IFRS Accounts for 2004/05
Tesco PLC
25 May 2005
25 May 2005
Tesco Releases IFRS Accounts for 2004/05
As previously announced, Tesco today releases restated consolidated financial
information for the 52 weeks ending 26 February 2005, applying International
Financial Reporting Standards (IFRS).
The purpose of this release is to help investors and analysts understand the
changes which will impact the company's reported accounts from the 2005/06
financial year as a result of the introduction of IFRS. These changes come into
effect this year for all listed companies in the European Union and many other
countries around the world.
The key headlines from the restated accounts are in line with the guidance given
to investors and analysts at Tesco's IFRS seminar, held on 25 February 2005:
• No change to underlying business performance
• Small impact to reported 04/05 profit (profit after tax reduces by £19m*)
• No impact to group pre-tax cash flow
This full press release and accompanying financial information is available on
the company's website, at www.tesco.com/corporateinfo
*This impact excludes the effect of IAS32 and IAS39 - Tesco has elected to take
a one year exemption on these standards, as allowed under IFRS rules.
Contacts:
Investor Relations Steve Webb 01992 644 800
Press Jon Church 01992 646 606
Notes to Editors:
1. International Financial Reporting Standards have been drawn up by the
International Accounting Standards Board (www.iasb.org).
2. While UK industry has to cope with the introduction of 37 new standards
under IFRS, 17 of these have little or no impact on Tesco. A further 9 lead
only to additional disclosure. Of the 11 remaining standards, in line with
many other companies, Tesco has elected to take a one-year exemption on
IAS32 and IAS39.
3. The first results reported by Tesco under IFRS will be the group's
interim results, due for release on 20 September 2005.
Restatement of financial information for 2004/05 under International Financial
Reporting Standards (IFRS)
CONTENTS
1. Introduction
2. Restated IFRS consolidated financial statements
• Consolidated Income Statement for the 52 weeks ended 26 February 2005
• Consolidated Statement of Recognised Income and Expense for the 52 weeks
ended 26 February 2005
• Reconciliation of consolidated cashflows for the 52 weeks ended 26
February 2005
• Consolidated Balance Sheets as at 29 February 2004 (date of transition
to IFRS) - 'Opening balance sheet' and as at 26 February 2005
3. Basis of preparation
4. Review of main changes arising from IFRS
5. IFRS Accounting Policies
APPENDICES:
• Detailed reconciliation of 2004/05 profit
• Detailed reconciliation of equity at 29 February 2004 (date of
transition to IFRS)
• Detailed reconciliation of equity at 26 February 2005
1. INTRODUCTION
Tesco PLC currently prepares its consolidated financial statements under UK
Generally Accepted Accounting Principles (UK GAAP). Following regulation passed
by the European Parliament in July 2002, we will be required to prepare our 2005
/06 consolidated financial statements in accordance with International Financial
Reporting Standards (IFRS) (1).
This change applies to all financial reporting for accounting periods beginning
on or after 1 January 2005. The Group's first Annual report under IFRS will be
for 2005/06 and first IFRS interim results for the 24 weeks to 13 August 2005.
The purpose of this document is to explain how Tesco's financial performance for
the 52 week period ended 26 February 2005, and its financial position as at that
date presented under IFRS differs to that reported under UK GAAP.
The financial information presented in this document is unaudited.
Summary of the effects of IFRS
Impact on 2004/05 profit
£m
Share-based payments (52)
Goodwill 61
Leasing (4)
Pensions (41)
JV and Associate presentation (32)
--------
Profit before tax (68)
Tax 49
--------
Profit after tax (19)
========
Impact on net assets
February 2005 February 2004
Net assets £(400m) £(305m)
Impact on cash flows
None of the adjustments arising from IFRS relate to cash, and therefore there is
no impact on reported cash flows.
(1) References to IFRS in this document refer to the application of
International Financial Reporting Standards (IFRS), International Accounting
Standards (IAS) and interpretations issued by the International Accounting
Standards Board (IASB) and its relevant committees.
2. RESTATED IFRS CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENT
For the 52 weeks ended 26 February 2005
2005 IFRS 2005
(under adjustments (restated
UK GAAP) for IFRS)
£m £m £m
Revenue 33,974 - 33,974
Cost of Sales (31,271) (39) (31,310)
-------- ---------- --------
Gross Profit 2,703 (39) 2,664
Administrative expenses (754) (1) (755)
Profit on disposal of fixed assets 53 (4) 49
-------- ---------- --------
Operating profit 2,002 (44) 1,958
Share of post-tax profits from joint
ventures and associates 130 (61) 69
Finance costs (269) 35 (234)
Finance income 99 2 101
-------- ---------- --------
Profit before tax 1,962 (68) 1,894
Taxation (593) 49 (544)
-------- ---------- --------
Profit for the period 1,369 (19) 1,350
======== ========== ========
Attributable to:
Equity holders of the parent 1,366 (19) 1,347
Minority interests 3 - 3
-------- ---------- --------
1369 (19) 1,350
======== ========== ========
Earnings per share Pence Pence Pence
Basic 17.72 (0.24) 17.48
Diluted 17.50 (0.24) 17.26
Non-GAAP measures
% % %
ROCE 11.5 0.1 11.6
£m £m £m
EBITDA 2,932 (107) 2,825
CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE
For the 52 weeks ended 26 February 2005
UK GAAP IFRS IFRS
2005 Adjustments 2005
£m £m £m
Exchange differences on translation
of foreign operations 19 (8) 11
Actuarial losses on defined benefit
pension schemes - (230) (230)
Tax on items taken directly to equity 16 76 92
-------- ---------- --------
Net expense recognised directly in
equity 35 (162) (127)
Profit for the financial period 1,369 (19) 1,350
-------- ---------- --------
Total recognised income and expense
for the period 1,404 (181) 1,223
======== ========== ========
Attributable to:
Equity holders of the parent 1,401 (181) 1,220
Minority Interests 3 - 3
-------- ---------- --------
1,404 (181) 1,223
======== ========== ========
CASH FLOW RECONCILIATION
For the 52 weeks ended 26 February 2005
None of the adjustments arising from IFRS relate to cash, and therefore there is
no impact on reported cash flows.
However, IAS 7 'cash flow statements' extends the definition of cash to 'cash
and cash equivalents' which includes movements on short-term deposits. This
results in a change in presentation of the cash flow information to include
these cash equivalents.
£m
Increase in cash as reported under UK GAAP 121
Movement on short-term deposits (cash-equivalents under IFRS) (97)
-------
Increase in cash and cash equivalents (per IFRS definition) 24
Cash and cash equivalents as at 29 February 2004 1,100
Effect of exchange rate fluctuations on cash and cash equivalents 22
-------
Cash and cash equivalents as at 26 February 2005 1,146
=======
CONSOLIDATED BALANCE SHEET
At 26 February 2005
2005 (under Adjustments 2005 2004
UK GAAP) for IFRS (under IFRS) (under IFRS)
£m £m £m
Non-current assets
Property, plant and
equipment 15,495 (1,046) 14,449 13,186
Investment property - 637 637 539
Goodwill and
intangible 1,044 364 1,408 1,221
assets
Investments in joint
ventures and 407 5 412 330
associates
Other investments 7 - 7 6
Deferred tax assets - 14 14 12
--------- ---------- ------- -------
16,953 (26) 16,927 15,294
Current assets
Inventories 1,309 - 1,309 1,199
Trade and other 1,002 (233) 769 811
receivables
Cash and cash 1,146 - 1,146 1,100
equivalents --------- ---------- ------- -------
3,457 (233) 3,224 3,110
Current liabilities
Trade and other (5,374) 417 (4,957) (3,986)
payables
Short-term (477) (5) (482) (847)
borrowings
Current tax payable (221) - (221) (308)
--------- ---------- ------- -------
(6,072) 412 (5,660) (5,141)
Net current (2,615) 179 (2,436) (2,031)
liabilities
Non-current liabilities
Long-term borrowings (4,511) (56) (4,567) (4,376)
Post-employment - (735) (735) (674)
benefits
Deferred tax (731) 232 (499) (438)
liabilities
Other liabilities (20) (1) (21) (25)
Provisions (19) 7 (12) (12)
--------- ---------- ------- -------
(5,281) (553) (5,834) (5,525)
--------- ---------- ------- -------
Net assets 9,057 (400) 8,657 7,738
========= ========== ======= =======
Equity
Share capital 389 - 389 384
Share premium 3,704 - 3,704 3,470
account
Other reserves 40 - 40 40
Retained earnings 4,873 (400) 4,473 3,799
--------- ---------- ------- -------
Equity attributable to
equity holders of 9,006 (400) 8,606 7,693
the parent
Minority interests 51 - 51 45
--------- ---------- ------- -------
Total equity 9,057 (400) 8,657 7,738
========= ========== ======= =======
3. BASIS OF PREPARATION
The financial information presented in this document has been prepared on the
basis of all International Financial Reporting Standards (IFRS) and
International Financial Reporting Interpretations Committee (IFRIC)
interpretations that are expected to be applicable to 2005/06 financial
reporting. These are subject to ongoing review and endorsement by the European
Commission, or possible amendment by the IASB, and are therefore subject to
possible change. Further standards or interpretations may also be issued that
could be applicable for 2005/06. These potential changes could result in the
need to change the basis of accounting or presentation of certain financial
information from that presented in this document.
The Group may need to review some accounting treatments used for the purpose of
this document as a result of emerging industry consensus on practical
application of IFRS and further technical opinions. This could mean that the
financial information in this document may require modification until the Group
prepares its first complete set of IFRS financial statements for the 2005/06
financial year.
3.1. IFRS 1: First time adoption of International Financial
Reporting Standards
The rules for first-time adoption of IFRS are set out in IFRS 1, which requires
that the Group establishes its IFRS accounting policies for the 2005/06
reporting date and, in general, apply these retrospectively.
The standard allows a number of optional exemptions on transition to help
companies simplify the move to IFRS. The exemptions selected by Tesco are set
out below:
a) Business Combinations (IFRS 3)
The Group has elected to apply IFRS 3 prospectively from the date of transition
to IFRS rather than to restate previous business combinations.
b) Employee Benefits (IAS 19) - Actuarial gains and losses on
defined benefit pension schemes
The Group has chosen to recognise all cumulative actuarial gains and losses at
the date of transition to IFRS. Going forward, we will apply the rules of the
amendment to IAS 19 (issued in December 2004) which allows actuarial gains and
losses to be recognised immediately in the Statement of Recognised Income and
Expense. This approach is consistent with the treatment required by the UK
standard FRS 17, the effect of which we have previously disclosed in our UK GAAP
accounts.
c) Cumulative translation differences (IAS 21 - The effects of changes in
foreign exchange rates)
According to IAS 21, cumulative foreign exchange movements on translation of
foreign entities on consolidation should be disclosed separately within
shareholders' funds. However, for simplicity, the Group has elected to reset the
foreign currency translation reserve to zero as at 29 February 2004.
d) Financial Instruments (IAS 39 - Financial Instruments: Recognition and
measurement and IAS 32 - Financial Instruments: Disclosure and presentation)
Tesco has opted to take advantage of the one-year exemption for implementation
of the Financial Instruments standards. Therefore, for 2004/05 IFRS financial
information, financial instruments continue to be accounted for and presented in
accordance with UK GAAP. For 2005/06 financial reporting, adjustments will be
made as at 27 February 2005 to reflect the differences between UK GAAP and IAS
32/IAS 39.
3.2 Presentation of financial information
The layout of the primary financial statements has been amended in accordance
with IAS 1 'Presentation of Financial Statements' from that presented under UK
GAAP. This format and presentation may require modification as practice and
industry consensus develops.
4. REVIEW OF MAIN CHANGES ARISING FROM ADOPTION OF IFRS
The following describes the most significant adjustments arising from transition
to IFRS.
4.1 Share-based payments (IFRS 2)
a) Share Option Schemes
The main impact of IFRS 2 for Tesco is the expensing of employees' and
directors' share options.
The expense is calculated with reference to the fair value of the award on the
date of grant and is recognised over the vesting period of the scheme, adjusted
to reflect actual and expected levels of vesting. We have used the Black-Scholes
model to calculate the fair values of options on their grant date.
To ensure better comparability, Tesco will apply IFRS 2 retrospectively to all
options granted but not fully vested as at 29 February 2004, rather than just to
those granted after 7 November 2002. The fair values of awards granted prior to
November 2002 were published on our website on 25 February 2005.
In 2004/05, application of IFRS 2 results in a pre-tax charge to the Income
Statement of £48m; however, the pre-tax effect is offset by a deferred tax
credit of £16m. Thus the net effect on post-tax profit for 2004/05 is £32m.
Deferred tax is calculated on the basis of the difference between market price
at the balance sheet date and the option exercise price. As a result the tax
effect will not correlate to the charge. The excess of the deferred tax over the
cumulative P&L charge at the tax rate is recognised in equity (in 2004/05 this
amounted to a credit of £9m to retained earnings). The deferred tax asset
recognised in February 2004 and February 2005 relating to the share option
schemes is £25m and £49m respectively.
b) Share Bonus Schemes
Under UK GAAP we currently expense share bonus schemes to the P&L applying the
rules of UITF 17. Whereas the UK GAAP P&L charge is based on the intrinsic value
of the award, the IFRS 2 charge is based on the Fair Value. This results in an
additional charge of £4m to the Income Statement in 2004/05.
As a result of IFRS, deferred tax assets recognised under UK GAAP relating to
share bonus schemes have reduced by approximately £8m at both the 2004 and 2005
balance sheet dates.
4.2 Goodwill arising on Business Combinations (IFRS 3)
Under IFRS 3, goodwill is no longer amortised on a straight-line basis but
instead is subject to annual impairment testing. Consequently, the goodwill
balances were reviewed for impairment as at February 2004 and February 2005 and
no further adjustments were identified.
In terms of adjustments to the income statement in 2004/05, the non-amortisation
of goodwill results in an increase of pre-tax profit of £61m. There are no
associated tax impacts.
In the February 2005 balance sheet, a foreign exchange gain of £2m has been
recognised through reserves relating to the non-amortisation of goodwill;
therefore, the total adjustment to net assets relating to goodwill amounts to
£63m.
4.3 Recognition of dividends (IAS 10 - Post-Balance sheet events)
Dividends declared after the balance sheet date will not be recognised as a
liability as at that balance sheet date.
The final dividend of £365m declared in April 2004 relating to the 2003/04
financial year has been reversed in the opening balance sheet and charged to
equity in the balance sheet as at 26 February 2005. Similarly, the final
dividend accrued for the 2004/05 financial year of £410m has been reversed in
the IFRS balance sheet as at 26 February 2005.
4.4 Leasing (IAS 17)
UK GAAP and IFRS accounting for leases are broadly similar except that IAS 17
requires the Group to consider property leases in their component parts (i.e.
land and building elements separately).
Following a detailed review of our property lease portfolio, a small number of
'building' leases have been reclassified as finance leases and brought on
balance sheet, based on the criteria of IAS 17. This has led to a relatively
small increase in fixed assets, and a similar increase in finance lease
creditors.
The following adjustments have been made at the opening balance sheet and as at
26 February 2005:
29 February 26 February
2004 2005
£m £m
Property, plant & equipment 29 49
Adjustment to net assets (4) (5)
The main impact on the income statement is that some UK GAAP operating lease
expenses will be replaced with depreciation and financing charges for the
building elements of the reclassified leases. Over the life of the lease, the
total Income Statement charge will remain the same, but the timing of expenses
will change, with more of the total expense recognised earlier in the lease
term. The net pre-tax impact on the Income Statement is immaterial for the 52
weeks ended 26 February 2005.
In 2004/05 there is a one-off P&L adjustment of £4m, relating to the deferral of
some profit from the sale and leaseback deal completed in April 2004, which
instead will be recognised over the 25 year lease term.
4.5 Employee benefits (IAS 19)
Post-employment benefits
For UK GAAP reporting, we apply the measurement and recognition policies of SSAP
24 for pensions and other post-employment benefits, whilst providing detailed
disclosures for the alternative measurement principles of FRS 17.
IAS 19 takes a similar approach to accounting for defined benefit schemes as FRS
17, 'Retirement Benefits', thus on transition, the deficit disclosed under FRS
17 has been recognised in the balance sheet. At the opening balance sheet, this
has resulted in a pre-tax reduction in net assets of £676m which represents the
sum of the deficit plus the reversal of a SSAP 24 debtor in the UK GAAP balance
sheet as at February 04. An associated deferred tax asset of £199m has been
recognised in respect of the pension deficit. Therefore the total adjustment to
net assets is £477m.
Going forward, we have chosen to apply the amendment to IAS 19 which allows
actuarial gains and losses to be recognised immediately in the Statement of
Recognised Income and Expense i.e. the actuarial gains and losses will be taken
directly to reserves.
The incremental pre-tax Income Statement charge for 2004/05 from the adoption of
IAS 19, compared to SSAP 24, is an additional charge of £41m. This is split
between the current service cost (increases operating costs by £45m) and the
return on plan assets (increases finance income by £4m). The related tax effect
of this is a £12m credit to the P&L. Therefore the 2004/05 after tax effect of
the change to IAS 19 is a reduction in profit of £29m.
The actuarial loss on the scheme for 2004/05, recognised through reserves, is
£230m, with an offsetting tax adjustment of £67m.
The February 2005 IAS 19 pension deficit is £735m, with an associated deferred
tax asset of £279m.
4.6 Joint ventures (IAS 31) and associates (IAS 28)
Tesco has chosen the equity method of accounting for joint ventures (JVs) and
associates, which is largely consistent with how they are accounted for in the
UK GAAP accounts.
The adoption of IFRS will lead to a change in the presentation of the Group's
share of the results of our JVs and Associates. Under UK GAAP, we currently
include our share of JV and Associate operating profits before interest and tax
and show our share of their interest and tax in the respective Group lines on
the P&L. Under IFRS, JV and Associate profit is shown as a net figure i.e. post
interest and tax. This will have the effect of reducing profit before tax, but
will reduce the tax charge. Overall, there is no impact on the Group profit
after tax as this is purely a presentational change.
4.7 Impairment of assets (IAS 36)
Under IAS 36, individual assets should be reviewed for impairment when there are
any indicators of impairment. Where individual assets do not generate cash flows
independently from one another, the impairment review should be carried out at
the 'Cash-Generating Unit' (CGU) level, which represents the lowest level at
which cash flows are independently generated. The IASB has determined that for
retailers this is at the individual store level.
Following impairment reviews at the opening balance sheet date, we identified a
small number of stores which in total required a provision for impairment of
£142m. This has the effect of reducing the total fixed asset balance by
approximately 1% as at 29 February 2004.
A similar review was performed for 2004/05 but no further stores required an
impairment provision. However, due to movements in foreign exchange rates, the
overall provision set against fixed assets has increased by £10m - this
consolidation adjustment has been taken through reserves, with no impact on the
2004/05 Income Statement.
IAS 36 has the additional effect of reducing the deferred tax liability by £15m
as at February 2004 and £17m as at February 2005 (the movement year-on-year
relates to foreign exchange differences which have been taken to reserves). The
deferred tax adjustments arise because the impairment reviews have reduced the
net book values of certain assets qualifying for capital allowances, with no
corresponding change in the tax base.
4.8 Intangible assets (IAS 38)
Under UK GAAP, we currently include licences and capitalised development costs
within tangible fixed assets on the balance sheet. Under IAS 38, 'Intangible
Assets', such items should be disclosed separately on the face of the balance
sheet.
As a result, there is a reclassification of £256m in the opening balance sheet,
and £306m in the balance sheet as at 26 February 2005, between property, plant
and equipment and intangible assets. There is no impact on the Income Statement
from this reclassification.
4.9 Investment Properties (IAS 40)
Under UK GAAP, we currently include all owned property assets within tangible
fixed assets on the balance sheet. Under IAS 40, 'Investment Properties', we are
required to split out any property which earns rental income or is held for
capital appreciation.
As a result, there is a reclassification of £539m in the opening balance sheet
and £637m in the balance sheet as at 26 February 2005 between property, plant
and equipment and investment property. There is no impact on the Income
Statement from this reclassification.
4.10 Deferred and current taxes (IAS 12, 'Income taxes')
Under UK GAAP, deferred tax is recognised in respect of all timing differences
that have originated but not reversed by the balance sheet date and which could
give rise to an obligation to pay more or less taxation in the future.
Deferred tax under IAS 12 'Income Taxes' is recognised in respect of all
temporary differences at the balance sheet date between the tax bases of assets
and liabilities and their carrying value for financial reporting purposes.
The change to a balance sheet liability method of providing for deferred tax
leads to a number of adjustments, as follows:
Feb 2004 2004/05 2004/05 Feb 2005
Net Assets P&L Reserves Net Assets
£m £m £m £m
Impact of IAS 12 (79) (13) (2)* (94)
Tax effect of accounting changes 232 30 78 340
-------- ------- -------- --------
Net impact on tax balance/profit
after tax 153 17 76 246
JV/Associate presentation change 32
-------
Total impact on tax (incl. JV
presentation) 49
* Foreign exchange loss on translation of foreign operations
The significant components of the balance sheet adjustments are the recognition
of deferred tax assets on the pension deficit and share-based payments; less
deferred tax provisions for potential future gains arising from rolled-over
gains and for the potential future tax liabilities arising from fair value
adjustments recorded for business combinations. Neither of these provisions were
previously recognised under FRS 19.
4.11 Other adjustments
Other adjustments arise from the reclassification of money market deposits from
current asset investments to cash and cash equivalents (as a result of the
definition within IAS 7 'Cash Flow Statements'), and other minor presentation
differences.
5. IFRS ACCOUNTING POLICIES
The following section provides a summary of Tesco's Group Accounting Policies
under IFRS.
Basis of preparation
The financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS) for the first time. For more details see
section 0 of this document.
Basis of consolidation
The Group financial statements consist of the financial statements of the
Company, entities controlled by the Company (its subsidiaries) and the Group's
share of interests in joint ventures and associates.
Subsidiaries, associates and joint ventures
A subsidiary is an entity whose operating and financing policies are controlled,
directly or indirectly, by Tesco PLC. The accounts of the parent Company's
subsidiary undertakings are prepared to dates around the Group period end apart
from Global T.H., Tesco Polska Sp. Z o.o., Tesco Stores CR a.s., Tesco Stores SR
a.s., Tesco Kipa A.S., Samsung Tesco Co. Limited, Ex-Chai Distribution System
Co. Ltd and C Two-Network Co. Ltd which are prepared to 31 December.
An associate is an undertaking, not being a subsidiary or joint venture, over
which Tesco PLC has significant influence and can participate in the financial
and operating policy decisions of the entity.
A joint venture is an entity in which Tesco holds an interest on a long-term
basis and which is jointly controlled by Tesco and one or more other venturers
under a contractual agreement.
Tesco's share of the results of joint ventures and associates is included in the
Group income statement using the equity accounting basis. Investments in joint
ventures and associates are carried in the Group balance sheet at cost plus
post-acquisition changes in the Group's share of the net assets of the entity,
less any impairment in value. The carrying values of investments in joint
ventures and associates include acquired goodwill.
Use of assumptions and estimates
The preparation of the consolidated financial statements requires management to
make judgements, estimates and assumptions that affect the application of
policies and reported amounts of assets and liabilities, income and expenses.
The estimates and associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of making judgements about
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and
future periods.
Revenue
Revenue consists of sales through retail outlets and sales of development
properties. Revenue is recorded net of returns, vouchers and value-added taxes,
when the significant risks and rewards of ownership have been transferred to the
buyer. Commission income is recorded based on the terms of the contracts.
Property, plant and equipment
Property, plant and equipment assets are carried at cost less accumulated
depreciation and any recognised impairment in value.
Depreciation is provided on a straight-line basis over the anticipated useful
economic lives of the assets.
The following rates applied for the Group and are consistent with the prior
year:
• Freehold and leasehold buildings with greater than 40 years unexpired -
at 2.5% of cost
• Leasehold properties with less than 40 years unexpired are depreciated
by equal annual instalments over the unexpired period of the lease.
• Plant, equipment, fixtures and fittings and motor vehicles - at rates
varying from 10% to 33%.
All tangible fixed assets are reviewed for impairment in accordance with IAS 36,
Impairment of Assets, when there are indications that the carrying value may not
be recoverable.
Borrowing costs
Borrowing costs directly attributable to the acquisition or construction of
qualifying assets are capitalised. Qualifying assets are those that necessarily
take a substantial period of time to prepare for their intended use.
Investment property
Investment property is property held to earn rentals and/or for capital
appreciation rather than for the purpose of Group operating activities. The cost
model is applied to all investment property, using consistent depreciation
policies to those described for owner-occupied property.
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at their
fair value or, if lower, at the present value of the minimum lease payments,
each determined at the inception of the lease. The corresponding liability to
the lessor is included in the balance sheet as a finance lease obligation. Lease
payments are apportioned between finance charges and reduction of the lease
obligations so as to achieve a constant rate of interest on the remaining
balance of the liability.
Rentals payable and receivable under operating leases are charged to income on a
straight-line basis over the term of the relevant lease.
Business Combinations and Goodwill
Goodwill arising on consolidation represents the excess of the cost of an
acquisition over the fair value of the Group's share of the net assets of the
acquired subsidiary, associate or joint venture at the date of acquisition.
At the acquisition date, goodwill acquired is recognised as an asset and is
allocated to each of the cash-generating units expected to benefit from the
combination's synergies. This goodwill is reviewed for impairment at least
annually 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.
Any impairment is recognised immediately in profit or loss and is not
subsequently reversed.
Goodwill arising on the acquisition of joint ventures and associates is included
within the carrying value of the investment.
Goodwill arising on acquisitions before 29 February 2004 (the date of transition
to IFRS) has been retained at the previous UK GAAP amounts subject to being
tested for impairment at that date.
Intangible assets
Acquired intangible assets, such as licences, are measured initially at cost and
are amortised on a straight-line basis over their estimated useful lives.
Research and development costs
Research costs are expensed as incurred. Development expenditure incurred on an
individual project is carried forward only if all the criteria set out in IAS 38
'Intangible Assets' are met.
Following the initial recognition of the development expenditure, the cost is
amortised over the project's estimated useful life, usually at 14-25% of cost.
Inventories
Inventories comprise goods held for resale and properties held for, or in the
course of, development and are valued at the lower of cost and net realisable
value. Stocks are valued at retail prices and reduced by appropriate margins to
take into account factors such as average cost, obsolescence, seasonality and
damage.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand
and short term deposits with an original maturity of three months or less.
Pensions
The Group accounts for pensions and other post-retirement benefits (principally
private healthcare) under IAS19 'Employee Benefits'.
In respect of defined benefit plans, obligations are measured at discounted
present value (using the projected unit credit method) whilst plan assets are
recorded at fair value. The operating and financing costs of such plans are
recognised separately in the Income Statement; service costs are spread
systematically over the expected service lives of employees and financing costs
are recognised in the periods in which they arise. Actuarial gains and losses
are recognised immediately in the Statement of Recognised Income and Expense.
Payments to defined contribution schemes are recognised as an expense as they
fall due.
Share-based payments
Employees (including directors) of the Group receive part of their remuneration
in the form of share-based payment transactions, whereby employees render
services in exchange for shares or rights over shares (equity-settled
transactions).
The fair value of employee share option plans is calculated using the
Black-Scholes model. In accordance with IFRS 2 'Share-based payments' the
resulting cost is charged to the Income Statement over the vesting period of the
options. The value of the charge is adjusted to reflect expected and actual
levels of options vesting.
Income tax
The tax expense included in the Income Statement comprises current and deferred
tax. Current tax is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted by the balance sheet date.
Tax is recognised in the Income Statement except to the extent that it relates
to items recognised directly in equity, in which case it is recognised in
equity.
Deferred tax is provided using the balance sheet liability method, providing for
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for taxation purposes.
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 is
charged or credited in the Income Statement, except when it relates to items
charged or credited directly to equity, in which case deferred tax is also dealt
with in equity.
Deferred tax liabilities are 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.
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 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.
Foreign currencies
Transactions in currencies other than Pounds Sterling are recorded at the
exchange rates on the date of the transaction. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign currencies are
retranslated at the rates prevailing on the balance sheet date. Gains and losses
arising on retranslation are included in the net profit or loss for the period,
except for exchange differences arising on non-monetary assets and liabilities
where the changes in fair value are recognised directly in equity.
The financial statements of foreign subsidiaries are translated into Pounds
Sterling according to the functional currency concept of IAS 21 'The Effects of
Changes in Foreign Exchange Rates'. Since all consolidated companies operate as
operationally independent entities, their respective local currency is the
functional currency. Therefore, assets and liabilities of overseas subsidiaries
in foreign currencies are translated at exchange rates prevailing at the date of
the Group balance sheet; profits and losses are translated into Sterling at
average exchange rates for the relevant accounting periods. Exchange differences
arising, if any, are classified as equity and transferred to the Group's
translation reserve.
Financial instruments
The policy on financial instruments used in this document is consistent with UK
GAAP as the Group has taken advantage of the exemption in IFRS 1 not to apply
IAS 32 and IAS 39 to its 2004/05 figures. The accounting policies for IAS 32 and
IAS 39 will be disclosed in the 2005/06 Interim Accounts.
APPENDIX 1: RECONCILIATION OF PROFIT
For the 52 weeks ended 26 February 2005
Reported Share-based Business Leasing Employee
under payments Combinations benefits
UK GAAP
IFRS 2 IFRS 3 IAS 17 IAS 19
£m £m £m £m £m
Revenue 33,974 - - - -
Cost of Sales (31,271) - - 1 (40)
-------- --------- ---------- ------- --------
Gross profit 2,703 - - 1 (40)
Administrative
expenses (754) (52) 56 - (5)
Profit on
disposal of
fixed assets 53 - - (4) -
-------- --------- ---------- ------- --------
Operating
profit 2,002 (52) 56 (3) (45)
Share of
post-tax
profits from
joint ventures
and associates 130 - 5 - -
Finance costs (269) - - (1) -
Finance income 99 - - - 4
-------- --------- ---------- ------- --------
Profit before
tax 1,962 (52) 61 (4) (41)
Income tax
expense (593) 16 - 2 12
-------- --------- ---------- ------- --------
Profit for the
period 1,369 (36) 61 (2) (29)
======== ========= ========== ======= ========
Reconciliation to underlying profit
Profit before
tax 1,962 (52) 61 (4) (41)
Net profit/
loss on
disposal of
fixed assets (53) - - 4 -
Integration
costs 53 - - - -
Goodwill
amortisation 67 - (61) - -
--------- ---------- ------- --------
Underlying
profit 2,029 (52) - - (41)
--------- ---------- ------- --------
Presentation Deferred Total IFRS Restated
of JVs and tax adjustments under
Associates IFRS
IAS 28/31 IAS 12
£m £m £m £m
Revenue - - - 33,974
Cost of Sales - - (39) (31,310)
--------- -------- --- --------- --------
Gross profit - - (39) 2,664
Administrative
expenses - - (1) (755)
Profit on
disposal of
fixed assets - - (4) 49
--------- -------- --- --------- --------
Operating profit - - (44) 1,958
Share of post-tax
profits from
joint ventures
and associates (66) - (61) 69
Finance costs 36 - 35 (234)
Finance income (2) - 2 101
--------- -------- --- --------- --------
Profit before
tax (32) - (68) 1,894
Income tax
expense 32 (13) 49 (544)
--------- -------- --- --------- --------
Profit for the
period - (13) (19) 1,350
========= ======== === ========= ========
Reconciliation to underlying profit
Profit before
tax (32) - (68) 1,894
Net profit/
loss on
disposal of
fixed assets - - 4 (49)
Integration
costs - - - 53
Goodwill
amortisation - - (61) 6
--------- -------- --------- --------
Underlying
profit (32) - (125) 1,904
--------- -------- --------- --------
APPENDIX 2: RECONCILIATION OF EQUITY - As at 29 February 2004 (Opening balance
sheet for IFRS)
Reported under Business Pensions Dividends Investment Intangible
UK GAAP Combinations property assets
IFRS 3 IAS 19 IAS 10 IAS 40 IAS 38
£m £m £m £m £m £m
Non-current assets
Property,
plant and
equipment 14,094 - - - (539) (256)
Investment
property - - - - 539 -
Goodwill and
intangible
assets 965 - - - - 256
Investments in
joint ventures
and associates 330 - - - - -
Other
investments 6 - - - - -
Deferred tax - - - - - -
assets -------- ------- ------ ------ ------- ------
15,395 - - - - -
Current assets
Inventories 1,199 - - - - -
Trade and
other
receivables 826 - (12) - - -
Investments 430 - - - - -
Cash and cash
equivalents 670 - - - - -
-------- ------- ------ ------ ------- ------
3,125 - (12) - - -
Current liabilities
Trade and
other payables (4,364) - 10 365 - -
Short-term
borrowings (844) - - - - -
Current tax
payable (308) - - - - -
-------- ------- ------ ------ ------- ------
(5,516) - 10 365 - -
Net current
liabilities (2,391) - (2) 365 - -
Non-current liabilities
Long-term
borrowings (4,346) - - - - -
Post-employment
benefits - - (674) - - -
Deferred tax
liabilities (579) - 199 - - -
Other
liabilities (22) - - - - -
-------- ------- ------ ------ ------- ------
(4,947) - (475) - - -
Provisions (14) - - - - -
-------- ------- ------ ------ ------- ------
Net Assets 8,043 - (477) 365 - -
======== ======= ====== ====== ======= ======
Equity
Share capital 384 - - - - -
Share premium
account 3,470 - - - - -
Other reserves 40 - - - - -
Retained
earnings 4,104 - (477) 365 - -
-------- ------- ------ ------ ------- ------
Total equity
shareholders'
funds 7,998 - (477) 365 - -
Minority
Interests 45 - - - - -
-------- ------- ------ ------ ------- ------
Total equity 8,043 - (477) 365 - -
======== ======= ====== ====== ======= ======
Leasing Share based Impairment of Deferred tax Other Restated
payments fixed assets under
IAS 17 IFRS 2 IAS 36 IAS 12 IFRS
£m £m £m £m £m £m
Non-current assets
Property,
plant and
equipment 29 - (142) - - 13,186
Investment
property - - - - - 539
Goodwill and
intangible
assets - - - - - 1,221
Investments in
joint ventures
and associates - - - - - 330
Other
investments - - - - - 6
Deferred tax
assets - - - - 12 12
------ ------- ------- ------ ----- -------
29 - (142) - 12 15,294
Current assets
Inventories - - - - - 1,199
Trade and
other
receivables (3) - - - - 811
Investments - - - - (430) -
Cash and cash
equivalents - - - - 430 1,100
------ ------- ------- ------ ----- -------
(3) - - - - 3,110
Current liabilities
Trade and
other payables - - - - 3 (3,986)
Short-term
borrowings (3) - - - - (847)
Current tax
payable - - - - - (308)
------ ------- ------- ------ ----- -------
(3) - - - 3 (5,141)
Net current
liabilities (6) - - - 3 (2,031)
Non-current liabilities
Long-term
borrowings (30) - - - - (4,376)
Post-employment
benefits - - - - - (674)
Deferred tax
liabilities 1 17 15 (79) (12) (438)
Other
liabilities - - - - (3) (25)
------ ------- ------- ------ ----- -------
(29) 17 15 (79) (15) (5,513)
Provisions 2 - - - - (12)
------ ------- ------- ------ ----- -------
Net Assets (4) 17 (127) (79) - 7,738
====== ======= ======= ====== ===== =======
Equity
Share - - - - - 384
capital
Share premium
account - - - - - 3,470
Other reserves - - - - - 40
Retained
earnings (4) 17 (127) (79) - 3,799
------ ------- ------- ------ ----- -------
Total equity
shareholders'
funds (4) 17 (127) (79) - 7,693
Minority
Interests - - - - - 45
------ ------- ------- ------ ----- -------
Total equity (4) 17 (127) (79) - 7,738
====== ======= ======= ====== ===== =======
NB - The above UK GAAP numbers have been adjusted into IFRS format (in
accordance with IAS 1)
APPENDIX 3: RECONCILIATION OF EQUITY - As at 26 February 2005
Reported under Business Pensions Dividends Investment Intangible
UK GAAP Combinations property assets
IFRS 3 IAS 19 IAS 10 IAS 40 IAS 38
£m £m £m £m £m £m
Non-current assets
Property,
plant and
equipment 15,495 - - - (637) (306)
Investment
property - - - - 637 -
Intangible
assets 1,044 58 - - - 306
Investments in
joint ventures
and associates 407 5 - - - -
Other
investments 7 - - - - -
Deferred tax - - - - - -
assets -------- -------- ------ ------ ------- ------
16,953 63 - - - -
Current assets
Inventories 1,309 - - - - -
Trade and
other
receivables 1,002 - (230) - - -
Investments 346 - - - - -
Cash and cash
equivalents 800 - - - - -
-------- -------- ------ ------ ------- ------
3,457 - (230) - - -
Current liabilities
Trade and
other payables (5,374) - 14 410 - -
Short-term
borrowings (477) - - - - -
Current tax
payable (221) - - - - -
-------- -------- ------ ------ ------- ------
(6,072) - 14 410 - -
Net current
liabilities (2,615) - (216) 410 - -
Non-current
liabilities
Long-term
borrowings (4,511) - - - - -
Post-employment
benefits - - (735) - - -
Deferred tax
liabilities (731) - 279 - - -
Other
liabilities (20) - - - - -
-------- -------- ------ ------ ------- ------
(5,262) - (456) - - -
Provisions (19) - - - - -
-------- -------- ------ ------ ------- ------
Net Assets 9,057 63 (672) 410 - -
======== ======== ====== ====== ======= ======
Equity
Share 389 - - - - -
capital
Share premium
account 3,704 - - - - -
Other reserves 40 - - - - -
Retained
earnings 4,873 63 (672) 410 - -
-------- -------- ------ ------ ------- ------
Total equity
shareholders'
funds 9,006 63 (672) 410 - -
Minority
Interests 51 - - - - -
-------- -------- ------ ------ ------- ------
Total equity 9,057 63 (672) 410 - -
======== ======== ====== ====== ======= ======
Leasing Share Impairment Deferred Other Restated
based of fixed tax under IFRS
payments assets
IAS 17 IFRS 2 IAS 36 IAS 12
£m £m £m £m £m £m
Non-current assets
Property,
plant and
equipment 49 - (152) - - 14,449
Investment
property - - - - - 637
Intangible
assets - - - - - 1,408
Investments in
joint ventures
and associates - - - - - 412
Other
investments - - - - - 7
Deferred tax
assets - - - - 14 14
------ ------- ------- ------ ----- -------
49 - (152) - 14 16,927
Current assets
Inventories - - - - - 1,309
Trade and
other
receivables (3) - - - - 769
Investments - - - - (346) -
Cash and cash
equivalents - - - - 346 1,146
------ ------- ------- ------ ----- -------
(3) - - - - 3,224
Current liabilities
Trade and
other payables - (8) - - 1 (4,957)
Short-term
borrowings (5) - - - - (482)
Current tax
payable - - - - - (221)
------ ------- ------- ------ ----- -------
(5) (8) - - 1 (5,660)
Net current
liabilities (8) (8) - - 1 (2,436)
Non-current liabilities
Long-term
borrowings (56) - - - - (4,567)
Post-employment
benefits - - - - - (735)
Deferred tax
liabilities 3 41 17 (94) (14) (499)
Other
liabilities - - - - (1) (21)
------ ------- ------- ------ ----- -------
(53) 41 17 (94) (15) (5,822)
Provisions 7 - - - - (12)
------ ------- ------- ------ ----- -------
Net Assets (5) 33 (135) (94) - 8,657
====== ======= ======= ====== ===== =======
Equity
Share - - - - - 389
capital
Share premium
account - - - - - 3,704
Other reserves - - - - - 40
Retained
earnings (5) 33 (135) (94) - 4,473
------ ------- ------- ------ ----- -------
Total equity
shareholders'
funds (5) 33 (135) (94) - 8,606
Minority
Interests - - - - - 51
------ ------- ------- ------ ----- -------
Total equity (5) 33 (135) (94) - 8,657
====== ======= ======= ====== ===== =======
NB - The above UK GAAP numbers have been adjusted into IFRS format (in
accordance with IAS 1)
This information is provided by RNS
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