8th Nov 2005 07:02
Marks & Spencer Group PLC08 November 2005 8 November 2005 Marks and Spencer Group plc Interim Results 2005/06 26 weeks ended 1 October 2005 Highlights: • UK sales at £3,302.3m down 0.2% (last year £3,307.6m); International sales £348.5m up 8.6% (last year £321.0m); • Group operating profit before exceptional items up 27.1% at £367.7m (last year £289.4m); • Group profit before tax and exceptional items up 19.6% at £308.2m (last year £257.8m); Group profit before tax, after exceptional items, up 74.3% at £308.2m (last year £176.8m); • Adjusted* earnings per share from continuing operations 12.8p, up 70.7% (last year 7.5p); Basic earnings per share 12.8p (last year 5.7p); • Interim dividend of 4.8p per share, up 4.3% (last year 4.6p); and • The Board announces the appointment of one executive director and two non-executive directors * adjusted for exceptional items Outlook When we updated the market on 11 October 2005, we said that the tradingenvironment remained very difficult. This view has not changed. We have theimportant Christmas trading period ahead which was very promotionally drivenlast year. We will continue to deliver outstanding quality and value. Customerfeedback on new product and pricing is positive. Paul Myners, Chairman, commented: "The Company has made progress in a difficult environment. The Board isproposing an interim dividend of 4.8p, representing a 4.3% increase on lastyear. We are pleased to announce the appointment of Steven Sharp to the Board asexecutive director Marketing, E-commerce, Store Design and Development. We are also announcing the appointment of two additional non-executivedirectors. Lady Patten and Jeremy Darroch will be joining as non-executivedirectors in February 2006. I am delighted to welcome Louise and Jeremy to theBoard. We plan to appoint a further new non-executive director before the end ofthis financial year". Chief Executive's Statement: This is an encouraging first half performance with Group sales up 0.6% on theyear and an improvement of 27.1% in Group operating profit before exceptionalcharges. We are pleased with the progress we are making but much remains to bedone. Our focus on full price profitable sales, better buying, control of stock,commitments and costs has enabled us to deliver the targets we set out in July2004. Full price sales have continued to improve and in General Merchandisewere up 0.4% in the second quarter against a decrease of 2.4% in the firstquarter. Our plan is to continue to deliver outstanding Product, Environmentand Service. Product We will focus on delivering value, styling, quality and competitiveness in allareas of the business. Customer perceptions on value are improving. Value willcontinue to be a key driver across all price points. Our buying is now much more flexible. We have opened sourcing offices in HongKong, Turkey, Bangladesh and India and this will deliver further efficiencies.The introduction of Open To Buy will mean more newness in stores and willimprove our ability to chase trends at speed. We continue to manage our stocksand commitments tightly. In September, we ran a TV advertising campaign for Womenswear. This was wellreceived, encouraging customers into store and driving improving perceptions onstyling and the brand. In Food we have launched 140 new lines to our already successful 'Cook!' rangewhich is unique in being totally preservative and additive free. We have maderecipe changes to 450 lines within our ready meals food range to remove allartificial flavourings, artificial colourings and hydrogenated fats: most ofthese lines have no artificial preservatives. We have also extended the Eat Wellcampaign into new recipes. Innovation and reacting to consumer trends will be akey driver for the coming year. Our TV advertising campaign is reinforcing ourquality credentials with customers. Environment Five new stores were opened in retail parks. We have modernised 13 more storesas part of our extended store modernisation trial. This programme will beaccelerated next year. Group capital expenditure for 2006/07 is expected to riseto between £450m to £500m. Our plans to broaden the reach of our Food business continues and six SimplyFoods were opened in the first half. Since the half year, we have opened sixtrial stores on BP Connect forecourts: a further two stores open this week.Initial performance has been encouraging. We are also opening a number of newinitiatives in some existing Food Halls offering 'Hot Food to Go', an eat-overdelicatessen counter and a new bakery concept. Service We launched a number of initiatives to improve service during the half. We haveoverhauled pay rates for our customer assistants and introduced better careerprogression plans. Around 40,000 store staff have attended a specially designedtraining programme this half. We are starting to see improvements in customerservice, although with the increasing sales volumes we are now driving throughthe business we still need to make further progress in this area. Board and Organisational changes In order to accelerate the pace of change and to better align responsibilities,we are today announcing further changes to our Board, management and operations. We have appointed one executive director and two additional non-executivedirectors to the Board. Steven Sharp is appointed executive director Marketing, E-commerce, Store Designand Development, with immediate effect. In addition to his previousresponsibilities, Steven will now be responsible for the delivery of the storemodernisation programme and for the M&S Money relationship with HSBC. There will now be three executive directors on the Board, Stuart Rose, Ian Dysonand Steven Sharp. Ian Dyson is responsible for Finance, International, IT,Logistics and Property. Stuart Rose will continue to manage buying andmerchandising in addition to his other responsibilities. We are pleased to announce that George Davies will continue to run per una on afull time basis until the end of June 2006. He will be working with us toimplement an orderly succession before becoming Chairman of per una from 1 July2006, when it is expected he will devote at least two days a week to per una.George is fully committed to working with us to further develop the successfulper una brand. We are reorganising our Childrenswear business. Boyswear, Schoolwear andNightwear will now be managed by Menswear, while Girlswear and Babywear will bemanaged by Womenswear. As a result of this restructure, Fiona Holmes, BusinessUnit Director, Childrenswear, will leave the business. In order to explore new opportunities to develop and broaden the reach of ourFood business we are forming a new Food development unit. Lady Patten and Jeremy Darroch will be joining the Board as non-executivedirectors in February 2006. Louise Patten is Chairman of Brixton plc and anon-executive director of Bradford & Bingley plc, GUS plc and Somerfield plc, aswell as senior advisor to Bain & Co. She brings a wide range of consumer andretail experience to the Board and will join the Remuneration Committee. JeremyDarroch, CFO of BSkyB plc, and ex-Group Finance Director of Dixons Stores Groupplc, brings consumer, retail and financial experience to the Board and will jointhe Audit Committee. The Board will now consist of three executive directors, six non-executivedirectors and a Chairman. Financial Review: Summary of Results 2005/06 2004/05 % inc £m £m Total Revenue (excl. VAT) 3,650.8 3,628.6 0.6UK 3,302.3 3,307.6 -0.2International 348.5 321.0 8.6Operating profit before exceptional charges 367.7 289.4 27.1UK 335.2 260.2 28.8International 32.5 29.2 11.3Profit before tax and exceptional charges 308.2 257.8 19.6Exceptional charges - (81.0) -Adjusted EPS from continuing operations 12.8 7.5 70.7Dividend per share 4.8 4.6 4.3 UK UK sales for the 26 weeks ended 1 October 2005, were £3,302.3m, down 0.2% anddown 2.3% on a like-for-like basis. A breakdown by business area, by quarter isshown below: Sales Q1 (14 weeks) Q2 (12 weeks) H1% Clothing -9.2 0.2 -4.9Home -22.3 2.1 -11.2General Merchandise -10.3 0.4 -5.5Food 5.0 6.3 +5.6 Total -3.1 3.3 -0.2 Like-for-Like Sales Q1 (14 weeks) Q2 (12 weeks) H1% General Merchandise -11.2 -0.2 -6.1Food 0.7 2.7 +1.6 Total -5.4 1.3 -2.3 Clothing sales were down 4.9% in total for the half but the performance improvedsubstantially in the second quarter with sales up 0.2%. This was driven byimprovements in Womenswear, where we took action on opening price points torestore our competitiveness. This more competitive stance, and focus on betterstyling and quality, is starting to reflect in improving customer perceptions ofour offer. We also took action on opening price points in Lingerie and Menswear,particularly on essentials. Childrenswear remains a difficult market, but ourschoolwear market share has remained stable. Home showed a significantimprovement through the course of the half, driven primarily by furniture. Thisbusiness has been refocused in terms of styling and value and is responding wellin a difficult market. Food sales for the first half were up 5.6% on last year, up 1.6% on alike-for-like basis with a similarly improving trend between quarter one andquarter two. We continue to benefit from additional footage as we extend theSimply Food format. UK operating profit for the 26 weeks to 1 October 2005 was £335.2m, up 28.8%(last year £260.2m). This growth reflects the benefits of the actions takenlast year to improve supplier terms and control stock and commitment, which havecontributed to an increase in the UK gross margin of 3.6 percentage points to42.6% (last half year 39.0%). UK operating costs of £1,073.4m, were up 4.3% on the year, reflecting the impactof new space and the provision for a staff bonus of £29.7m. Excluding the bonus,costs were up 1.4%. The UK operating profit includes a contribution of £2.4m from FinancialServices, representing the Group's continuing economic interest in M&S Moneywhich was sold to HSBC in November 2004. We expect the full year contributionfrom Financial Services to be around £11m. This is in line with our previousguidance but excludes the profit contribution from our captive insurancebusiness which is now included within UK operating costs. International We continue to make progress with sales up 8.6% and operating profit up 11.3%.Our first store in Moscow opened on 4 November and our existing franchisees arecontinuing to invest in new footage. In our wholly owned businesses, sales in the Republic of Ireland were ahead oflast year helped by store openings in the second half of last year inBlanchardstown and Dundrum, and continued improvement in the performance of ourexisting stores. Sales and profit in Hong Kong were affected by loss of spacefollowing the surrender of leases to the landlord for redevelopment. Kings SuperMarkets had a satisfactory half with sales up 0.3%. Net interest expense Net interest expense was £59.5m compared to £31.6m last year. This largelyreflects a significant increase in average net debt following the Tender Offerlast year. The average rate of interest on gross borrowings during the periodwas 5.8% (last year 5.5%). The increase in other finance income has been drivenby additional contributions made into the Defined Benefit Pension Scheme of £64min 2004/05 and £51m at the beginning of 2005/06. Taxation The tax charge reflects an effective tax rate for the first half of 31%,compared to 30.6% (before exceptional items) for the last full year. Shareholder returns and dividends Adjusted earnings per share from continuing operations, which excludes theeffect of exceptional items, has increased by 70.7% to 12.8p per share. Theaverage number of shares in issue during the period was 1,660.5m, reflecting theimpact of the Tender Offer last year. The Board is proposing an interim dividend of 4.8p per share (last year 4.6p pershare), an increase of 4.3%. Capital expenditure Group capital additions for the half were £171.2m compared to £118.7m last year,reflecting the trial store modernisation programme. Group capital expenditurefor the full year 2005/06, adjusted for IFRS, is expected to be between £350mand £400m. For the full year we expect to add 1.4% to our total footage,representing an increase of 1% in General Merchandise and 2.4% in Foods. Groupcapital expenditure for 2006/07 is expected to rise to between £450m to £500m. Cash flow and net debt The Group generated a net cash inflow for the period of £246.3m compared with£642.8m last year, a decrease of £396.5m. Last year's cashflow included £711.5mfrom the now discontinued M&S Money business. Cash inflow from continuingoperations increased by £207.2m reflecting higher operating profits of £78.3m,together with lower investment in working capital of £83.1m and lowerexceptional cash outflows of £35.8m. Stock levels were 11.4% down on the year,reflecting the tighter stock controls across the business. Free Cash Flow was £358.1m, compared to £778.5m last year. At the end of theperiod, net debt was £2,025.5m, a decrease of £251.7m since the year end, givingrise to gearing of 76.6% (last year end 75.6%). Pensions The Group paid £51m of additional contributions into the UK Defined BenefitPension Scheme in April 2005. These payments are reflected in the netpost-retirement liability of £778.4m at 1 October 2005 (last year £676.0m). The£102.4m increase in the level of this liability since the year end has beendriven by movements in AA corporate bond rates. Statements made in this announcement that look forward in time or that expressmanagement's beliefs, expectations or estimates regarding future occurrences andprospects are "forward-looking statements" within the meaning of the UnitedStates federal securities laws. These forward-looking statements reflect Marks &Spencer's current expectations concerning future events and actual results maydiffer materially from current expectations or historical results. Any suchforward-looking statements are subject to various risks and uncertainties,including failure by Marks & Spencer to predict accurately customer preferences;decline in the demand for products offered by Marks & Spencer; competitiveinfluences; changes in levels of store traffic or consumer spending habits;effectiveness of Marks & Spencer's brand awareness and marketing programmes;general economic conditions or a downturn in the retail or financial servicesindustries; acts of war or terrorism worldwide; work stoppages, slowdowns orstrikes; and changes in financial and equity markets. For further information, please contact: Investor Relations:Amanda Mellor +44 (0)20 8718 3604Sarah McGlyne +44 (0)20 8718 1563 Media enquiries:Corporate Press Office: +44 (0)20 8718 1919 Investor & Analyst webcast: There will be an investor and analyst presentation at 09.30 (GMT) on Tuesday 8November 2005: This presentation can be viewed live on the Marks and SpencerGroup plc website on www.marksandspencer.com Fixed Income Investor Conference Call: This will be hosted by Ian Dyson at 14.30 (GMT) on Tuesday 8 November 2005:Dial in number: +44 (0) 20 7162 0125 A recording of this call will be available until Tuesday 15 November 2005:Dial in number: +44 (0) 20 7031 4064Access Code: 682872 Consolidated income statement 26 weeks ended Year ended 1 Oct 2005 2 Oct 2004 2 Apr 2005 Notes £m £m £m Revenue 2 3,650.8 3,628.6 7,710.3 Operating profitBefore exceptional charges 367.7 289.4 653.2Exceptional operating charges 4 - (81.0) (50.6) 3 367.7 208.4 602.6 Interest expense and similar charges (71.9) (47.1) (121.3)Interest income 12.4 15.5 28.1 Profit on ordinary activities before taxation 308.2 176.8 509.4 Analysed between:Before exceptional operating charges 308.2 257.8 560.0Exceptional operating charges - (81.0) (50.6) Income tax expense 5 (95.6) (68.3) (150.5) Profit on ordinary activities after taxation 212.6 108.5 358.9 Profit from discontinued operations 6 - 21.9 227.3 Profit for the period attributableto shareholders 212.6 130.4 586.2 Earnings per share 7 12.8p 5.7p 29.1pDiluted earnings per share 7 12.7p 5.6p 28.9pEarnings per share from continuing operations 7 12.8p 4.7p 17.8pDiluted earnings per share fromcontinuing operations 7 12.7p 4.7p 17.6p Consolidated statement of recognised income and expense 26 weeks ended Year ended 1 Oct 2005 2 Oct 2004 2 Apr 2005 £m £m £mProfit for the period attributable to shareholders 212.6 130.4 586.2Exchange differences on translation of foreign operations 4.9 3.7 -Actuarial losses on defined benefit pension schemes (142.0) (114.4) (78.1)Tax on items taken directly to equity 49.2 35.2 24.9Hedging reserve - current period movement (6.1) - - 118.6 54.9 533.0First time adoption of IAS 39 (net of tax) (1.9) - -Total recognised income for the period 116.7 54.9 533.0 Consolidated balance sheet As at As at As at 1 Oct 2005 2 Oct 2004 2 Apr 2005 £m £m £mASSETSNon-current assetsIntangible assets 162.4 32.3 165.4Property, plant and equipment 3,600.2 3,703.0 3,586.2Investment property 38.5 38.6 38.6Investments in joint ventures 8.6 8.5 8.7Trade and other receivables 209.3 1,882.1 211.2Other financial assets 79.3 0.6 0.3Deferred tax asset 57.5 108.9 31.9 4,155.8 5,774.0 4,042.3 Current assetsInventories 405.5 457.5 338.9Trade and other receivables 197.6 1,092.9 213.8Other financial assets 59.3 347.2 67.0Cash and cash equivalents 321.1 850.2 212.6 983.5 2,747.8 832.3 TOTAL ASSETS 5,139.3 8,521.8 4,874.6 LIABILITIESCurrent liabilitiesTrade and other payables 837.8 2,007.9 717.9Other financial liabilities 511.7 405.6 478.8Current tax liabilities 62.9 50.1 15.5Provisions 14.5 37.0 25.2 1,426.9 2,500.6 1,237.4 Non-current liabilitiesFinancial liabilities 1,967.5 2,114.7 1,948.5Retirement benefit obligations 778.4 796.2 676.0Other non-current liabilities 74.5 290.8 71.8Provisions 20.1 20.1 19.7 2,840.5 3,221.8 2,716.0 TOTAL LIABILITIES 4,267.4 5,722.4 3,953.4 NET ASSETS 871.9 2,799.4 921.2 CAPITAL AND RESERVESCalled up share capital - equity 415.7 570.1 414.5Called up share capital - non-equity - 73.3 65.7Share premium account 117.9 78.3 106.6Capital redemption reserve 2,108.1 1,936.3 2,102.8Hedging reserve (6.0) - -Other reserves (6,542.2) (6,542.2) (6,542.2)Retained earnings 4,778.4 6,683.6 4,773.8SHAREHOLDERS' FUNDS 871.9 2,799.4 921.2 Consolidated cash flow information CASH FLOW STATEMENT 26 weeks ended Year ended 1 Oct 2005 2 Oct 2004 2 Apr 2005 Notes £m £m £mCash flows from operating activitiesProfit on ordinary activities aftertaxation 212.6 108.5 358.9Taxation 95.6 68.3 150.5Net finance expense 59.5 31.6 93.2Exceptional operating charges - 81.0 50.6 Operating profit before exceptionalcharges 367.7 289.4 653.2(Increase)/decrease in workingcapital 10A 10.4 (72.7) 20.4Exceptional operating cash outflow (11.5) (47.3) (74.6)Depreciation and amortisation 128.2 119.2 260.8Share-based payments 11.5 10.5 23.4 Cash generated from operations -continuing 506.3 299.1 883.2Cash generated from operations -discontinued operations - 711.5 718.6Tax paid (23.6) (91.3) (166.7) Net cash inflow from operatingactivities 482.7 919.3 1,435.1 Cash flow from investing activitiesAcquisition of subsidiary, net ofcash acquired - - (125.9)Disposal of subsidiary, net of cashdisposed - - 477.0Capital expenditure and financialinvestment 10B (63.7) (145.6) (113.5)Interest received 3.5 8.1 15.4 Net cash (outflow)/inflow frominvesting activities (60.2) (137.5) 253.0 Cash flows from financing activitiesDebt financing 10C (199.7) (196.6) 637.8Equity financing 10D (111.8) (135.7) (2,502.0) Net cash outflow from financingactivities (311.5) (332.3) (1,864.2) Net cash inflow/(outflow) fromactivities 111.0 449.5 (176.1)Effects of exchange rate changes 1.2 0.9 1.1Cash and cash equivalents atbeginning of the period 149.3 324.3 324.3 Cash and cash equivalents at end ofthe period 261.5 774.7 149.3 RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 26 weeks ended Year ended 1 Oct 2005 2 Oct 2004 2 Apr 2005 Notes £m £m £mOpening net debt (2,147.7) (2,043.9) (2,043.9)Reclassification on the adoption of IAS 32 and 39 (129.5) - -Opening net debt - under IFRS (2,277.2) (2,043.9) (2,043.9) Net cash inflow/(outflow) from activities 111.0 449.5 (176.1)Cash (inflow)/outflow from (decrease)/increase incurrent asset investments (17.2) 20.6 (11.0)Cash outflow/(inflow) from decrease/(increase) in debt financing 10C 152.5 172.7 (757.1)Debt financing net of liquid resources disposed with subsidiary - - 839.7Exchange and other movements 5.4 1.3 0.7Movement in net debt 251.7 644.1 (103.8) Closing net debt (2,025.5) (1,399.8) (2,147.7) 1 General information and basis of preparation The next annual financial statements of the Group will be prepared in accordancewith International Financial Reporting Standards (IFRS) as adopted for use inthe EU, and those parts of the Companies Act 1985 applicable to those companiesunder IFRS. The financial information contained in these interim financialstatements has been prepared on the basis of IFRS that the Directors expect tobe applicable as at 1 April 2006. In particular the Directors have assumed thatthe European Commission will endorse the amendment to IAS 19 - 'EmployeeBenefits - Actuarial Gain and Losses, Group Plans and Disclosures' issued by theIASB in December 2004. IFRS is subject to amendment and interpretation by theInternational Accounting Standards Board (IASB) and there is an on-going processof review and endorsement by the European Commission. For the reasons outlinedabove, it is possible that the information presented here may be subject tochange before its inclusion in the 2006 Report and Accounts, which will be theGroup's first complete financial statements prepared in accordance with IFRS. The accounting policies followed in the interim financial report are set out inAppendix 1. The results for the first half of the financial year have not been audited andwere approved by the Board of Directors on 7 November 2005. The summary ofresults for the year ended 2 April 2005 does not constitute the full financialstatements within the meaning of s240 of the Companies Act 1985. The fullfinancial statements for that year, prepared under UK GAAP, have been reportedon by the Group's auditors and delivered to the Registrar of Companies. Theaudit report was unqualified and did not contain a statement under s237(2) ors237(3) of the Companies Act 1985. The income statement, the cash flow statement and the statement of recognisedincome and expense for the comparative period to 2 October 2004 and year ended 2April 2005, as well as the balance sheets at 2 October 2004 and 2 April 2005,and the related notes contained within this interim report have neither beenreviewed nor audited. 2 Revenue 26 weeks Year ended ended 1 Oct 2 Oct 2 Apr 2005 2004 2005 £m £m £m UK Retail 3,302.3 3,307.6 7,034.7 International Retail Marks & Spencer branded1 239.2 212.0 455.8 Kings Super Markets 109.3 109.0 219.8 348.5 321.0 675.6 Total revenue 3,650.8 3,628.6 7,710.3 1Marks & Spencer branded businesses within International Retail consists of Republic of Ireland, Hong Kong and franchise operations. 3 Operating profit 26 weeks Year ended ended 1 Oct 2 Oct 2 Apr 2005 2004 2005 £m £m £m UK Retail Before exceptional operating charges 335.2 260.2 588.3 Exceptional operating charges - (81.0) (60.3) 335.2 179.2 528.0 International Retail Marks & Spencer branded 30.1 27.7 60.4 Kings Super Markets 2.4 1.5 4.5 Exceptional operating income - European closure - - 9.7 32.5 29.2 74.6 Total operating profit 367.7 208.4 602.6 4 Exceptional items 26 weeks Year ended ended 1 Oct 2 Oct 2 Apr 2005 2004 2005 £m £m £m Head office relocation - (8.3) (8.8) Head office restructuring programme - (3.8) (6.3) Board restructure - (4.6) (8.4) Closure of Lifestore - (29.3) (29.3) Defence costs - (35.0) (38.6) Sale of head office premises - - 31.1 Release of provision held against European closure - - 9.7 - (81.0) (50.6) 5 Taxation The taxation charge for the 26 weeks ended 1 October 2005 is based on anestimated effective tax rate before exceptional items of 31.0% (last full year30.6%). Included in the tax charge for the period is a credit of £nil (lasthalf year £16.8m), which is attributable to exceptional operating charges. 6 Discontinued operations 26 weeks Year ended ended 1 Oct 2 Oct 2 Apr 2005 2004 2005 £m £m £m Profit before tax from discontinued operations - 23.4 31.2 Taxation on results from discontinued operations - (1.5) (2.0) Profit after tax from discontinued operations - 21.9 29.2 Gain on disposal of subsidiary net assets - - 199.0 Taxation - - (0.9) Net gain on disposal - - 198.1 Total - 21.9 227.3 On 9 November 2004, the Group completed the sale of Marks and Spencer RetailFinancial Services Holdings Limited to HSBC Holdings plc. The net sale proceedswere £533.6m after accounting for a pre-sale dividend of £235.0m together withthe associated disposal costs. At the same time, the Group and HSBC enteredinto a relationship under which the Group will continue to share in the successof the business. Under this relationship, the Group will receive income in theform of fees representing an amount equivalent to costs incurred, 50% of theprofits of M&S Money (after a notional tax charge and after deducting agreedoperating and capital costs) together with an amount relating to sales growth. 7 Earnings per share The calculation of earnings per ordinary share is based on earnings after tax(last year earnings after tax and non-equity dividends), and the weightedaverage number of ordinary shares in issue during the period. The adjusted earnings per share figures have been calculated in addition to theearnings per share required by IAS 33 - 'Earnings per Share' and is based onearnings excluding the effect of exceptional items. It has been calculated toallow the shareholders to gain an understanding of the underlying tradingperformance of the Group. Details of the adjusted earnings per share are set out below: 26 weeks Year ended ended 1 Oct 2 Oct 2 Apr 2005 2004 2005 £m £m £m Earnings after tax and non-equity dividends 212.6 129.0 583.4 Profit from discontinued activities - (21.9) (227.3) Earnings after tax and non-equity dividends - continuing 212.6 107.1 356.1 Exceptional operating charges (net of taxation) - 64.2 31.5 Adjusted earnings after tax and non-equity dividends - continuing 212.6 171.3 387.6 Weighted average number of ordinary shares in issue(millions) 1,660.5 2,274.1 2,006.2 Potentially dilutive share options under Group's share option schemes(millions) 11.6 13.8 12.1 1,672.1 2,287.9 2,018.3 Basic earnings per share: Weighted average number of ordinary shares in issue(millions) 1,660.5 2,274.1 2,006.2 Basic earnings per share 12.8 5.7 29.1 Profit from discontinued operations per share - (1.0) (11.3) Basic earnings per share - continuing 12.8 4.7 17.8 Exceptional operating charges per share - 2.8 1.5 Adjusted basic earnings per share - continuing 12.8 7.5 19.3 Diluted earnings per share Weighted average number of ordinary shares in issue (millions) 1,672.1 2,287.9 2,018.3 Diluted earnings per share 12.7 5.6 28.9 Profit from discontinued operations per share - (0.9) (11.3) Diluted earnings per share - continuing 12.7 4.7 17.6 Exceptional operating charges per share - 2.8 1.6 Diluted adjusted basic earnings per share - continuing 12.7 7.5 19.2 8 Dividends 26 weeks Year ended ended 1 Oct 2 Oct 2 Apr 2005 2004 2005 £m £m £m Dividends on equity shares: Ordinary : Final dividend of 7.5p per share (last half year 7.1p per share) 124.3 161.3 161.3 Ordinary : Interim dividend of 4.6p per share - - 75.6 124.3 161.3 236.9 Dividends on non-equity shares B share : Interim dividend last half year at 3.36%1 - 1.4 1.4 B share : Final dividend last year at 3.78%1 - - 1.4 - 1.4 2.8 124.3 162.7 239.7 1Under IAS 32 - 'Financial Instruments' dividends on non-equity shares are now treated as part of interest. The Directors have approved an interim dividend of 4.8p per share (last halfyear 4.6p per share) which, in line with the requirements of IAS 10 - 'Eventsafter the Balance Sheet Date', has not been recognised within these results. This results in an interim dividend of £79.8m (last year £75.6m) which will bepaid on 13 January 2006 to shareholders whose names are on the Register ofMembers at the close of business on 18 November 2005. The ordinary shares willbe quoted ex dividend on 16 November 2005. Shareholders may choose to take thisdividend in shares or in cash. 9 Changes in shareholders' funds 26 weeks Year ended ended 1 Oct 2 Oct 2 Apr 2005 2004 2005 £m £m £m Opening shareholders' equity 921.2 2,871.1 2,871.1 First time adoption of IAS 32 and 39 (see note 12) (67.6) - - 853.6 2,871.1 2,871.1 Profit for the period attributable to shareholders 212.6 130.4 586.2 Dividends (124.3) (162.7) (239.7) Sales of shares held by employee trusts - 0.6 0.3 New share capital subscribed 12.5 36.9 68.4 Redemption of B shares - (11.5) (19.2) Actuarial losses on defined benefit pension schemes (142.0) (114.4) (78.1) Foreign currency translation 4.9 3.7 - Charge for share based payments 11.5 10.1 22.2 Tax on items taken directly to equity 49.2 35.2 24.9 Loss on cashflow hedges deferred in equity (6.1) - - Purchase of own shares - - (2,300.0) Tender Offer expenses - - (14.9) Closing shareholders' equity 871.9 2,799.4 921.2 10 Cash flow analysis 26 weeks Year ended ended 1 Oct 2 Oct 2 Apr 2005 2004 2005 £m £m £m A (Increase)/decrease in working capital - continuing (Increase)/decrease in inventory (65.7) (63.8) 55.5 Increase in debtors 14.6 (5.2) (1.5) Increase/(decrease) in creditors 61.5 (3.7) (33.6) 10.4 (72.7) 20.4 B Capital expenditure and financial investment Purchase of property, plant and equipment (111.8) (119.3) (232.2) Proceeds from sale of property, plant and equipment 37.5 - 117.8 Purchase of intangible fixed assets (3.6) (6.5) (10.9) (Purchase)/sale of non-current financial assets (3.0) 0.8 0.8 Sale/(purchase) of current available for sale investments 17.2 (20.6) 11.0 (63.7) (145.6) (113.5) C Debt financing Cash (outflow)/inflow from borrowings (144.6) (50.5) 649.0 Drawdown of syndicated bank facility - - 200.0 Redemption of securitised loan notes (1.6) (1.2) (2.8) Redemption of medium term notes - (125.8) (95.2) Decrease in obligations under finance leases (1.0) (1.3) (1.6) Redemption of B shares (5.3) - - Movement in other creditors treated as financing - 6.1 7.7 Cash (outflow)/inflow from debt financing (152.5) (172.7) 757.1 Interest paid (47.2) (22.5) (116.5) Non-equity dividends paid - (1.4) (2.8) (199.7) (196.6) 637.8 D Equity financing Equity dividends paid (124.3) (161.3) (236.9) Shares issued under employee share schemes 12.5 36.9 68.4 Redemption of B shares - (11.5) (19.2) Net sale of own shares held in employee trusts - 0.2 0.6 Purchase of own shares - - (2,300.0) Tender Offer expenses - - (14.9) (111.8) (135.7) (2,502.0) 11 Adoption of International Financial Reporting Standards As at As at As at 2 Apr 2 Oct 3 Apr 2005 2004 2004 £m £m £m Net assets under UK GAAP 521.4 2,466.1 2,454.0 Adjustments (after taxation) IFRS 1 - 'Property Revaluation' a 388.2 391.3 390.5 IFRS 2 - 'Share Schemes' b 9.8 7.8 6.2 IAS 10 - 'Dividend Recognition' c 124.3 75.7 160.7 IAS 17 - 'Leasing' Treatment of leasehold land d (72.4) (102.9) (102.4) Finance leases e (1.8) (1.8) (1.7) Lease incentives f (21.0) (17.9) (17.2) Fixed rental uplifts g (13.5) (11.9) (10.3) IAS 19 - 'Employee Benefits' h (27.2) (29.0) (30.7) IAS 38 - 'Intangible Assets' Software assets i 13.0 22.6 22.7 Goodwill and brands j 1.3 - - Other (0.9) (0.6) (0.7) Net assets under IFRS 921.2 2,799.4 2,871.1 26 weeks Year ended ended 2 Apr 2005 2 Oct 2004 £m £m Net income under UK GAAP 587.0 140.1 Adjustments (before taxation)IFRS 1- 'Property Revaluation' a 1.1 0.6IFRS 2 - 'Share Schemes' b (23.0) (10.5)IAS 17 - 'Leasing'Treatment of leasehold land d 29.9 (1.7)Finance leases e (0.2) -Lease incentives f (5.1) -Fixed rental uplifts g (4.5) (2.2)IAS 19 - 'Employee Benefits' h 5.3 2.4IAS 38 - 'Intangible Assets'Software assets i 1.4 1.0Goodwill and brands j 0.5 -Other (0.1) - 5.3 (10.4) Taxation 4.6 1.4Discontinued operations - software assets (10.7) (0.7) 586.2 130.4 a) IFRS 1 - 'Property Revaluation'Under UK GAAP property was stated at historical cost, subject to certainproperties having been revalued as at 31 March 1988. A property revaluation wasprepared on an existing use basis by external valuers DTZ Debenham Tie Leung asat 2 April 2004. The Group has elected under IFRS 1 to reflect this valuation,in so far as it relates to freehold land and buildings, as deemed cost ontransition at 4 April 2004. b) IFRS 2 - 'Share Schemes'The Group operates a range of share-based incentive schemes. Under UK GAAP whereshares (or rights to shares) were awarded to employees, UITF 17 required thatthe charge to the profit and loss account should be based on the differencebetween the market value of shares at the date of grant and the exercise price(i.e. an intrinsic value basis) spread over the performance period. Save As YouEarn (SAYE) schemes were exempt from this requirement and no charge was made. IFRS 2 requires that all shares or options (including SAYE) awarded to employeesas remuneration should be measured at fair value at grant date, using an optionpricing model, and charged against profits over the period between grant dateand vesting date, being the vesting period. This treatment has been applied toall awards granted but not fully vested at the date of transition. c) IAS 10 - 'Events after the Balance Sheet Date'Under UK GAAP dividends are recognised in the period to which they relate. IAS10 requires that dividends declared after the balance sheet date should not berecognised as a liability at that balance sheet date as the liability does notrepresent a present obligation as defined by IAS 37 - 'Provisions, ContingentLiabilities, and Contingent Assets'. Accordingly the final dividends for2003/04 (£160.7m) and 2004/05 (£124.3m) are derecognised in the balance sheetsfor April 2004 and April 2005 respectively. d) IAS 17 - 'Treatment of Leasehold Land'The Group previously recognised finance leases under the recognition criteriaset out in SSAP 21. IAS 17 Leases requires the land and building elements ofproperty leases to be considered separately, with leasehold land normally beingtreated as an operating lease. As a consequence payments made to acquireleasehold land, previously treated as fixed assets, have been re-categorised asprepaid leases and amortised over the life of the lease. In addition therevaluation previously attributed to the land element has been derecognised. e) IAS 17 - 'Leases - Finance Leases'Also under the provisions of IAS 17 the building elements of certain propertyleases, classified as operating leases under UK GAAP, have been reclassified asfinance leases. The adjustments are to include the fair value of these leasedbuildings within fixed assets and to set up the related obligation, net offinance charges, in respect of future periods, within creditors. f) IAS 17 ' Leases - Lease Incentives'Under UK GAAP leasehold incentives received on entering into property leaseswere recognised as deferred income on the balance sheet and amortised to theprofit and loss account over the period to the first rent review. Under IAS 17,these incentives have to be amortised over the term of the lease. Consequently,as the term of the lease is longer than the period to the first rent review,amounts previously amortised to the profit and loss account are reinstated onthe balance sheet as deferred income and released over the term of the lease. g) IAS 17 - 'Leasing - Fixed Rental Uplifts'The Group has a number of leases that contain predetermined, fixed rentaluplifts. Recent comments by the International Financial ReportingInterpretations Committee have indicated that under IFRS, it is necessary toaccount for these leases such that the predetermined, fixed rental payments arerecognised on a straight line basis over the life of the lease. Under UK GAAP, the Group accounted for these property lease rentals such that the increaseswere charged in the year that they arose. h) IAS 19 - 'Employee Benefits'Previously no provision was made for holiday pay. Under IAS 19 - 'EmployeeBenefits' the expected cost of compensated short term absences (e.g. holidays)should be recognised when employees render the service that increases theirentitlement. As a result an accrual has been made for holidays earned but nottaken. i) IAS 38 - 'Software Assets'The cost of developing software used to be written off as incurred. Under IAS38 - 'Intangible Assets' there is a requirement to capitalise internallygenerated intangible assets provided certain recognition criteria are met. Results have been adjusted to reflect the capitalisation and subsequentamortisation of costs that meet the criteria. As a result expenses previouslycharged to the profit and loss account have been brought onto the balance sheetas intangible software assets and amortised over their estimated useful lives. j) IAS 38 - 'Goodwill'Goodwill used to be capitalised and amortised over its useful economic life. Under IAS 38 - 'Intangible Assets' there is a requirement to separately identifybrands and other intangibles acquired rather than include these as part ofgoodwill. Intangible assets, other than goodwill, are amortised over theiruseful lives. Goodwill, which is considered to have an indefinite life, issubject to an annual impairment review. As a result the goodwill recognisedunder UK GAAP on the acquisition of Per Una of £125.5m has been split betweenbrand (£80m) and goodwill (£45.5m). The goodwill amortisation under UK GAAP hasbeen reversed but the brand has been amortised as required under IFRS. 12 First time adoption of IAS 32 and 39 The adoption of IAS 32 - 'Financial Instruments: Disclosure and Presentation'and IAS 39 - 'Financial Instruments: Recognition and Measurement' with effectfrom 3 April 2005 results in a change in the Group's accounting policy forfinancial instruments. The impact of these standards on the Group's openingbalance sheet is shown below. The principal impacts of IAS 32 and IAS 39 on the Group's financial statementsrelate to the recognition of derivative financial instruments at fair value andthe reclassification of non-equity B shares as debt. Any derivatives that donot qualify for hedge accounting are held on the balance sheet at fair valuewith the changes in value reflected through the income statement. Theaccounting treatment of derivatives that qualify for hedge accounting depends onhow they are designated, as follows: Fair value hedgesThe Group uses interest rate swaps to hedge the exposure to interest rates ofits issued debt. Under UK GAAP, derivative financial instruments were notrecognised at fair value in the balance sheet. Under IAS 39, derivative financial instruments that meet the 'fair value'hedging requirements are recognised in the balance sheet at fair value withcorresponding fair value movements recognised in the income statement. For aneffective fair value hedge, the hedged item is adjusted for changes in fairvalue attributable to the risk being hedged with the corresponding entry in theincome statement. To the extent that the designated hedge relationship is fullyeffective, the amounts in the income statement offset each other. As a result,only the ineffective element of any designated hedging relationship impacts thefinancing line in the income statement. Cash flow hedgesUnder IAS 39, derivative financial instruments that qualify for cash flowhedging are recognised on the balance sheet at fair value with correspondingfair value changes deferred in equity. In addition, the Group hedges the foreigncurrency exposure on inventory purchases. Under UK GAAP, foreign currencyderivatives were held off balance sheet and these are now treated as cash flowhedges. The adjustments to the opening balance sheet as at 3 April 2005 are as follows: Restated Opening Effect of opening balance IAS 32 position sheet and at under IAS 39 3 Apr IFRS 2005 £m £m £m Non-current assets Other financial assets 0.3 71.0 71.3 Deferred tax asset 31.9 1.3 33.2 Current assets Other financial assets 67.0 2.7 69.7 Inventories 338.9 0.4 339.3 Current liabilities Other financial liabilities (478.8) (68.0) (546.8) Trade and other payables (733.2) 24.7 (708.5) Non-current liabilities Financial liabilities (1,948.5) (99.7) (2,048.2) Impact on net assets (67.6) Non-equity B shares (65.7) Hedging reserve (1.6) Retained earnings (0.3) Impact on shareholders' funds (67.6) 13 Date of approval The interim financial statements for the 26 weeks ended 1 October 2005 were approved by the Board on 7 November 2005. Independent review report to Marks and Spencer Group plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 1 October 2005 which comprises consolidated interim balancesheet as at 1 October 2005 and the related consolidated interim statements ofincome, cash flows and statement of recognised income and expense for the sixmonths then ended and related notes. We have read the other informationcontained in the interim report and considered whether it contains any apparentmisstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority. As disclosed in note 1, the next annual financial statements of the Group willbe prepared in accordance with accounting standards adopted for use in theEuropean Union. This interim report has been prepared in accordance with thebasis set out in note 1. The accounting policies are consistent with those that the directors intend touse in the next annual financial statements. As explained in note 1, there is,however, a possibility that the directors may determine that some changes arenecessary when preparing the full annual financial statements for the first timein accordance with accounting standards adopted for use in the European Union.The IFRS standards and IFRIC interpretations that will be applicable and adoptedfor use in the European Union at 1 April 2006 are not known with certainty atthe time of preparing this interim financial information. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of Group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for theCompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 1 October 2005. PricewaterhouseCoopers LLPChartered AccountantsLondon7 November 2005 Appendix 1 Accounting policies Basis of preparation The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") and International Financial ReportingInterpretations Committee ("IFRIC") interpretations and with those parts of theCompanies Act 1985 applicable to companies reporting under IFRS. Thedisclosures required by IFRS 1 - 'First-time Adoption of International FinancialReporting Standards' concerning the transition from UK GAAP to IFRS are given innote 11. The date of transition to IFRS is 4 April 2004. A summary of the Group's accounting policies is given below. Accounting Convention and basis of consolidation The Group financial statements incorporate the financial statements of Marks andSpencer Group plc and all its subsidiaries. The financial statements are drawn up on the historical cost basis ofaccounting, except as disclosed in the accounting policies set out below. First time adoption of International Financial Reporting Standards IFRS 1 - 'First-time Adoption of International Financial Reporting Standards'sets out the requirements for the first time adoption of IFRS. The Group isrequired to establish its IFRS accounting policies for the year to 1 April 2006and, in general, apply these retrospectively to determine the IFRS openingbalance sheet at its date of transition, 4 April 2004. The standard permits a number of optional exemptions to this general principle.The Group has adopted the following approach to the key exemptions: • business combinations: the Group has chosen not to restate business combinations prior to the transition date; • fair value or revaluation as deemed cost: the Group has adopted a valuation as deemed cost on transition for freehold land and buildings; • employee benefits: all cumulative actuarial gains and losses, having been recognised in equity under FRS 17 for UK GAAP purposes, have continued to be recognised in equity at the transition date; • financial instruments: the Group has taken the exemption not to restate comparatives for IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 - 'Financial Instruments: Recognition and Measurement'. Comparative information for 2005 in the 2006 financial statements is presented on a UK GAAP basis as previously reported; • share based payments: the Group has not adopted the exemption to apply IFRS 2 Share-Based Payments only to awards made after 7 November 2002. Instead a full retrospective approach has been followed on all awards granted but not fully vested at the date of transition to maintain consistency across reporting periods; and • cumulative translation differences: the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to IFRS. Turnover Turnover comprises sales of goods to customers outside the Group less anappropriate deduction for actual and expected returns, discounts and loyaltyscheme voucher costs, and is stated net of Value Added Tax and other salestaxes. Sales of furniture are recorded on delivery. Pensions Funded pension plans are in place for the Group's UK employees and the majorityof employees overseas. The assets of these pension plans are managed bythird-party investment managers and are held separately in trust. Regular valuations are prepared by independent professionally qualifiedactuaries. These determine the level of contribution required to fund thebenefits set out in the rules of the plans and allow for the periodic increaseof pensions in payment. The regular service cost of providing retirementbenefits to employees during the year, together with the cost of any benefitsrelating to past service, is charged to operating profit in the year. A credit representing the expected return on the assets of the retirementbenefit schemes during the year is included within interest. This is based onthe market value of the assets of the schemes at the start of the financialyear. A charge is also made within interest representing the expected increase in theliabilities of the retirement benefits schemes during the year. This arisesfrom the liabilities of the schemes being one year closer to payment. The difference between the market value of the assets and the present value ofaccrued pension liabilities is shown as an asset or liability in the balancesheet. Differences between actual and expected returns on assets during the year arerecognised in the statement of recognised income and expense in the year,together with differences arising from changes in actuarial assumptions. Intangible Assets A Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisitions over the Group's interest in the fair value of the identifiable assets and liabilities (including intangible assets) of the acquired entity at the date of the acquisition. Goodwill is recognised as an asset and assessed for impairment at least annually. Any impairment is recognised immediately in the income statement. Upon disposal of a subsidiary the attributable goodwill is included in the calculation of the profit or loss arising on disposal. Goodwill written off to reserves under UK GAAP prior to 31 March 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. B Brands Acquired brand values are held on the balance sheet at cost and amortised over their estimated useful lives. Any impairment in value is recognised immediately in the income statement. C Software Intangibles Where computer software is not an integral part of a related item of computer hardware, the software is treated as an intangible asset. Capitalised software costs include external direct costs of material and services and the payroll and payroll-related costs for employees who are directly associated with the project. Capitalised software development costs are amortised over their expected economic lives, normally between 3 to 5 years. Property, Plant and Equipment A Land and buildings Under UK GAAP property had been previously stated at historical cost, subject to certain properties having been revalued as at 31 March 1988. The property portfolio was revalued as at 2 April 2004. The Group adopted the following values on transition to IFRS: • Freehold land and building: the 2004 revaluation was adopted as deemed cost under the exemptions available under IFRS 1. • Leasehold buildings: cost or 1988 revaluations were adopted as deemed cost under the provisions of IFRS 1. • Leasehold land: any revaluations held against leasehold land were derecognised and the remaining cost included in prepayments. Given that under IFRS leasehold land can not be revalued, the 2004 valuation as it related to leasehold properties was not adopted on transition. The Group's policy is to state property, plant and equipment at cost less accumulated depreciation and not to revalue property for accounting purposes. B Investment Properties Investment properties are recorded at cost less accumulated depreciation and any recognised impairment loss. C Interest Interest is not capitalised. D Depreciation Depreciation is provided to write off the cost of tangible non-current assets, less estimated residual values, by equal annual instalments as follows: • Land: not depreciated; • Freehold and leasehold buildings with a remaining lease term over 50 years: depreciated to their residual value over their estimated remaining economic lives; • Leasehold buildings with a remaining lease term of less than 50 years: over the remaining period of the lease; • Fit-out: 10-25 years according to the estimated life of the asset; and • Fixtures, fittings and equipment: 3-15 years according to the estimated life of the asset. Depreciation is charged on all additions to, or disposals of, depreciating assets in the year of purchase or disposal. Any impairment in value is charged to the income statement. E Assets held under leases Where assets are financed by leasing agreements where the risks and rewards are substantially transferred to the Group ("finance leases") the assets are treated as if they had been purchased outright and the corresponding liability to the leasing company is included as an obligation under finance leases. Depreciation on leased assets is charged to the income statement on the same basis as owned assets. Leasing payments are treated as consisting of capital and interest elements and the interest is charged to the income statement. All other leases are 'operating leases' and the costs in respect of operating leases are charged on a straight-line basis over the lease term. The value of any lease incentive received to take on an operating lease (for example rent free periods) is recognised as deferred income and is released over the life of the lease. Leasehold Prepayments Payments made to acquire leasehold land are included in prepayments at cost andare amortised over the life of the lease. Share Based Payments The Group issues equity settled share based payments to certain employees. Afair value for the equity settled share awards is measured at the date of grant.The Group measures the fair value using the valuation technique mostappropriate to value each class of award, either the Black-Scholes or MonteCarlo method. The fair value of each award is recognised as an expense over the performanceand vesting period on a straight-line basis, after allowing for an estimate ofthe share awards that will eventually vest. The level of vesting is reviewedannually; and the charge is adjusted to reflect actual and estimated levels ofvesting. Inventories Inventories are valued at the lower of cost and net realisable value using theretail method. All inventories are finished goods. Foreign Currencies The results of overseas subsidiaries are translated at the weighted average ofmonthly exchange rates for sales and profits. The balance sheets of overseassubsidiaries are translated at year-end exchange rates. The resulting exchangedifferences are dealt with through reserves and reported in the consolidatedstatement of recognised income and expense. Transactions denominated in foreign currencies are translated at the exchangerate at the date of the transaction. Foreign currency assets and liabilitiesheld at the balance sheet date are translated at the closing balance sheet rate.The resulting exchange gain or loss is dealt with in the income statement. Taxation The tax charge comprises current tax payable and deferred tax. The current tax charge represents an estimate of the amounts payable to taxauthorities in respect of the Group's taxable profits and is based on aninterpretation of existing tax laws. Deferred tax is recognised on temporary differences between the carrying amountof an asset or liability in the balance sheet and its tax base at tax rates thatare expected to apply when the asset is realised or the liability settled, basedon tax rates that have been enacted or substantively enacted by the balancesheet date. Deferred tax is not recognised in respect of: • the initial recognition of goodwill that is not tax deductible. • the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction does not affect accounting or taxable profits. Deferred tax assets are only recognised when it is probable that taxable profitswill be available against which the deferred tax asset can be utilised. Deferred tax liabilities are not provided in respect of undistributed profits ofnon-UK resident subsidiaries where (i) the Group is able to control the timingof distribution of such profits and (ii) it is not probable that a taxabledistribution will be made in the foreseeable future. Financial Instruments The Group has adopted both IAS 32 - 'Financial Instruments: Disclosure andPresentation' and IAS 39 -'Financial Instrument: Recognition and Measurement'from 3 April 2005. Under the IFRS 1 transition rules IAS 32 and IAS 39 are notapplied to comparative figures. Financial assets and liabilities are recognised on the Group's balance sheetwhen the Group becomes a party to the contractual provisions of the instrument. A Trade receivables Trade receivables are recorded at their nominal amount less an allowance for any doubtful debts. B Investments Investments are initially measured at cost, including transaction costs. They are classified as either 'available for sale', 'fair value through profit or loss' or 'held to maturity'. Where securities are designated as 'fair value through profit or loss', gains and losses arising from changes in fair value are included in net profit or loss for the period. For 'available for sale' investments, gain or losses arising from changes in fair value are recognised directly in equity, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the net profit or loss for the period. Equity investments that do not have a quoted market price n an active market and whose fair value can not be reliably measured by other means are held at cost. 'Held to maturity' investments are measured at amortised cost using the effective interest method. C Financial liability and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. D Non-equity shares Non equity B shares in the Group are held as a current liability and the dividend paid is included within the interest charge for the year. E Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. F Loan notes Long term loans are held at amortised cost unless the loan is hedged by a derivative financial instrument in which case hedge accounting treatment will apply. G Trade payables Trade payables are stated at their nominal value. H Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Derivative financial instruments and hedging activities The Group primarily uses interest rate swaps and forward foreign currencycontracts to manage its exposures to fluctuating interest and foreign exchangerates. These instruments are initially recognised at fair value and aresubsequently re-measured at their fair value. The method of recognising theresulting gain or loss is dependant on whether the derivative is designated as ahedging instrument and the nature of the item being hedged. The Groupdesignates derivatives as either: • a hedge of a highly probable forecast transaction or change in the cashflows of a recognised asset or liability (a cashflow hedge); or • a hedge of the exposure to change in the fair value of a recognised asset or liability (a fair value hedge). Underlying the definition of fair value is the presumption that the group is agoing concern without any intention of curtailing materially the scale of itsoperations. For a majority of the Group's derivative instruments, the fair value will bedetermined by the Group applying discounted cash flow analysis using quotedmarket rates as an input into the valuation model. In determining the fair value of a derivative, the appropriate quoted marketprice for an asset held is the bid price, and for a liability issued is theoffer price. When the group has assets and liabilities with offsetting marketrisks, it uses the mid-market prices as a basis for establishing fair values forthe offsetting risk positions and applies the bid or asking price to the netopen position as appropriate. At inception of a hedging relationship, the hedging instrument and the hedgeditem are documented and prospective effectiveness testing is performed. Duringthe life of the hedging relationship effectiveness testing is continued toensure the instrument remains an effective hedge of the transaction. In order to qualify for hedge accounting the following conditions must be met: • formal designation and documentation at inception of the hedging relationship, detailing the risk management objective and strategy for undertaking the hedge; • the hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk; • for a cash flow hedge, a forecast transaction that is the subject of the hedge must be highly probable; • the effectiveness of the hedge can be reliably measured; and • the hedge is assessed on an ongoing basis and determined actually to have been highly effective throughout its life. Derivatives classified as cash flow hedges 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 firm commitment or forecasted transaction that is the subjectof a cash flow hedge results in the recognition of an asset or a liability,then, at the time the asset or liability is recognised, the associated gains orlosses on the derivative that had previously been recognised in equity areincluded in the initial measurement of the asset or liability. For hedges thatdo not result in the recognition of an asset or a liability, amounts deferred inequity are recognised in the income statement in the same period in which thehedged items affect net profit or loss. Derivatives classified as fair value hedges 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 profit or loss. The gain orloss on the hedged item attributable to the hedged risk is used to adjust thecarrying amount of the hedged item and is recognised in profit or loss. 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 net profit or loss for the period. The Group does not use derivatives to hedge balance sheet and profit and lossaccount translation exposures. Where appropriate, borrowings are arranged inlocal currencies to provide a natural hedge against overseas assets. Acquisition or disposal of subsidiary undertakings Results of subsidiary undertakings acquired during the financial year areincluded in the financial statements from the effective date of control. Theseparable net assets, both tangible and intangible of the newly acquiredsubsidiary undertakings are incorporated into the financial statements on thebasis of the fair value as at the effective date of control. Results of subsidiary undertakings disposed of during the financial year, areincluded in the financial statements up to the effective date of disposal.Where a business component representing a separate major line of business isdisposed of, or classified as held for sale, it is classified as a discontinuedoperation. The post tax profit or loss of the discontinued operations is shownas a single amount on the face of the income statement, separate from the otherresults of the Group. Policies relating to discontinued operations in comparatives Loans and advances to customers Loans and advances are classified as impaired when an instalment is in excess of30 days overdue. Specific provisions are made against all advances identifiedas impaired at the balance sheet date to the extent that, in the opinion of thedirectors, recovery is doubtful. Specific provisions against such exposures arecalculated using a bad debt provision model, which uses the last two years'credit history to produce estimates of the likely level of asset impairment.General provisions relate to latent bad and doubtful debts which are present inany lending portfolio but have not been specifically identified. Generalprovisions are calculated using the same bad debt provision model and anevaluation of current economic and political factors. Loans and advances are written off when there is no realistic prospect ofrecovery, based on a predetermined set of criteria. Account balances writtenoff include those where no payment has been received for a period of 12 monthssince the account was identified as doubtful, and in other situations such asbankruptcy, insolvency or fraud. Long-term assurance business The value of the long-term assurance business consists of the present value ofsurpluses expected to emerge in the future from business currently in force, andthis value is included in prepayments and accrued income. In determining theirvalue, these surpluses are discounted at a risk-adjusted, post tax rate.Changes in the value are included in the income statement grossed up at thestandard rate of corporation tax applicable to insurance companies. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Marks & Spencer