29th Nov 2005 07:01
Smith WH PLC29 November 2005 WH SMITH PLC RESTATEMENT OF FINANCIAL INFORMATION UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) 1. INTRODUCTION WH Smith PLC and its subsidiaries ("the Group") currently prepares itsconsolidated financial statements under UK Generally Accepted AccountingPractices (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)(1) for all reportingperiods commencing after 1 January 2005. IFRS will apply for the first time tothe Group's consolidated financial statements for the year ending 31 August2006. The first results to be published under IFRS will be the interim resultsfor the six months ending 28 February 2006. The purpose of this report is to explain how the Group's financial performancefor the year ended 31 August 2005, and its financial position as at that date,presented under IFRS, differs to that reported under UK GAAP. The informationhas been prepared on the basis of the Group's current interpretation of how theIFRSs 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 onadoption of IFRS and the Group's first IFRS financial statements may thereforebe prepared in accordance with different accounting policies and treatments thanthose presented here. 2. SUMMARY OF IFRS ADOPTION CHANGES The adoption of IFRS represents an accounting change only, and does not affectthe operations or cash flows of the Group. The effect of the adoption of IFRS onthe results of the Group for the year ended 31 August 2005 is to decrease profitbefore tax for continuing operations by £1m. Year ended 31 August 2005 UK GAAP IFRS Change Turnover (£m)(2) 2,508 2,497 (11)Profit before tax - continuing operations (£m) 72 71 (1)Profit for the year (£m) 46 47 1Basic earnings per share (pence) 26.0 26.6 0.6Headline earnings per share (pence)(3) 31.6 31.6 -Net assets as at 31 August 2005 42 52 10 (1)References to IFRS in this document refer to the application of InternationalFinancial Reporting Standards (IFRS), International Accounting Standards (IAS)and interpretations issued by the International Accounting Standards Board(IASB) and its relevant committees.(2)Under IFRS Turnover represents that derived from continuing operations only;the discontinued operation relates to the sale of the Publishing business.(3)Headline earnings per share has been calculated using profit after tax butbefore exceptional items and net interest charges on the defined benefit pensionscheme as defined under IAS 19. The accounting policy changes that have the most significant impact on thefinancial statements of the Group for the year ended 31 August 2005 are: • Recognition of a fair value charge for share based payments • Spreading of lease incentives over the term of the lease • Timing of the recognition of dividends • Goodwill subject to an annual impairment review rather than annual amortisation • Valuation method used in assessing the defined benefit pension scheme • Related deferred tax adjustments These changes are further explained in Section 4 and detailed reconciliationsare shown in the Appendices to this report. 3. BASIS OF PREPARATION The financial information presented in this document has been prepared using theaccounting policies detailed in section 5. These accounting policies are basedon all International Financial Reporting Standards (IFRS) and InternationalFinancial Reporting Interpretations Committee (IFRIC) interpretations that areexpected to be applicable to the financial reporting for the year ending 31August 2006. These are subject to changes resulting from ongoing reviews andendorsements by the European Commission, possible amendments by theInternational Accounting Standards Board (IASB) and issuance of furtherstandards or interpretations that may affect the 2005/06 reporting period. Thefinancial information in this document may therefore require modification upuntil the period that the Group prepares its first complete set of IFRSfinancial statements for the year ending 31 August 2006. In preparing this financial information, the Group has assumed that the EuropeanCommission will endorse the amendment to IAS 19 Employee Benefits "ActuarialGains and Losses, Group Plans and Disclosures". On 19 November 2004, the European Commission endorsed an amended version of IAS39 Financial Instruments: Recognition and Measurement rather than the fullversion previously published by the IASB. In accordance with guidance issued bythe UK Accounting Standards Board, the full version of IAS 39, as issued by theIASB, will be adopted with effect from 1 September 2005. The financial information contained in this document does not constitute fullaccounts within the meaning of Section 240 of the Companies Act 1985. Fullaccounts for the year ended 31 August 2005, prepared under UK GAAP, will bedelivered to the Registrar of Companies. These accounts contain an unqualifiedreport from the Group's auditors which do not contain a statement under S237(2)or (3) of the Companies Act 1985. IFRS 1 First-time adoption IFRS 1 First-time adoption of International Financial Reporting Standardsdetails the procedures a company must follow when adopting IFRS for the firsttime. It also gives companies the option of taking a number of exemptions to thefull requirements of IFRS in the year of transition. The Group's date oftransition to IFRS is 1 September 2004, with the transitional year being theyear ended 31 August 2005. The Group has elected to take the following key exemptions on transition toIFRS: a) IFRS 3 Business combinations The Group has chosen not to restate historic business combinations to comply with IFRS 3 Business combinations. The goodwill carrying value has not therefore been adjusted between the UK GAAP balance sheet at 31 August 2004 and the IFRS opening balance sheet. b) IAS 19 Employee benefits: Actuarial gains and losses Under UK GAAP FRS 17, the Group recognised all cumulative actuarial gains and losses in equity. These gains and losses have continued to be recognised in equity at the date of transition. c) IAS 21 The effects of changes in foreign exchange rates IAS 21 states that cumulative foreign exchange movements created on the translation of foreign entities should be disclosed in a separate reserve within shareholders' funds. On disposal of a foreign entity, the cumulative exchange gains or losses associated with that entity should be recycled through the income statement as part of the gain or loss on disposal. The Group has taken the exemption under FRS 1 whereby cumulative exchange differences are deemed to be zero at the date of transition to IFRS. The gain or loss on any subsequent disposals will therefore exclude any translation gains or losses prior to the date of transition. d) IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement The Group has taken the option to defer the implementation of IAS 32 and IAS 39 to the financial year ending 31 August 2006. Therefore, financial instruments continue to be accounted for and presented in accordance with UK GAAP for the year ended 31 August 2005. e) IAS 16 - Valuation of properties The Group has elected not to use fair value as deemed cost for any items of property, plant and equipment at the date of transition. f) IFRS 2 Share-based payments IFRS 1 provides an exemption which allows companies to only apply IFRS 2 to share-based payment awards granted after 7 November 2002. The Group has not taken this exemption, but elected to apply IFRS 2 to all share options which have not fully vested by the date of transition. 4. REVIEW OF MAIN CHANGES ARISING FROM IFRS ADOPTION The most significant areas of change to the Group on adoption of IFRS aresummarised below. 4.1 Share-based payments (IFRS 2) The Group operates a range of share-based incentive schemes. Further detail onthese schemes can be found in the Group's Annual Report. IFRS 2 requires the charge recognised in the income statement for share options,long-term incentive plans and other share based payments (includingSave-As-You-Earn) to be based on the 'fair value' at grant date, using anappropriate option pricing model. The fair value of the shares / options ischarged against profits over the period from grant date to vesting (the vestingperiod). This differs from UK GAAP UITF 17, which requires that the charge tothe profit and loss account should be based on the difference between the marketvalue of shares at the date of grant and the exercise price (i.e. an intrinsicvalue basis) and spread over the performance period. In addition, as permittedunder UK GAAP, UITF 17 has never been applied to Save-As-You-Earn share options. For improved comparability purposes, the Group will apply IFRS 2 retrospectivelyto all options granted but not fully vested as at the date of transition, ratherthan only those granted after 7 November 2002. The fair values of awards grantedon or before 7 November 2002 were published on 29 November 2005. The fair valuation of the share based incentive schemes operated by the Grouphas led to an additional charge to profit before tax for the year ended 31August 2005 of £2m, which is offset by a deferred tax credit of £2m. There is nosignificant impact on the net assets at 1 September 2004. 4.2 Leasing (IAS 17) 4.2.1 Lease Incentives Under UK GAAP, the Group has recognised operating lease incentives (rent freeperiods and capital contributions) in the profit and loss account over theperiod to the first rent review. In accordance with IAS 17 as interpreted by SIC15, lease incentives will be recognised in the income statement over the fulllease term. The adjustment made on IFRS adoption is therefore a timingdifference, which will reverse over the lease terms. The adoption of IAS 17 will lead to a £6m reduction to net assets at the date oftransition. The impact on profit before tax for the year ended 31 August 2005 is notsignificant. The net assets at 31 August 2005 have been reduced by £5m. 4.2.2 Finance leases The Group currently recognises finance leases under the recognition criteriadetailed in UK GAAP SSAP 21 'Accounting for leases and hire purchase contracts'.IAS 17 introduces new tests in determining the classification of leases betweenoperating and finance leases. Under these new tests, a number of computer leaseswill be reclassified as finance leases on IFRS adoption. The change inaccounting policy has no impact on the net assets of the Group, however, at 1September 2004 plant, property and equipment will increase by £11m and trade andother payables will increase by a similar amount. 4.3 Recognition of dividends (IAS 10 - Events after the balance sheet date) Dividends declared after the balance sheet date will not be recognised under IAS10 as a liability at that balance sheet date. The final dividends for thefinancial year ended 31 August 2004 (£14m) and 31 August 2005 (£16m) have notbeen recognised in the Group's IFRS restated balance sheets at 1 September 2004and 31 August 2005 respectively. The dividend for the year ended 31 August 2004has been charged directly to equity in the Group's IFRS balance sheet as at 31August 2005, following its approval by shareholders on 27 January 2005. 4.4 Goodwill arising on business combinations (IFRS 3) Under IFRS 3, goodwill is no longer amortised, but is subject to an annualimpairment assessment. The Group has reviewed the goodwill balances forimpairment as at 1 September 2004 and 31 August 2005, and no impairment wasidentified at either date. During the year ended 31 August 2005, a £1m amortisation charge was made to theprofit and loss account under UK GAAP. This charge will be reversed out of theincome statementto comply with IFRS 3, which results in an increase in the Group's profit beforetax for £1m for the year ended 31 August 2005. There is no significantassociated tax impact. 4.5 Employee benefits (IAS 19) 4.5.1 Retirement Obligations Under UK GAAP, the Group applies the measurement and recognition policies of FRS17 "Retirement benefits". IAS 19 'Employee benefits' takes a similar approach toaccounting for defined benefit pension schemes as FRS 17 with the followingprincipal differences; 1) The assets of the defined benefit pension schemes are measured on a bid-price basis rather than mid-price basis. This has resulted in a downward adjustment to the valuation of the pension schemes at 1 September 2004 and 31 August 2005 of £2m. 2) IAS 19 permits a number of alternative methods of accounting for the actuarial gains and losses of the defined benefit scheme. The Group has elected to recognise in full all actuarial gains and losses to equity when they occur. This approach is consistent with that used under FRS 17. Additionally under IAS 12, the deferred tax asset relating to the definedbenefit pension scheme deficit is required to be separately presented on thebalance sheet and the defined benefit pension deficit is presented on a grossbasis. Under UK GAAP the defined benefit pension scheme deficit is shown net ofdeferred tax. 4.5.2 Short term benefits IAS 19 requires the expected cost of compensated short-term absences such asholidays to be accrued for when the corresponding services have been receivedfrom employees. The impact on the results for the year ended 31 August 2005 andon transition to IFRS is not material. The charge (net of tax) to the incomestatement for the 6 months to 28 February 2005 was £1m - this was effectivelyreversed in the second half of that year. 4.6 Deferred and current taxes (IAS 12) IFRS accounting adjustments have been tax effected where appropriate. Under IAS 12, deferred tax is provided on all temporary differences between thecarrying value of assets and liabilities and their tax base. This differs fromUK GAAP where deferred tax is calculated based on timing differences arising inthe income statement. However the effect of this change in the calculationmethod on the Group's balance sheets is not significant. The impact of IFRS adoption is to reduce the tax charge for the year ended 31August 2005 by £2m. 4.7 Impairment of assets (IAS 36) Under IAS 36, individual assets should be reviewed for impairment when animpairment indicator exists. Where individual assets do not generate cash flowsindependently from one another, the impairment review should be carried out atthe 'cash generating unit' (CGU) level, which represents the lowest level atwhich cash flows are independently generated. The IASB has indicated that forretailers this is at the individual store level. An impairment review was performed at the opening balance sheet date, whichidentified that a small number of stores were impaired, and a provision of £2mwas recorded as at 1 September 2004. No significant impairment charges wereidentified in the year ending 31 August 2005. 4.8 Intangible assets (IAS 38) Under UK GAAP, capitalised software costs are included within tangible fixedassets on the balance sheet. Under IAS 38 such items, where they are not anintegral part of the related hardware should be disclosed separately on the faceof the balance sheet. This has resulted in a reclassification of £23m in the balance sheet at 1September 2004 and £18m in the balance sheet at 31 August 2005. There is norelated impact on the income statement. 4.9 Financial instruments (IAS 32 and IAS 39) - adopted from 1 September 2005 As the Group has taken the option to defer the implementation of IAS 32 and IAS39 to the financial year ending 31 August 2006, the comparatives for the yearended 31 August 2005 will be not restated. The effective date of adoption of IAS32 and 39 will therefore be 1 September 2005. At this date, the effect on theGroup balance sheet will be to reduce net assets by £7m in respect of non-equityshare capital, derivative and other financial instruments. The Group has designated the majority of its foreign exchange derivatives ascash flow hedges at 1 September 2005. There is expected to be a low level ofvolatility in the income statement as a result of fair valuing the Group'sfinancial instruments. 5. IFRS ACCOUNTING POLICIES The accounting policies used in the preparation of the restatement of theGroup's results from UK GAAP to IFRS are detailed below. These IFRS accountingpolicies will be adopted by the Group for use in the preparation of all futureconsolidated financial statements. (a) Basis of preparationThis financial information has been prepared in accordance with IFRS accountingpolicies disclosed in this document. The disclosures required by IFRS 1concerning the transition from UK GAAP to IFRSs are given in the appendices tothis report. The financial information has been prepared on the historical cost basis, exceptfor the revaluation of certain properties and financial instruments. Theprincipal accounting policies adopted are set out below. (b) Basis of consolidation This financial information consolidates the accounts of the Company, itssubsidiary undertakings and its associated undertakings for the 12 months to 31August each year. The results of subsidiaries and associated undertakings areincluded in the Group income statement from the date of acquisition, or in thecase of disposals, up to the effective date of disposal. The Group's interests in its associated undertakings are accounted for using theequity method. All intra-group transactions, balances, income and expenses are eliminated onconsolidation. (c) Revenue 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 haspassed. (d) Retirement benefit costs Payments to the Company's defined contribution pension scheme, WHSmithPensionbuilder, are recognised as an expense in the income statement as theyfall due. The cost of providing benefits for the main defined benefit scheme, WHSmithPension Trust, is determined by the Projected Unit Credit Method, with actuarialcalculations being carried out at each balance sheet date. Actuarial gains andlosses are recognised in full in the period in which they occur. They arerecognised outside the income statement in the Consolidated Statement ofRecognised Income 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 the calculation is limited to past service cost, plus the presentvalue of available refunds and reductions in future contributions to the plan. WH Smith PLC provides medical benefits to certain pensioners. The present valueof estimated future benefit payments is included in the balance sheet underpension liabilities. Any differences arising from changes in assumptions inrespect of the estimation of this liability are recognised in the ConsolidatedStatement of Recognised Income and Expense. (e) 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. Assets held under finance leases are recognised as assets of the Group at theirfair value determined at the inception of the lease or, if lower, at the presentvalue of the minimum lease payments. The corresponding liability to the lessoris included in the balance sheet as a finance lease obligation. Lease paymentsare apportioned between finance charges and a reduction of the lease obligationsso as to achieve a constant rate of interest on the remaining balance of theliability. Finance charges are recognised directly in the income statement. Rentals payable and receivable under operating leases are charged to the incomestatement on a straight-line basis 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. (f) Intangible assets Goodwill Goodwill represents the excess of the fair value of purchase consideration overthe net fair value of identifiable assets and liabilities acquired. Goodwill is recognised as an asset at cost and subsequently measured at costless accumulated impairment. For the purposes of impairment testing, goodwill isallocated to those cash generating units that have benefited from theacquisition. The carrying value of goodwill is reviewed for impairment at leastannually or where there is an indication that goodwill may be impaired. If therecoverable amount of the cash generating unit is less than its carrying amount,then the impairment loss is allocated first to reduce the carrying amount of thegoodwill allocated to the unit and then to the other assets of the unit on a prorata basis. Any impairment is recognised immediately in the income statement andis not subsequently reversed. On disposal of a subsidiary, the attributable amount of goodwill is included inthe determination of the profit and loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRS 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 1 June1997 has not been reinstated and is not included in determining any subsequentprofit or loss on disposal. Other intangible assets The costs of acquiring and developing software that is not integral to therelated hardware is capitalised separately as an intangible asset. Theseintangibles are stated at cost less accumulated amortisation and impairmentlosses. Amortisation is charged so as to write off the costs of assets over theirestimated useful lives, using the straight-line method. The estimated lives areusually a period of up to 5 years. Assets held under finance leases aredepreciated over their expected useful lives on the same basis as owned assetsor, where shorter, over the term of the relevant lease. All such intangible assets are reviewed for impairment in accordance with IAS 36"Impairment of Assets", when there are indications that the carrying value maynot be recoverable. (g) Property, plant and equipment Property, plant and equipment assets are carried at cost less accumulateddepreciation and any recognised impairment in value. The carrying values oftangible fixed assets previously revalued have been retained at their bookamount. Depreciation is charged so as to write off the costs of assets, other than land,over their estimated useful lives, using the straight-line method, with theannual rates applicable to the principal categories being: Freehold and long leasehold properties - over 20 yearsShort leasehold properties - shorter of the lease period and the estimated remaining economic lifeInstore fixtures and fittings - 10 yearsEquipment - 8 to 10 yearsComputer equipment - up to 5 years Assets held under finance leases are depreciated over their expected usefullives on the same basis as owned assets or, where shorter, over the term of therelevant lease. All tangible fixed assets are reviewed for impairment in accordance with IAS 36"Impairment of Assets", when there are indications that the carrying value maynot be recoverable. (h) Non current assets held for resale Non current assets and disposal groups are classified as held for sale if theircarrying amount will be recovered through a sale transaction rather than throughcontinuing use. This condition is regarded as met only when the sale is highlyprobable and the asset (or disposal group) is available for immediate sale inits present condition. Management must be committed to the sale, which should beexpected to qualify for recognition as a completed sale within one year from thedate of classification. Non-current assets (and disposal groups) classified as held for sale aremeasured at the lower of the assets' previous carrying amount and fair valueless costs to sell. (i) Inventories Inventories comprise goods held for resale and are stated at the lower of costor net realisable value. Inventories are valued using a weighted average costmethod. (j) Provisions Provisions are recognised in the balance sheet when the Group has a presentlegal or constructive obligation as a result of a past event and it is probablethat an outflow of economic benefits will be required to settle the obligation.Provisions are measured at the Directors' best estimate of the expenditurerequired to settle the obligation at the balance sheet date. Where the effect ismaterial, the provision is determined by discounting the expected future cashflows at the Group's weighted average cost of capital. Onerous contracts - property provisions The Group's property provisions represent the present value of future net leaseobligations and related costs of leasehold property (net of estimated subleaseincome and adjusted for certain risk factors) where the space is vacant orcurrently not planned to be used for ongoing operations. The periodic unwindingof the discount is treated as an imputed interest charge and is disclosed in theincome statement as "unwinding of discount on provisions". (k) Foreign currencies Transactions denominated in foreign currencies are recorded at the rates ofexchange prevailing on the dates of the transactions. At each balance sheetdate, monetary items denominated in foreign currencies are retranslated at therates prevailing on the balance sheet date. Exchange differences arising on thesettlement of monetary items, and on the retranslation of monetary items, areincluded in the income statement for the period. 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 into Sterling at exchange rates prevailing on the balance sheetdate. Income and expense items are translated into Sterling at the averageexchange rates for the period. Exchange differences arising, if any, areclassified as equity and transferred to the Group's translation reserve. (l) Taxation The tax expense included in the income statement comprises current and deferredtax. Current tax is the expected tax payable based on the taxable profit for theperiod, using tax rates that have been enacted or substantively enacted by thebalance sheet date. Deferred tax is recognised on differences between the carrying amounts of assetsand liabilities in the accounts and the corresponding tax bases used in thecomputation of taxable profit, and is accounted for using the balance sheetliability method. Deferred tax liabilities are generally recognised for alltaxable temporary differences and deferred tax assets are recognised to theextent that it is probable that taxable profits will be available against whichdeductible temporary differences can be utilised. Such assets and liabilitiesare not recognised if the temporary difference arises from goodwill or from theinitial recognition (other than in business combination) of other assets andliabilities in a transaction that affects neither tax profit nor the accountingprofit. 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. (m) Financial instruments UK GAAP - to 31 August 2005 The Group uses certain derivative financial instruments to reduce exposure toforeign exchange and interest rate movements. The Group does not hold or usederivative financial instruments for speculative purposes. The financial instruments used by the Group to manage its currency risks areforward rate contracts and currency options. Interest payments arising fromfinancial instruments are recognised within net interest payable over the periodof the contract. Any premiums or discounts arising are amortised over the livesof the instruments. Forward currency contracts entered into with respect to trading transactions areaccounted for as hedges, with the instrument's impact on profit deferred untilthe underlying transaction is recognised in the profit and loss account. IFRS - from 1 September 2005 Trade receivables Trade receivables are measured at initial recognition, do not carry any interestand are stated at their fair value and are subsequently measured at amortisedcosts using the effective interest rate method. Appropriate allowances forestimated irrecoverable amounts are recognised in the income statement whenthere is evidence that the asset is impaired. Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in handand short term deposits with an original maturity of three months or less. Financial liabilities and equity Financial liabilities and equity instruments are classified according to thesubstance of the contractual arrangements entered into. An equity instrument isany contract that evidences a residual interest in the assets of the Group afterdeducting all of its liabilities. Bank borrowings Interest bearing bank loans and overdrafts are initially measured at fair value(being proceeds received, net of direct issue costs), and are subsequentlymeasured at amortised cost, using the effective interest rate method recorded asthe proceeds received, net of direct issue costs. Finance charges, includingpremiums payable on settlement or redemptions and direct issue costs areaccounted for on an accruals basis and taken to the income statement using theeffective interest rate method and are added to the carrying value of theinstrument to the extent that they are not settled in the period in which theyarise. Trade payables Trade payables are initially measured at fair value, and are subsequentlymeasured at amortised cost, using the effective interest rate method. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received,net of direct issues costs. Derivative financial instruments and hedge accounting The Group uses certain derivative financial instruments to reduce its exposureto foreign exchange and interest rate movements. The Group does not hold or usederivative financial instruments for speculative purposes. Changes in the fair value of derivative financial instruments that aredesignated and effective as hedges of future cash flows are recognised directlyin equity and any ineffective portion is recognised immediately in the incomestatement. If the cash flow hedge of a firm commitment or forecasted transactionresults in the recognition of an asset or liability, then, at the time the assetor liability is recognised, the associated gains or losses on the derivativethat had previously been recognised in equity are included in the initialmeasurement of the asset or liability. For hedges that do not result in therecognition of an asset or a liability, amounts deferred in equity arerecognised in the income statement in the same period in which the hedged itemaffects net income statement. For an effective hedge of an exposure to changes in the fair value, the hedgeditem is adjusted for changes in fair value attributable to the risk being hedgedwith the corresponding entry in profit or loss. Gains or losses fromre-measuring the derivative, or for non-derivatives the foreign currencycomponent of its carrying amount, are recognised in the income statement. Changes in the fair value of derivative financial instruments that do notqualify for hedge accounting are recognised in the income statement as theyarise. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated, or exercised, or no longer qualifies for hedge accounting. At thattime, any cumulative gain or loss on the hedging instrument recognised in equityis retained in equity until the forecasted transaction occurs. If a hedgedtransaction is no longer expected to occur, the net cumulative gain or lossrecognised in equity is transferred to the net profit or loss for the period. Derivatives embedded in other financial instruments or other host contracts aretreated as separate derivatives when their risks and characteristics are notclosely related to those of host contracts and the host contracts are notcarried at fair value with unrealised gains or losses reported in the incomestatement. (n) Share schemes W H Smith Employees' Share Trust 1999 The shares held by the W H Smith Employees' Share Trust 1999 are valued at thehistoric cost of the shares acquired. They are deducted in arriving atshareholders' funds and are presented as an other reserve in line with IAS 32"Financial Instruments: Disclosure and Presentation". Share based payments Employees of the Group receive part of their remuneration in the form of sharebased payment transactions, whereby employees render services in exchange forshares or rights over shares (equity settled transactions). Equity settled share-based payments are measured at fair value at the date ofgrant. The fair value is calculated using an appropriate options pricing model.The fair value is expensed to the income statement on a straight-line basis overthe vesting period, based on the Group's estimate of shares that will eventuallyvest. -ENDS- EnquiriesWH Smith PLC Mark Boyle Investor Relations 020 7851 8820 6. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF WH SMITH PLC ON THEPRELIMINARY COMPARATIVE IFRS FINANCIAL INFORMATION We have audited the preliminary comparative IFRS financial information ofWH Smith PLC for the year ended 31 August 2005, which comprises the consolidatedbalance sheet, the consolidated income statement, the basis of preparation(section 3), the IFRS accounting policies (section 5) and the appendices 1 and2. This report is made solely to the Board of Directors, in accordance with ourengagement letter dated 2 September 2005 and solely for the purpose of assistingwith the transition to IFRS. Our audit work will be undertaken so that we mightstate to the company's board of directors those matters we are required to stateto them in an auditors' report and for no other purpose. To the fullest extentpermitted by law, we will not accept or assume responsibility to anyone otherthan the company for our audit work, for our report, or for the opinions we haveformed. Respective responsibilities of directors and auditors The company's directors are responsible for ensuring that the Company and theGroup maintains proper accounting records and for the preparation of thepreliminary comparative IFRS financial information on the basis set out insection 3, which describes how IFRS will be applied under IFRS 1, including theassumptions the directors have made about the standards and interpretationsexpected to be effective, and the policies expected to be adopted, when thecompany prepares its first complete set of IFRS financial statements as at 31August 2006. Our responsibility is to audit the preliminary comparativefinancial information in accordance with relevant United Kingdom legal andregulatory requirements and auditing standards and report to you our opinion asto whether the preliminary comparative IFRS financial information is prepared,in all material respects, on the basis set out in section 3. We read the other information contained in the preliminary comparative IFRSfinancial information for the above year as described in the contents sectionand consider the implications for our report if we become aware of any apparentmisstatements or material inconsistencies with the preliminary comparative IFRSfinancial information. Basis of audit opinion We conducted our audit in accordance with United Kingdom auditing standardsissued by the Auditing Practices Board. An audit includes examination, on a testbasis, of evidence relevant to the amounts and disclosures in the preliminarycomparative IFRS financial information. It also includes an assessment of thesignificant estimates and judgements made by the directors in the preparation ofthe preliminary comparative IFRS financial information and of whether theaccounting policies are appropriate to the circumstances of the group,consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the preliminarycomparative IFRS financial information is free from material misstatement,whether caused by fraud or other irregularity or error. In forming our opinion,we also evaluated the overall adequacy of the presentation of information in thepreliminary comparative IFRS financial information. Without qualifying our opinion, we draw attention to the fact that section 3explains why there is a possibility that the accompanying preliminary IFRScomparative financial information may require adjustment before constituting thefinal comparative IFRS financial information. Moreover, we draw attention to thefact that, under IFRSs, only a complete set of financial statements comprising abalance sheet, income statement, statement of changes in equity, cash flowstatement, together with comparative financial information and explanatorynotes, can provide a fair presentation of the company's financial position,results of operations and cash flows in accordance with IFRSs. Opinion In our opinion the preliminary comparative IFRS financial information isprepared, in all material respects, on the basis set out in section 3 whichdescribes how IFRS will be applied under IFRS 1, including the assumptions thedirectors have made about the standards and interpretations expected to beeffective, and the policies expected to be adopted, when the company preparesits first complete set of IFRS financial statements as at 31 August 2006. Deloitte & Touche LLP Chartered AccountantsLondon 29 November 2005 7. RESTATED FINANCIAL INFORMATION WH Smith PLCConsolidated Income StatementYear ended 31 August 2005 £m As reported IFRS As restated UK GAAP Adjustments IFRS------------------ ------------ ------------ ------------ Continuing operationsRevenue 2,508 (11) 2,497------------------ ------------ ------------ ------------Operating profit 80 - 80Investment income 3 - 3Finance costs (11) (1) (12)------------------ ------------ ------------ ------------Profit before tax 72 (1) 71Income tax expense (18) 2 (16)------------------ ------------ ------------ ------------Profit after tax fromcontinuing operations 54 1 55Loss for the period fromdiscontinued operations (8) - (8)------------------ ------------ ------------ ------------Profit for the period 46 1 47------------------ ------------ ------------ ------------ Continuing earnings per shareBasic earnings per share 30.5p 31.1pDiluted earnings per share 30.2p 30.7p Earnings per shareBasic earnings per share 26.0p 26.6pDiluted earnings per share 25.7p 26.3p Headline earnings per shareBasic earnings per share 31.6p 31.6pDiluted earnings per share 31.3p 31.3p WH Smith PLCConsolidated Balance SheetAs at 31 August 2005 £m As reported IFRS As restated UK GAAP Adjustments IFRS ----------------- ------------- ------------- ------------- Non-current assetsIntangible assets 14 19 33Property, plant and equipment 231 (12) 219Deferred tax assets 20 37 57----------------- ------------- ------------- ------------- 265 44 309----------------- ------------- ------------- -------------Current assetsInventories 162 - 162Trade and other receivables 112 (1) 111Cash and cash equivalents 46 - 46----------------- ------------- ------------- ------------- 320 (1) 319----------------- ------------- ------------- -------------Total assets 585 43 628----------------- ------------- ------------- -------------Current LiabilitiesTrade and other payables (319) 16 (303)Current tax liabilities (27) - (27)Obligations under financeleases (3) (3) (6)Bank overdrafts and loans (45) - (45)Short-term provisions - (5) (5)----------------- ------------- ------------- ------------- (394) 8 (386)----------------- ------------- ------------- -------------Net current assets /(liabilities) (74) 7 (67)----------------- ------------- ------------- -------------Non-current liabilitiesBank loans (37) - (37)Retirement benefit obligation (71) (32) (103)Deferred tax liabilities - (16) (16)Long-term provisions (31) 19 (12)Obligations under financeleases (9) (5) (14)Other non-current liabilities (1) (7) (8)----------------- ------------- ------------- ------------- (149) (41) (190)----------------- ------------- ------------- -------------Total liabilities (543) (33) (576)----------------- ------------- ------------- -------------Total net assets 42 10 52----------------- ------------- ------------- ------------- Shareholders' equityCalled up share capital (equityand non equity) 157 - 157Share premium account 17 - 17Other reserves 187 - 187Retained earnings (319) 10 (309)----------------- ------------- ------------- -------------Total equity 42 10 52----------------- ------------- ------------- ------------- WH Smith PLCConsolidated Balance SheetAs at 1 September 2004 (date of transition) £m As reported IFRS As restated UK GAAP Adjustments IFRS ----------------- ------------- ------------- ------------- Non-current assetsIntangible assets 164 (126) 38Property, plant and equipment 237 (21) 216Deferred tax assets - 68 68----------------- ------------- ------------- ------------- 401 (79) 322----------------- ------------- ------------- -------------Current assetsInventories 184 (17) 167Trade and other receivables 212 (75) 137Cash and cash equivalents 64 - 64----------------- ------------- ------------- ------------- 460 (92) 368Assets held for sale - 247 247----------------- ------------- ------------- ------------- 460 155 615----------------- ------------- ------------- -------------Total assets 861 76 937----------------- ------------- ------------- -------------Current LiabilitiesTrade and other payables (367) 51 (316)Current tax liabilities (30) - (30)Obligations under financeleases - (4) (4)Bank overdrafts and loans (17) - (17)Short-term provisions - (10) (10)----------------- ------------- ------------- ------------- (414) 37 (377)----------------- ------------- ------------- -------------Net current assets /(liabilities) 46 192 238----------------- ------------- ------------- -------------Non-current liabilitiesBank loans (2) - (2)Retirement benefit obligation (149) (65) (214)Deferred tax liabilities - (17) (17)Long-term provisions (38) 25 (13)Obligations under financeleases - (6) (6)Other non-current liabilities (2) (8) (10)----------------- ------------- ------------- ------------- (191) (71) (262)Non-current liabilities heldfor resale - (37) (37)----------------- ------------- ------------- -------------Total liabilities (605) (71) (676)----------------- ------------- ------------- -------------Total net assets 256 5 261----------------- ------------- ------------- ------------- Shareholders' equityCalled up share capital (equityand non equity) 141 - 141Share premium account 93 - 93Other reserves 132 - 132Retained earnings (110) 5 (105)----------------- ------------- ------------- -------------Total equity 256 5 261----------------- ------------- ------------- ------------- Appendix 1 Reconciliation of Profit for the year ended 31 August 2005 Disclosure Effect of Changes to Accounting Policies £m As reported Discontinued Share based Leasing Dividends Other IFRS As restated UK GAAP operations payments Adjustments IFRS ------------- ------- ------ ----- ------ ------ ------ -------- --------ContinuingoperationsRevenue 2,508 (11) - - - - (11) 2,497------------- ------- ------ ----- ------ ------ ------ -------- --------Operatingprofit 80 - (2) 1 - 1 - 80Investmentincome 3 - - - - - - 3Finance costs (11) - - (1) - - (1) (12)------------- ------- ------ ----- ------ ------ ------ -------- --------Profitbefore tax 72 - (2) - - 1 (1) 71Income taxexpense (18) - 2 - - - 2 (16)------------- ------- ------ ----- ------ ------ ------ -------- --------Profit after tax for continuingoperations 54 - - - - 1 1 55Loss for theperiod fromdiscontinuedoperations (8) - - - - - - (8)------------- ------- ------ ----- ------ ------ ------ -------- --------Profit forthe period 46 - - - - 1 1 47------------- ------- ------ ----- ------ ------ ------ -------- -------- Appendix 2Reconciliation of Net Assets as at 31 August 2005 Disclosure £m As reported Discontinued Pensions Intangible Provisions UK GAAP operations assets----------------------- -------- --------- --------- -------- -------- Non-current assetsIntangible assets 14 - - 18 -Property, plant andequipment 231 - - (18) -Deferred tax assets 20 - 30 - 2----------------------- -------- --------- --------- -------- -------- 265 - 30 - 2----------------------- -------- --------- --------- -------- --------Current assetsInventories 162 - - - -Trade and otherreceivables 112 - - - -Cash and cashequivalents 46 - - - ------------------------ -------- --------- --------- -------- -------- 320 - - - ------------------------ -------- --------- --------- -------- --------Total assets 585 - 30 - 2----------------------- -------- --------- --------- -------- --------Current LiabilitiesTrade and other payables (319) - - - -Current tax liabilities (27) - - - -Obligations under finance leases (3) - - - -Bank overdrafts and loans (45) - - - -Short-term provisions - - - - (5)----------------------- -------- --------- --------- -------- -------- (394) - - - (5)----------------------- -------- --------- --------- -------- --------Net current assets /(liabilities) (74) - - - (5)----------------------- -------- --------- --------- -------- --------Non-current liabilitiesBank loans (37) - - - -Retirement benefitobligation (71) - (30) - -Deferred tax liabilities - - - - (16)Long-term provisions (31) - - - 19Obligations under finance leases (9) - - - -Other non-current liabilities (1) - - - ------------------------ -------- --------- --------- -------- -------- (149) - (30) - 3----------------------- -------- --------- --------- -------- --------Total liabilities (543) - (30) - (2)----------------------- -------- --------- --------- -------- --------Total net assets 42 - - - ------------------------ -------- --------- --------- -------- --------Shareholders' equityCalled up share capital(equity and non equity) 157 - - - -Share premium account 17 - - - -Other reserves 187 - - - -Retained earnings (319) - - - ------------------------ -------- --------- --------- -------- --------Total equity 42 - - - ------------------------ -------- --------- --------- -------- -------- Effect of Changes in Accounting Policies £m Share Leasing Dividends Other IFRS As restated based payments Adjustments IFRS------------------------ ------- ------- ------ ----- ---------- --------Non-current assetsIntangible assets - - 1 19 33Property, plant andequipment - 8 - (2) (12) 219Deferred tax assets 2 2 - 1 37 57------------------------ ------- ------- ------ ----- ---------- -------- 2 10 - - 44 309------------------------ ------- ------- ------ ----- ---------- -------- Current assets Inventories - - - - - 162Trade and otherreceivables - (1) - - (1) 111Cash and cashequivalents - - - - - 46------------------------ ------- ------- ------ ----- ---------- -------- - (1) - - (1) 319------------------------ ------- ------- ------ ----- ---------- --------Total assets 2 9 - - 43 628------------------------ ------- ------- ------ ----- ---------- --------Current Liabilities -Trade and other payables - - 16 - 16 (303)Current tax liabilities - - - - - (27)Obligations under finance leases - (3) - - (3) (6)Bank overdrafts andloans - - - - - (45)Short-term provisions - - - - (5) (5)------------------------ ------- ------- ------ ----- ---------- -------- - (3) 16 - 8 (386)------------------------ ------- ------- ------ ----- ---------- --------Net current assets /(liabilities) - (4) 16 - 7 (67)------------------------ ------- ------- ------ ----- ---------- --------Non-current liabilitiesBank loans - - - - - (37)Retirement benefitobligation - - - (2) (32) (103)Deferred tax liabilities - - - - (16) (16)Long-term provisions - - - - 19 (12)Obligations under finance leases - (5) - - (5) (14)Other non-currentliabilities - (7) - - (7) (8)------------------------ ------- ------- ------ ----- ---------- -------- - (12) - (2) (41) (190)------------------------ ------- ------- ------ ----- ---------- --------Total liabilities - (15) 16 (2) (33) (576)------------------------ ------- ------- ------ ----- ---------- --------Total net assets 2 (6) 16 (2) 10 52------------------------ ------- ------- ------ ----- ---------- -------- Shareholders' equityCalled up share capital(equity and non equity) - - - - - 157Share premium account - - - - - 17Other reserves - - - - - 187Retained earnings 2 (6) 16 (2) 10 (309)------------------------ ------- ------- ------ ----- ---------- --------Total equity 2 (6) 16 (2) 10 52------------------------ ------- ------- ------ ----- ---------- -------- Appendix 3Reconciliation of Net Assets as at transition (1 September 2004) Disclosure £m As reported Discontinued Pensions Intangible Provisions UK GAAP operations assets------------------------ --------- -------- ------- ------- -------Non-current assetsIntangible assets 164 (149) - 23 -Property, plant andequipment 237 (7) - (23) -Deferred tax assets - - 63 - 2------------------------ --------- -------- ------- ------- ------- 401 (156) 63 - 2------------------------ --------- -------- ------- ------- -------Current assetsInventories 184 (17) - - -Trade and otherreceivables 212 (74) - - -Cash and cashequivalents 64 - - - ------------------------- --------- -------- ------- ------- ------- 460 (91) - - -Assets held for sale - 247 - - ------------------------- --------- -------- ------- ------- ------- 460 156 - - ------------------------- --------- -------- ------- ------- -------Total assets 861 - 63 - 2------------------------ --------- -------- ------- ------- -------Current LiabilitiesTrade andother payables (367) 37 - - -Current taxliabilities (30) - - - -Obligations under finance - - - - -leasesBankoverdrafts and loans (17) - - - -Short-term provisions - - - - (10)------------------------ --------- -------- ------- ------- ------- (414) 37 - - (10)------------------------ --------- -------- ------- ------- -------Net currentassets /(liabilities) 46 193 - - (10)------------------------ --------- -------- ------- ------- -------Non-current liabilitiesBank loans (2) - - - -Retirement benefit obligation (149) - (63) - -Deferred taxliabilities - - - - (17)Long-term provisions (38) - - - 25Obligations under finance - - - - -leasesOther non-currentliabilities (2) - - - ------------------------- --------- -------- ------- ------- ------- (191) - (63) - 8------------------------ --------- -------- ------- ------- -------Non-currentliabilitiesheld for sale - (37) - - -Total liabilities (605) - (63) - (2) Total net assets 256 - - - ------------------------- --------- -------- ------- ------- -------Shareholders' equityCalled upshare capital (equity and non equity) 141 - - - -Share premium account 93 - - - -Other reserves 132 - - - -Retained earnings (110) - - - ------------------------- --------- -------- ------- ------- -------Total equity 256 - - - ------------------------- --------- -------- ------- ------- ------- Effect of Changes in Accounting Policies £m Share based Leasing Dividends Other IFRS As payments Adjustments restated IFRS------------------------ ---------- ------- ------ ----- -------- -------Non-current assetsIntangible assets - - - - (126) 38Property, plant andequipment - 11 - (2) (21) 216Deferred tax assets - 2 - 1 68 68------------------------ ---------- ------- ------ ----- -------- ------- - 13 - (1) (79) 322------------------------ ---------- ------- ------ ----- -------- -------Current assetsInventories - - - - (17) 167Trade andother receivables - (1) - - (75) 137Cash and cash equivalents - - - - - 64------------------------ ---------- ------- ------ ----- -------- ------- - (1) - - (92) 368Assets held for sale - - - - 247 247------------------------ ---------- ------- ------ ----- -------- ------- - (1) - - 155 615------------------------ ---------- ------- ------ ----- -------- -------Total assets - 12 - (1) 76 937------------------------ ---------- ------- ------ ----- -------- -------Current LiabilitiesTrade and other payables - - 14 - 51 (316)Current tax liabilities - - - - - (30)Obligations under financeleases - (4) - - (4) (4)Bank overdrafts and loans - - - - - (17)Short-term provisions - - - - (10) (10)------------------------ ---------- ------- ------ ----- -------- ------- - (4) 14 - 37 (377)Net current assets /(liabilities) - (5) 14 - 192 238------------------------ ---------- ------- ------ ----- -------- -------Non-current liabilitiesBank loans - - - - - (2)Retirement benefit obligation - - - (2) (65) (214)Deferred tax liabilities - - - - (17) (17)Long-term provisions - - - - 25 (13)Obligations under financeleases - (6) - - (6) (6)Other non-currentliabilities - (8) - - (8) (10)------------------------ ---------- ------- ------ ----- -------- ------- - (14) - (2) (71) (262)------------------------ ---------- ------- ------ ----- -------- -------Non-currentliabilitiesheld for sale - - - - (37) (37)------------------------ ---------- ------- ------ ----- -------- -------Total liabilities - (18) 14 (2) (71) (676)------------------------ ---------- ------- ------ ----- -------- -------Total net assets - (6) 14 (3) 5 261------------------------ ---------- ------- ------ ----- -------- -------Shareholders' equityCalled up share capital(equity andnon equity) - - - - - 141Share premium account - - - - - 93Other reserves - - - - - 132Retained earnings - (6) 14 (3) 5 (105)------------------------ ---------- ------- ------ ----- -------- -------Total equity - (6) 14 (3) 5 261------------------------ ---------- ------- ------ ----- -------- ------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Wh Smith