement. As a result an accrual has been made for holidays earned but not
taken.
i) IAS 38 - 'Software Assets'
The cost of developing software used to be written off as incurred. Under IAS
38 - 'Intangible Assets' there is a requirement to capitalise internally
generated intangible assets provided certain recognition criteria are met.
Results have been adjusted to reflect the capitalisation and subsequent
amortisation of costs that meet the criteria. As a result expenses previously
charged to the profit and loss account have been brought onto the balance sheet
as intangible software assets and amortised over their estimated useful lives.
j) IAS 38 - 'Goodwill'
Goodwill used to be capitalised and amortised over its useful economic life.
Under IAS 38 - 'Intangible Assets' there is a requirement to separately identify
brands and other intangibles acquired rather than include these as part of
goodwill. Intangible assets, other than goodwill, are amortised over their
useful lives. Goodwill, which is considered to have an indefinite life, is
subject to an annual impairment review. As a result the goodwill recognised
under UK GAAP on the acquisition of Per Una of £125.5m has been split between
brand (£80m) and goodwill (£45.5m). The goodwill amortisation under UK GAAP has
been reversed but the brand has been amortised as required under IFRS.
12 First time adoption of IAS 32 and 39
The adoption of IAS 32 - 'Financial Instruments: Disclosure and Presentation'
and IAS 39 - 'Financial Instruments: Recognition and Measurement' with effect
from 3 April 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 impacts of IAS 32 and IAS 39 on the Group's financial statements
relate to the recognition of derivative financial instruments at fair value and
the reclassification of non-equity B shares as debt. Any 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, as follows:
Fair value hedges
The Group uses interest rate swaps to hedge the exposure to interest rates of
its issued debt. Under UK GAAP, derivative financial instruments 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
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. In addition, the Group hedges the foreign
currency exposure on inventory purchases. Under UK GAAP, foreign currency
derivatives were held off balance sheet and these are now treated as cash flow
hedges.
The adjustments to the opening balance sheet as at 3 April 2005 are as follows:
Restated
Opening Effect of opening
balance IAS 32 position
sheet and at
under IAS 39 3 Apr
IFRS 2005
£m £m £m
Non-current assets
Other financial assets 0.3 71.0 71.3
Deferred tax asset 31.9 1.3 33.2
Current assets
Other financial assets 67.0 2.7 69.7
Inventories 338.9 0.4 339.3
Current liabilities
Other financial liabilities (478.8) (68.0) (546.8)
Trade and other payables (733.2) 24.7 (708.5)
Non-current liabilities
Financial liabilities (1,948.5) (99.7) (2,048.2)
Impact on net assets (67.6)
Non-equity B shares (65.7)
Hedging reserve (1.6)
Retained earnings (0.3)
Impact on shareholders' funds (67.6)
13 Date of approval
The interim financial statements for the 26 weeks ended 1 October 2005 were
approved by the Board on 7 November 2005.
Independent review report to Marks and Spencer Group plc
Introduction
We have been instructed by the Company to review the financial information for
the six months ended 1 October 2005 which comprises consolidated interim balance
sheet as at 1 October 2005 and the related consolidated interim statements of
income, cash flows and statement of recognised income and expense for the six
months then ended and related notes. 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 accounting standards adopted for use in the
European Union. 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 accounting standards adopted for use in the European Union.
The IFRS standards and IFRIC interpretations that will be applicable and adopted
for use in the European Union at 1 April 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 1 October 2005.
PricewaterhouseCoopers LLP
Chartered Accountants
London
7 November 2005
Appendix 1
Accounting policies
Basis of preparation
The financial statements have been prepared in accordance with International
Financial Reporting Standards ('IFRS') and International Financial Reporting
Interpretations Committee ('IFRIC') interpretations and with those parts of the
Companies Act 1985 applicable to companies reporting under IFRS. The
disclosures required by IFRS 1 - 'First-time Adoption of International Financial
Reporting Standards' concerning the transition from UK GAAP to IFRS are given in
note 11. The date of transition to IFRS is 4 April 2004.
A summary of the Group's accounting policies is given below.
Accounting Convention and basis of consolidation
The Group financial statements incorporate the financial statements of Marks and
Spencer Group plc and all its subsidiaries.
The financial statements are drawn up on the historical cost basis of
accounting, except as disclosed in the accounting policies set out below.
First time adoption of International Financial Reporting Standards
IFRS 1 - 'First-time Adoption of International Financial Reporting Standards'
sets out the requirements for the first time adoption of IFRS. The Group is
required to establish its IFRS accounting policies for the year to 1 April 2006
and, in general, apply these retrospectively to determine the IFRS opening
balance sheet at its date of transition, 4 April 2004.
The standard permits a number of optional exemptions to this general principle.
The Group has adopted the following approach to the key exemptions:
• business combinations: the Group has chosen not to restate business
combinations prior to the transition date;
• fair value or revaluation as deemed cost: the Group has adopted a
valuation as deemed cost on transition for freehold land and buildings;
• employee benefits: all cumulative actuarial gains and losses, having been
recognised in equity under FRS 17 for UK GAAP purposes, have continued to be
recognised in equity at the transition date;
• financial instruments: the Group has taken the exemption not to restate
comparatives for IAS 32 Financial Instruments: Disclosure and Presentation
and IAS 39 - 'Financial Instruments: Recognition and Measurement'.
Comparative information for 2005 in the 2006 financial statements is
presented on a UK GAAP basis as previously reported;
• share based payments: the Group has not adopted the exemption to apply
IFRS 2 Share-Based Payments only to awards made after 7 November 2002.
Instead a full retrospective approach has been followed on all awards
granted but not fully vested at the date of transition to maintain
consistency across reporting periods; and
• cumulative translation differences: the cumulative translation differences
for all foreign operations are deemed to be zero at the date of transition
to IFRS.
Turnover
Turnover comprises sales of goods to customers outside the Group less an
appropriate deduction for actual and expected returns, discounts and loyalty
scheme voucher costs, and is stated net of Value Added Tax and other sales
taxes. Sales of furniture are recorded on delivery.
Pensions
Funded pension plans are in place for the Group's UK employees and the majority
of employees overseas. The assets of these pension plans are managed by
third-party investment managers and are held separately in trust.
Regular valuations are prepared by independent professionally qualified
actuaries. These determine the level of contribution required to fund the
benefits set out in the rules of the plans and allow for the periodic increase
of pensions in payment. The regular service cost of providing retirement
benefits to employees during the year, together with the cost of any benefits
relating to past service, is charged to operating profit in the year.
A credit representing the expected return on the assets of the retirement
benefit schemes during the year is included within interest. This is based on
the market value of the assets of the schemes at the start of the financial
year.
A charge is also made within interest representing the expected increase in the
liabilities of the retirement benefits schemes during the year. This arises
from the liabilities of the schemes being one year closer to payment.
The difference between the market value of the assets and the present value of
accrued pension liabilities is shown as an asset or liability in the balance
sheet.
Differences between actual and expected returns on assets during the year are
recognised in the statement of recognised income and expense in the year,
together with differences arising from changes in actuarial assumptions.
Intangible Assets
A Goodwill
Goodwill arising on consolidation represents the excess of the cost of
acquisitions over the Group's interest in the fair value of the identifiable
assets and liabilities (including intangible assets) of the acquired
entity at the date of the acquisition. Goodwill is recognised as an asset
and assessed for impairment at least annually. Any impairment is recognised
immediately in the income statement.
Upon disposal of a subsidiary the attributable goodwill is included in the
calculation of the profit or loss arising on disposal. Goodwill written off
to reserves under UK GAAP prior to 31 March 1998 has not been reinstated and
is not included in determining any subsequent profit or loss on disposal.
B Brands
Acquired brand values are held on the balance sheet at cost and amortised
over their estimated useful lives. Any impairment in value is recognised
immediately in the income statement.
C Software Intangibles
Where computer software is not an integral part of a related item of
computer hardware, the software is treated as an intangible asset.
Capitalised software costs include external direct costs of material and
services and the payroll and payroll-related costs for employees who are
directly associated with the project.
Capitalised software development costs are amortised over their expected
economic lives, normally between 3 to 5 years.
Property, Plant and Equipment
A Land and buildings
Under UK GAAP property had been previously stated at historical cost,
subject to certain properties having been revalued as at 31 March 1988.
The property portfolio was revalued as at 2 April 2004. The Group adopted
the following values on transition to IFRS:
• Freehold land and building: the 2004 revaluation was adopted as deemed
cost under the exemptions available under IFRS 1.
• Leasehold buildings: cost or 1988 revaluations were adopted as deemed
cost under the provisions of IFRS 1.
• Leasehold land: any revaluations held against leasehold land were
derecognised and the remaining cost included in prepayments.
Given that under IFRS leasehold land can not be revalued, the 2004
valuation as it related to leasehold properties was not adopted on
transition.
The Group's policy is to state property, plant and equipment at cost less
accumulated depreciation and not to revalue property for accounting
purposes.
B Investment Properties
Investment properties are recorded at cost less accumulated depreciation
and any recognised impairment loss.
C Interest
Interest is not capitalised.
D Depreciation
Depreciation is provided to write off the cost of tangible non-current
assets, less estimated residual values, by equal annual instalments as
follows:
• Land: not depreciated;
• Freehold and leasehold buildings with a remaining lease term over 50
years: depreciated to their residual value over their estimated
remaining economic lives;
• Leasehold buildings with a remaining lease term of less than 50 years:
over the remaining period of the lease;
• Fit-out: 10-25 years according to the estimated life of the asset; and
• Fixtures, fittings and equipment: 3-15 years according to the
estimated life of the asset.
Depreciation is charged on all additions to, or disposals of, depreciating
assets in the year of purchase or disposal. Any impairment in value is
charged to the income statement.
E Assets held under leases
Where assets are financed by leasing agreements where the risks and rewards
are substantially transferred to the Group ('finance leases') the assets
are treated as if they had been purchased outright and the corresponding
liability to the leasing company is included as an obligation under finance
leases. Depreciation on leased assets is charged to the income statement
on the same basis as owned assets. Leasing payments are treated as
consisting of capital and interest elements and the interest is charged to
the income statement.
All other leases are 'operating leases' and the costs in respect of
operating leases are charged on a straight-line basis over the lease term.
The value of any lease incentive received to take on an operating lease
(for example rent free periods) is recognised as deferred income and is
released over the life of the lease.
Leasehold Prepayments
Payments made to acquire leasehold land are included in prepayments at cost and
are amortised over the life of the lease.
Share Based Payments
The Group issues equity settled share based payments to certain employees. A
fair value for the equity settled share awards is measured at the date of grant.
The Group measures the fair value using the valuation technique most
appropriate to value each class of award, either the Black-Scholes or Monte
Carlo method.
The fair value of each award is recognised as an expense over the performance
and vesting period on a straight-line basis, after allowing for an estimate of
the share awards that will eventually vest. The level of vesting is reviewed
annually; and the charge is adjusted to reflect actual and estimated levels of
vesting.
Inventories
Inventories are valued at the lower of cost and net realisable value using the
retail method. All inventories are finished goods.
Foreign Currencies
The results of overseas subsidiaries are translated at the weighted average of
monthly exchange rates for sales and profits. The balance sheets of overseas
subsidiaries are translated at year-end exchange rates. The resulting exchange
differences are dealt with through reserves and reported in the consolidated
statement of recognised income and expense.
Transactions denominated in foreign currencies are translated at the exchange
rate at the date of the transaction. Foreign currency assets and liabilities
held at the balance sheet date are translated at the closing balance sheet rate.
The resulting exchange gain or loss is dealt with in the income statement.
Taxation
The tax charge comprises current tax payable and deferred tax.
The current tax charge represents an estimate of the amounts payable to tax
authorities in respect of the Group's taxable profits and is based on an
interpretation of existing tax laws.
Deferred tax is recognised on temporary differences between the carrying amount
of an asset or liability in the balance sheet and its tax base at tax rates that
are expected to apply when the asset is realised or the liability settled, based
on tax rates that have been enacted or substantively enacted by the balance
sheet date.
Deferred tax is not recognised in respect of:
• the initial recognition of goodwill that is not tax deductible.
• the initial recognition of an asset or liability in a transaction which is
not a business combination and at the time of the transaction does not
affect accounting or taxable profits.
Deferred tax assets are only recognised when it is probable that taxable profits
will be available against which the deferred tax asset can be utilised.
Deferred tax liabilities are not provided in respect of undistributed profits of
non-UK resident subsidiaries where (i) the Group is able to control the timing
of distribution of such profits and (ii) it is not probable that a taxable
distribution will be made in the foreseeable future.
Financial Instruments
The Group has adopted both IAS 32 - 'Financial Instruments: Disclosure and
Presentation' and IAS 39 -'Financial Instrument: Recognition and Measurement'
from 3 April 2005. Under the IFRS 1 transition rules IAS 32 and IAS 39 are not
applied to comparative figures.
Financial assets and 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 are recorded at their nominal amount less an allowance
for any doubtful debts.
B Investments
Investments are initially measured at cost, including transaction costs.
They are classified as either 'available for sale', 'fair value through
profit or loss' or 'held to maturity'. Where securities are designated as
'fair value through profit or loss', gains and losses arising from changes
in fair value are included in net profit or loss for the period. For
'available for sale' investments, gain or 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 net profit
or loss for the period. Equity investments that do not have a quoted
market price n an active market and whose fair value can not be reliably
measured by other means are held at cost. 'Held to maturity' investments
are measured at amortised cost using the effective interest method.
C Financial liability and equity
Financial liabilities and equity instruments are classified according to
the substance of the contractual arrangements entered into. An equity
instrument is any contract that evidences a residual interest in the assets
of the Group after deducting all of its liabilities.
D Non-equity shares
Non equity B shares in the Group are held as a current liability and the
dividend paid is included within the interest charge for the year.
E 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 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.
F Loan notes
Long term loans are held at amortised cost unless the loan is hedged by a
derivative financial instrument in which case hedge accounting treatment
will apply.
G Trade payables
Trade payables are stated at their nominal value.
H Equity instruments
Equity instruments issued by the Company are recorded at the proceeds
received, net of direct issue costs.
Derivative financial instruments and hedging activities
The Group primarily uses interest rate swaps and forward foreign currency
contracts to manage its exposures to fluctuating interest and foreign exchange
rates. These instruments are initially recognised at fair value and are
subsequently re-measured at their fair value. The method of recognising the
resulting gain or loss is dependant on whether the derivative is designated as a
hedging instrument and the nature of the item being hedged. The Group
designates derivatives as either:
• a hedge of a highly probable forecast transaction or change in the
cashflows of a recognised asset or liability (a cashflow hedge); or
• a hedge of the exposure to change in the fair value of a recognised asset
or liability (a fair value hedge).
Underlying the definition of fair value is the presumption that the group is a
going concern without any intention of curtailing materially the scale of its
operations.
For a majority of the Group's derivative instruments, the fair value will be
determined by the Group applying discounted cash flow analysis using quoted
market rates as an input into the valuation model.
In determining the fair value of a derivative, the appropriate quoted market
price for an asset held is the bid price, and for a liability issued is the
offer price. When the group has assets and liabilities with offsetting market
risks, it uses the mid-market prices as a basis for establishing fair values for
the offsetting risk positions and applies the bid or asking price to the net
open position as appropriate.
At inception of a hedging relationship, the hedging instrument and the hedged
item are documented and prospective effectiveness testing is performed. During
the life of the hedging relationship effectiveness testing is continued to
ensure the instrument remains an effective hedge of the transaction.
In order to qualify for hedge accounting the following conditions must be met:
• formal designation and documentation at inception of the hedging
relationship, detailing the risk management objective and strategy for
undertaking the hedge;
• the hedge is expected to be highly effective in achieving offsetting
changes in fair value or cash flows attributable to the hedged risk;
• for a cash flow hedge, a forecast transaction that is the subject of the
hedge must be highly probable;
• the effectiveness of the hedge can be reliably measured; and
• the hedge is assessed on an ongoing basis and determined actually to have
been highly effective throughout its life.
Derivatives classified as cash flow hedges
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 any ineffective portion is recognised immediately in the income
statement. If the firm commitment or forecasted transaction that is the subject
of a cash flow hedge results in the recognition of an asset or a liability,
then, at the time the 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 asset or liability. For hedges that
do not result in the recognition of an asset or a liability, amounts deferred in
equity are recognised in the income statement in the same period in which the
hedged items affect net profit or loss.
Derivatives classified as fair value hedges
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 profit or loss. Gains or losses from
re-measuring the derivative, or for non-derivatives the foreign currency
component of its carrying amount, are recognised in profit or loss. The gain or
loss on the hedged item attributable to the hedged risk is used to adjust the
carrying amount of the hedged item and is recognised in profit or loss.
Changes in the fair value of derivative financial instruments that do not
qualify for hedge accounting are recognised in the income statement as they
arise.
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 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 net profit or loss for the period.
The Group does not use derivatives to hedge balance sheet and profit and loss
account translation exposures. Where appropriate, borrowings are arranged in
local currencies to provide a natural hedge against overseas assets.
Acquisition or disposal of subsidiary undertakings
Results of subsidiary undertakings acquired during the financial year are
included in the financial statements from the effective date of control. The
separable net assets, both tangible and intangible of the newly acquired
subsidiary undertakings are incorporated into the financial statements on the
basis of the fair value as at the effective date of control.
Results of subsidiary undertakings disposed of during the financial year, are
included in the financial statements up to the effective date of disposal.
Where a business component representing a separate major line of business is
disposed of, or classified as held for sale, it is classified as a discontinued
operation. The post tax profit or loss of the discontinued operations is shown
as a single amount on the face of the income statement, separate from the other
results of the Group.
Policies relating to discontinued operations in comparatives
Loans and advances to customers
Loans and advances are classified as impaired when an instalment is in excess of
30 days overdue. Specific provisions are made against all advances identified
as impaired at the balance sheet date to the extent that, in the opinion of the
directors, recovery is doubtful. Specific provisions against such exposures are
calculated using a bad debt provision model, which uses the last two years'
credit history to produce estimates of the likely level of asset impairment.
General provisions relate to latent bad and doubtful debts which are present in
any lending portfolio but have not been specifically identified. General
provisions are calculated using the same bad debt provision model and an
evaluation of current economic and political factors.
Loans and advances are written off when there is no realistic prospect of
recovery, based on a predetermined set of criteria. Account balances written
off include those where no payment has been received for a period of 12 months
since the account was identified as doubtful, and in other situations such as
bankruptcy, insolvency or fraud.
Long-term assurance business
The value of the long-term assurance business consists of the present value of
surpluses expected to emerge in the future from business currently in force, and
this value is included in prepayments and accrued income. In determining their
value, these surpluses are discounted at a risk-adjusted, post tax rate.
Changes in the value are included in the income statement grossed up at the
standard rate of corporation tax applicable to insurance companies.
This information is provided by RNS
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