25th May 2005 07:01
Tesco PLC25 May 2005 25 May 2005 Tesco Releases IFRS Accounts for 2004/05 As previously announced, Tesco today releases restated consolidated financialinformation for the 52 weeks ending 26 February 2005, applying InternationalFinancial Reporting Standards (IFRS). The purpose of this release is to help investors and analysts understand thechanges which will impact the company's reported accounts from the 2005/06financial year as a result of the introduction of IFRS. These changes come intoeffect this year for all listed companies in the European Union and many othercountries around the world. The key headlines from the restated accounts are in line with the guidance givento investors and analysts at Tesco's IFRS seminar, held on 25 February 2005: • No change to underlying business performance • Small impact to reported 04/05 profit (profit after tax reduces by £19m*) • No impact to group pre-tax cash flow This full press release and accompanying financial information is available onthe company's website, at www.tesco.com/corporateinfo \* This impact excludes the effect of IAS32 and IAS39 - Tesco has elected to takea one year exemption on these standards, as allowed under IFRS rules. Contacts: Investor Relations Steve Webb 01992 644 800Press Jon Church 01992 646 606 Notes to Editors: 1. International Financial Reporting Standards have been drawn up by the International Accounting Standards Board (www.iasb.org). 2. While UK industry has to cope with the introduction of 37 new standards under IFRS, 17 of these have little or no impact on Tesco. A further 9 lead only to additional disclosure. Of the 11 remaining standards, in line with many other companies, Tesco has elected to take a one-year exemption on IAS32 and IAS39. 3. The first results reported by Tesco under IFRS will be the group's interim results, due for release on 20 September 2005. Restatement of financial information for 2004/05 under International Financial Reporting Standards (IFRS) CONTENTS 1. Introduction 2. Restated IFRS consolidated financial statements • Consolidated Income Statement for the 52 weeks ended 26 February 2005 • Consolidated Statement of Recognised Income and Expense for the 52 weeks ended 26 February 2005 • Reconciliation of consolidated cashflows for the 52 weeks ended 26 February 2005 • Consolidated Balance Sheets as at 29 February 2004 (date of transition to IFRS) - 'Opening balance sheet' and as at 26 February 2005 3. Basis of preparation 4. Review of main changes arising from IFRS 5. IFRS Accounting Policies APPENDICES: • Detailed reconciliation of 2004/05 profit • Detailed reconciliation of equity at 29 February 2004 (date of transition to IFRS) • Detailed reconciliation of equity at 26 February 2005 1. INTRODUCTION Tesco PLC currently prepares its consolidated financial statements under UKGenerally Accepted Accounting Principles (UK GAAP). Following regulation passedby the European Parliament in July 2002, we will be required to prepare our 2005/06 consolidated financial statements in accordance with International FinancialReporting Standards (IFRS) (1). This change applies to all financial reporting for accounting periods beginningon or after 1 January 2005. The Group's first Annual report under IFRS will befor 2005/06 and first IFRS interim results for the 24 weeks to 13 August 2005. The purpose of this document is to explain how Tesco's financial performance forthe 52 week period ended 26 February 2005, and its financial position as at thatdate presented under IFRS differs to that reported under UK GAAP. The financial information presented in this document is unaudited. Summary of the effects of IFRS Impact on 2004/05 profit £mShare-based payments (52)Goodwill 61Leasing (4)Pensions (41)JV and Associate presentation (32) --------Profit before tax (68)Tax 49 --------Profit after tax (19) ======== Impact on net assets February 2005 February 2004 Net assets £(400m) £(305m) Impact on cash flows None of the adjustments arising from IFRS relate to cash, and therefore there isno impact on reported cash flows. (1) References to IFRS in this document refer to the application ofInternational Financial Reporting Standards (IFRS), International AccountingStandards (IAS) and interpretations issued by the International AccountingStandards Board (IASB) and its relevant committees. 2. RESTATED IFRS CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT For the 52 weeks ended 26 February 2005 2005 IFRS 2005 (under adjustments (restated UK GAAP) for IFRS) £m £m £mRevenue 33,974 - 33,974Cost of Sales (31,271) (39) (31,310) -------- ---------- --------Gross Profit 2,703 (39) 2,664Administrative expenses (754) (1) (755)Profit on disposal of fixed assets 53 (4) 49 -------- ---------- --------Operating profit 2,002 (44) 1,958Share of post-tax profits from jointventures and associates 130 (61) 69Finance costs (269) 35 (234)Finance income 99 2 101 -------- ---------- --------Profit before tax 1,962 (68) 1,894Taxation (593) 49 (544) -------- ---------- --------Profit for the period 1,369 (19) 1,350 ======== ========== ======== Attributable to:Equity holders of the parent 1,366 (19) 1,347Minority interests 3 - 3 -------- ---------- -------- 1369 (19) 1,350 ======== ========== ======== Earnings per share Pence Pence PenceBasic 17.72 (0.24) 17.48Diluted 17.50 (0.24) 17.26 Non-GAAP measures % % %ROCE 11.5 0.1 11.6 £m £m £mEBITDA 2,932 (107) 2,825 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEFor the 52 weeks ended 26 February 2005 UK GAAP IFRS IFRS 2005 Adjustments 2005 £m £m £m Exchange differences on translationof foreign operations 19 (8) 11Actuarial losses on defined benefitpension schemes - (230) (230)Tax on items taken directly to equity 16 76 92 -------- ---------- --------Net expense recognised directly inequity 35 (162) (127)Profit for the financial period 1,369 (19) 1,350 -------- ---------- --------Total recognised income and expensefor the period 1,404 (181) 1,223 ======== ========== ======== Attributable to:Equity holders of the parent 1,401 (181) 1,220Minority Interests 3 - 3 -------- ---------- -------- 1,404 (181) 1,223 ======== ========== ======== CASH FLOW RECONCILIATIONFor the 52 weeks ended 26 February 2005 None of the adjustments arising from IFRS relate to cash, and therefore there isno impact on reported cash flows. However, IAS 7 'cash flow statements' extends the definition of cash to 'cashand cash equivalents' which includes movements on short-term deposits. Thisresults in a change in presentation of the cash flow information to includethese cash equivalents. £mIncrease in cash as reported under UK GAAP 121Movement on short-term deposits (cash-equivalents under IFRS) (97) -------Increase in cash and cash equivalents (per IFRS definition) 24 Cash and cash equivalents as at 29 February 2004 1,100Effect of exchange rate fluctuations on cash and cash equivalents 22 -------Cash and cash equivalents as at 26 February 2005 1,146 ======= CONSOLIDATED BALANCE SHEETAt 26 February 2005 2005 (under Adjustments 2005 2004 UK GAAP) for IFRS (under IFRS) (under IFRS) £m £m £mNon-current assetsProperty, plant andequipment 15,495 (1,046) 14,449 13,186Investment property - 637 637 539Goodwill andintangible 1,044 364 1,408 1,221assetsInvestments in jointventures and 407 5 412 330associatesOther investments 7 - 7 6Deferred tax assets - 14 14 12 --------- ---------- ------- ------- 16,953 (26) 16,927 15,294Current assetsInventories 1,309 - 1,309 1,199Trade and other 1,002 (233) 769 811receivablesCash and cash 1,146 - 1,146 1,100equivalents --------- ---------- ------- ------- 3,457 (233) 3,224 3,110Current liabilitiesTrade and other (5,374) 417 (4,957) (3,986)payablesShort-term (477) (5) (482) (847)borrowingsCurrent tax payable (221) - (221) (308) --------- ---------- ------- ------- (6,072) 412 (5,660) (5,141) Net current (2,615) 179 (2,436) (2,031)liabilities Non-current liabilitiesLong-term borrowings (4,511) (56) (4,567) (4,376)Post-employment - (735) (735) (674)benefitsDeferred tax (731) 232 (499) (438)liabilitiesOther liabilities (20) (1) (21) (25)Provisions (19) 7 (12) (12) --------- ---------- ------- ------- (5,281) (553) (5,834) (5,525) --------- ---------- ------- -------Net assets 9,057 (400) 8,657 7,738 ========= ========== ======= ======= EquityShare capital 389 - 389 384Share premium 3,704 - 3,704 3,470accountOther reserves 40 - 40 40Retained earnings 4,873 (400) 4,473 3,799 --------- ---------- ------- -------Equity attributable toequity holders of 9,006 (400) 8,606 7,693the parentMinority interests 51 - 51 45 --------- ---------- ------- -------Total equity 9,057 (400) 8,657 7,738 ========= ========== ======= ======= 3. BASIS OF PREPARATION The financial information presented in this document has been prepared on thebasis of all International Financial Reporting Standards (IFRS) andInternational Financial Reporting Interpretations Committee (IFRIC)interpretations that are expected to be applicable to 2005/06 financialreporting. These are subject to ongoing review and endorsement by the EuropeanCommission, or possible amendment by the IASB, and are therefore subject topossible change. Further standards or interpretations may also be issued thatcould be applicable for 2005/06. These potential changes could result in theneed to change the basis of accounting or presentation of certain financialinformation from that presented in this document. The Group may need to review some accounting treatments used for the purpose ofthis document as a result of emerging industry consensus on practicalapplication of IFRS and further technical opinions. This could mean that thefinancial information in this document may require modification until the Groupprepares its first complete set of IFRS financial statements for the 2005/06financial year. 3.1. IFRS 1: First time adoption of International FinancialReporting Standards The rules for first-time adoption of IFRS are set out in IFRS 1, which requiresthat the Group establishes its IFRS accounting policies for the 2005/06reporting date and, in general, apply these retrospectively. The standard allows a number of optional exemptions on transition to helpcompanies simplify the move to IFRS. The exemptions selected by Tesco are setout below: a) Business Combinations (IFRS 3) The Group has elected to apply IFRS 3 prospectively from the date of transitionto IFRS rather than to restate previous business combinations. b) Employee Benefits (IAS 19) - Actuarial gains and losses ondefined benefit pension schemes The Group has chosen to recognise all cumulative actuarial gains and losses atthe date of transition to IFRS. Going forward, we will apply the rules of theamendment to IAS 19 (issued in December 2004) which allows actuarial gains andlosses to be recognised immediately in the Statement of Recognised Income andExpense. This approach is consistent with the treatment required by the UKstandard FRS 17, the effect of which we have previously disclosed in our UK GAAPaccounts. c) Cumulative translation differences (IAS 21 - The effects of changes in foreign exchange rates) According to IAS 21, cumulative foreign exchange movements on translation offoreign entities on consolidation should be disclosed separately withinshareholders' funds. However, for simplicity, the Group has elected to reset theforeign currency translation reserve to zero as at 29 February 2004. d) Financial Instruments (IAS 39 - Financial Instruments: Recognition and measurement and IAS 32 - Financial Instruments: Disclosure and presentation) Tesco has opted to take advantage of the one-year exemption for implementationof the Financial Instruments standards. Therefore, for 2004/05 IFRS financialinformation, financial instruments continue to be accounted for and presented inaccordance with UK GAAP. For 2005/06 financial reporting, adjustments will bemade as at 27 February 2005 to reflect the differences between UK GAAP and IAS32/IAS 39. 3.2 Presentation of financial information The layout of the primary financial statements has been amended in accordancewith IAS 1 'Presentation of Financial Statements' from that presented under UKGAAP. This format and presentation may require modification as practice andindustry consensus develops. 4. REVIEW OF MAIN CHANGES ARISING FROM ADOPTION OF IFRS The following describes the most significant adjustments arising from transitionto IFRS. 4.1 Share-based payments (IFRS 2) a) Share Option Schemes The main impact of IFRS 2 for Tesco is the expensing of employees' anddirectors' share options. The expense is calculated with reference to the fair value of the award on thedate of grant and is recognised over the vesting period of the scheme, adjustedto reflect actual and expected levels of vesting. We have used the Black-Scholesmodel to calculate the fair values of options on their grant date. To ensure better comparability, Tesco will apply IFRS 2 retrospectively to alloptions granted but not fully vested as at 29 February 2004, rather than just tothose granted after 7 November 2002. The fair values of awards granted prior toNovember 2002 were published on our website on 25 February 2005. In 2004/05, application of IFRS 2 results in a pre-tax charge to the IncomeStatement of £48m; however, the pre-tax effect is offset by a deferred taxcredit of £16m. Thus the net effect on post-tax profit for 2004/05 is £32m.Deferred tax is calculated on the basis of the difference between market priceat the balance sheet date and the option exercise price. As a result the taxeffect will not correlate to the charge. The excess of the deferred tax over thecumulative P&L charge at the tax rate is recognised in equity (in 2004/05 thisamounted to a credit of £9m to retained earnings). The deferred tax assetrecognised in February 2004 and February 2005 relating to the share optionschemes is £25m and £49m respectively. b) Share Bonus Schemes Under UK GAAP we currently expense share bonus schemes to the P&L applying therules of UITF 17. Whereas the UK GAAP P&L charge is based on the intrinsic valueof the award, the IFRS 2 charge is based on the Fair Value. This results in anadditional charge of £4m to the Income Statement in 2004/05. As a result of IFRS, deferred tax assets recognised under UK GAAP relating toshare bonus schemes have reduced by approximately £8m at both the 2004 and 2005balance sheet dates. 4.2 Goodwill arising on Business Combinations (IFRS 3) Under IFRS 3, goodwill is no longer amortised on a straight-line basis butinstead is subject to annual impairment testing. Consequently, the goodwillbalances were reviewed for impairment as at February 2004 and February 2005 andno further adjustments were identified. In terms of adjustments to the income statement in 2004/05, the non-amortisationof goodwill results in an increase of pre-tax profit of £61m. There are noassociated tax impacts. In the February 2005 balance sheet, a foreign exchange gain of £2m has beenrecognised through reserves relating to the non-amortisation of goodwill;therefore, the total adjustment to net assets relating to goodwill amounts to£63m. 4.3 Recognition of dividends (IAS 10 - Post-Balance sheet events) Dividends declared after the balance sheet date will not be recognised as aliability as at that balance sheet date. The final dividend of £365m declared in April 2004 relating to the 2003/04financial year has been reversed in the opening balance sheet and charged toequity in the balance sheet as at 26 February 2005. Similarly, the finaldividend accrued for the 2004/05 financial year of £410m has been reversed inthe IFRS balance sheet as at 26 February 2005. 4.4 Leasing (IAS 17) UK GAAP and IFRS accounting for leases are broadly similar except that IAS 17requires the Group to consider property leases in their component parts (i.e.land and building elements separately). Following a detailed review of our property lease portfolio, a small number of'building' leases have been reclassified as finance leases and brought onbalance sheet, based on the criteria of IAS 17. This has led to a relativelysmall increase in fixed assets, and a similar increase in finance leasecreditors. The following adjustments have been made at the opening balance sheet and as at26 February 2005: 29 February 26 February 2004 2005 £m £m Property, plant & equipment 29 49Adjustment to net assets (4) (5) The main impact on the income statement is that some UK GAAP operating leaseexpenses will be replaced with depreciation and financing charges for thebuilding elements of the reclassified leases. Over the life of the lease, thetotal Income Statement charge will remain the same, but the timing of expenseswill change, with more of the total expense recognised earlier in the leaseterm. The net pre-tax impact on the Income Statement is immaterial for the 52weeks ended 26 February 2005. In 2004/05 there is a one-off P&L adjustment of £4m, relating to the deferral ofsome profit from the sale and leaseback deal completed in April 2004, whichinstead will be recognised over the 25 year lease term. 4.5 Employee benefits (IAS 19) Post-employment benefits For UK GAAP reporting, we apply the measurement and recognition policies of SSAP24 for pensions and other post-employment benefits, whilst providing detaileddisclosures for the alternative measurement principles of FRS 17. IAS 19 takes a similar approach to accounting for defined benefit schemes as FRS17, 'Retirement Benefits', thus on transition, the deficit disclosed under FRS17 has been recognised in the balance sheet. At the opening balance sheet, thishas resulted in a pre-tax reduction in net assets of £676m which represents thesum of the deficit plus the reversal of a SSAP 24 debtor in the UK GAAP balancesheet as at February 04. An associated deferred tax asset of £199m has beenrecognised in respect of the pension deficit. Therefore the total adjustment tonet assets is £477m. Going forward, we have chosen to apply the amendment to IAS 19 which allowsactuarial gains and losses to be recognised immediately in the Statement ofRecognised Income and Expense i.e. the actuarial gains and losses will be takendirectly to reserves. The incremental pre-tax Income Statement charge for 2004/05 from the adoption ofIAS 19, compared to SSAP 24, is an additional charge of £41m. This is splitbetween the current service cost (increases operating costs by £45m) and thereturn on plan assets (increases finance income by £4m). The related tax effectof this is a £12m credit to the P&L. Therefore the 2004/05 after tax effect ofthe change to IAS 19 is a reduction in profit of £29m. The actuarial loss on the scheme for 2004/05, recognised through reserves, is£230m, with an offsetting tax adjustment of £67m. The February 2005 IAS 19 pension deficit is £735m, with an associated deferredtax asset of £279m. 4.6 Joint ventures (IAS 31) and associates (IAS 28) Tesco has chosen the equity method of accounting for joint ventures (JVs) andassociates, which is largely consistent with how they are accounted for in theUK GAAP accounts. The adoption of IFRS will lead to a change in the presentation of the Group'sshare of the results of our JVs and Associates. Under UK GAAP, we currentlyinclude our share of JV and Associate operating profits before interest and taxand show our share of their interest and tax in the respective Group lines onthe P&L. Under IFRS, JV and Associate profit is shown as a net figure i.e. postinterest and tax. This will have the effect of reducing profit before tax, butwill reduce the tax charge. Overall, there is no impact on the Group profitafter tax as this is purely a presentational change. 4.7 Impairment of assets (IAS 36) Under IAS 36, individual assets should be reviewed for impairment when there areany indicators of impairment. 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 determined that forretailers this is at the individual store level. Following impairment reviews at the opening balance sheet date, we identified asmall number of stores which in total required a provision for impairment of£142m. This has the effect of reducing the total fixed asset balance byapproximately 1% as at 29 February 2004. A similar review was performed for 2004/05 but no further stores required animpairment provision. However, due to movements in foreign exchange rates, theoverall provision set against fixed assets has increased by £10m - thisconsolidation adjustment has been taken through reserves, with no impact on the2004/05 Income Statement. IAS 36 has the additional effect of reducing the deferred tax liability by £15mas at February 2004 and £17m as at February 2005 (the movement year-on-yearrelates to foreign exchange differences which have been taken to reserves). Thedeferred tax adjustments arise because the impairment reviews have reduced thenet book values of certain assets qualifying for capital allowances, with nocorresponding change in the tax base. 4.8 Intangible assets (IAS 38) Under UK GAAP, we currently include licences and capitalised development costswithin tangible fixed assets on the balance sheet. Under IAS 38, 'IntangibleAssets', such items should be disclosed separately on the face of the balancesheet. As a result, there is a reclassification of £256m in the opening balance sheet,and £306m in the balance sheet as at 26 February 2005, between property, plantand equipment and intangible assets. There is no impact on the Income Statementfrom this reclassification. 4.9 Investment Properties (IAS 40) Under UK GAAP, we currently include all owned property assets within tangiblefixed assets on the balance sheet. Under IAS 40, 'Investment Properties', we arerequired to split out any property which earns rental income or is held forcapital appreciation. As a result, there is a reclassification of £539m in the opening balance sheetand £637m in the balance sheet as at 26 February 2005 between property, plantand equipment and investment property. There is no impact on the IncomeStatement from this reclassification. 4.10 Deferred and current taxes (IAS 12, 'Income taxes') Under UK GAAP, deferred tax is recognised in respect of all timing differencesthat have originated but not reversed by the balance sheet date and which couldgive rise to an obligation to pay more or less taxation in the future. Deferred tax under IAS 12 'Income Taxes' is recognised in respect of alltemporary differences at the balance sheet date between the tax bases of assetsand liabilities and their carrying value for financial reporting purposes. The change to a balance sheet liability method of providing for deferred taxleads to a number of adjustments, as follows: Feb 2004 2004/05 2004/05 Feb 2005 Net Assets P&L Reserves Net Assets £m £m £m £mImpact of IAS 12 (79) (13) (2)* (94)Tax effect of accounting changes 232 30 78 340 -------- ------- -------- --------Net impact on tax balance/profitafter tax 153 17 76 246JV/Associate presentation change 32 -------Total impact on tax (incl. JVpresentation) 49 * Foreign exchange loss on translation of foreign operations The significant components of the balance sheet adjustments are the recognitionof deferred tax assets on the pension deficit and share-based payments; lessdeferred tax provisions for potential future gains arising from rolled-overgains and for the potential future tax liabilities arising from fair valueadjustments recorded for business combinations. Neither of these provisions werepreviously recognised under FRS 19. 4.11 Other adjustments Other adjustments arise from the reclassification of money market deposits fromcurrent asset investments to cash and cash equivalents (as a result of thedefinition within IAS 7 'Cash Flow Statements'), and other minor presentationdifferences. 5. IFRS ACCOUNTING POLICIES The following section provides a summary of Tesco's Group Accounting Policiesunder IFRS. Basis of preparation The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) for the first time. For more details seesection 0 of this document. Basis of consolidation The Group financial statements consist of the financial statements of theCompany, entities controlled by the Company (its subsidiaries) and the Group'sshare of interests in joint ventures and associates. Subsidiaries, associates and joint ventures A subsidiary is an entity whose operating and financing policies are controlled,directly or indirectly, by Tesco PLC. The accounts of the parent Company'ssubsidiary undertakings are prepared to dates around the Group period end apartfrom Global T.H., Tesco Polska Sp. Z o.o., Tesco Stores CR a.s., Tesco Stores SRa.s., Tesco Kipa A.S., Samsung Tesco Co. Limited, Ex-Chai Distribution SystemCo. Ltd and C Two-Network Co. Ltd which are prepared to 31 December. An associate is an undertaking, not being a subsidiary or joint venture, overwhich Tesco PLC has significant influence and can participate in the financialand operating policy decisions of the entity. A joint venture is an entity in which Tesco holds an interest on a long-termbasis and which is jointly controlled by Tesco and one or more other venturersunder a contractual agreement. Tesco's share of the results of joint ventures and associates is included in theGroup income statement using the equity accounting basis. Investments in jointventures and associates are carried in the Group balance sheet at cost pluspost-acquisition changes in the Group's share of the net assets of the entity,less any impairment in value. The carrying values of investments in jointventures and associates include acquired goodwill. Use of assumptions and estimates The preparation of the consolidated financial statements requires management tomake judgements, estimates and assumptions that affect the application ofpolicies and reported amounts of assets and liabilities, income and expenses.The estimates and associated assumptions are based on historical experience andvarious other factors that are believed to be reasonable under thecircumstances, the results of which form the basis of making judgements aboutcarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period, or in the periodof the revision and future periods if the revision affects both current andfuture periods. Revenue Revenue consists of sales through retail outlets and sales of developmentproperties. Revenue is recorded net of returns, vouchers and value-added taxes,when the significant risks and rewards of ownership have been transferred to thebuyer. Commission income is recorded based on the terms of the contracts. Property, plant and equipment Property, plant and equipment assets are carried at cost less accumulateddepreciation and any recognised impairment in value. Depreciation is provided on a straight-line basis over the anticipated usefuleconomic lives of the assets. The following rates applied for the Group and are consistent with the prioryear: • Freehold and leasehold buildings with greater than 40 years unexpired - at 2.5% of cost • Leasehold properties with less than 40 years unexpired are depreciated by equal annual instalments over the unexpired period of the lease. • Plant, equipment, fixtures and fittings and motor vehicles - at rates varying from 10% to 33%. All tangible fixed assets are reviewed for impairment in accordance with IAS 36,Impairment of Assets, when there are indications that the carrying value may notbe recoverable. Borrowing costs Borrowing costs directly attributable to the acquisition or construction ofqualifying assets are capitalised. Qualifying assets are those that necessarilytake a substantial period of time to prepare for their intended use. Investment property Investment property is property held to earn rentals and/or for capitalappreciation rather than for the purpose of Group operating activities. The costmodel is applied to all investment property, using consistent depreciationpolicies to those described for owner-occupied property. 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 or, if lower, at the present value of the minimum lease payments,each determined at the inception of the lease. The corresponding liability tothe lessor is included in the balance sheet as a finance lease obligation. Leasepayments are apportioned between finance charges and reduction of the leaseobligations so as to achieve a constant rate of interest on the remainingbalance of the liability. Rentals payable and receivable under operating leases are charged to income on astraight-line basis over the term of the relevant lease. Business Combinations and Goodwill Goodwill arising on consolidation represents the excess of the cost of anacquisition over the fair value of the Group's share of the net assets of theacquired subsidiary, associate or joint venture at the date of acquisition. At the acquisition date, goodwill acquired is recognised as an asset and isallocated to each of the cash-generating units expected to benefit from thecombination's synergies. This goodwill is reviewed for impairment at leastannually by assessing the recoverable amount of each cash-generating unit towhich the goodwill relates. When the recoverable amount of the cash-generatingunit is less than the carrying amount, an impairment loss is recognised. Any impairment is recognised immediately in profit or loss and is notsubsequently reversed. Goodwill arising on the acquisition of joint ventures and associates is includedwithin the carrying value of the investment. Goodwill arising on acquisitions before 29 February 2004 (the date of transitionto IFRS) has been retained at the previous UK GAAP amounts subject to beingtested for impairment at that date. Intangible assets Acquired intangible assets, such as licences, are measured initially at cost andare amortised on a straight-line basis over their estimated useful lives. Research and development costs Research costs are expensed as incurred. Development expenditure incurred on anindividual project is carried forward only if all the criteria set out in IAS 38'Intangible Assets' are met. Following the initial recognition of the development expenditure, the cost isamortised over the project's estimated useful life, usually at 14-25% of cost. Inventories Inventories comprise goods held for resale and properties held for, or in thecourse of, development and are valued at the lower of cost and net realisablevalue. Stocks are valued at retail prices and reduced by appropriate margins totake into account factors such as average cost, obsolescence, seasonality anddamage. 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. Pensions The Group accounts for pensions and other post-retirement benefits (principallyprivate healthcare) under IAS19 'Employee Benefits'. In respect of defined benefit plans, obligations are measured at discountedpresent value (using the projected unit credit method) whilst plan assets arerecorded at fair value. The operating and financing costs of such plans arerecognised separately in the Income Statement; service costs are spreadsystematically over the expected service lives of employees and financing costsare recognised in the periods in which they arise. Actuarial gains and lossesare recognised immediately in the Statement of Recognised Income and Expense. Payments to defined contribution schemes are recognised as an expense as theyfall due. Share-based payments Employees (including directors) of the Group receive part of their remunerationin the form of share-based payment transactions, whereby employees renderservices in exchange for shares or rights over shares (equity-settledtransactions). The fair value of employee share option plans is calculated using theBlack-Scholes model. In accordance with IFRS 2 'Share-based payments' theresulting cost is charged to the Income Statement over the vesting period of theoptions. The value of the charge is adjusted to reflect expected and actuallevels of options vesting. Income tax The tax expense included in the Income Statement comprises current and deferredtax. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantively enacted by the balance sheet date. Tax is recognised in the Income Statement except to the extent that it relatesto items recognised directly in equity, in which case it is recognised inequity. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. 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 deferred tax is also dealtwith in equity. Deferred tax liabilities are recognised for all taxable temporary differencesand deferred tax assets are recognised to the extent that it is probable thattaxable profits will be available against which deductible temporary differencescan be utilised. 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 assets and liabilities are offset against each other when theyrelate to income taxes levied by the same tax jurisdiction and when the groupintends to settle its current tax assets and liabilities on a net basis. Foreign currencies Transactions in currencies other than Pounds Sterling are recorded at theexchange rates on the date of the transaction. At each balance sheet date,monetary assets and liabilities that are denominated in foreign currencies areretranslated at the rates prevailing on the balance sheet date. Gains and lossesarising on retranslation are included in the net profit or loss for the period,except for exchange differences arising on non-monetary assets and liabilitieswhere the changes in fair value are recognised directly in equity. The financial statements of foreign subsidiaries are translated into PoundsSterling according to the functional currency concept of IAS 21 'The Effects ofChanges in Foreign Exchange Rates'. Since all consolidated companies operate asoperationally independent entities, their respective local currency is thefunctional currency. Therefore, assets and liabilities of overseas subsidiariesin foreign currencies are translated at exchange rates prevailing at the date ofthe Group balance sheet; profits and losses are translated into Sterling ataverage exchange rates for the relevant accounting periods. Exchange differencesarising, if any, are classified as equity and transferred to the Group'stranslation reserve. Financial instruments The policy on financial instruments used in this document is consistent with UKGAAP as the Group has taken advantage of the exemption in IFRS 1 not to applyIAS 32 and IAS 39 to its 2004/05 figures. The accounting policies for IAS 32 andIAS 39 will be disclosed in the 2005/06 Interim Accounts. APPENDIX 1: RECONCILIATION OF PROFITFor the 52 weeks ended 26 February 2005 Reported Share-based Business Leasing Employee under payments Combinations benefits UK GAAP IFRS 2 IFRS 3 IAS 17 IAS 19 £m £m £m £m £m Revenue 33,974 - - - -Cost of Sales (31,271) - - 1 (40) -------- --------- ---------- ------- --------Gross profit 2,703 - - 1 (40)Administrativeexpenses (754) (52) 56 - (5)Profit ondisposal offixed assets 53 - - (4) - -------- --------- ---------- ------- --------Operatingprofit 2,002 (52) 56 (3) (45)Share ofpost-taxprofits fromjoint venturesand associates 130 - 5 - -Finance costs (269) - - (1) -Finance income 99 - - - 4 -------- --------- ---------- ------- --------Profit beforetax 1,962 (52) 61 (4) (41)Income taxexpense (593) 16 - 2 12 -------- --------- ---------- ------- --------Profit for theperiod 1,369 (36) 61 (2) (29) ======== ========= ========== ======= ======== Reconciliation to underlying profit Profit beforetax 1,962 (52) 61 (4) (41)Net profit/loss ondisposal offixed assets (53) - - 4 -Integrationcosts 53 - - - -Goodwillamortisation 67 - (61) - - --------- ---------- ------- --------Underlyingprofit 2,029 (52) - - (41) --------- ---------- ------- -------- Presentation Deferred Total IFRS Restated of JVs and tax adjustments under Associates IFRS IAS 28/31 IAS 12 £m £m £m £m Revenue - - - 33,974Cost of Sales - - (39) (31,310) --------- -------- --- --------- --------Gross profit - - (39) 2,664Administrativeexpenses - - (1) (755)Profit ondisposal offixed assets - - (4) 49 --------- -------- --- --------- --------Operating profit - - (44) 1,958Share of post-taxprofits fromjoint venturesand associates (66) - (61) 69Finance costs 36 - 35 (234)Finance income (2) - 2 101 --------- -------- --- --------- --------Profit beforetax (32) - (68) 1,894Income taxexpense 32 (13) 49 (544) --------- -------- --- --------- --------Profit for theperiod - (13) (19) 1,350 ========= ======== === ========= ======== Reconciliation to underlying profit Profit beforetax (32) - (68) 1,894Net profit/loss ondisposal offixed assets - - 4 (49)Integrationcosts - - - 53Goodwillamortisation - - (61) 6 --------- -------- --------- --------Underlyingprofit (32) - (125) 1,904 --------- -------- --------- -------- APPENDIX 2: RECONCILIATION OF EQUITY - As at 29 February 2004 (Opening balancesheet for IFRS) Reported under Business Pensions Dividends Investment Intangible UK GAAP Combinations property assets IFRS 3 IAS 19 IAS 10 IAS 40 IAS 38 £m £m £m £m £m £mNon-current assetsProperty,plant andequipment 14,094 - - - (539) (256)Investmentproperty - - - - 539 -Goodwill andintangibleassets 965 - - - - 256Investments injoint venturesand associates 330 - - - - -Otherinvestments 6 - - - - -Deferred tax - - - - - -assets -------- ------- ------ ------ ------- ------ 15,395 - - - - -Current assetsInventories 1,199 - - - - -Trade andotherreceivables 826 - (12) - - -Investments 430 - - - - -Cash and cashequivalents 670 - - - - - -------- ------- ------ ------ ------- ------ 3,125 - (12) - - - Current liabilitiesTrade andother payables (4,364) - 10 365 - -Short-termborrowings (844) - - - - -Current taxpayable (308) - - - - - -------- ------- ------ ------ ------- ------ (5,516) - 10 365 - - Net currentliabilities (2,391) - (2) 365 - - Non-current liabilitiesLong-termborrowings (4,346) - - - - -Post-employment benefits - - (674) - - -Deferred taxliabilities (579) - 199 - - -Otherliabilities (22) - - - - - -------- ------- ------ ------ ------- ------ (4,947) - (475) - - - Provisions (14) - - - - - -------- ------- ------ ------ ------- ------Net Assets 8,043 - (477) 365 - - ======== ======= ====== ====== ======= ====== EquityShare capital 384 - - - - -Share premiumaccount 3,470 - - - - -Other reserves 40 - - - - -Retainedearnings 4,104 - (477) 365 - - -------- ------- ------ ------ ------- ------Total equityshareholders'funds 7,998 - (477) 365 - -MinorityInterests 45 - - - - - -------- ------- ------ ------ ------- ------Total equity 8,043 - (477) 365 - - ======== ======= ====== ====== ======= ====== Leasing Share based Impairment of Deferred tax Other Restated payments fixed assets under IAS 17 IFRS 2 IAS 36 IAS 12 IFRS £m £m £m £m £m £mNon-current assetsProperty,plant andequipment 29 - (142) - - 13,186Investmentproperty - - - - - 539Goodwill andintangibleassets - - - - - 1,221Investments injoint venturesand associates - - - - - 330Otherinvestments - - - - - 6Deferred taxassets - - - - 12 12 ------ ------- ------- ------ ----- ------- 29 - (142) - 12 15,294Current assetsInventories - - - - - 1,199Trade andotherreceivables (3) - - - - 811Investments - - - - (430) -Cash and cashequivalents - - - - 430 1,100 ------ ------- ------- ------ ----- ------- (3) - - - - 3,110 Current liabilitiesTrade andother payables - - - - 3 (3,986)Short-termborrowings (3) - - - - (847)Current taxpayable - - - - - (308) ------ ------- ------- ------ ----- ------- (3) - - - 3 (5,141) Net currentliabilities (6) - - - 3 (2,031) Non-current liabilitiesLong-termborrowings (30) - - - - (4,376)Post-employmentbenefits - - - - - (674)Deferred taxliabilities 1 17 15 (79) (12) (438)Otherliabilities - - - - (3) (25) ------ ------- ------- ------ ----- ------- (29) 17 15 (79) (15) (5,513) Provisions 2 - - - - (12) ------ ------- ------- ------ ----- -------Net Assets (4) 17 (127) (79) - 7,738 ====== ======= ======= ====== ===== ======= EquityShare - - - - - 384capitalShare premiumaccount - - - - - 3,470Other reserves - - - - - 40Retainedearnings (4) 17 (127) (79) - 3,799 ------ ------- ------- ------ ----- -------Total equityshareholders'funds (4) 17 (127) (79) - 7,693MinorityInterests - - - - - 45 ------ ------- ------- ------ ----- -------Total equity (4) 17 (127) (79) - 7,738 ====== ======= ======= ====== ===== ======= NB - The above UK GAAP numbers have been adjusted into IFRS format (inaccordance with IAS 1) APPENDIX 3: RECONCILIATION OF EQUITY - As at 26 February 2005 Reported under Business Pensions Dividends Investment Intangible UK GAAP Combinations property assets IFRS 3 IAS 19 IAS 10 IAS 40 IAS 38 £m £m £m £m £m £mNon-current assetsProperty,plant andequipment 15,495 - - - (637) (306)Investmentproperty - - - - 637 -Intangibleassets 1,044 58 - - - 306Investments injoint venturesand associates 407 5 - - - -Otherinvestments 7 - - - - -Deferred tax - - - - - -assets -------- -------- ------ ------ ------- ------ 16,953 63 - - - -Current assetsInventories 1,309 - - - - -Trade andotherreceivables 1,002 - (230) - - -Investments 346 - - - - -Cash and cashequivalents 800 - - - - - -------- -------- ------ ------ ------- ------ 3,457 - (230) - - - Current liabilitiesTrade andother payables (5,374) - 14 410 - -Short-termborrowings (477) - - - - -Current taxpayable (221) - - - - - -------- -------- ------ ------ ------- ------ (6,072) - 14 410 - - Net currentliabilities (2,615) - (216) 410 - - Non-currentliabilitiesLong-termborrowings (4,511) - - - - -Post-employmentRelated Shares:
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