Adoption of IFRS

Mothercare PLC 15 July 2005 Mothercare plc 15 July 2005 Adoption of International Financial Reporting Standards Mothercare plc (the 'Company') today releases its audited financial results for the 52 weeks ended 26 March 2005 as prepared under International Financial Reporting Standards ('IFRS'), as part of the process for the adoption of IFRS as its primary accounting basis for the 53 weeks ending 1 April 2006. For the 52 weeks ended 26 March 2005, there is no net impact on profit before taxation from the adoption of IFRS, however profit after taxation increases £0.2m to £11.3m. As at 26 March 2005, net assets are reduced by £24.5m to £119.0m. None of the adjustments arising from the adoption of IFRS relate to cash, so there is no impact on reported cash flows. The key changes to the Company's reported financial information as at 26 March 2005 under IFRS are: • Accounting for pension schemes under IAS19. The pension scheme deficit has been included in full in the balance sheet and accordingly the SSAP 24 prepayment previously reported has been eliminated. The effect of these adjustments, net of deferred tax, is to reduce net assets by £22.7m. The increase in the net pension cost will reduce profit before tax by £0.3m. • Accounting for share based payments under IFRS 2. Under IFRS 2 an expense is recognised to spread the fair value of each award over its vesting period on a straight-line basis, after allowing for an estimate of the share awards that will eventually vest. The net effect of these changes is to increase net assets by £0.9m and increase profit before tax by £0.4m. • Amortisation of lease incentives under IFRS Lease incentives received are now amortised evenly over the life of the lease rather than the period up to the first market rent review. The net effect of this change is to decrease net assets by £6.3m and decrease profit before tax by £0.1m. • Recognition of dividends Under IFRS, dividends declared after the balance sheet date are not recognised as a liability as there is no present obligation at that time The effect of this change is to increase net assets at 26 March 2005 by £3.6m. IFRS will apply for the first time in the Company's financial statements for the 53 weeks ending 1 April 2006. Accordingly, financial results for the 28 weeks ending 8 October 2005 will be prepared and reported under IFRS. CONTENTS PART I Introduction Basis of preparation Statement of directors' responsibilities Significant differences between UK GAAP and IFRS Presentational changes between UK GAAP and IFRS PART II Preliminary comparative IFRS financial information • Consolidated income statement for the 52 weeks ended 26 March 2005 • Consolidated statement of recognised income and expense for the 52 weeks ended 26 March 2005 • Consolidated balance sheet at 26 March 2005 • Consolidated cash flow statement for the 52 weeks ended 26 March 2005 • Notes to the preliminary comparative IFRS financial information including significant accounting policies • Independent auditors' report to the board of directors of Mothercare plc on the preliminary comparative IFRS financial information PART III Reconciliation of restated financial information from UK GAAP to IFRS for the 52 weeks ended 26 March 2005 PART IV Presentation of UK GAAP financial information in IFRS format PART I INTRODUCTION For the 52 weeks ended 26 March 2005, Mothercare plc (the 'Company') prepared its consolidated financial statements under UK generally accepted accounting principles ('UK GAAP'). With effect from 1 April 2006, the Company is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards ('IFRS'). The Company will therefore prepare its consolidated financial statements for the 53 weeks ending 1 April 2006 in compliance with IFRS. Mothercare will present one year of comparative IFRS financial information for the 52 weeks ended 26 March 2005 ('2005') and consequently, the date of transition to IFRS for the Company is 28 March 2004 being the first day of the comparative period ('the date of transition'). The first results to be prepared on an IFRS basis will be contained in the Company's results announcement for the 28 weeks ending 8 October 2005 (which will be announced on 17 November 2005). The purpose of this document is to: • explain the basis on which Mothercare plc has made the transition to IFRS; • identify the significant differences between IFRS and UK GAAP relevant to Mothercare plc; • set out the Company's significant accounting policies under IFRS; and • show the impact of restatement in accordance with IFRS on the Company's previously reported results and financial position under UK GAAP. An explanation of the effect that the adoption of IFRS has had on the Company's results is provided in Part I. Set out in Part II are extracts from the Company's consolidated financial statements, comprising the primary statements (the consolidated income statement, the consolidated statement of recognised income and expense, the consolidated balance sheet and the consolidated cash flow statement) and certain key disclosure notes for the 52 weeks ended 26 March 2005 as restated for IFRS. A reconciliation of restated financial information from UK GAAP to IFRS for the 52 weeks ended 26 March 2005 and as at 26 March 2005 is provided in Part III. The schedules in Part IV reclassify the UK GAAP profit and loss account for the 52 weeks ended 26 March 2005 and the corresponding balance sheet into IFRS format. The financial information in Part II and the related information in Parts III and IV relating to the 52 weeks ended 26 March 2005 has been audited by Deloitte & Touche LLP and their opinion is set out in Part II. The change in reporting principally impacts the following areas: lease accounting, share based payments, pensions and the related deferred tax adjustments on these items. The adjustments required under IFRS have no net impact on the profit before taxation previously reported under UK GAAP. However, under IFRS, the 2005 net assets are £24.5 million lower than under UK GAAP. This is mainly due to full inclusion of the pension fund deficit. Net assets are also reduced by the write back of lease incentives previously taken into profit and now included in the balance sheet as deferred income, offset by the write back of the accrual of the year end dividend and the adjustments relating to share based payments. BASIS OF PREPARATION European law requires that the Company's financial statements for the 53 weeks ending 1 April 2006 are prepared on the basis of IFRS as endorsed for use in the European Union. IFRS are subject to amendment or interpretation by the International Accounting Standards Board ('IASB') and there is an ongoing process of review and endorsement by the European Commission. The financial information contained in this document has been prepared on the basis of IFRS that the directors expect to be applicable as at 1 April 2006. In particular the directors have assumed that the European Commission will endorse Amendment to IAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures issued by the IASB in December 2004. For the reasons outlined above, it is possible that the restated information for 2005 presented in this document may be subject to change before its inclusion in the annual report and accounts for the 53 weeks ending 1 April 2006, which will contain the Company's first complete financial statements prepared in accordance with IFRS. IFRS 1 First time adoption of International Financial Reporting Standards sets out the requirements for the first time adoption of IFRS. Generally, IFRS 1 requires that accounting policies be adopted that are compliant with IFRS and that these policies be applied retrospectively to all periods presented. However, a number of exemptions are permitted to be taken in preparing the balance sheet at the date of transition and in preparing the financial information for the 52 weeks ended 26 March 2005. The directors have not revised estimates required under IFRS that were also required under UK GAAP as at 28 March 2004 and 26 March 2005 and in addition, where estimates were not required under UK GAAP, they have been based on information known at that time, and not on subsequent events. In accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards, the Company has considered the ten optional exemptions to the general principle of retrospective application. The Company has concluded the following with regards to the optional exemptions: • IFRS 2 Share Based Payment: the Company has applied IFRS 2 to those share based payment arrangements granted after 7 November 2002 and remaining unvested as at 1 January 2005. • IAS 16 Property, Plant and Equipment: the Company has not applied the optional exemption relating to IAS 16 and will therefore continue to follow the current UK GAAP policy and carry assets at cost, less any provisions for impairment. • IAS 19 Employee benefits: subject to endorsement by the EU, the Company has elected to adopt Amendment to IAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures. The Company has selected the option available within this standard, similar to FRS 17 under UK GAAP, for immediate recognition of all actuarial gains and losses outside of the income statement. • The Company has elected to apply IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement prospectively from 27 March 2005. Consequently, the relevant comparative information for the 52 weeks ended 26 March 2005 does not reflect the impact of these standards. STATEMENT OF DIRECTORS' RESPONSIBILITIES The following statement, which should be read in conjunction with the auditors' statement of auditors' responsibilities set out in their report on page 17, is made with a view to distinguishing for shareholders the respective responsibilities of the directors and of the auditors in relation to the preliminary comparative IFRS financial information. The directors consider in preparing the preliminary comparative IFRS financial information on the basis set out in Part II that the Company and the group have used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, including the assumptions the directors have made about the standards and interpretations expected to be effective, and the policies expected to be adopted, when they prepare the first complete set of IFRS financial statements as at 1 April 2006 and that all accounting standards which they consider to be applicable have been followed. SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND IFRS The significant differences between UK GAAP and IFRS impacting the results and net assets of the Company are described below. These differences affect the comparative information for 2005 which will be presented in the consolidated financial statements for the 53 weeks ending 1 April 2006 and, unless otherwise stated, have been applied retrospectively in arriving at the balance sheet at the date of transition to IFRS prepared under IFRS. a. Leases Under UK GAAP, the Company has property leases which are accounted for as operating leases. IAS 17 Leases, requires that the land and building components of a lease are considered separately and sets out more detailed criteria in assessing whether the land and building elements are operating or finance leases. In accordance with IAS 17, the Company has reviewed its property leases against these criteria and assessed that there are no material finance lease arrangements in place. Consequently there is no impact on the results for the 52 weeks ended 26 March 2005 or the balance sheet at that date or at the date of transition. In addition, in accordance with IAS 17, lease incentives received by the Company have been amortised evenly over the life of the lease. Under UK GAAP, these lease incentives were amortised evenly over the period to the first rent review date on which the rent was expected to be adjusted to the prevailing market rate, if this was shorter than the full lease term. The impact of amortising the lease incentives evenly over the life of the lease is a decrease in pre-tax net assets of £7.3 million as at 26 March 2005 and a debit to pre-tax profits of £0.1 million for the 52 weeks ended 26 March 2005. b. Share based payments Details of the share awards used by the Company can be found in the annual report and accounts for the 52 weeks ended 26 March 2005. Under UK GAAP, the Company recorded a charge for employee share incentive awards based on the intrinsic value of the award being the difference, if any, between the option price of the conditional award and the share price on the date of grant. The Company utilised the exemption available within UITF Abstract 17 from reporting a charge to profits for UK Inland Revenue approved SAYE schemes and equivalent overseas schemes. As the Company's share options have an option price equal to the market price on the date of grant no charge was required to be recorded under UK GAAP. IFRS 2 Share based payments requires the Company to record a charge for all share based payments equivalent to the fair value of the award at the date of grant. An expense is recognised to spread the fair value of each award over its vesting period on a straight-line basis, after allowing for an estimate of the share awards that will eventually vest. The Company has calculated fair values for each of its employee incentive share awards. The calculation of fair values requires management to select the option valuation model they consider to be most appropriate for the valuation of each type of award. The key variables in arriving at the share option charge are the expected future volatility in the Company's share price, the expected period of time between the grant and exercise of an award and the expected level of forfeiture that will occur between the grant of an award and its vesting. The application of IFRS 2 instead of UK GAAP has reduced the amount charged to profits for share based payments for the 52 weeks ended 26 March 2005 by £0.3 million net of tax. c. Employee benefits Under UK GAAP, the Company accounted for post employment benefits under SSAP 24 Accounting for pension costs. This standard seeks to spread the cost of providing defined benefit pensions and post retirement benefits over the estimated average remaining service life of the scheme members based on triennial actuarial valuation. Under IFRS, the Company is required to calculate the pension cost for defined benefit pension schemes and other post retirement benefits using the projected unit credit method, with actuarial valuations being carried out at each balance sheet date. The Company intends to apply the option within the Amendment to IAS 19 that allows for immediate recognition of all actuarial gains and losses in the period in which they occur, outside of profit and loss and presented in the statement of recognised income and expense, which is similar to the treatment required by FRS 17 Retirement benefits under UK GAAP. The Company intends to present the current and past service pension costs as a charge to profit from operations. The unwinding of the discount on pension liabilities and the expected return on pension assets will be presented as a financing item. At the date of transition the immediate recognition of the Company's pension liabilities on the balance sheet results in the recognition of a liability of £22.8 million compared to the recognition of £nil in the balance sheet at the date of transition in accordance with SSAP 24 under UK GAAP. As at 26 March 2005 the immediate recognition of the Company's pension liabilities on the balance sheet results in the recognition of a liability of £22.4 million compared to the recognition of a £10.0 million prepayment as at 26 March 2005 in accordance with SSAP 24 under UK GAAP. The application of IAS 19 to the Company's results for the 52 weeks ended 26 March 2005 reduces profit from operations by £1.5 million and increases net investment income by £1.2 million resulting in a pre-tax underlying incremental charge of £0.3 million. d. Deferred tax Under UK GAAP the Company recognised deferred tax on timing differences that arose from the inclusion of gains and losses in tax assessments in periods different from those in which they were recognised in the financial statements (an income statement approach). Under IAS 12 Deferred tax, deferred tax is recognised in respect of nearly all taxable temporary timing differences arising between the tax base and the accounting book value of balance sheet items (a balance sheet approach). This results in deferred tax being recognised on certain timing differences that would not have given rise to deferred tax under UK GAAP. Deferred taxation has been provided, where appropriate as a result of IFRS transition adjustments, principally recoverable deferred tax assets in respect of the full recognition of pension deficits. e. Software Under UK GAAP, all capitalised computer software was included within tangible fixed assets. IAS 38 Intangible Assets requires software that is not an integral part of an item of computer hardware to be classified within intangible assets. An adjustment of £2.7 million has been made to reclassify such computer software from property, plant and equipment to intangible assets as at 26 March 2005. f. Dividends payable Under UK GAAP, the Company recognised a liability for dividends that were proposed in respect of a prior accounting period, even if the formal authorisation of the dividend did not take place until after the year end. In accordance with IAS 10 Events after the Balance Sheet Date, dividends declared after the balance sheet date are not recognised as a liability in the financial statements, as there is no present obligation at the balance sheet date. Accordingly no accruals are required for the final dividends declared for 2004 of £2.7 million and for 2005 of £3.6 million. g. Financial instruments As permitted under IFRS 1, the Company has elected to apply IAS 32 and IAS 39 prospectively from 27 March 2005 onwards. As a result, the relevant comparative information for 26 March 2005 does not reflect the impact of these standards. PRESENTATIONAL CHANGES BETWEEN UK GAAP AND IFRS The primary financial statements contained in this document have been presented in accordance with IAS 1 Presentation of Financial Statements and IAS 7 Cash Flow Statements. There are a number of presentational changes compared with UK GAAP. The impact of these presentational changes is discussed below. It is possible that the format and presentation of the primary financial statements will change in the event that further guidance is issued by the IASB and as practice develops. The effect of presentational changes is shown in Part IV. a. Reorganisation of distribution network Under UK GAAP, the costs associated with the reorganisation of the distribution network were shown as an operating exceptional item within cost of sales. Under IFRS, the Company has concluded that the most appropriate treatment for the costs associated with the reorganisation of the distribution network is to highlight this alongside cost of sales, within profit from operations. b. Profit on disposal of subsidiary undertaking Under UK GAAP, gains and losses arising on certain items were shown as exceptional items, outside of profit from retail operations, such as the profit on disposal of subsidiary undertaking. Under IFRS, the Company has concluded that the most appropriate treatment for the profit on disposal of subsidiary undertaking is to continue to show these amounts below profit from operations, as this item does not result from the operating activities of the Company. The Company will continue to exclude any such gains and losses in arriving at its profit from operations. c. Cash flow statement The adoption of IFRS does not affect the Company's cash flows. However the IFRS presentation of cash flows differs from that required under UK GAAP. IFRS requires that the cash flows of the Company be split between three categories - operating activities, investing activities and financing activities. Under IFRS, liquid investments with maturities of less than three months at acquisition are classified with cash and cash equivalents. Under UK GAAP, these amounts were presented as time deposits within liquid resources. Under UK GAAP, a reconciliation of net cash flow to movement in net funds was presented. This included as a reconciling item the cash flows arising from the investment in, or realisation of, cash equivalents. Under IFRS, the cash flow statement reconciles the movement in cash and cash equivalents and as such, any movements arising due to cash equivalents do not represent reconciling items. PART II Preliminary comparative IFRS financial information Consolidated income statement For the 52 weeks ended 26 March 2005 --------------- 52 weeks ended 26 March 2005 £ million Revenue 457.2 Cost of sales (408.1) Re-organisation of distribution network (6.5) --------------- Gross profit 42.6 Administrative expenses (32.4) --------------- Profit from operations 10.2 Profit on disposal of subsidiary undertaking 2.4 --------------- Profit before financing and taxation 12.6 Investment income 10.9 Finance costs (8.0) --------------- Profit before taxation 15.5 Taxation (4.2) --------------- Profit for the financial year attributable to equity shareholders of the parent 11.3 =============== Earnings per share (note 2) Basic 16.6p Diluted 16.3p --------------- Consolidated statement of recognised income and expense For the 52 weeks ended 26 March 2005 --------------- 52 weeks ended 26 March 2005 £ million Post employment benefits: Actuarial losses (9.3) Tax on items taken directly to equity 3.1 --------------- Net expenses recognised directly in equity (6.2) Profit for the financial year 11.3 --------------- Total recognised income and expense for the financial year attributable to equity shareholders of the parent 5.1 =============== --------------- Consolidated balance sheet As at 26 March 2005 --------------- 26 March 2005 £ million Non-current assets Property, plant and equipment 84.3 Other intangible assets - software 2.7 Deferred tax asset 13.6 --------------- 100.6 --------------- Current assets Inventories 46.8 Trade and other receivables 28.8 Cash and cash equivalents 37.0 --------------- 112.6 --------------- Total assets 213.2 --------------- Current liabilities Trade and other payables (55.9) Short term provisions (5.1) --------------- (61.0) --------------- Non-current liabilities Trade and other payables (7.8) Retirement benefit obligations (22.4) Long term provisions (3.0) --------------- (33.2) --------------- Total liabilities (94.2) --------------- Net assets 119.0 =============== Equity attributable to equity shareholders of the parent Called up share capital 35.8 Share premium account 1.3 Own shares (5.5) Retained earnings 87.4 --------------- Total equity 119.0 =============== --------------- Consolidated cash flow statement For the 52 weeks ended 26 March 2005 --------------------------------- 52 weeks ended 52 weeks ended 26 March 2005 26 March 2005 £ million £ million Reconciliation of cash flow from operating activities Profit from operations 10.2 Adjustments for: Depreciation of property, plant and equipment 12.0 Loss on disposal of property, plant and equipment 0.7 Cost of employee share schemes 0.8 Charge to profit from operations in respect of the costs of the re-organisation of distribution network 6.5 Utilisation of provision for costs of re-organisation of distribution network (0.9) Utilisation of property provisions (1.1) Payments to retirement benefit schemes (12.4) Charge to profit from operations in respect of the service costs of retirement benefit obligations 3.9 --------------- Operating cash flow before movements in working capital 19.7 Increase in inventories (1.8) Increase in receivables (3.3) Decrease in payables (2.1) --------------- Net cash flow from operating activities 12.5 =============== Net cash flow from operating activities 12.5 Cash flows from investing activities Interest received 1.8 Interest paid (0.1) Purchase of property, plant and equipment (18.4) Proceeds from sale of property, plant and equipment 1.1 Proceeds from sale of subsidiary undertaking 3.4 --------------- Net cash used in investing activities (12.2) Cash flows from financing activities Equity dividends paid (4.6) Issue of ordinary share capital 1.0 --------------- Net cash used in financing activities (3.6) --------------- Net decrease in cash and cash equivalents (3.3) Cash and cash equivalents at the beginning of the financial year 40.3 --------------- Cash and cash equivalents at the end of the financial year 37.0 =============== --------------------------------- Notes to the preliminary comparative IFRS financial information 1. Significant accounting policies UNDER IFRS Basic of preparation The financial statements have been prepared, for the first time, in accordance with International Financial Reporting Standards (IFRSs) and those parts of the Companies Act 1985 that are applicable to companies reporting under IFRS. The disclosures required by IFRS 1 concerning the transition from UK GAAP to IFRSs are given in Parts III and IV. The 2005 financial statements are the first financial statements to be prepared in accordance with IFRS and the date of transition is 28 March 2004. The financial statements have been prepared on the historical cost basis. The principal accounting policies adopted are set out below. The financial information contained in this document has been prepared on the basis of IFRS that the directors expect to be applicable as at 1 April 2006. In particular the directors have assumed that the European Commission will endorse Amendment to IAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures issued by the IASB in December 2004. For the reasons outlined above, it is possible that the restated information for 2005 presented in this document may be subject to change before its inclusion in the annual report and accounts for the 53 weeks ending 1 April 2006, which will contain the Company's first complete financial statements prepared in accordance with IFRS. IFRS 1 First time adoption of International Financial Reporting Standards sets out the requirements for the first time adoption of IFRS. Generally, IFRS 1 requires that accounting policies be adopted that are compliant with IFRS and that these policies be applied retrospectively to all periods presented. However, a number of exemptions are permitted to be taken in preparing the balance sheet at the date of transition and in preparing the financial information for the 52 weeks ended 26 March 2005. In accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards, the Company has considered the ten optional exemptions to the general principle of retrospective application. The Company has concluded the following with regards to the optional exemptions: • IFRS 2 Share Based Payment: the Company has applied IFRS 2 to those share based payment arrangements granted after 7 November 2002 and remaining unvested as at 1 January 2005. • IAS 16 Property, Plant and Equipment: the Company has not applied the optional exemption relating to IAS 16 and will therefore continue to follow the current UK GAAP policy and carry assets at cost, less any provisions for impairment. • IAS 19 Employee benefits: subject to endorsement by the EU, the Company has elected to adopt Amendment to IAS 19 Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures. The Company has selected the option available within this standard, similar to FRS 17 under UK GAAP, for immediate recognition of all actuarial gains and losses outside of the income statement. • The Company has elected to apply IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement prospectively from 27 March 2005. Consequently, the relevant comparative information for the 52 weeks ended 26 March 2005 does not reflect the impact of these standards. The directors have not revised estimates required under IFRS that were also required under UK GAAP as at 28 March 2004 and 26 March 2005 and in addition, where estimates were not required under UK GAAP, they have been based on information known at that time, and not on subsequent events. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 26 March 2005. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to profit and loss in the period of acquisition. The interest of minority shareholders is stated at the minority's proportion of the fair values of the assets and liabilities recognised. Subsequently, any losses applicable to the minority interest in excess of the minority interest are allocated against the interests of the parent. The results of subsidiaries acquired or disposed of during the financial year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the group. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the group's interest in the fair value of the identifiable assets and liabilities of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is recognised as an asset and reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is not subsequently reversed. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill arising on acquisitions before the date of transition to IFRSs has been retained at the previous UK GAAP amounts subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 29 March 1997 has not been reinstated and is not included in determining any subsequent profit or loss on disposal. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales related taxes. Sales of goods are recognised when goods are delivered and title has passed. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount. Dividend income from investments is recognised when the shareholders' rights to receive payment have been established. Leasing Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The group as lessor Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. The group as lessee Rentals payable under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight line basis over the lease term. Foreign currencies Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Gains and losses arising on retranslation are included in net profit or loss for the period, except for exchange differences arising on non-monetary assets and liabilities where the changes in fair value are recognised directly in equity. In order to hedge its exposure to certain foreign exchange risks, the group enters into forward contracts and options (see below for details of the group's accounting policies in respect of such derivative financial instruments). On consolidation, the assets and liabilities of the group's overseas operations are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period unless exchange rates fluctuate significantly. Exchange differences arising, if any, are classified as equity and transferred to the group's translation reserve. Such translation differences are recognised as income or as expenses in the period in which the operation is disposed of. Retirement benefit costs Payments to defined contribution retirement benefit schemes are charged as an expense as they fall due. For defined benefit retirement benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside of the income statement and presented in the statement of recognised income and expense. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past service cost, plus the present value of available refunds and reductions in future contributions to the plan. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the financial year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other financial years and it further excludes items that are never taxable or deductible. The group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation and any impairment losses Depreciation is charged so as to write off the cost or valuation of assets, other than land and assets in course of construction, over their estimated useful lives, using the straight-line method, on the following bases: Freehold buildings - 50 years Fixed equipment in freehold buildings - 20 years Leasehold improvements - the lease term Fixtures, fittings and equipment - 3 to 20 years The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Impairment of tangible assets At each balance sheet date, the group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. Other intangible assets Where computer software is not an integral part of a related item of computer hardware, the software is classified as an intangible asset. The capitalised costs of software for internal use include external direct costs of materials and services consumed in developing or obtaining the software and payroll and payroll-related costs for employees who are directly associated with and who devote substantial time to the project. Capitalisation of these costs ceases no later than the point at which the software is substantially complete and ready for its intended use. These costs are amortised over their expected useful lives, which are reviewed annually. Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Cost is calculated using the first-in, first-out cost formula. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Financial instruments Prospective adoption of IAS 32 and IAS 39 As permitted by IFRS 1, the Company has elected to apply IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement prospectively from 27 March 2005. Consequently, the relevant comparative information for the 52 weeks ended 26 March 2005 does not reflect the impact of these standards. Derivative financial instruments The group uses derivative financial instruments, principally, forward foreign currency contracts to reduce its exposure to exchange rate movements. The group does not hold or issue derivatives for speculative or trading purposes. Under UK GAAP, such derivative contracts are not recognised as assets and liabilities on the balance sheet and gains or losses arising on them are not recognised until the hedged item is itself recognised in the financial statements. From 27 March 2005 onwards, derivative financial instruments will be recognised as assets and liabilities measured at their fair values at the balance sheet date. Changes in their fair values will be recognised in the income statement and this is likely to cause volatility in situations where the carrying value of the hedged item is either not adjusted to reflect fair value changes arising from the hedged risk or is so adjusted but that adjustment is not recognised in the income statement. Provided the conditions specified by IAS 39 are met, hedge accounting may be used to mitigate this income statement volatility. The Company expects that hedge accounting will not generally be applied to transactional hedging relationships, such as hedges of forecast or committed transactions. Where the hedging relationship is classified as a cash flow hedge, to the extent the hedge is effective, changes in the fair value of the hedging instrument will be recognised directly in equity rather than in the income statement. When the hedged item is recognised in the financial statements, the accumulated gains and losses recognised in equity will be either recycled to the income statement or, if the hedged item results in a non-financial asset, will be recognised as adjustments to its initial carrying amount. Embedded derivatives Under UK GAAP, embedded derivatives are not recognised in the financial statements. From 27 March 2005 onwards, derivatives embedded in non-derivative host contracts will be recognised separately as derivative financial instruments when their risks and characteristics are not closely related to those of the host contract and the host contract is not stated at its fair value with changes in its fair value recognised in the income statement. Treasury policy and financial risk management The board approves treasury policies and senior management directly controls day-to-day operations within these policies. The major financial risks to which the group is exposed relate to movements in exchange rates and interest rates. Where appropriate, cost effective and practicable the group uses financial instruments and derivatives to manage these risks. No speculative use of derivatives, currency or other instruments is permitted. Foreign currency risk All export sales to franchise operations are invoiced in sterling. Export sales represent approximately 12 per cent of group sales. The group therefore has no currency exposure on these sales. The group purchases product in foreign currency, representing less than 6 per cent of purchases. The group policy is that all material exposures are hedged by using forward currency contracts. Provisions Provisions for restructuring and store closure costs are recognised when the group has a detailed formal plan that has been communicated to affected parties. Share based payments The group has applied the requirements of IFRS 2 Share based payments. In accordance with the transitional provisions, IFRS 2 has been applied to all grants of equity instruments after 7 November 2002 that were unvested as of 1 January 2005. The group issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the group's estimate of shares that will eventually vest. Fair value is measured by use of the valuation technique considered to be most appropriate for each class of award, including Black-Scholes calculations and Monte Carlo simulations. The expected life used in the formula is adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. The group also provides employees with the ability to purchase the group's ordinary shares at 80 per cent of the current market value. The group records an expense based on its estimate of the 20 per cent discount related to shares expected to vest on a straight-line basis over the vesting period. 2. EARNINGS PER SHARE The calculation of earnings per share is based on the following data: --------------- 52 weeks ended 26 March 2005 £ million Earnings Earnings for the purposes of basic and diluted earnings per share being profit for the financial year attributable to equity shareholders of the parent 11.3 Adjustment to exclude the costs of the re-organisation of the distribution network (net of tax) 4.6 Adjustment to exclude the profit on disposal of subsidiary undertaking (net of tax) (2.4) --------------- Earnings for the purposes of adjusted earnings per share 13.5 =============== Number of shares million Weighted average number of ordinary shares for the purposes of basic earnings per share 68.0 Effect of dilutive potential ordinary shares: - share options 1.2 --------------- Weighted average number of ordinary shares for the purposes of diluted earnings per share 69.2 =============== Basic earnings per share 16.6p Diluted earnings per share 16.3p Adjusted earnings per share 19.9p --------------- INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF MOTHERCARE PLC ON THE PRELIMINARY COMPARATIVE IFRS FINANCIAL INFORMATION We have audited the preliminary comparative IFRS financial information of Mothercare plc for the 52 weeks ended 26 March 2005 which comprises the consolidated income statement, the consolidated statement of recognised income and expense, the consolidated balance sheet, the consolidated cash flow statement and the related notes 1 and 2 set out in Part II, the reconciliations in Part III and the financial information prepared in accordance with UK GAAP in IFRS format set out in Part IV. This report is made solely to the board of directors, in accordance with our related engagement letter dated 7 July 2005 and solely for the purpose of assisting with the transition to IFRS. Our audit work has been undertaken so that we might state to the Company's board of directors, those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the Company for our audit work, for our report, or for the opinions we have formed. Respective responsibilities of directors and auditors The Company's directors are responsible for ensuring that the group maintains proper accounting records and for the preparation of the preliminary comparative IFRS financial information on the basis set out in Part II, which describes how IFRS will be applied under IFRS 1, including the assumptions the directors have made about the standards and interpretation expected to be effective, and the policies expected to be adopted, when they prepare its first complete set of IFRS financial statements as at 1 April 2006. Our responsibility is to audit the preliminary comparative IFRS financial information in accordance with relevant United Kingdom legal and regulatory requirements and auditing standards and report to you our opinion as to whether the preliminary comparative IFRS financial information is prepared, in all material respects, on the basis set out in Part II. We read the other information contained in the preliminary comparative IFRS financial information for the above year as described in the contents section and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the preliminary comparative IFRS financial information. Basis of audit opinion We conducted our audit in accordance with United Kingdom auditing standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the preliminary comparative IFRS financial information. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the preliminary comparative IFRS financial information and of whether the accounting policies are appropriate to the circumstances of the group, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we consider necessary in order to provide us with sufficient evidence to give reasonable assurance that the preliminary comparative IFRS financial information is free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the preliminary comparative IFRS financial information. Without qualifying our opinion, we draw attention to the fact that Part I explains why there is a possibility that the accompanying preliminary comparative IFRS financial information may require adjustment before constituting the final comparative IFRS financial information. Moreover, we draw attention to the fact that, under IFRS, only a complete set of financial statements comprising an income statement, balance sheet, cash flow statement, statement of recognised income and expense and statement of changes in shareholders equity, together with comparative financial information and explanatory notes, can provide a fair presentation of the group's financial position, results of operations and cash flows in accordance with IFRS. Opinion In our opinion the preliminary comparative IFRS financial information is prepared, in all material respects, on the basis set out in Part II which describes how IFRS will be applied under IFRS1, including the assumptions management have made about the standards and interpretations expected to be effective, and the policies expected to be adopted, when management prepares its first complete set of IFRS financial statements as at 1 April 2006. Deloitte & Touche LLP Chartered Accountants London 15 July 2005 PART III Reconciliation of restated financial information from UK GAAP to IFRS for the 52 weeks ended 26 March 2005 Consolidated income statement For the 52 weeks ended 26 March 2005 ------------------------------------------------------------------------------- UK GAAP IFRS IFRS Consolidated Accounting adjustments Consolidated income income statement statement (IFRS) format Note 1 Note 2 Note 3 £ million £ million £ million £ million £ million Revenue 457.2 457.2 Cost of sales (408.0) (0.1) (408.1) Re-organisation of distribution network (6.5) (6.5) ---------- ---------- ---------- ---------- ---------- Gross profit 42.7 (0.1) - - 42.6 Administrative expenses (31.3) 0.4 (1.5) (32.4) ---------- ---------- ---------- ---------- ---------- Profit from operations 11.4 (0.1) 0.4 (1.5) 10.2 Profit on disposal of subsidiary undertaking 2.4 2.4 ---------- ---------- ---------- ---------- ---------- Profit before financing and taxation 13.8 (0.1) 0.4 (1.5) 12.6 Investment income 1.8 9.1 10.9 Finance costs (0.1) (7.9) (8.0) ---------- ---------- ---------- ---------- ---------- Profit before taxation 15.5 (0.1) 0.4 (0.3) 15.5 Taxation (4.4) 0.2 (0.1) 0.1 (4.2) ---------- ---------- ---------- ---------- ---------- Profit for the financial year attributable to equity shareholders of the parent 11.1 0.1 0.3 (0.2) 11.3 ========== ========== ========== ========== ========== ------------------------------------------------------------------------------- Notes 1. To amortise lease incentives over the life of the lease under IFRS and the related tax adjustments. 2. To account for share based payments under IFRS and the related tax adjustments. 3. To account for the Mothercare pension schemes under IAS 19 and the related tax adjustments. ----------------------------------------------------------------------------------------- Consolidated balance sheet As at 26 March 2005 UK GAAP IFRS IFRS Consolidated Accounting adjustments Consolidated balance sheet balance sheet (IFRS) format Note 1 Note 2 Note 3 Note 4 Note 5 £ million £ million £ million £ million £ million £ million £ million Non-current assets Property, plant and equipment 87.0 (2.7) 84.3 Other intangible assets - software 2.7 2.7 Deferred tax asset 2.0 1.0 0.9 9.7 13.6 ---------- ---------- ---------- ---------- ---------- --------- --------- 89.0 1.0 0.9 9.7 - - 100.6 ---------- ---------- ---------- ---------- ---------- --------- --------- Current assets Inventories 46.8 46.8 Trade and other receivables 38.8 (10.0) 28.8 Cash and cash equivalents 37.0 37.0 ---------- ---------- ---------- ---------- ---------- --------- --------- 122.6 - - (10.0) - - 112.6 ---------- ---------- ---------- ---------- ---------- --------- --------- Total assets 211.6 1.0 0.9 (0.3) - - 213.2 ---------- ---------- ---------- ---------- ---------- --------- --------- Current liabilities Trade and other payables (59.5) 3.6 (55.9) Short term provisions (5.1) (5.1) ---------- ---------- ---------- ---------- ---------- --------- --------- (64.6) - - - - 3.6 (61.0) ---------- ---------- ---------- ---------- ---------- --------- --------- Non-current liabilities Trade and other payables (0.5) (7.3) (7.8) Retirement benefit obligations (22.4) (22.4) Long term provisions (3.0) (3.0) ---------- ---------- ---------- ---------- ---------- --------- --------- (3.5) (7.3) - (22.4) - - (33.2) ---------- ---------- ---------- ---------- ---------- --------- --------- Total liabilities (68.1) (7.3) - (22.4) - 3.6 (94.2) ---------- ---------- ---------- ---------- ---------- --------- --------- Net assets 143.5 (6.3) 0.9 (22.7) - 3.6 119.0 ========== ========== ========== ========== ========== ========= ========= Equity attributable to equity shareholders of the parent Called up share capital 35.8 35.8 Share premium account 1.3 1.3 Own shares (3.2) (2.3) (5.5) Retained earnings 109.6 (6.3) 3.2 (22.7) 3.6 87.4 ---------- ---------- ---------- ---------- ---------- --------- --------- Total equity 143.5 (6.3) 0.9 (22.7) - 3.6 119.0 ========== ========== ========== ========== ========== ========= ========= ----------------------------------------------------------------------------------------- Notes 1. To amortise lease incentives over the life of the lease under IFRS and the related tax adjustments. 2. To account for share based payments under IFRS and the related tax adjustments. 3. To account for the Mothercare pension schemes under IAS 19 and the related tax adjustments. 4. To reclassify standalone computer software as intangible assets. 5. To adjust for the final dividend accrued under UK GAAP but not under IFRS. PART IV Effect of IAS 1 Presentation of Financial Statements on UK GAAP balances Consolidated income statement For the 52 weeks ended 26 March 2005 ------------------------------------------------------------------------------------------------------- UK GAAP IAS 1 UK Group profit and loss account Presentation adjustments GAAP Consolidated income statement (IFRS) format Before exceptional Exceptional items items Total Note 1 Note 2 Note 3 £ million £ million £ million £ million £ million £ million £ million Turnover 457.2 - 457.2 457.2 Revenue Cost of sales (408.0) (6.5) (414.5) 6.5 (408.0) Cost of sales (6.5) (6.5) Re-organisation of distribution network ------------------------------------ ------------------------------------- ----------- Gross profit 49.2 (6.5) 42.7 - - - 42.7 Gross profit Administrative expenses (31.3) - (31.3) (31.3) Administrative expenses ------------------------------------ ------------------------------------- ----------- Profit from retail Profit from operations 17.9 (6.5) 11.4 - - - 11.4 operations Exceptional item: Profit on Profit on disposal of disposal of subsidiary subsidiary undertaking - 2.4 2.4 2.4 undertaking Interest (net) 1.7 - 1.7 (1.7) ------------------------------------ ------------------------------------- ----------- Profit on Profit before ordinary financing and activities taxation before Investment taxation 19.6 (4.1) 15.5 (1.7) - - 13.8 income 1.8 1.8 (0.1) (0.1) Finance costs ------------------------------------ ----------- - - - 15.5 Profit before taxation Taxation (6.3) 1.9 (4.4) (4.4) Taxation ------------------------------------ ----------- Profit on Profit for the ordinary financial year activities attributable after to equity taxation 13.3 (2.2) 11.1 11.1 shareholders ==================================== ========== of the parent Dividends (5.5) 5.5 ----------- ------------------------------------ Retained profit for the financial year 5.6 - 5.5 - =========== ==================================== ------------------------------------------------------------------------------------------------------- Notes 1. To present interest gross as opposed to net. 2. To remove dividend line. 3. To present the costs of the re-organisation of the distribution network as a separate item alongside cost of sales. Consolidated balance sheet As at 26 March 2005 ------------------------------------------------------------------------------------------------------- UK GAAP IAS 1 UK Group balance sheet Presentation adjustments GAAP Consolidated balance sheet (IFRS) format Note 1 Note 2 £ million £ million £ million £ million Fixed assets Non-current assets Tangible assets 87.0 87.0 Property, plant and equipment 2.0 2.0 Deferred tax asset 87.0 2.0 - 89.0 ------------ ----------------------------- ------------ Current assets Current assets Stocks 46.8 46.8 Inventories Debtors 40.8 (2.0) 38.8 Trade and other receivables Cash at 37.0 37.0 Cash and cash bank and equivalents in hand and time deposits ------------ ----------------------------- ------------ 124.6 (2.0) - 122.6 ----------------------------- ------------ - - 211.6 Total assets ----------------------------- ------------ Current liabilities Creditors - amounts falling due within one year (59.5) (59.5) Trade and other payables (5.1) (5.1) Short term provisions ------------ ----------------------------- ------------ Net current assets 65.1 - (5.1) (64.6) ------------ ----------------------------- ------------ Total assets less current liabilities 152.1 Non-current liabilities Creditors - amounts falling due within one year (0.5) (0.5) Trade and other payables Provisions for liabilities and charges (8.1) 5.1 (3.0) Long term provisions ----------------------------- ------------ - 5.1 (3.5) ----------------------------- ------------ - - (68.1) Total liabilities ------------ ----------------------------- ------------ Net assets 143.5 - - 143.5 Net assets ============ ============================= ============ Capital and Equity reserves attributable to attributable equity to equity shareholders of interests the parent Called up 35.8 35.8 Called up share share capital capital Share 1.3 1.3 Share premium premium account account ESOP (3.2) (3.2) Own shares reserve Profit and 109.6 109.6 Retained loss earnings account ------------ ----------------------------- ------------ 143.5 - - 143.5 Total equity ============ ============================= ============ ------------------------------------------------------------------------------------------------------- Notes 1. To present the deferred tax asset as a non-current asset. 2. To show the provisions balance split between current and non-current. This information is provided by RNS The company news service from the London Stock Exchange

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