24th May 2005 10:30
Marks & Spencer Group PLC24 May 2005 Issued: Tuesday 24 May 2005 MARKS AND SPENCER GROUP PLC ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS Marks & Spencer currently reports under UK Generally Accepted AccountingPrinciples (UK GAAP). As part of its preparation for the adoption of International Financial ReportingStandards (IFRS), Marks & Spencer is today making available financialinformation for the year ended 2 April 2005 prepared in accordance with IFRS. The adoption of IFRS represents an accounting change only, and does not affectthe underlying operations or cash flows of the Group. Summary of main changes 2004/05 UK GAAP IFRS Change Change % Turnover (£m) 7,942.3 7,942.3 - -Operating Profit before Exceptionals (£m) 709.4 689.2 (20.2) (2.8)Profit before Tax and Exceptionals (£m) 618.5 596.0 (22.5) (3.6)Adjusted EPS (pence) 21.9 21.0 (0.9) (4.1) Net Assets (at 2 April 2005) (£m) 521.4 938.6 417.2 80.0 The most significant elements contributing to the change between UK GAAP andIFRS are: • the inclusion of a fair value charge in respect of outstanding share based awards for 35,000 employees which reduces operating profit and profit before tax by £23m in 2004/05; and • the adoption of a valuation of freehold land and buildings as deemed cost which increases net assets at 2 April 2005 by £388m net of tax. This financial information has been prepared on the basis of IFRSs expected tobe available for use in the Group's consolidated financial statements for theyear ended 1 April 2006. These are subject to review and endorsement by the EUas well as ongoing review by the International Financial ReportingInterpretations Committee. They are therefore still subject to change and wewill update our information for any such changes as they arise. Further details of these changes follow. Background to the change Marks and Spencer Group plc and its subsidiaries (the Group) currently preparesits consolidated financial statements under UK Generally Accepted AccountingPractice (UK GAAP). Under a European Union Regulation issued in 2002 all EUlisted companies are required to report their consolidated financial statementsunder International Financial Reporting Standards (IFRS) from 2005 onwards. IFRSwill apply for the first time in the Group's financial statements for the yearbeginning 3 April 2005. The first results to be published under IFRS will be theinterim results for the six months to 1 October 2005. This document explains the accounting policy changes arising from the adoptionof IFRS from those applied in the UK GAAP financial statements for the yearended 2 April 2005. The information has been prepared on the basis of theGroup's current interpretation of how the IFRSs in issue should be applied. The standards in issue are subject to ongoing review and endorsement by the EU,whilst the application of the standards continues to be subject tointerpretation by the International Financial Reporting InterpretationsCommittee (IFRIC). As a consequence further adjustments may be required on theadoption of IFRS and the Group's first IFRS financial statements may thereforebe prepared in accordance with different accounting policies and treatments fromthose presented here. The adoption of IFRS represents an accounting change only, and does not affectthe operations or cash flows of the Group. Impact at a glance 2004/05 UK GAAP IFRS Change Change % Turnover (£m) 7,942.3 7,942.3 - -Operating Profit before Exceptionals (£m) 709.4 689.2 (20.2) (2.8)Profit before Tax and Exceptionals (£m) 618.5 596.0 (22.5) (3.6)Adjusted EPS (pence) 21.9 21.0 (0.9) (4.1) Net Assets (at 2 April 2005) (£m) 521.4 938.6 417.2 80.0 Significant changes The most significant areas of change, described more fully in the followingpages, are: • property - where a valuation has been adopted as deemed cost for freehold land and buildings (IFRS 1); • property leasing - where certain operating leases of buildings have been recognised as finance leases, payments to acquire leasehold land have been reclassified from property at valuation to prepayments at cost and the treatment of lease incentives has changed (IAS 17); • employee benefits - where a fair value charge has been made for awards under share schemes (IFRS 2) and a holiday pay provision set up (IAS 19); • intangible assets - where software expenditure has been capitalised (IAS 38); and • the timing of the recognition of dividends (IAS 10). IFRS 1 exemptions IFRS 1 First Time Adoption of International Financial Reporting Standards, setsout the procedures that the Group must follow when it adopts IFRS for the firsttime. The Group is required to establish its IFRS accounting policies for theyear to 1 April 2006 as at 3 April 2005 and, in general, apply theseretrospectively to determine the IFRS opening balance sheet at its date oftransition, 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 will be presented on the existing UK GAAP basis; • share based payments: the Group has not adopted the exemption to apply IFRS 2 Share-based Payment 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. Balance sheets and profit and loss account Reconciliations to assist in understanding the nature and value of thedifferences between UK GAAP and IFRS are given in the appendices to thisrelease. These present the balance sheets on transition (as at 4 April 2004) andyear end (as at 2 April 2005) together with the profit and loss account for theyear to 2 April 2005. The adjustments are stated net of the taxation impact andare unaudited. The statements have been presented under a UK GAAP format to minimise the numberof restatement adjustments shown. The format will change under IFRS and therewill be a number of reclassifications arising (for example the treatment ofexceptional items, non-equity B shares and discontinued operations). The interimfinancial statements for the 6 months to 1 October 2005 will be the first toreflect the IFRS format. Cash flow The IFRS cash flow statement will explain the change in cash and cashequivalents rather than just cash as under UK GAAP. Cash and cash equivalentsunder IFRS comprise cash and certain short-term highly liquid investments. Theformat of the cash flow statement will change with cash flows being categorisedunder the headings of 'operating', 'investing' and 'funding'. Key impacts The following impacts on net assets are stated after the impact of taxation. Property Revaluation Increase/(Decrease) (£m) Profit before tax and exceptional items 1.1 Net Assets (3 April 2004) 390.5Net Assets (2 April 2005) 388.2----------------------------- ---------------- Property has previously been stated at historical cost, subject to certainproperties having been revalued as at 31 March 1988. A property revaluation wasprepared on an existing use basis by external valuers DTZ Debenham Tie Leung asat 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 ontransition at 4 April 2004. As a result, the cost of freehold land and buildings will be restated to therevalued amount and depreciated, in accordance with the Group's depreciationpolicy, over the remaining useful life. The Group will not revalue fixed assetsfor accounting purposes in the future. Property Leases Increase/(Decrease) (£m) Profit before tax and exceptional items (6.5)Exceptional item - (loss)/profit on sale of property 31.1 Net Assets (3 April 2004) (121.3)Net Assets (2 April 2005) (95.2)----------------------------- ---------------- 1. •Finance Leases The Group currently recognises finance leases under the recognition criteria setout in SSAP 21. IAS 17 Leases requires the land and building elements ofproperty leases to be considered separately, with leasehold land normally beingtreated as an operating lease. As a consequence payments made to acquireleasehold land, previously treated as fixed assets, have been re-categorised asprepaid leases and amortised over the life of the lease. In addition therevaluation previously attributed to the land element has been derecognised. The (loss)/profit on sale of property has been restated to reflect the differentcarrying value under IFRS of leasehold properties disposed of during the year. Also under the provisions of IAS 17 the building elements of certain propertyleases, classified as operating leases under UK GAAP, have been reclassified asfinance leases. The adjustments are to include the fair value of these leasedbuildings within fixed assets and to set up the related obligation, net offinance charges, in respect of future periods, within creditors. 2. •Lease Incentives Leasehold incentives received on entering into property leases are currentlyrecognised as deferred income on the balance sheet and are amortised to theprofit 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 will be restated onthe balance sheet as deferred income and released over the term of the lease. Employee Benefits Increase/(Decrease) (£m) Profit before tax and exceptional items (17.7) Net Assets (3 April 2004) (20.8)Net Assets (2 April 2005) (13.5)----------------------------- ---------------- 1. •Share Schemes The Group operates a range of share-based incentive schemes. Under UK GAAP whereshares (or rights to shares) are awarded to employees, UITF 17 requires that thecharge to the profit and loss account should be based on the difference betweenthe market value of shares at the date of grant and the exercise price (i.e. anintrinsic value basis) spread over the performance period. SAYE schemes areexempt from this requirement and no charge is made. IFRS 2 requires that allshares or options (including SAYE) awarded to employees as remuneration shouldbe measured at fair value at grant date, using an option pricing model, andcharged against profits over the period between grant date and vesting date,being the vesting period. This treatment has been applied to all awards grantedbut not fully vested at the date of transition. As a result, under IFRS, therewill be an additional charge to our profit and loss account for the year. 2. •Pensions Under UK GAAP the Group's pension and post retirement benefits are accounted forunder FRS 17. This is broadly similar to the accounting treatment availableunder IAS 19 and there are no material measurement adjustments althoughpresentation in the financial statements will change. In particular itemscurrently shown as 'other finance income/ (charges)' below operating profitunder UK GAAP will be shown within operating profit under IFRS. 3. •Other Employee Benefits Currently no provision is made for holiday pay. Under IAS 19 Employee Benefitsthe expected cost of compensated short term absences (e.g. holidays) should berecognised when employees render the service that increases their entitlement.As a result an accrual has been made for holidays earned but not taken. Intangible Assets Increase/(Decrease) (£m) Profit before tax and exceptional items 0.7Exceptional item - profit on sale of operations (9.9) Net Assets (3 April 2004) 22.7Net Assets (2 April 2005) 14.3----------------------------- ---------------- 1. •Software Capitalisation The cost of developing software is currently written off as incurred. Under IAS38 Intangible Assets there is a requirement to capitalise internally generatedintangible assets provided certain recognition criteria are met. Results havebeen adjusted to reflect the capitalisation and subsequent amortisation of coststhat meet the criteria. As a result expenses previously charged to the profitand loss account have been brought onto the balance sheet as intangible softwareassets and amortised over their estimated useful lives. The exceptional profit on sale of M&S Money is restated under IFRS to reflectthe value of their capitalised software at the point of disposal. 2. •Goodwill and Brand Currently goodwill is capitalised and amortised over its useful economic life.Under IAS 38 Intangible Assets there is a requirement to separately identifybrands and other intangibles acquired rather than include these as part ofgoodwill. Intangible assets, other than goodwill, are amortised over theiruseful lives. Goodwill, which is considered to have an indefinite life, issubject to an annual impairment review. As a result the goodwill recognisedunder UK GAAP on the acquisition of Per Una of £125.5m has been split betweenbrand (£80m) and goodwill (£45.5m). The goodwill amortisation under UK GAAP hasbeen reversed but the brand has been amortised as required under IFRS. Other changes Increase/(Decrease) (£m) Profit before tax and exceptional items (0.1) Net Assets (3 April 2004) 160.0Net Assets (2 April 2005) 123.4----------------------------- ---------------- The impact of other changes primarily relates to dividends. Under UK GAAPdividends are recognised in the period to which they relate. IAS 10 Events afterthe Balance Sheet Date requires that dividends declared after the balance sheetdate should not be recognised as a liability at that balance sheet date as theliability does not represent a present obligation as defined by IAS 37Provisions, Contingent Liabilities, and Contingent Assets. Accordingly the finaldividends for 2003/04 (£160.7m) and 2004/05 (£124.2m) are derecognised in thebalance sheets for April 2004 and April 2005 respectively. Taxation All of the gross IFRS accounting adjustments have been tax effected whereappropriate and are included as such above. The main impact of switching to IAS12 Income Taxes is that it is necessary to provide deferred tax on propertyrevaluation surpluses and the amount recategorised as brand. These deferred taxliabilities are not required under FRS 19. IAS 12 also requires deferred tax to be provided in respect of undistributedprofits of overseas subsidiaries unless the parent is able to control the timingof remittances and it is probable that such remittances will not be made in theforeseeable future. As the Group is able to control the timing of remittancesfrom overseas subsidiaries and no such remittances are anticipated in theforeseeable future no provision has been made for any tax on undistributedprofits of overseas subsidiaries. Non-retrospective changes arising from the adoption of IFRS The Group has taken the exemption not to restate comparatives for both IAS 32and IAS 39 Financial Instruments. The impact of these standards on 2005/06 isexpected to be as follows: • interest rate swaps will be reflected on the balance sheet under IAS 39. Under the current strategy there will be little perceived volatility in the profit and loss account as a result of fair valuing these instruments as the hedge effectiveness criteria are expected to be fully achieved and therefore hedge accounting will be applied; • we will meet the hedge accounting criteria for the majority of our forward exchange contracts, enabling profit and loss volatility to be kept to a minimum; and • non-equity B shares, currently with a value on the balance sheet of £65.7m, will be treated as a liability rather than as equity under IAS 32. Consolidated balance sheet as at 3 April 2004 - unaudited Employee Benefits £m UK GAAP Property Property Share Intangible --------------------------- ------- Revaluation Leasing Schemes Other Assets Other IFRS --------- ------- ------- ------- -------- ------- ------- Fixed assets:Intangibleassets - 32.4 32.4Tangibleassets 3,497.6 531.0 (270.9) 3,757.7Investments 10.0 10.0--------------------------- ------- --------- ------- -------- ------- -------- ------- ------- 3,507.6 531.0 (270.9) - - 32.4 - 3,800.1--------------------------- ------- --------- ------- -------- ------- -------- ------- ------- Current assetsStocks 398.0 (1.0) 397.0Debtors 2,750.9 229.7 2,980.6Cash andinvestments 720.6 720.6--------------------------- ------- --------- ------- -------- ------- -------- ------- ------- 3,869.5 - 229.7 - - - (1.0) 4,098.2 Current liabilitiesCreditors :amountsfalling duewithin oneyear (1,884.7) (5.4) 1.1 (37.9) 160.7 (1,766.2)--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Net currentassets 1,984.8 - 224.3 1.1 (37.9) - 159.7 2,332.0--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Total assetsless currentliabilities 5,492.4 531.0 (46.6) 1.1 (37.9) 32.4 159.7 6,132.1 Creditors :amountsfalling dueafter morethan one year (2,519.6) (81.0) (2,600.6)Deferred taxliability - (140.5) 6.3 5.1 10.9 (9.7) 0.3 (127.6)Otherprovisions forliabilitiesand charges (49.3) (49.3)--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Net assetsbefore netpost-retirement liability 2,923.5 390.5 (121.3) 6.2 (27.0) 22.7 160.0 3,354.6--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Netpost-retirement liability (469.5) (469.5)--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Net assets 2,454.0 390.5 (121.3) 6.2 (27.0) 22.7 160.0 2,885.1--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Capital & ReservesCalled upshare capital 651.2 651.2Share premiumaccount 45.2 45.2Capitalredemptionreserve 1,924.8 1,924.8Revaluationreserve 356.4 390.5 (71.6) 675.3Other reserve (6,542.2) (6,542.2)Share schemereserve (note 1) - 36.1 36.1Profit andloss account 6,018.6 - (49.7) (29.9) (27.0) 22.7 160.0 6,094.7--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Shareholders'funds 2,454.0 390.5 (121.3) 6.2 (27.0) 22.7 160.0 2,885.1--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Consolidated profit and loss account for the year ended 2 April 2005 - unaudited Employee Benefits Property Property Share Intangible £m UK GAAP Revaluation Leasing Schemes Other Assets Other IFRS--------------------------- -------- --------- ------- -------- -------- ------- ------- -------- Turnover 7,942.3 7,942.3--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- OperatingProfit 618.0 1.1 (4.2) (23.0) 5.3 0.7 (0.1) 597.8--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Analysed between:Beforeexceptionalitems 709.4 1.1 (4.2) (23.0) 5.3 0.7 (0.1) 689.2Exceptionalitems (91.4) (91.4)--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- (Loss) /profit on saleof propertyand otherfixed assets (0.4) 31.1 30.7Profit on sale/ closure ofoperations 218.6 (9.9) 208.7Net interestexpense (102.3) (2.3) (104.6)Other financeincome 11.4 11.4--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Profit onordinaryactivitiesbeforetaxation 745.3 1.1 24.6 (23.0) 5.3 (9.2) (0.1) 744.0--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Analysed between:Beforeexceptionalitems 618.5 1.1 (6.5) (23.0) 5.3 0.7 (0.1) 596.0Exceptionalitems 126.8 31.1 (9.9) 148.0--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Taxation onordinaryactivities (158.3) 0.5 1.4 2.6 (1.6) 0.7 - (154.7)--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Profitattributabletoshareholders 587.0 1.6 26.0 (20.4) 3.7 (8.5) (0.1) 589.3Dividends(includingdividends inrespect ofnon-equityshares) (203.3) (36.5) (239.8)--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Retainedprofit 383.7 1.6 26.0 (20.4) 3.7 (8.5) (36.6) 349.5--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Earnings pershare 29.1p 29.2pAdjustedearnings pershare 21.9p 21.0p Consolidated balance sheet as at 2 April 2005 - unaudited Employee Benefits Property Property Share Intangible £m UK GAAP Revaluation Leasing Schemes Other Assets Other IFRS--------------------------- -------- --------- ------- -------- -------- ------- ------- -------- Fixed assets:Intangibleassets 122.4 43.0 165.4Tangibleassets 3,316.1 528.1 (219.1) (0.3) 3,624.8Investments 9.0 9.0--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- 3,447.5 528.1 (219.1) - - 43.0 (0.3) 3,799.2--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Current assetsStocks 339.7 (0.8) 338.9Debtors 218.2 206.9 425.1Cash andinvestments 279.6 279.6--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- 837.5 - 206.9 - - - (0.8) 1,043.6 Current liabilitiesCreditors :amountsfalling duewithin oneyear (1,289.3) (5.4) 0.2 (32.6) 124.3 (1,202.8)--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Net currentliabilities (451.8) - 201.5 0.2 (32.6) - 123.5 (159.2)--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Total assetsless currentliabilities 2,995.7 528.1 (17.6) 0.2 (32.6) 43.0 123.2 3,640.0 Creditors :amountsfalling dueafter morethan one year (1,919.7) (85.3) (2,005.0)Deferred taxliability (35.5) (139.9) 7.7 9.6 9.3 (28.7) 0.2 (177.3)Otherprovisions forliabilitiesand charges (44.9) (44.9)--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Net assetsbefore netpost-retirement liability 995.6 388.2 (95.2) 9.8 (23.3) 14.3 123.4 1,412.8--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Netpost-retirement liability (474.2) (474.2)--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Net assets 521.4 388.2 (95.2) 9.8 (23.3) 14.3 123.4 938.6--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Capital & ReservesCalled upshare capital 480.2 480.2Share premiumaccount 106.6 106.6Capitalredemptionreserve 2,102.8 2,102.8Revaluationreserve 330.8 388.2 (51.2) 667.8Other reserve (6,542.2) (6,542.2)Share schemereserve (note 1) - 58.3 58.3Profit andloss account 4,043.2 (44.0) (48.5) (23.3) 14.3 123.4 4,065.1--------------------------- -------- --------- ------- -------- ------- -------- ------- --------Shareholders'funds 521.4 388.2 (95.2) 9.8 (23.3) 14.3 123.4 938.6--------------------------- -------- --------- ------- -------- ------- -------- ------- -------- Notes1. A share scheme reserve has been separately shown for illustrative purposes. Under IFRS presentation thiswill be included within the profit and loss account reserve.2.The financial information included in this document does not comprise statutory accounts within the meaningof section 240 of the Companies Act 1985. Theadjustments are unaudited and may change as the Groupfinalises its analysis of the effect of IFRS. Contacts: Investor Relations:Amanda Mellor +44 (0) 20 8718 3604Sarah McGlyne +44 (0) 20 8718 1563 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" withinthe 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 currentexpectations or historical results. Any such forward-looking statements are subject to various risks anduncertainties, including failure by Marks & Spencer to predict accurately customer preferences; decline in thedemand for products offered by Marks & Spencer; competitive influences; changes in levels of store traffic orconsumer spending habits; effectiveness of Marks & Spencer's brand awareness and marketing programmes; generaleconomic conditions or a downturn in the retail or financial services industries; acts of war or terrorismworldwide; work stoppages, slowdowns or strikes; and changes in financial and equity markets. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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