Adoption of IFRS
Marks & Spencer Group PLC
24 May 2005
Issued: Tuesday 24 May 2005
MARKS AND SPENCER GROUP PLC
ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
Marks & Spencer currently reports under UK Generally Accepted Accounting
Principles (UK GAAP).
As part of its preparation for the adoption of International Financial Reporting
Standards (IFRS), Marks & Spencer is today making available financial
information for the year ended 2 April 2005 prepared in accordance with IFRS.
The adoption of IFRS represents an accounting change only, and does not affect
the underlying operations or cash flows of the Group.
Summary of main changes
2004/05
UK GAAP IFRS Change Change
%
Turnover (£m) 7,942.3 7,942.3 - -
Operating Profit before Exceptionals (£m) 709.4 689.2 (20.2) (2.8)
Profit before Tax and Exceptionals (£m) 618.5 596.0 (22.5) (3.6)
Adjusted EPS (pence) 21.9 21.0 (0.9) (4.1)
Net Assets (at 2 April 2005) (£m) 521.4 938.6 417.2 80.0
The most significant elements contributing to the change between UK GAAP and
IFRS are:
• the inclusion of a fair value charge in respect of outstanding share
based awards for 35,000 employees which reduces operating profit and profit
before tax by £23m in 2004/05; and
• the adoption of a valuation of freehold land and buildings as deemed
cost which increases net assets at 2 April 2005 by £388m net of tax.
This financial information has been prepared on the basis of IFRSs expected to
be available for use in the Group's consolidated financial statements for the
year ended 1 April 2006. These are subject to review and endorsement by the EU
as well as ongoing review by the International Financial Reporting
Interpretations Committee. They are therefore still subject to change and we
will update our information for any such changes as they arise.
Further details of these changes follow.
Background to the change
Marks and Spencer Group plc and its subsidiaries (the Group) currently prepares
its consolidated financial statements under UK Generally Accepted Accounting
Practice (UK GAAP). Under a European Union Regulation issued in 2002 all EU
listed companies are required to report their consolidated financial statements
under International Financial Reporting Standards (IFRS) from 2005 onwards. IFRS
will apply for the first time in the Group's financial statements for the year
beginning 3 April 2005. The first results to be published under IFRS will be the
interim results for the six months to 1 October 2005.
This document explains the accounting policy changes arising from the adoption
of IFRS from those applied in the UK GAAP financial statements for the year
ended 2 April 2005. The information has been prepared on the basis of the
Group's current interpretation of how the IFRSs in issue should be applied.
The standards in issue are subject to ongoing review and endorsement by the EU,
whilst the application of the standards continues to be subject to
interpretation by the International Financial Reporting Interpretations
Committee (IFRIC). As a consequence further adjustments may be required on the
adoption of IFRS and the Group's first IFRS financial statements may therefore
be prepared in accordance with different accounting policies and treatments from
those presented here.
The adoption of IFRS represents an accounting change only, and does not affect
the operations or cash flows of the Group.
Impact at a glance
2004/05
UK GAAP IFRS Change Change
%
Turnover (£m) 7,942.3 7,942.3 - -
Operating Profit before Exceptionals (£m) 709.4 689.2 (20.2) (2.8)
Profit before Tax and Exceptionals (£m) 618.5 596.0 (22.5) (3.6)
Adjusted EPS (pence) 21.9 21.0 (0.9) (4.1)
Net Assets (at 2 April 2005) (£m) 521.4 938.6 417.2 80.0
Significant changes
The most significant areas of change, described more fully in the following
pages, are:
• property - where a valuation has been adopted as deemed cost for
freehold land and buildings (IFRS 1);
• property leasing - where certain operating leases of buildings have been
recognised as finance leases, payments to acquire leasehold land have been
reclassified from property at valuation to prepayments at cost and the
treatment of lease incentives has changed (IAS 17);
• employee benefits - where a fair value charge has been made for awards
under share schemes (IFRS 2) and a holiday pay provision set up (IAS 19);
• intangible assets - where software expenditure has been capitalised (IAS
38); and
• the timing of the recognition of dividends (IAS 10).
IFRS 1 exemptions
IFRS 1 First Time Adoption of International Financial Reporting Standards, sets
out the procedures that the Group must follow when it adopts IFRS for the first
time. The Group is required to establish its IFRS accounting policies for the
year to 1 April 2006 as at 3 April 2005 and, in general, apply these
retrospectively to determine the IFRS opening balance 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 will be presented on
the existing UK GAAP basis;
• share based payments: the Group has not adopted the exemption to apply
IFRS 2 Share-based Payment 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.
Balance sheets and profit and loss account
Reconciliations to assist in understanding the nature and value of the
differences between UK GAAP and IFRS are given in the appendices to this
release. These present the balance sheets on transition (as at 4 April 2004) and
year end (as at 2 April 2005) together with the profit and loss account for the
year to 2 April 2005. The adjustments are stated net of the taxation impact and
are unaudited.
The statements have been presented under a UK GAAP format to minimise the number
of restatement adjustments shown. The format will change under IFRS and there
will be a number of reclassifications arising (for example the treatment of
exceptional items, non-equity B shares and discontinued operations). The interim
financial statements for the 6 months to 1 October 2005 will be the first to
reflect the IFRS format.
Cash flow
The IFRS cash flow statement will explain the change in cash and cash
equivalents rather than just cash as under UK GAAP. Cash and cash equivalents
under IFRS comprise cash and certain short-term highly liquid investments. The
format of the cash flow statement will change with cash flows being categorised
under the headings of 'operating', 'investing' and 'funding'.
Key impacts
The following impacts on net assets are stated after the impact of taxation.
Property Revaluation
Increase/(Decrease)
(£m)
Profit before tax and exceptional items 1.1
Net Assets (3 April 2004) 390.5
Net Assets (2 April 2005) 388.2
----------------------------- ----------------
Property has previously been stated at historical cost, subject to certain
properties having been revalued as at 31 March 1988. A property revaluation was
prepared on an existing use basis by external valuers DTZ Debenham Tie Leung as
at 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 on
transition at 4 April 2004.
As a result, the cost of freehold land and buildings will be restated to the
revalued amount and depreciated, in accordance with the Group's depreciation
policy, over the remaining useful life. The Group will not revalue fixed assets
for accounting purposes in the future.
Property Leases
Increase/(Decrease)
(£m)
Profit before tax and exceptional items (6.5)
Exceptional item - (loss)/profit on sale of property 31.1
Net Assets (3 April 2004) (121.3)
Net Assets (2 April 2005) (95.2)
----------------------------- ----------------
1. •Finance Leases
The Group currently recognises finance leases under the recognition criteria set
out in SSAP 21. IAS 17 Leases requires the land and building elements of
property leases to be considered separately, with leasehold land normally being
treated as an operating lease. As a consequence payments made to acquire
leasehold land, previously treated as fixed assets, have been re-categorised as
prepaid leases and amortised over the life of the lease. In addition the
revaluation previously attributed to the land element has been derecognised.
The (loss)/profit on sale of property has been restated to reflect the different
carrying value under IFRS of leasehold properties disposed of during the year.
Also under the provisions of IAS 17 the building elements of certain property
leases, classified as operating leases under UK GAAP, have been reclassified as
finance leases. The adjustments are to include the fair value of these leased
buildings within fixed assets and to set up the related obligation, net of
finance charges, in respect of future periods, within creditors.
2. •Lease Incentives
Leasehold incentives received on entering into property leases are currently
recognised as deferred income on the balance sheet and are amortised to the
profit 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 will be restated on
the balance sheet as deferred income and released over the term of the lease.
Employee Benefits
Increase/(Decrease)
(£m)
Profit before tax and exceptional items (17.7)
Net Assets (3 April 2004) (20.8)
Net Assets (2 April 2005) (13.5)
----------------------------- ----------------
1. •Share Schemes
The Group operates a range of share-based incentive schemes. Under UK GAAP where
shares (or rights to shares) are awarded to employees, UITF 17 requires that the
charge to the profit and loss account should be based on the difference between
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. SAYE schemes are
exempt from this requirement and no charge is made. IFRS 2 requires that all
shares or options (including SAYE) awarded to employees as remuneration should
be measured at fair value at grant date, using an option pricing model, and
charged against profits over the period between grant date and vesting date,
being the vesting period. This treatment has been applied to all awards granted
but not fully vested at the date of transition. As a result, under IFRS, there
will be an additional charge to our profit and loss account for the year.
2. •Pensions
Under UK GAAP the Group's pension and post retirement benefits are accounted for
under FRS 17. This is broadly similar to the accounting treatment available
under IAS 19 and there are no material measurement adjustments although
presentation in the financial statements will change. In particular items
currently shown as 'other finance income/ (charges)' below operating profit
under UK GAAP will be shown within operating profit under IFRS.
3. •Other Employee Benefits
Currently no provision is made for holiday pay. Under IAS 19 Employee Benefits
the expected cost of compensated short term absences (e.g. holidays) should be
recognised when employees render the service that increases their entitlement.
As a result an accrual has been made for holidays earned but not taken.
Intangible Assets
Increase/(Decrease)
(£m)
Profit before tax and exceptional items 0.7
Exceptional item - profit on sale of operations (9.9)
Net Assets (3 April 2004) 22.7
Net Assets (2 April 2005) 14.3
----------------------------- ----------------
1. •Software Capitalisation
The cost of developing software is currently written off as incurred. Under IAS
38 Intangible Assets there is a requirement to capitalise internally generated
intangible assets provided certain recognition criteria are met. Results have
been adjusted to reflect the capitalisation and subsequent amortisation of costs
that meet the criteria. As a result expenses previously charged to the profit
and loss account have been brought onto the balance sheet as intangible software
assets and amortised over their estimated useful lives.
The exceptional profit on sale of M&S Money is restated under IFRS to reflect
the value of their capitalised software at the point of disposal.
2. •Goodwill and Brand
Currently goodwill is capitalised and amortised over its useful economic life.
Under IAS 38 Intangible Assets there is a requirement to separately identify
brands and other intangibles acquired rather than include these as part of
goodwill. Intangible assets, other than goodwill, are amortised over their
useful lives. Goodwill, which is considered to have an indefinite life, is
subject to an annual impairment review. As a result the goodwill recognised
under UK GAAP on the acquisition of Per Una of £125.5m has been split between
brand (£80m) and goodwill (£45.5m). The goodwill amortisation under UK GAAP has
been reversed but the brand has been amortised as required under IFRS.
Other changes
Increase/(Decrease)
(£m)
Profit before tax and exceptional items (0.1)
Net Assets (3 April 2004) 160.0
Net Assets (2 April 2005) 123.4
----------------------------- ----------------
The impact of other changes primarily relates to dividends. Under UK GAAP
dividends are recognised in the period to which they relate. IAS 10 Events after
the Balance Sheet Date requires that dividends declared after the balance sheet
date should not be recognised as a liability at that balance sheet date as the
liability does not represent a present obligation as defined by IAS 37
Provisions, Contingent Liabilities, and Contingent Assets. Accordingly the final
dividends for 2003/04 (£160.7m) and 2004/05 (£124.2m) are derecognised in the
balance sheets for April 2004 and April 2005 respectively.
Taxation
All of the gross IFRS accounting adjustments have been tax effected where
appropriate and are included as such above. The main impact of switching to IAS
12 Income Taxes is that it is necessary to provide deferred tax on property
revaluation surpluses and the amount recategorised as brand. These deferred tax
liabilities are not required under FRS 19.
IAS 12 also requires deferred tax to be provided in respect of undistributed
profits of overseas subsidiaries unless the parent is able to control the timing
of remittances and it is probable that such remittances will not be made in the
foreseeable future. As the Group is able to control the timing of remittances
from overseas subsidiaries and no such remittances are anticipated in the
foreseeable future no provision has been made for any tax on undistributed
profits of overseas subsidiaries.
Non-retrospective changes arising from the adoption of IFRS
The Group has taken the exemption not to restate comparatives for both IAS 32
and IAS 39 Financial Instruments. The impact of these standards on 2005/06 is
expected to be as follows:
• interest rate swaps will be reflected on the balance sheet under IAS 39.
Under the current strategy there will be little perceived volatility in the
profit and loss account as a result of fair valuing these instruments as the
hedge effectiveness criteria are expected to be fully achieved and therefore
hedge accounting will be applied;
• we will meet the hedge accounting criteria for the majority of our
forward exchange contracts, enabling profit and loss volatility to be kept
to a minimum; and
• non-equity B shares, currently with a value on the balance sheet of
£65.7m, will be treated as a liability rather than as equity under IAS 32.
Consolidated balance sheet as at 3 April 2004 - unaudited
Employee Benefits
£m UK GAAP Property Property Share Intangible
--------------------------- ------- Revaluation Leasing Schemes Other Assets Other IFRS
--------- ------- ------- ------- -------- ------- -------
Fixed assets:
Intangible
assets - 32.4 32.4
Tangible
assets 3,497.6 531.0 (270.9) 3,757.7
Investments 10.0 10.0
--------------------------- ------- --------- ------- -------- ------- -------- ------- -------
3,507.6 531.0 (270.9) - - 32.4 - 3,800.1
--------------------------- ------- --------- ------- -------- ------- -------- ------- -------
Current assets
Stocks 398.0 (1.0) 397.0
Debtors 2,750.9 229.7 2,980.6
Cash and
investments 720.6 720.6
--------------------------- ------- --------- ------- -------- ------- -------- ------- -------
3,869.5 - 229.7 - - - (1.0) 4,098.2
Current liabilities
Creditors :
amounts
falling due
within one
year (1,884.7) (5.4) 1.1 (37.9) 160.7 (1,766.2)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Net current
assets 1,984.8 - 224.3 1.1 (37.9) - 159.7 2,332.0
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Total assets
less current
liabilities 5,492.4 531.0 (46.6) 1.1 (37.9) 32.4 159.7 6,132.1
Creditors :
amounts
falling due
after more
than one year (2,519.6) (81.0) (2,600.6)
Deferred tax
liability - (140.5) 6.3 5.1 10.9 (9.7) 0.3 (127.6)
Other
provisions for
liabilities
and charges (49.3) (49.3)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Net assets
before net
post-retirement
liability 2,923.5 390.5 (121.3) 6.2 (27.0) 22.7 160.0 3,354.6
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Net
post-retirement
liability (469.5) (469.5)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Net assets 2,454.0 390.5 (121.3) 6.2 (27.0) 22.7 160.0 2,885.1
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Capital & Reserves
Called up
share capital 651.2 651.2
Share premium
account 45.2 45.2
Capital
redemption
reserve 1,924.8 1,924.8
Revaluation
reserve 356.4 390.5 (71.6) 675.3
Other reserve (6,542.2) (6,542.2)
Share scheme
reserve (note 1) - 36.1 36.1
Profit and
loss account 6,018.6 - (49.7) (29.9) (27.0) 22.7 160.0 6,094.7
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Shareholders'
funds 2,454.0 390.5 (121.3) 6.2 (27.0) 22.7 160.0 2,885.1
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Consolidated profit and loss account for the year ended 2 April 2005 - unaudited
Employee Benefits
Property Property Share Intangible
£m UK GAAP Revaluation Leasing Schemes Other Assets Other IFRS
--------------------------- -------- --------- ------- -------- -------- ------- ------- --------
Turnover 7,942.3 7,942.3
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Operating
Profit 618.0 1.1 (4.2) (23.0) 5.3 0.7 (0.1) 597.8
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Analysed between:
Before
exceptional
items 709.4 1.1 (4.2) (23.0) 5.3 0.7 (0.1) 689.2
Exceptional
items (91.4) (91.4)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
(Loss) /
profit on sale
of property
and other
fixed assets (0.4) 31.1 30.7
Profit on sale
/ closure of
operations 218.6 (9.9) 208.7
Net interest
expense (102.3) (2.3) (104.6)
Other finance
income 11.4 11.4
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Profit on
ordinary
activities
before
taxation 745.3 1.1 24.6 (23.0) 5.3 (9.2) (0.1) 744.0
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Analysed between:
Before
exceptional
items 618.5 1.1 (6.5) (23.0) 5.3 0.7 (0.1) 596.0
Exceptional
items 126.8 31.1 (9.9) 148.0
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Taxation on
ordinary
activities (158.3) 0.5 1.4 2.6 (1.6) 0.7 - (154.7)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Profit
attributable
to
shareholders 587.0 1.6 26.0 (20.4) 3.7 (8.5) (0.1) 589.3
Dividends
(including
dividends in
respect of
non-equity
shares) (203.3) (36.5) (239.8)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Retained
profit 383.7 1.6 26.0 (20.4) 3.7 (8.5) (36.6) 349.5
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Earnings per
share 29.1p 29.2p
Adjusted
earnings per
share 21.9p 21.0p
Consolidated balance sheet as at 2 April 2005 - unaudited
Employee Benefits
Property Property Share Intangible
£m UK GAAP Revaluation Leasing Schemes Other Assets Other IFRS
--------------------------- -------- --------- ------- -------- -------- ------- ------- --------
Fixed assets:
Intangible
assets 122.4 43.0 165.4
Tangible
assets 3,316.1 528.1 (219.1) (0.3) 3,624.8
Investments 9.0 9.0
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
3,447.5 528.1 (219.1) - - 43.0 (0.3) 3,799.2
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Current assets
Stocks 339.7 (0.8) 338.9
Debtors 218.2 206.9 425.1
Cash and
investments 279.6 279.6
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
837.5 - 206.9 - - - (0.8) 1,043.6
Current liabilities
Creditors :
amounts
falling due
within one
year (1,289.3) (5.4) 0.2 (32.6) 124.3 (1,202.8)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Net current
liabilities (451.8) - 201.5 0.2 (32.6) - 123.5 (159.2)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Total assets
less current
liabilities 2,995.7 528.1 (17.6) 0.2 (32.6) 43.0 123.2 3,640.0
Creditors :
amounts
falling due
after more
than one year (1,919.7) (85.3) (2,005.0)
Deferred tax
liability (35.5) (139.9) 7.7 9.6 9.3 (28.7) 0.2 (177.3)
Other
provisions for
liabilities
and charges (44.9) (44.9)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Net assets
before net
post-retirement
liability 995.6 388.2 (95.2) 9.8 (23.3) 14.3 123.4 1,412.8
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Net
post-retirement
liability (474.2) (474.2)
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Net assets 521.4 388.2 (95.2) 9.8 (23.3) 14.3 123.4 938.6
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Capital & Reserves
Called up
share capital 480.2 480.2
Share premium
account 106.6 106.6
Capital
redemption
reserve 2,102.8 2,102.8
Revaluation
reserve 330.8 388.2 (51.2) 667.8
Other reserve (6,542.2) (6,542.2)
Share scheme
reserve (note 1) - 58.3 58.3
Profit and
loss account 4,043.2 (44.0) (48.5) (23.3) 14.3 123.4 4,065.1
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Shareholders'
funds 521.4 388.2 (95.2) 9.8 (23.3) 14.3 123.4 938.6
--------------------------- -------- --------- ------- -------- ------- -------- ------- --------
Notes
1. A share scheme reserve has been separately shown for illustrative purposes. Under IFRS presentation this
will be included within the profit and loss account reserve.
2.The financial information included in this document does not comprise statutory accounts within the meaning
of section 240 of the Companies Act 1985. The
adjustments are unaudited and may change as the Group
finalises its analysis of the effect of IFRS.
Contacts:
Investor Relations:
Amanda Mellor +44 (0) 20 8718 3604
Sarah McGlyne +44 (0) 20 8718 1563
Statements made in this announcement that look forward in time or that express management's beliefs,
expectations or estimates regarding future occurrences and prospects are 'forward-looking statements' within
the meaning of the United States federal securities laws. These forward-looking statements reflect Marks &
Spencer's current expectations concerning future events and actual results may differ materially from current
expectations or historical results. Any such forward-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; competitive influences; 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 services industries; acts of war or terrorism
worldwide; work stoppages, slowdowns or strikes; and changes in financial and equity markets.
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