15th Jul 2005 07:00
Mothercare PLC15 July 2005 Mothercare plc 15 July 2005 Adoption of International Financial Reporting Standards Mothercare plc (the "Company") today releases its audited financial results forthe 52 weeks ended 26 March 2005 as prepared under International FinancialReporting Standards ("IFRS"), as part of the process for the adoption of IFRS asits primary accounting basis for the 53 weeks ending 1 April 2006. For the 52 weeks ended 26 March 2005, there is no net impact on profit beforetaxation from the adoption of IFRS, however profit after taxation increases£0.2m to £11.3m. As at 26 March 2005, net assets are reduced by £24.5m to£119.0m. None of the adjustments arising from the adoption of IFRS relate to cash, sothere is no impact on reported cash flows. The key changes to the Company's reported financial information as at 26 March2005 under IFRS are: • Accounting for pension schemes under IAS19. The pension scheme deficit has been included in full in the balance sheet and accordingly the SSAP 24 prepayment previously reported has been eliminated. The effect of these adjustments, net of deferred tax, is to reduce net assets by £22.7m. The increase in the net pension cost will reduce profit before tax by £0.3m. • Accounting for share based payments under IFRS 2. Under IFRS 2 an expense is recognised to spread the fair value of each award over its vesting period on a straight-line basis, after allowing for an estimate of the share awards that will eventually vest. The net effect of these changes is to increase net assets by £0.9m and increase profit before tax by £0.4m. • Amortisation of lease incentives under IFRS Lease incentives received are now amortised evenly over the life of the lease rather than the period up to the first market rent review. The net effect of this change is to decrease net assets by £6.3m and decrease profit before tax by £0.1m. • Recognition of dividends Under IFRS, dividends declared after the balance sheet date are not recognised as a liability as there is no present obligation at that time The effect of this change is to increase net assets at 26 March 2005 by £3.6m. IFRS will apply for the first time in the Company's financial statements for the 53 weeks ending 1 April 2006. Accordingly, financial results for the 28 weeks ending 8 October 2005 will be prepared and reported under IFRS. CONTENTS PART IIntroduction Basis of preparation Statement of directors' responsibilities Significant differences between UK GAAP and IFRS Presentational changes between UK GAAP and IFRS PART IIPreliminary comparative IFRS financial information • Consolidated income statement for the 52 weeks ended 26 March 2005 • Consolidated statement of recognised income and expense for the 52 weeks ended 26 March 2005 • Consolidated balance sheet at 26 March 2005 • Consolidated cash flow statement for the 52 weeks ended 26 March 2005 • Notes to the preliminary comparative IFRS financial information including significant accounting policies • Independent auditors' report to the board of directors of Mothercare plc on the preliminary comparative IFRS financial information PART III Reconciliation of restated financial information from UK GAAP to IFRSfor the 52 weeks ended 26 March 2005 PART IV Presentation of UK GAAP financial information in IFRS format PART I INTRODUCTION For the 52 weeks ended 26 March 2005, Mothercare plc (the 'Company') preparedits consolidated financial statements under UK generally accepted accountingprinciples ('UK GAAP'). With effect from 1 April 2006, the Company is requiredto prepare its consolidated financial statements in accordance withInternational Financial Reporting Standards ('IFRS'). The Company will thereforeprepare its consolidated financial statements for the 53 weeks ending 1 April2006 in compliance with IFRS. Mothercare will present one year of comparativeIFRS financial information for the 52 weeks ended 26 March 2005 ('2005') andconsequently, the date of transition to IFRS for the Company is 28 March 2004being the first day of the comparative period ('the date of transition'). Thefirst results to be prepared on an IFRS basis will be contained in the Company'sresults announcement for the 28 weeks ending 8 October 2005 (which will beannounced on 17 November 2005). The purpose of this document is to: • explain the basis on which Mothercare plc has made the transition to IFRS; • identify the significant differences between IFRS and UK GAAP relevant to Mothercare plc; • set out the Company's significant accounting policies under IFRS; and • show the impact of restatement in accordance with IFRS on the Company's previously reported results and financial position under UK GAAP. An explanation of the effect that the adoption of IFRS has had on the Company'sresults is provided in Part I. Set out in Part II are extracts from the Company's consolidated financialstatements, comprising the primary statements (the consolidated incomestatement, the consolidated statement of recognised income and expense, theconsolidated balance sheet and the consolidated cash flow statement) and certainkey disclosure notes for the 52 weeks ended 26 March 2005 as restated for IFRS. A reconciliation of restated financial information from UK GAAP to IFRS for the52 weeks ended 26 March 2005 and as at 26 March 2005 is provided in Part III. The schedules in Part IV reclassify the UK GAAP profit and loss account for the52 weeks ended 26 March 2005 and the corresponding balance sheet into IFRSformat. The financial information in Part II and the related information in Parts IIIand IV relating to the 52 weeks ended 26 March 2005 has been audited by Deloitte& Touche LLP and their opinion is set out in Part II. The change in reporting principally impacts the following areas: leaseaccounting, share based payments, pensions and the related deferred taxadjustments on these items. The adjustments required under IFRS have no netimpact on the profit before taxation previously reported under UK GAAP. However,under IFRS, the 2005 net assets are £24.5 million lower than under UK GAAP. Thisis mainly due to full inclusion of the pension fund deficit. Net assets are alsoreduced by the write back of lease incentives previously taken into profit andnow included in the balance sheet as deferred income, offset by the write backof the accrual of the year end dividend and the adjustments relating to sharebased payments. BASIS OF PREPARATION European law requires that the Company's financial statements for the 53 weeksending 1 April 2006 are prepared on the basis of IFRS as endorsed for use in theEuropean Union. IFRS are subject to amendment or interpretation by theInternational Accounting Standards Board ('IASB') and there is an ongoingprocess of review and endorsement by the European Commission. The financialinformation contained in this document has been prepared on the basis of IFRSthat the directors expect to be applicable as at 1 April 2006. In particular thedirectors have assumed that the European Commission will endorse Amendment toIAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plans andDisclosures issued by the IASB in December 2004. For the reasons outlined above,it is possible that the restated information for 2005 presented in this documentmay be subject to change before its inclusion in the annual report and accountsfor the 53 weeks ending 1 April 2006, which will contain the Company's firstcomplete financial statements prepared in accordance with IFRS. IFRS 1 First time adoption of International Financial Reporting Standards setsout the requirements for the first time adoption of IFRS. Generally, IFRS 1requires that accounting policies be adopted that are compliant with IFRS andthat these policies be applied retrospectively to all periods presented.However, a number of exemptions are permitted to be taken in preparing thebalance sheet at the date of transition and in preparing the financialinformation for the 52 weeks ended 26 March 2005. The directors have not revised estimates required under IFRS that were alsorequired under UK GAAP as at 28 March 2004 and 26 March 2005 and in addition,where estimates were not required under UK GAAP, they have been based oninformation known at that time, and not on subsequent events. In accordance with IFRS 1 First-time Adoption of International FinancialReporting Standards, the Company has considered the ten optional exemptions tothe general principle of retrospective application. The Company has concluded the following with regards to the optional exemptions: • IFRS 2 Share Based Payment: the Company has applied IFRS 2 to those share based payment arrangements granted after 7 November 2002 and remaining unvested as at 1 January 2005. • IAS 16 Property, Plant and Equipment: the Company has not applied the optional exemption relating to IAS 16 and will therefore continue to follow the current UK GAAP policy and carry assets at cost, less any provisions for impairment. • IAS 19 Employee benefits: subject to endorsement by the EU, the Company has elected to adopt Amendment to IAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures. The Company has selected the option available within this standard, similar to FRS 17 under UK GAAP, for immediate recognition of all actuarial gains and losses outside of the income statement. • The Company has elected to apply IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement prospectively from 27 March 2005. Consequently, the relevant comparative information for the 52 weeks ended 26 March 2005 does not reflect the impact of these standards. STATEMENT OF DIRECTORS' RESPONSIBILITIES The following statement, which should be read in conjunction with the auditors'statement of auditors' responsibilities set out in their report on page 17, ismade with a view to distinguishing for shareholders the respectiveresponsibilities of the directors and of the auditors in relation to thepreliminary comparative IFRS financial information. The directors consider in preparing the preliminary comparative IFRS financialinformation on the basis set out in Part II that the Company and the group haveused appropriate accounting policies, consistently applied and supported byreasonable and prudent judgements and estimates, including the assumptions thedirectors have made about the standards and interpretations expected to beeffective, and the policies expected to be adopted, when they prepare the firstcomplete set of IFRS financial statements as at 1 April 2006 and that allaccounting standards which they consider to be applicable have been followed. SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND IFRS The significant differences between UK GAAP and IFRS impacting the results andnet assets of the Company are described below. These differences affect thecomparative information for 2005 which will be presented in the consolidatedfinancial statements for the 53 weeks ending 1 April 2006 and, unless otherwisestated, have been applied retrospectively in arriving at the balance sheet atthe date of transition to IFRS prepared under IFRS. a. Leases Under UK GAAP, the Company has property leases which are accounted for as operating leases. IAS 17 Leases, requires that the land and building components of a lease are considered separately and sets out more detailed criteria in assessing whether the land and building elements are operating or finance leases. In accordance with IAS 17, the Company has reviewed its property leases against these criteria and assessed that there are no material finance lease arrangements in place. Consequently there is no impact on the results for the 52 weeks ended 26 March 2005 or the balance sheet at that date or at the date of transition. In addition, in accordance with IAS 17, lease incentives received by the Company have been amortised evenly over the life of the lease. Under UK GAAP, these lease incentives were amortised evenly over the period to the first rent review date on which the rent was expected to be adjusted to the prevailing market rate, if this was shorter than the full lease term. The impact of amortising the lease incentives evenly over the life of the lease is a decrease in pre-tax net assets of £7.3 million as at 26 March 2005 and a debit to pre-tax profits of £0.1 million for the 52 weeks ended 26 March 2005. b. Share based payments Details of the share awards used by the Company can be found in the annual report and accounts for the 52 weeks ended 26 March 2005. Under UK GAAP, the Company recorded a charge for employee share incentive awards based on the intrinsic value of the award being the difference, if any, between the option price of the conditional award and the share price on the date of grant. The Company utilised the exemption available within UITF Abstract 17 from reporting a charge to profits for UK Inland Revenue approved SAYE schemes and equivalent overseas schemes. As the Company's share options have an option price equal to the market price on the date of grant no charge was required to be recorded under UK GAAP. IFRS 2 Share based payments requires the Company to record a charge for all share based payments equivalent to the fair value of the award at the date of grant. An expense is recognised to spread the fair value of each award over its vesting period on a straight-line basis, after allowing for an estimate of the share awards that will eventually vest. The Company has calculated fair values for each of its employee incentive share awards. The calculation of fair values requires management to select the option valuation model they consider to be most appropriate for the valuation of each type of award. The key variables in arriving at the share option charge are the expected future volatility in the Company's share price, the expected period of time between the grant and exercise of an award and the expected level of forfeiture that will occur between the grant of an award and its vesting. The application of IFRS 2 instead of UK GAAP has reduced the amount charged to profits for share based payments for the 52 weeks ended 26 March 2005 by £0.3 million net of tax. c. Employee benefits Under UK GAAP, the Company accounted for post employment benefits under SSAP 24 Accounting for pension costs. This standard seeks to spread the cost of providing defined benefit pensions and post retirement benefits over the estimated average remaining service life of the scheme members based on triennial actuarial valuation. Under IFRS, the Company is required to calculate the pension cost for defined benefit pension schemes and other post retirement benefits using the projected unit credit method, with actuarial valuations being carried out at each balance sheet date. The Company intends to apply the option within the Amendment to IAS 19 that allows for immediate recognition of all actuarial gains and losses in the period in which they occur, outside of profit and loss and presented in the statement of recognised income and expense, which is similar to the treatment required by FRS 17 Retirement benefits under UK GAAP. The Company intends to present the current and past service pension costs as a charge to profit from operations. The unwinding of the discount on pension liabilities and the expected return on pension assets will be presented as a financing item. At the date of transition the immediate recognition of the Company's pension liabilities on the balance sheet results in the recognition of a liability of £22.8 million compared to the recognition of £nil in the balance sheet at the date of transition in accordance with SSAP 24 under UK GAAP. As at 26 March 2005 the immediate recognition of the Company's pension liabilities on the balance sheet results in the recognition of a liability of £22.4 million compared to the recognition of a £10.0 million prepayment as at 26 March 2005 in accordance with SSAP 24 under UK GAAP. The application of IAS 19 to the Company's results for the 52 weeks ended 26 March 2005 reduces profit from operations by £1.5 million and increases net investment income by £1.2 million resulting in a pre-tax underlying incremental charge of £0.3 million. d. Deferred tax Under UK GAAP the Company recognised deferred tax on timing differences that arose from the inclusion of gains and losses in tax assessments in periods different from those in which they were recognised in the financial statements (an income statement approach). Under IAS 12 Deferred tax, deferred tax is recognised in respect of nearly all taxable temporary timing differences arising between the tax base and the accounting book value of balance sheet items (a balance sheet approach). This results in deferred tax being recognised on certain timing differences that would not have given rise to deferred tax under UK GAAP. Deferred taxation has been provided, where appropriate as a result of IFRS transition adjustments, principally recoverable deferred tax assets in respect of the full recognition of pension deficits. e. Software Under UK GAAP, all capitalised computer software was included within tangible fixed assets. IAS 38 Intangible Assets requires software that is not an integral part of an item of computer hardware to be classified within intangible assets. An adjustment of £2.7 million has been made to reclassify such computer software from property, plant and equipment to intangible assets as at 26 March 2005. f. Dividends payable Under UK GAAP, the Company recognised a liability for dividends that were proposed in respect of a prior accounting period, even if the formal authorisation of the dividend did not take place until after the year end. In accordance with IAS 10 Events after the Balance Sheet Date, dividends declared after the balance sheet date are not recognised as a liability in the financial statements, as there is no present obligation at the balance sheet date. Accordingly no accruals are required for the final dividends declared for 2004 of £2.7 million and for 2005 of £3.6 million. g. Financial instruments As permitted under IFRS 1, the Company has elected to apply IAS 32 and IAS 39 prospectively from 27 March 2005 onwards. As a result, the relevant comparative information for 26 March 2005 does not reflect the impact of these standards. PRESENTATIONAL CHANGES BETWEEN UK GAAP AND IFRS The primary financial statements contained in this document have been presentedin accordance with IAS 1 Presentation of Financial Statements and IAS 7 CashFlow Statements. There are a number of presentational changes compared with UKGAAP. The impact of these presentational changes is discussed below. It is possible that the format and presentation of the primary financialstatements will change in the event that further guidance is issued by the IASBand as practice develops. The effect of presentational changes is shown in PartIV. a. Reorganisation of distribution network Under UK GAAP, the costs associated with the reorganisation of the distribution network were shown as an operating exceptional item within cost of sales. Under IFRS, the Company has concluded that the most appropriate treatment for the costs associated with the reorganisation of the distribution network is to highlight this alongside cost of sales, within profit from operations. b. Profit on disposal of subsidiary undertaking Under UK GAAP, gains and losses arising on certain items were shown as exceptional items, outside of profit from retail operations, such as the profit on disposal of subsidiary undertaking. Under IFRS, the Company has concluded that the most appropriate treatment for the profit on disposal of subsidiary undertaking is to continue to show these amounts below profit from operations, as this item does not result from the operating activities of the Company. The Company will continue to exclude any such gains and losses in arriving at its profit from operations. c. Cash flow statement The adoption of IFRS does not affect the Company's cash flows. However the IFRS presentation of cash flows differs from that required under UK GAAP. IFRS requires that the cash flows of the Company be split between three categories - operating activities, investing activities and financing activities. Under IFRS, liquid investments with maturities of less than three months at acquisition are classified with cash and cash equivalents. Under UK GAAP, these amounts were presented as time deposits within liquid resources. Under UK GAAP, a reconciliation of net cash flow to movement in net funds was presented. This included as a reconciling item the cash flows arising from the investment in, or realisation of, cash equivalents. Under IFRS, the cash flow statement reconciles the movement in cash and cash equivalents and as such, any movements arising due to cash equivalents do not represent reconciling items. PART IIPreliminary comparative IFRS financial information Consolidated income statementFor the 52 weeks ended 26 March 2005 --------------- 52 weeks ended 26 March 2005 £ million Revenue 457.2Cost of sales (408.1)Re-organisation of distribution network (6.5) ---------------Gross profit 42.6Administrative expenses (32.4) ---------------Profit from operations 10.2Profit on disposal of subsidiary undertaking 2.4 ---------------Profit before financing and taxation 12.6Investment income 10.9Finance costs (8.0) ---------------Profit before taxation 15.5Taxation (4.2) ---------------Profit for the financial year attributable to equity shareholders of the parent 11.3 =============== Earnings per share (note 2)Basic 16.6pDiluted 16.3p --------------- Consolidated statement of recognised income and expenseFor the 52 weeks ended 26 March 2005 --------------- 52 weeks ended 26 March 2005 £ million Post employment benefits: Actuarial losses (9.3)Tax on items taken directly to equity 3.1 ---------------Net expenses recognised directly in equity (6.2)Profit for the financial year 11.3 ---------------Total recognised income and expense for the financial year attributable to equity shareholders of the parent 5.1 =============== --------------- Consolidated balance sheetAs at 26 March 2005 --------------- 26 March 2005 £ millionNon-current assets Property, plant and equipment 84.3 Other intangible assets - software 2.7 Deferred tax asset 13.6 --------------- 100.6 ---------------Current assets Inventories 46.8 Trade and other receivables 28.8 Cash and cash equivalents 37.0 --------------- 112.6 ---------------Total assets 213.2 --------------- Current liabilities Trade and other payables (55.9) Short term provisions (5.1) --------------- (61.0) --------------- Non-current liabilities Trade and other payables (7.8) Retirement benefit obligations (22.4) Long term provisions (3.0) --------------- (33.2) ---------------Total liabilities (94.2) ---------------Net assets 119.0 =============== Equity attributable to equity shareholders of the parent Called up share capital 35.8 Share premium account 1.3 Own shares (5.5) Retained earnings 87.4 ---------------Total equity 119.0 =============== --------------- Consolidated cash flow statementFor the 52 weeks ended 26 March 2005 --------------------------------- 52 weeks ended 52 weeks ended 26 March 2005 26 March 2005 £ million £ million Reconciliation of cash flow from operating activities Profit from operations 10.2 Adjustments for: Depreciation of property, plant and equipment 12.0 Loss on disposal of property, plant and equipment 0.7 Cost of employee share schemes 0.8 Charge to profit from operations in respect of the costs of the re-organisation of distribution network 6.5 Utilisation of provision for costs of re-organisation of distribution network (0.9) Utilisation of property provisions (1.1) Payments to retirement benefit schemes (12.4) Charge to profit from operations in respect of the service costs of retirement benefit obligations 3.9 --------------- Operating cash flow before movements in working capital 19.7 Increase in inventories (1.8) Increase in receivables (3.3) Decrease in payables (2.1) ---------------Net cash flow from operating activities 12.5 =============== Net cash flow from operating activities 12.5Cash flows from investing activities Interest received 1.8 Interest paid (0.1) Purchase of property, plant and equipment (18.4) Proceeds from sale of property, plant and equipment 1.1 Proceeds from sale of subsidiary undertaking 3.4 ---------------Net cash used in investing activities (12.2)Cash flows from financing activities Equity dividends paid (4.6) Issue of ordinary share capital 1.0 ---------------Net cash used in financing activities (3.6) ---------------Net decrease in cash and cash equivalents (3.3)Cash and cash equivalents at the beginning of the financial year 40.3 ---------------Cash and cash equivalents at the end of the financial year 37.0 =============== --------------------------------- Notes to the preliminary comparative IFRS financial information 1. Significant accounting policies UNDER IFRS Basic of preparation The financial statements have been prepared, for the first time, in accordancewith International Financial Reporting Standards (IFRSs) and those parts of theCompanies Act 1985 that are applicable to companies reporting under IFRS. Thedisclosures required by IFRS 1 concerning the transition from UK GAAP to IFRSsare given in Parts III and IV. The 2005 financial statements are the firstfinancial statements to be prepared in accordance with IFRS and the date oftransition is 28 March 2004. The financial statements have been prepared on the historical cost basis. Theprincipal accounting policies adopted are set out below. The financial information contained in this document has been prepared on thebasis of IFRS that the directors expect to be applicable as at 1 April 2006. Inparticular the directors have assumed that the European Commission will endorseAmendment to IAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plansand Disclosures issued by the IASB in December 2004. For the reasons outlinedabove, it is possible that the restated information for 2005 presented in thisdocument may be subject to change before its inclusion in the annual report andaccounts for the 53 weeks ending 1 April 2006, which will contain the Company'sfirst complete financial statements prepared in accordance with IFRS. IFRS 1 First time adoption of International Financial Reporting Standards setsout the requirements for the first time adoption of IFRS. Generally, IFRS 1requires that accounting policies be adopted that are compliant with IFRS andthat these policies be applied retrospectively to all periods presented.However, a number of exemptions are permitted to be taken in preparing thebalance sheet at the date of transition and in preparing the financialinformation for the 52 weeks ended 26 March 2005. In accordance with IFRS 1 First-time Adoption of International FinancialReporting Standards, the Company has considered the ten optional exemptions tothe general principle of retrospective application. The Company has concluded the following with regards to the optional exemptions: • IFRS 2 Share Based Payment: the Company has applied IFRS 2 to those share based payment arrangements granted after 7 November 2002 and remaining unvested as at 1 January 2005. • IAS 16 Property, Plant and Equipment: the Company has not applied the optional exemption relating to IAS 16 and will therefore continue to follow the current UK GAAP policy and carry assets at cost, less any provisions for impairment. • IAS 19 Employee benefits: subject to endorsement by the EU, the Company has elected to adopt Amendment to IAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures. The Company has selected the option available within this standard, similar to FRS 17 under UK GAAP, for immediate recognition of all actuarial gains and losses outside of the income statement. • The Company has elected to apply IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement prospectively from 27 March 2005. Consequently, the relevant comparative information for the 52 weeks ended 26 March 2005 does not reflect the impact of these standards. The directors have not revised estimates required under IFRS that were alsorequired under UK GAAP as at 28 March 2004 and 26 March 2005 and in addition,where estimates were not required under UK GAAP, they have been based oninformation known at that time, and not on subsequent events. Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Company and entities controlled by the Company (its subsidiaries) made up to26 March 2005. Control is achieved where the Company has the power to govern thefinancial and operating policies of an investee entity so as to obtain benefitsfrom its activities. On acquisition, the assets and liabilities and contingent liabilities of asubsidiary are measured at their fair values at the date of acquisition. Anyexcess of the cost of acquisition over the fair values of the identifiable netassets acquired is recognised as goodwill. Any deficiency of the cost ofacquisition below the fair values of the identifiable net assets acquired (i.e.discount on acquisition) is credited to profit and loss in the period ofacquisition. The interest of minority shareholders is stated at the minority'sproportion of the fair values of the assets and liabilities recognised.Subsequently, any losses applicable to the minority interest in excess of theminority interest are allocated against the interests of the parent. The results of subsidiaries acquired or disposed of during the financial yearare included in the consolidated income statement from the effective date ofacquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring the accounting policies used into line with those used bythe group. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. Goodwill Goodwill arising on consolidation represents the excess of the cost ofacquisition over the group's interest in the fair value of the identifiableassets and liabilities of a subsidiary, associate or jointly controlled entityat the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at leastannually. Any impairment is recognised immediately in profit or loss and is notsubsequently reversed. On disposal of a subsidiary, associate or jointly controlled entity, theattributable amount of goodwill is included in the determination of the profitor loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRSs has beenretained at the previous UK GAAP amounts subject to being tested for impairmentat that date. Goodwill written off to reserves under UK GAAP prior to 29 March1997 has not been reinstated and is not included in determining any subsequentprofit or loss on disposal. Revenue recognition Revenue is measured at the fair value of the consideration received orreceivable and represents amounts receivable for goods and services provided inthe normal course of business, net of discounts, VAT and other sales relatedtaxes. Sales of goods are recognised when goods are delivered and title has passed. Interest income is accrued on a time basis, by reference to the principaloutstanding and at the effective interest rate applicable, which is the ratethat exactly discounts estimated future cash receipts through the expected lifeof the financial asset to that asset's net carrying amount. Dividend income from investments is recognised when the shareholders' rights toreceive payment have been established. Leasing Leases are classified as finance leases whenever the terms of the lease transfersubstantially all the risks and rewards of ownership to the lessee. All otherleases are classified as operating leases. The group as lessor Rental income from operating leases is recognised on a straight-line basis overthe term of the relevant lease. The group as lessee Rentals payable under operating leases are charged to income on a straight-linebasis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operatinglease are also spread on a straight line basis over the lease term. Foreign currencies Transactions in currencies other than pounds sterling are recorded at the ratesof exchange prevailing on the dates of the transactions. At each balance sheetdate, monetary assets and liabilities that are denominated in foreign currenciesare retranslated at the rates prevailing on the balance sheet date. Non-monetaryassets and liabilities carried at fair value that are denominated in foreigncurrencies are translated at the rates prevailing at the date when the fairvalue was determined. Gains and losses arising on retranslation are included innet profit or loss for the period, except for exchange differences arising onnon-monetary assets and liabilities where the changes in fair value arerecognised directly in equity. In order to hedge its exposure to certain foreign exchange risks, the groupenters into forward contracts and options (see below for details of the group'saccounting policies in respect of such derivative financial instruments). On consolidation, the assets and liabilities of the group's overseas operationsare translated at exchange rates prevailing on the balance sheet date. Incomeand expense items are translated at the average exchange rates for the periodunless exchange rates fluctuate significantly. Exchange differences arising, ifany, are classified as equity and transferred to the group's translationreserve. Such translation differences are recognised as income or as expenses inthe period in which the operation is disposed of. Retirement benefit costs Payments to defined contribution retirement benefit schemes are charged as anexpense as they fall due. For defined benefit retirement benefit schemes, the cost of providing benefitsis determined using the Projected Unit Credit Method, with actuarial valuationsbeing carried out at each balance sheet date. Actuarial gains and losses arerecognised in full in the period in which they occur. They are recognisedoutside of the income statement and presented in the statement of recognisedincome and expense. Past service cost is recognised immediately to the extent that the benefits arealready vested, and otherwise is amortised on a straight-line basis over theaverage period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents thepresent value of the defined benefit obligation as adjusted for unrecognisedpast service cost, and as reduced by the fair value of scheme assets. Any assetresulting from this calculation is limited to past service cost, plus thepresent value of available refunds and reductions in future contributions to theplan. Taxation The tax expense represents the sum of the tax currently payable and deferredtax. The tax currently payable is based on taxable profit for the financial year.Taxable profit differs from net profit as reported in the income statementbecause it excludes items of income or expense that are taxable or deductible inother financial years and it further excludes items that are never taxable ordeductible. The group's liability for current tax is calculated using tax ratesthat have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differencesbetween the carrying amounts of assets and liabilities in the financialstatements and the corresponding tax bases used in the computation of taxableprofit, and is accounted for using the balance sheet liability method. Deferredtax liabilities are generally recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. Such assets and liabilities are not recognised if the temporarydifference arises from goodwill or from the initial recognition (other than in abusiness combination) of other assets and liabilities in a transaction thataffects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differencesarising on investments in subsidiaries and associates, and interests in jointventures, except where the group is able to control the reversal of thetemporary difference and it is probable that the temporary difference will notreverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheetdate and reduced to the extent that it is no longer probable that sufficienttaxable profits will be available to allow all or part of the asset to berecovered. Deferred tax is calculated at the tax rates that are expected to apply in theperiod when the liability is settled or the asset is realised. Deferred tax ischarged or credited in the income statement, except when it relates to itemscharged or credited directly to equity, in which case the deferred tax is alsodealt with in equity. Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciationand any impairment losses Depreciation is charged so as to write off the cost or valuation of assets,other than land and assets in course of construction, over their estimateduseful lives, using the straight-line method, on the following bases: Freehold buildings - 50 yearsFixed equipment in freehold buildings - 20 yearsLeasehold improvements - the lease termFixtures, fittings and equipment - 3 to 20 years The gain or loss arising on the disposal or retirement of an asset is determinedas the difference between the sales proceeds and the carrying amount of theasset and is recognised in income. Impairment of tangible assetsAt each balance sheet date, the group reviews the carrying amounts of itstangible assets to determine whether there is any indication that those assetshave suffered an impairment loss. If any such indication exists, the recoverableamount of the asset is estimated in order to determine the extent of theimpairment loss (if any). Where the asset does not generate cash flows that areindependent from other assets, the group estimates the recoverable amount of thecash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value inuse. In assessing value in use, the estimated future cash flows are discountedto their present value using a pre-tax discount rate that reflects currentmarket assessments of the time value of money and the risks specific to theasset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset (orcash-generating unit) is reduced to its recoverable amount. An impairment lossis recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset(or cash-generating unit) is increased to the revised estimate of itsrecoverable amount, but so that the increased carrying amount does not exceedthe carrying amount that would have been determined had no impairment loss beenrecognised for the asset (or cash-generating unit) in prior years. A reversal ofan impairment loss is recognised as income immediately. Other intangible assets Where computer software is not an integral part of a related item of computerhardware, the software is classified as an intangible asset. The capitalisedcosts of software for internal use include external direct costs of materialsand services consumed in developing or obtaining the software and payroll andpayroll-related costs for employees who are directly associated with and whodevote substantial time to the project. Capitalisation of these costs ceases nolater than the point at which the software is substantially complete and readyfor its intended use. These costs are amortised over their expected usefullives, which are reviewed annually. Inventories Inventories are stated at the lower of cost and net realisable value. Costcomprises direct materials and, where applicable, direct labour costs and thoseoverheads that have been incurred in bringing the inventories to their presentlocation and condition. Cost is calculated using the first-in, first-out costformula. Net realisable value represents the estimated selling price less allestimated costs of completion and costs to be incurred in marketing, selling anddistribution. Financial instruments Prospective adoption of IAS 32 and IAS 39 As permitted by IFRS 1, the Company has elected to apply IAS 32 FinancialInstruments: Disclosure and Presentation and IAS 39 Financial Instruments:Recognition and Measurement prospectively from 27 March 2005. Consequently, therelevant comparative information for the 52 weeks ended 26 March 2005 does notreflect the impact of these standards. Derivative financial instruments The group uses derivative financial instruments, principally, forward foreigncurrency contracts to reduce its exposure to exchange rate movements. The groupdoes not hold or issue derivatives for speculative or trading purposes. Under UKGAAP, such derivative contracts are not recognised as assets and liabilities onthe balance sheet and gains or losses arising on them are not recognised untilthe hedged item is itself recognised in the financial statements. From 27 March 2005 onwards, derivative financial instruments will be recognisedas assets and liabilities measured at their fair values at the balance sheetdate. Changes in their fair values will be recognised in the income statementand this is likely to cause volatility in situations where the carrying value ofthe hedged item is either not adjusted to reflect fair value changes arisingfrom the hedged risk or is so adjusted but that adjustment is not recognised inthe income statement. Provided the conditions specified by IAS 39 are met, hedgeaccounting may be used to mitigate this income statement volatility. The Company expects that hedge accounting will not generally be applied totransactional hedging relationships, such as hedges of forecast or committedtransactions. Where the hedging relationship is classified as a cash flow hedge, to the extentthe hedge is effective, changes in the fair value of the hedging instrument willbe recognised directly in equity rather than in the income statement. When thehedged item is recognised in the financial statements, the accumulated gains andlosses recognised in equity will be either recycled to the income statement or,if the hedged item results in a non-financial asset, will be recognised asadjustments to its initial carrying amount. Embedded derivativesUnder UK GAAP, embedded derivatives are not recognised in the financialstatements. From 27 March 2005 onwards, derivatives embedded in non-derivativehost contracts will be recognised separately as derivative financial instrumentswhen their risks and characteristics are not closely related to those of thehost contract and the host contract is not stated at its fair value with changesin its fair value recognised in the income statement. Treasury policy and financial risk management The board approves treasury policies and senior management directly controlsday-to-day operations within these policies. The major financial risks to whichthe group is exposed relate to movements in exchange rates and interest rates.Where appropriate, cost effective and practicable the group uses financialinstruments and derivatives to manage these risks. No speculative use ofderivatives, currency or other instruments is permitted. Foreign currency risk All export sales to franchise operations are invoiced in sterling. Export salesrepresent approximately 12 per cent of group sales. The group therefore has nocurrency exposure on these sales. The group purchases product in foreign currency, representing less than 6 percent of purchases. The group policy is that all material exposures are hedged byusing forward currency contracts. Provisions Provisions for restructuring and store closure costs are recognised when thegroup has a detailed formal plan that has been communicated to affected parties. Share based payments The group has applied the requirements of IFRS 2 Share based payments. Inaccordance with the transitional provisions, IFRS 2 has been applied to allgrants of equity instruments after 7 November 2002 that were unvested as of 1January 2005. The group issues equity-settled share-based payments to certain employees.Equity-settled share-based payments are measured at fair value at the date ofgrant. The fair value determined at the grant date of the equity-settledshare-based payments is expensed on a straight-line basis over the vestingperiod, based on the group's estimate of shares that will eventually vest. Fair value is measured by use of the valuation technique considered to be mostappropriate for each class of award, including Black-Scholes calculations andMonte Carlo simulations. The expected life used in the formula is adjusted,based on management's best estimate, for the effects of non-transferability,exercise restrictions, and behavioural considerations. The group also provides employees with the ability to purchase the group'sordinary shares at 80 per cent of the current market value. The group records anexpense based on its estimate of the 20 per cent discount related to sharesexpected to vest on a straight-line basis over the vesting period. 2. EARNINGS PER SHARE The calculation of earnings per share is based on the following data: --------------- 52 weeks ended 26 March 2005 £ millionEarnings Earnings for the purposes of basic and diluted earnings per share being profit for the financial year attributable to equity shareholders of the parent 11.3Adjustment to exclude the costs of the re-organisation of the distribution network (net of tax) 4.6Adjustment to exclude the profit on disposal of subsidiary undertaking (net of tax) (2.4) ---------------Earnings for the purposes of adjusted earnings per share 13.5 =============== Number of shares millionWeighted average number of ordinary shares for the purposes of basic earnings per share 68.0Effect of dilutive potential ordinary shares:- share options 1.2 ---------------Weighted average number of ordinary shares for the purposes of diluted earnings per share 69.2 =============== Basic earnings per share 16.6pDiluted earnings per share 16.3pAdjusted earnings per share 19.9p ---------------Related Shares:
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