Annual Financial Report

Publication of GlaxoSmithKline Capital plc's

Annual Report 2016

Today, 27 April 2017, GlaxoSmithKline Capital plc published on the GlaxoSmithKline Group website, www.gsk.com, its Annual Report in respect of the year ended 31 December 2016.

In compliance with Listing Rule 9.6.1 of the UK Financial Conduct Authority ("FCA"), copies of GlaxoSmithKline Capital plc's 2016 Annual Report, have been submitted to the UK Listing Authority's National Storage Mechanism and will shortly be available for inspection at http:/www.morningstar.co.uk/UK/NSM.

In accordance with the FCA's Disclosure and Transparency Rules 4.1 and 6.3.5, Appendix A to this announcement contains GlaxoSmithKline Capital plc's 2016 Annual Report, which includes a description of the principal risks and uncertainties affecting it together with a responsibility statement.

V A Whyte

Company Secretary

27 April 2017

Cautionary statement regarding forward-looking statements

Under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, GlaxoSmithKline plc (GSK) and the company caution investors that any forward-looking statements or projections made by GSK and the company, including those made in this announcement, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Such factors include, but are not limited to, those described under Item 3.D "Principal risks and uncertainties" in GSK's Annual Report on Form 20-F for 2016.

GlaxoSmithKline Capital plc

(Registered number: 2258699)

Annual Report

for the year ended 31 December 2016

Registered office address:

980 Great West Road

Brentford

Middlesex

TW8 9GS

GlaxoSmithKline Capital plc

(Registered number: 2258699)

Annual Report

for the year ended 31 December 2016

CONTENTS

Page

Strategic report

1

Directors' report

2-4

Independent auditors' report

5-6

Income statement

7

Statement of other comprehensive income

8

Balance sheet

9

Statement of changes in equity

10

Cash flow statement

11

Notes to the financial statements

12-24

The Directors present their Strategic report on GlaxoSmithKline Capital plc (the "Company") for the year ended 31 December 2016.

Principal activities and future developments

The Company is a member of the GlaxoSmithKline Group (the "Group"). The Company's principal activity is the issuance of notes under the Group's European and US Medium Term Note programme and the provision of financial services to other companies within the Group.

The Directors do not envisage any change to the nature of the business in the foreseeable future.

Review of business

The Company made a profit for the financial year of £11,297k (2015: £8,749k), which will be transferred to reserves. The Directors are of the opinion that the current level of activity and the year end financial position are satisfactory and will remain so in the foreseeable future.

At 31 December 2016, the Company had in issue £7,874,858k European Medium Term Notes and £3,214,961k US Medium Term Notes (2015: £7,333,953k and £2,708,366k respectively) which mature at dates between 2017 and 2045. All notes currently in issue pay interest on a fixed rate basis.

Principal risks and uncertainties

The Directors of GlaxoSmithKline plc manage the risks of the Group at a group level, rather than at an individual statutory entity level. For this reason, the Company's Directors believe that a discussion of the Group's risks would not be appropriate for an understanding of the development, performance or position of the Company's business. The principal risks and uncertainties of the Group, which include those of the Company, are discussed in the Group's 2016 Annual Report which does not form part of this report.

Key Performance Indicators (KPIs)

The Directors of the Group manage the Group's operations on an operating segment basis. For this reason, the Company's Directors believe that analysis using key performance indicators for the Company is not necessary or appropriate for an understanding of the development, performance or position of the Company's business. The development, performance and position of the Group are discussed in the Group's 2016 Annual Report which does not form part of this report.

By order of the Board

A Walker

For and on behalf of Glaxo Group Limited

Corporate Director

27 April 2017

The Directors present their report on the Company and the audited financial statements for the year ended 31 December 2016.

Results and dividends

The Company's profit for the financial year is shown in the income statement on page 7.

No dividend is proposed to the holders of Ordinary Shares in respect of the year ended 31 December 2016 (2015: £nil).

Internal control framework

The Internal Control Framework is the means by which the Group ensures compliance with laws and regulations, the reliability of financial reporting and comprehensive risk management. The Directors of the Group are accountable for evaluating and approving the effectiveness of the internal controls, including financial, operational and compliance controls, and risk management processes operated by the Group.

To ensure effective governance and promote an ethical culture, the Group has in place the Risk Oversight and Compliance Council. This team of senior leaders is authorised by the Board to assist the Audit and Risk Committee in overseeing risk management and internal control activities. It also provides the business units with a framework for risk management and upward escalation of significant risks, of which the Company operates within. Further information on the Group's Internal Control Framework is discussed in the Group's 2016 Annual Report which does not form part of this report.

Financial risk management

The Company issues notes under the Group's European and US Medium Term Note programmes in order to meet anticipated funding requirements. The strategy is to diversify liquidity sources using a range of facilities and to maintain broad access to funding markets. Details of derivative financial instruments and hedging and further information on risk management policies, exposures to market, credit and liquidity risk are disclosed in Note 2(l) and 4 respectively.

Previously in 2012, the Company entered into US dollar Government treasury base rate Locks to manage interest rate risk on its forecasted 3, 7 and 30 year US dollar debt issued under the Group's European Medium Term Note programme.

At 31 December 2016, none of the Company's total debt issuances were exposed to floating interest rates and interest is paid on a fixed rate basis.

Directors and their interests

The Directors of the Company who were in office during the year and up to the date of signing the financial statements were as follows:

Mr S Dingemans

Edinburgh Pharmaceutical Industries Limited

Glaxo Group Limited

No Director had, during the year or at the end of the year, any material interest in any contract of significance to the Company's business with the exception of the Corporate Directors (Edinburgh Pharmaceutical Industries Limited and Glaxo Group Limited), where such an interest may arise in the ordinary course of business.

Directors' indemnity

Each of the Directors benefits from an indemnity given by the Company under its articles of association. This indemnity is in respect of liabilities incurred by the Director in the execution and discharge of their duties.

In addition, each of the Directors, who is an individual, benefits from an indemnity given by another Group company, GlaxoSmithKline Services Unlimited. This indemnity is in respect of liabilities arising out of third party proceedings to which the Director is a party by virtue of his or her engagement in the business of the Company.

Directors' interest

The following interests of the Director in office at the year-end in the shares of the ultimate parent undertaking, GlaxoSmithKline plc, have been notified to the Company.

Ordinary Shares

At 31 Dec2015

Acquired

Disposed

At 31 Dec2016

Shares

Mr S Dingemans

129,797

210,454

(153,817)

186,434

At 31 Dec2015

Granted

Exercised/lapsed

At 31 Dec2016

Options

Mr S Dingemans

-

19,008

(19,008)

-

At 31 Dec2015

Granted

Exercised/lapsed

At 31 Dec2016

ShareSave

Mr S Dingemans

720

208

(216)

712

At 31 Dec2015

Granted

Exercised/lapsed

At 31 Dec2016

Performance Share Plan awards

Mr S Dingemans

611,834

256,884

(225,372)

643,346

At 31 Dec2015

Granted

Exercised/lapsed

At 31 Dec2016

Deferred Annual Bonus Plan

Mr S Dingemans

99,458

81,761

(27,597)

153,622

All share awards are over Ordinary shares of GlaxoSmithKline plc.

Further details of the above-mentioned Plans are disclosed in the 2016 Annual Report of GlaxoSmithKline plc.

Statement of Directors' responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing the financial statements, the Directors are required to:

l

select suitable accounting policies and then apply them consistently;

l

state whether applicable United Kingdom Accounting Standards, comprising FRS 101, have been followed, subject to any material departures disclosed and explained in the financial statements;

l

make judgements and accounting estimates that are reasonable and prudent; and

l

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006.

The Directors are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The following items have been included in the Strategic report on page 1:

l

principal activities and future developments;

l

review of business; and

l

principal risks and uncertainties.

Governance

The Company's approach to the Modern Slavery Act 2015 is set by the Group. As part of their governance, the Group reviewed and approved the approach to the Modern Slavery Act 2015 during 2016.

Disclosure of information to auditors

As far as each of the Directors are aware, there is no relevant audit information of which the Company's auditors are unaware, and the Directors have taken all the steps that ought to have been taken to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

Independent auditors

PricewaterhouseCoopers LLP have been appointed to act as the Company's auditors in accordance with a resolution of the Board of Directors. A resolution dealing with their reappointment will be proposed at a General Meeting of the Company.

By order of the Board

A Walker

For and on behalf of Glaxo Group Limited

Corporate Director,

27 April 2017

Independent auditors' report to the members of GlaxoSmithKline Capital plc

Report on the financial statements

Our opinion

In our opinion, GlaxoSmithKline Capital plc's financial statements (the "financial statements"):

l

give a true and fair view of the state of the company's affairs at 31 December 2016 and of its profit and cash flows for the year then ended;

l

have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

l

have been prepared in accordance with the requirements of the Companies Act 2006.

What we have audited

The financial statements, included within the Annual Report, comprise:

l

the balance sheet at 31 December 2016;

l

the income statement and statement of comprehensive income for the year then ended;

l

the cash flow statement for the year then ended;

l

the statement of changes in equity for the year then ended; and

l

the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.

The financial reporting framework that has been applied in the preparation of the financial statements is United Kingdom Accounting Standards, comprising FRS 101 "Reduced Disclosure Framework", and applicable law (United Kingdom Generally Accepted Accounting Practice).

In applying the financial reporting framework, the directors have made a number of subjective judgements, for example in respect of significant accounting estimates. In making such estimates, they have made assumptions and considered future events.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

l

the information given in the Strategic report and the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

l

the Strategic report and the Directors' report have been prepared in accordance with applicable legal requirements.

In addition, in light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic report and the Directors' report. We have nothing to report in this respect.

Other matters on which we are required to report by exception

Adequacy of accounting records and information and explanations received

Under the Companies Act 2006, we are required to report to you if, in our opinion:

l

we have not received all the information and explanations we require for our audit; or

l

adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or

l

the financial statements are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Independent auditors' report to the members of GlaxoSmithKline Capital plc

Directors' remuneration

Under the Companies Act 2006, we are required to report to you if, in our opinion, certain disclosures of directors' remuneration specified by law are not made. We have no exceptions to report arising from this responsibility.

Responsibilities for the financial statements and the audit

Our responsibilities and those of the directors

As explained more fully in the Statement of Directors' responsibilities set out on page 4, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.

Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland) ("ISAs (UK & Ireland)"). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What an audit of financial statements involves

We conducted our audit in accordance with ISAs (UK & Ireland). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:

l

whether the accounting policies are appropriate to the company's circumstances and have been consistently applied and adequately disclosed;

l

the reasonableness of significant accounting estimates made by the directors; and

l

the overall presentation of the financial statements.

We primarily focus our work in these areas by assessing the directors' judgements against available evidence, forming our own judgements and evaluating the disclosures in the financial statements.

We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.

In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies, we consider the implications for our report. With respect to the Strategic report and Directors' report, we consider whether those reports include the disclosures required by applicable legal requirements.

Other matters

The Company has passed a resolution in accordance with Section 506 of the Companies Act 2006 that the senior statutory auditor's name should not be stated.

PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

London

27 April 2017

Income statement

for the year ended 31 December 2016

2016

2015

Notes

£'000

£'000

Other operating income

2,711 

547 

Finance income

8

399,340 

394,271 

Finance expense

9

(387,930)

(383,849)

Operating profit

6

14,121 

10,969 

Profit before taxation

14,121 

10,969 

Tax on profit

10

(2,824)

(2,220)

Profit for the financial year

11,297 

8,749 

The results disclosed above for both the current year and prior year relate entirely to continuing operations.

The notes on pages 12 to 24 are an integral part of these financial statements.

Statement of comprehensive income

for the year ended 31 December 2016

2016

2015

Notes

£'000

£'000

Profit for the financial year

11,297 

8,749 

Items that may be subsequently reclassified to the Income statement:

Reclassification of cash flow hedges to the Income statement

954 

954 

Deferred tax on cash flow hedges

10

(283) 

(433)

Other comprehensive income for the financial year

671 

521 

Total comprehensive income for the financial year

11,968 

9,270 

The notes on pages 12 to 24 are an integral part of these financial statements.

Balance Sheet

As at 31 December 2016

2016

2015

Notes

£'000

£'000

Non-current assets

Deferred tax assets

10

1,893 

2,176 

Loans and receivables

11

8,353,138 

9,984,314 

Total non-current assets

8,355,031 

9,986,490 

Current assets

Loans and receivables

11

2,767,682 

74,346 

Prepayment and accrued income

12

110,223 

105,382 

Cash and cash equivalents

2 

2 

Total current assets

2,877,907 

179,730 

Total assets

11,232,938 

10,166,220 

Current liabilities

Other payables

13

(5,026)

(2,200)

Short-term borrowings

14

(2,679,716)

- 

Accruals and deferred income

15

(106,431)

(102,007)

Creditors: amounts falling due within one year

(2,791,173)

(104,207)

Net current assets

86,734 

75,523 

Non-current liabilities

Long-term borrowings

14

(8,410,103)

(10,042,319)

Creditors: amounts falling due after more than one year

(8,410,103)

(10,042,319)

Total liabilities

(11,201,276)

(10,146,526)

Net assets

31,662 

19,694 

Equity

Called up share capital

20

100 

100 

Other reserves

21

(9,243)

(9,914)

Retained earnings

40,805 

29,508 

Total equity

31,662 

19,694 

The notes on pages 12 to 24 are an integral part of these financial statements.

The financial statements on pages 7 to 24 were approved by the Board of Directors on 27 April 2017 and signed on its behalf by:

A Walker

For and on behalf of Glaxo Group Limited

Corporate Director

Statement of changes in equity

for the year ended 31 December 2016

Called up share capital

Other reserves

Retained earnings

Totalequity

£'000

£'000

£'000

£'000

At 1 January 2015

100

(10,435)

20,759

10,424

Profit for the financial year

-

- 

8,749

8,749

Other comprehensive income for the financial year

-

521 

-

521

At 31 December 2015

100

(9,914)

29,508

19,694

Profit for the financial year

-

- 

11,297

11,297

Other comprehensive income for the financial year

-

671 

-

671

At 31 December 2016

100

(9,243)

40,805

31,662

The notes on pages 12 to 24 are an integral part of these financial statements.

Cash flow statement

for the year ended 31 December 2016

2016

2015

Notes

£'000

£'000

Cash flow from operating activities

Operating profit

14,121 

10,969 

Adjustments reconciling profit before tax to operating

cash flows

18

9,277 

1,777,479 

Net cash inflow from operating activities

23,398 

1,788,448 

Cash flow from financing activities

Repayment of short-term borrowings

- 

(1,780,815)

Decrease in loans with Group undertakings

(23,398)

(7,634)

Net cash outflow from financing activities

(23,398)

(1,788,449)

Net movement in cash in the year

- 

(1)

Cash at beginning of year

2 

3 

Movement in cash

- 

(1)

Cash at end of year

2 

2 

The notes on pages 12 to 24 are an integral part of these financial statements.

1

Presentation of the financial statements

General information

GlaxoSmithKline Capital plc (the "Company") is a member of the GlaxoSmithKline Group (the "Group"). The Company's principal activity is the issuance of notes under the Group's European and US Medium Term Note programmes and the provision of financial services to other companies within the Group.

The company is a public company limited by shares and is incorporated and domiciled in the UK (England). The address of the registered office is 980 Great West Road, Brentford, Middlesex TW8 9GS.

2

Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied, unless otherwise stated. There have been no changes and no early adoptions of accounting policies during the year.

(a)

Basis of preparation

The financial statements have been prepared in accordance with Financial Reporting Standard 100 "Application of Financial Reporting Requirements" ("FRS 100") and Financial Reporting Standard 101 "Reduced Disclosure Framework" ("FRS 101").

These financial statements have been prepared on the going concern basis under the historical cost convention and in accordance with the Companies Act 2006 as applicable to companies using FRS 101.

Disclosure exemptions adopted

In preparing these financial statements, the Company has taken advantage of all disclosure exemptions conferred by FRS 101. Therefore these financial statements do not include:

l

Paragraph 38 of IAS 1 "Presentation of financial statements" comparative information requirements in respect of:

(i)

paragraph 79(a) (iv) of IAS 1;

l

The following paragraphs of IAS 1 "Presentation of financial statements":

-

16 (statement of compliance with all IFRS); and

-

38B-D (additional comparative information)

l

Paragraph 30 and 31 of IAS 8 "Accounting policies, changes in accounting estimates and errors" (requirement for the disclosure of information when an entity has not applied a new IFRS that has been issued but is not yet effective);

l

Paragraph 17 of IAS 24 "Related party disclosures" (key management compensation); and

l

The requirements in IAS 24 "Related party disclosures" to disclose related party transactions entered into between two or more wholly owned members of a group.

The financial statements of GlaxoSmithKline plc can be obtained as described in Note 2(b).

The preparation of financial statements in conformity with FRS 101 requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the company's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3.

2

Summary of significant accounting policies (continued)

(b)

Ultimate and immediate parent undertaking

The Company is a wholly owned subsidiary of the ultimate parent company. GlaxoSmithKline plc, a company registered in England and Wales and is the Company's ultimate parent undertaking and controlling party. The largest and smallest group of undertakings for which group financial statements are prepared and which include the results of the Company are the consolidated financial statements of GlaxoSmithKline plc. Copies of the consolidated financial statements can be obtained from the Company Secretary, GlaxoSmithKline plc, 980 Great West Road, Brentford, Middlesex TW8 9GS. The immediate parent undertaking is SmithKline Beecham Limited. These financial statements are separate financial statements.

(c)

Foreign currency transactions

Foreign currency transactions are booked in the functional currency of the Company at the exchange rate ruling on the date of the transaction. Foreign currency monetary assets and liabilities are translated into functional currency at rates of exchange ruling at the balance sheet date. Exchange differences are included in the income statement. The functional and presentation currency of the Company is Pounds Sterling.

(d)

Other operating income

Management service fees are recognised in other operating income on an accruals basis.

(e)

Finance income and expense

Finance income and expenses are recognised on an accruals basis using the effective interest method.

(f)

Financial assets

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. The Company's loans and receivables represents intercompany balances with other Group undertakings, which are carried at amortised cost using the effective interest method.

(g)

Impairment of financial assets

The Company assesses at the end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicates that there is a measureable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

For loans and receivables, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in the income statement.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the reversal of the previously recognised impairment loss is recognised in the income statement.

2

Summary of significant accounting policies (continued)

(h)

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions. They are readily convertible into known amounts of cash and have an insignificant risk of changes in value.

(i)

Other payables

Other payables are initially recognised at fair value and then held at amortised cost using the effective interest method. Long-term payables are discounted where the effect is material.

(j)

Borrowings

All borrowings, which comprise European and US Medium Term Notes, are initially recorded at the amount of proceeds received, net of transaction costs. Borrowings are subsequently carried at amortised cost, with the difference between the proceeds, net of transaction costs, and the amount due on redemption being recognised as a charge to the income statement over the period of the relevant borrowing.

(k)

Taxation

Current tax is provided at the amounts expected to be paid or refunded applying the rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is provided in full, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are recognised to the extent that it is probably that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is provided using rates of tax that have been enacted or substantively enacted by the balance sheet date.

(l)

Derivative financial instruments and hedging

Derivative financial instruments can be used by the Company to manage exposure to market risks. The Company does not hold or issue derivative financial instruments for trading or speculative purposes and does not currently hold any derivative financial instruments.

Changes in the fair value of derivatives designated as cash flow hedges are recognised in other comprehensive income to the extent that the hedges are effective. Ineffective portions are recognised in profit or loss immediately. Amounts deferred in other comprehensive income are reclassified to the income statement when the hedged item affects profit or loss.

Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement.

The Company carries a balance in other comprehensive income that arose from using US dollar Government Treasury base rate locks for pre-hedging fluctuations in long-term interest rates when pricing bonds issued in prior years.

3

Key accounting judgements and estimates

In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses reported in the financial statements. Actual amounts and results could differ from those estimates. The following are considered to be the key accounting judgements and estimates made.

(a)

Taxation

Current tax is provided at the amounts expected to be paid or refunded, and deferred tax is provided on temporary differences between the tax bases of assets and liabilities and their carrying amounts, at the rates that have been enacted or substantively enacted by the balance sheet date.

3

Key accounting judgements and estimates (continued)

Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised, based on managements assumptions relating to the amounts and timing of future taxable profits.

4

Financial risk management

Risk management is carried out by the Group's Corporate Treasury under policies and procedures approved annually by the Group's Board of Directors, and most recently on 21 July 2016. The role of Corporate Treasury is to monitor and manage the Group's external and internal funding requirements and financial risks, covering foreign exchange, interest rate, liquidity, and credit risks, in support of the Group's strategic objectives. A Treasury Management Group meeting, chaired by the Group's Chief Financial Officer, also takes place on a monthly basis to review treasury activities.

(a)

Market risk

(i)

Foreign exchange risk

The Company is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and Euro, in respect of bonds issued under the Group's European and US Medium Term Note programmes.

The net proceeds of bond issuances received are subsequently advanced as loans to other Group undertakings in the same currency which minimises the foreign translation exposure within the Company. On this basis, foreign exchange risk is not considered material and the Company has not prepared a sensitivity analysis.

(ii)

Interest rate risk

The Group's objective is to minimise the effective net interest cost and to balance the mix of debt at fixed and floating interest rates over time. The policy on interest rate risk management limits the amount of floating interest payments to a prescribed percentage of operating profit.

The Company's interest rate risk arises mainly from deposits with Group undertakings and cash held at variable rates which expose the Company to interest rate risk. The Company has borrowings, comprising of European and US Medium Term Notes and amounts owed by Group undertakings, which are at fixed rates and expose the Company to fair value interest rate risk.

The table below hypothetically shows the Company's sensitivity to interest rates on its floating rate US dollar, Sterling, and Euro financial assets. The Company has considered movements in interest rates over the last three years and has concluded that a 1% (100 basis point) movement is a reasonable benchmark. If interest rates applicable to floating rate financial assets were to have increased by 1% (100 basis points), and assuming all other variables had remained constant, it is estimated that the Company's finance income for 2016 would have increased by approximately £1,064k (2015: £743k increase in finance income).

2016

2015

Increase in income

Increase in income

£'000

£'000

1% (100 basis points) increase in US dollar interest rates (2015: 1%)

339

221

1% (100 basis points) increase in Sterling interest rates (2015: 1%)

350

291

1% (100 basis points) increase in Euro interest rates (2015: 1%)

375

231

4

Financial risk management (continued)

The tables below illustrate the currency and interest rate profiles arising from the Company's borrowings and loans and receivable balances.

Currency and interest rate risk profile of borrowings

Fixed rate

At 31 December 2016

Weighted average interest rate

Average years for which rateis fixed

Total

Currency

%

£'000

US dollars

2.2

3

(3,214,961)

Sterling

5.0

21

(4,050,413)

Euro

3.0

5

(3,824,445)

Total borrowings

3.4

10

(11,089,819)

Fixed rate

At 31 December 2015

Weighted average interest rate

Average years for which rateis fixed

Total

Currency

%

£'000

US dollars

2.0

2

(2,708,366)

Sterling

5.0

22

(4,047,819)

Euro

3.0

5

(3,286,134)

Total borrowings

3.4

10

(10,042,319)

(a)

Market risk

Currency and interest rate risk profile of loans and receivables

At 31 December 2016

Fixed rate

Fixed rate

Total

Currency

£'000

£'000

£'000

US dollars

3,196,145

33,887

3,230,032

Sterling

4,024,023

34,996

4,059,019

Euro

3,794,309

37,460

3,831,769

Total loans and receivables

11,014,477

106,343

11,120,820

At 31 December 2015

Fixed rate

Fixed rate

Total

Currency

£'000

£'000

£'000

US dollars

2,696,069

22,109

2,718,178

Sterling

4,024,023

29,138

4,053,161

Euro

3,264,222

23,099

3,287,321

Total loans and receivables

9,984,314

74,346

10,058,660

4

Financial risk management (continued)

Net currency exposure

2016

2015

£'000

£'000

US dollars

15,071

9,812

Euro

7,324

1,187

22,395

10,999

(b)

Credit risk

Credit risk is managed on a Group basis and arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions. The Group sets global counterparty limits for each of its banking and investment counterparties based on long-term credit ratings from Standard and Poor's and Moody's Investor Services ("Moody's"). Usage of these limits is monitored daily and Corporate Treasury actively manages its exposure to credit risk, reducing surplus cash balances wherever possible.

There are no financial assets that are past due or impaired as at 31 December 2016 (2015: £nil).

The Company did not hold any collateral as security or obtained other credit enhancements as at 31 December 2016 (2015: £nil).

The Company considers its maximum exposure to credit risk at 31 December 2016, without taking into account any collateral held or other credit enhancements, to be £11,231,045k (2015: £10,164,044k) being the total of the Company's financial assets of which the balances are all held within the GlaxoSmithKline Group, see Note 16.

(c)

Liquidity risk

Liquidity is managed centrally by the Group by borrowing in order to meet anticipated funding requirements and investing centrally managed liquid assets in bank deposits, Aaa/AAA rated US Treasury and Treasury repo only money market funds and Aaa/AAA rated liquidity funds. The Group's cash flow forecast and funding requirements are monitored on a monthly basis by the Treasury Management Group and the strategy is to have diversified liquidity sources using a range of facilities and to maintain broad access to funding markets.

5

Capital management

The Group's financial strategy supports its strategic priorities and is regularly reviewed by the Board. The capital structure of the Group is managed through an appropriate mix of debt and equity in order to optimise returns to shareholders whilst maintaining the Group's credit ratings that provide the Company with flexibility to access debt capital markets on attractive terms under the Group's European and US Medium Term Note programmes.

The capital structure of the Company consists of net debt of £11,089,817k (2015: £11,042,317k) and shareholders' funds of £31,662k (2015: £19,694k) (see Statement of changes in equity).

6

Operating profit

2016

2015

£'000

£'000

The following items have been credited/(charged) in operating profit:

Exchange gains on foreign currency transactions

2,758 

593 

Management fee

(47)

(46)

6

Operating profit (continued)

GlaxoSmithKline Services Unlimited provides various services and facilities to the Company including finance and administrative services for which a management fee was charged of £47,085 in 2016 compared with £45,879 in 2015. Included in the management fee is a charge for auditors' remuneration of £35,945 (2015: £34,898).

7

Employees

All of the Group's UK employees are remunerated by GlaxoSmithKline Services Unlimited and receive no remuneration from the Company. A management fee is charged by GlaxoSmithKline Services Unlimited for services provided to the Company (see Note 6). The Company has no employees.

8

Finance income

2016

2015

£'000

£'000

Interest income arising from loans and receivables

399,340 

394,271 

9

Finance expense

2016

2015

£'000

£'000

Interest expense arising on financial liabilities at amortised cost

(386,976)

(382,895)

Reclassification of cash flow hedge from other comprehensive income

(954)

(954)

Total finance expense

(387,930)

(383,849)

10

Taxation

2016

2015

Income tax expense on ordinary activities

£'000

£'000

Current tax:

UK Corporation tax at 20.00% (2015: 20.25%)

2,824 

2,133 

Total current tax

2,824 

2,133 

Deferred tax:

Origination and reversal of timing differences

- 

78 

Adjustments in respect of previous years

- 

- 

Change in tax rate - impact on deferred tax

- 

9 

Total deferred tax

- 

87 

Total tax charge for the year

2,824 

2,220 

The tax assessed for the year is the same as (2015: lower than) the standard rate of corporation tax in the UK for the year ended 31 December 2016 of 20.00% (2015: 20.25%). The differences are explained below:

2016

2015

Tax expense included in other comprehensive income

£'000

£'000

Deferred tax:

Fair value movements on cash flow hedges

162 

172 

change in tax rates

121 

261 

Total tax expense included in other comprehensive income

283 

433 

10

Taxation (continued)

2016