IFRS
Smith WH PLC
29 November 2005
WH SMITH PLC
RESTATEMENT OF FINANCIAL INFORMATION UNDER INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS)
1. INTRODUCTION
WH Smith PLC and its subsidiaries ('the Group') currently prepares its
consolidated financial statements under UK Generally Accepted Accounting
Practices (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)(1) for all reporting
periods commencing after 1 January 2005. IFRS will apply for the first time to
the Group's consolidated financial statements for the year ending 31 August
2006. The first results to be published under IFRS will be the interim results
for the six months ending 28 February 2006.
The purpose of this report is to explain how the Group's financial performance
for the year ended 31 August 2005, and its financial position as at that date,
presented under IFRS, differs to that reported under UK GAAP. The 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
adoption of IFRS and the Group's first IFRS financial statements may therefore
be prepared in accordance with different accounting policies and treatments than
those presented here.
2. SUMMARY OF IFRS ADOPTION CHANGES
The adoption of IFRS represents an accounting change only, and does not affect
the operations or cash flows of the Group. The effect of the adoption of IFRS on
the results of the Group for the year ended 31 August 2005 is to decrease profit
before tax for continuing operations by £1m.
Year ended 31 August 2005
UK GAAP IFRS Change
Turnover (£m)(2) 2,508 2,497 (11)
Profit before tax - continuing operations (£m) 72 71 (1)
Profit for the year (£m) 46 47 1
Basic earnings per share (pence) 26.0 26.6 0.6
Headline earnings per share (pence)(3) 31.6 31.6 -
Net assets as at 31 August 2005 42 52 10
(1)References to IFRS in this document refer to the application of International
Financial Reporting Standards (IFRS), International Accounting Standards (IAS)
and interpretations issued by the International Accounting Standards Board
(IASB) and its relevant committees.
(2)Under IFRS Turnover represents that derived from continuing operations only;
the discontinued operation relates to the sale of the Publishing business.
(3)Headline earnings per share has been calculated using profit after tax but
before exceptional items and net interest charges on the defined benefit pension
scheme as defined under IAS 19.
The accounting policy changes that have the most significant impact on the
financial statements of the Group for the year ended 31 August 2005 are:
• Recognition of a fair value charge for share based payments
• Spreading of lease incentives over the term of the lease
• Timing of the recognition of dividends
• Goodwill subject to an annual impairment review rather than annual
amortisation
• Valuation method used in assessing the defined benefit pension scheme
• Related deferred tax adjustments
These changes are further explained in Section 4 and detailed reconciliations
are shown in the Appendices to this report.
3. BASIS OF PREPARATION
The financial information presented in this document has been prepared using the
accounting policies detailed in section 5. These accounting policies are based
on all International Financial Reporting Standards (IFRS) and International
Financial Reporting Interpretations Committee (IFRIC) interpretations that are
expected to be applicable to the financial reporting for the year ending 31
August 2006. These are subject to changes resulting from ongoing reviews and
endorsements by the European Commission, possible amendments by the
International Accounting Standards Board (IASB) and issuance of further
standards or interpretations that may affect the 2005/06 reporting period. The
financial information in this document may therefore require modification up
until the period that the Group prepares its first complete set of IFRS
financial statements for the year ending 31 August 2006.
In preparing this financial information, the Group has assumed that the European
Commission will endorse the amendment to IAS 19 Employee Benefits 'Actuarial
Gains and Losses, Group Plans and Disclosures'.
On 19 November 2004, the European Commission endorsed an amended version of IAS
39 Financial Instruments: Recognition and Measurement rather than the full
version previously published by the IASB. In accordance with guidance issued by
the UK Accounting Standards Board, the full version of IAS 39, as issued by the
IASB, will be adopted with effect from 1 September 2005.
The financial information contained in this document does not constitute full
accounts within the meaning of Section 240 of the Companies Act 1985. Full
accounts for the year ended 31 August 2005, prepared under UK GAAP, will be
delivered to the Registrar of Companies. These accounts contain an unqualified
report from the Group's auditors which do not contain a statement under S237(2)
or (3) of the Companies Act 1985.
IFRS 1 First-time adoption
IFRS 1 First-time adoption of International Financial Reporting Standards
details the procedures a company must follow when adopting IFRS for the first
time. It also gives companies the option of taking a number of exemptions to the
full requirements of IFRS in the year of transition. The Group's date of
transition to IFRS is 1 September 2004, with the transitional year being the
year ended 31 August 2005.
The Group has elected to take the following key exemptions on transition to
IFRS:
a) IFRS 3 Business combinations
The Group has chosen not to restate historic business combinations to
comply with IFRS 3 Business combinations. The goodwill carrying value has
not therefore been adjusted between the UK GAAP balance sheet at 31 August
2004 and the IFRS opening balance sheet.
b) IAS 19 Employee benefits: Actuarial gains and losses
Under UK GAAP FRS 17, the Group recognised all cumulative actuarial gains
and losses in equity. These gains and losses have continued to be
recognised in equity at the date of transition.
c) IAS 21 The effects of changes in foreign exchange rates
IAS 21 states that cumulative foreign exchange movements created on the
translation of foreign entities should be disclosed in a separate reserve
within shareholders' funds. On disposal of a foreign entity, the cumulative
exchange gains or losses associated with that entity should be recycled
through the income statement as part of the gain or loss on disposal. The
Group has taken the exemption under FRS 1 whereby cumulative exchange
differences are deemed to be zero at the date of transition to IFRS. The
gain or loss on any subsequent disposals will therefore exclude any
translation gains or losses prior to the date of transition.
d) IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39
Financial Instruments: Recognition and Measurement
The Group has taken the option to defer the implementation of IAS 32 and
IAS 39 to the financial year ending 31 August 2006. Therefore, financial
instruments continue to be accounted for and presented in accordance with
UK GAAP for the year ended 31 August 2005.
e) IAS 16 - Valuation of properties
The Group has elected not to use fair value as deemed cost for any items of
property, plant and equipment at the date of transition.
f) IFRS 2 Share-based payments
IFRS 1 provides an exemption which allows companies to only apply IFRS 2 to
share-based payment awards granted after 7 November 2002. The Group has not
taken this exemption, but elected to apply IFRS 2 to all share options
which have not fully vested by the date of transition.
4. REVIEW OF MAIN CHANGES ARISING FROM IFRS ADOPTION
The most significant areas of change to the Group on adoption of IFRS are
summarised below.
4.1 Share-based payments (IFRS 2)
The Group operates a range of share-based incentive schemes. Further detail on
these schemes can be found in the Group's Annual Report.
IFRS 2 requires the charge recognised in the income statement for share options,
long-term incentive plans and other share based payments (including
Save-As-You-Earn) to be based on the 'fair value' at grant date, using an
appropriate option pricing model. The fair value of the shares / options is
charged against profits over the period from grant date to vesting (the vesting
period). This differs from UK GAAP UITF 17, which 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) and spread over the performance period. In addition, as permitted
under UK GAAP, UITF 17 has never been applied to Save-As-You-Earn share options.
For improved comparability purposes, the Group will apply IFRS 2 retrospectively
to all options granted but not fully vested as at the date of transition, rather
than only those granted after 7 November 2002. The fair values of awards granted
on or before 7 November 2002 were published on 29 November 2005.
The fair valuation of the share based incentive schemes operated by the Group
has led to an additional charge to profit before tax for the year ended 31
August 2005 of £2m, which is offset by a deferred tax credit of £2m. There is no
significant impact on the net assets at 1 September 2004.
4.2 Leasing (IAS 17)
4.2.1 Lease Incentives
Under UK GAAP, the Group has recognised operating lease incentives (rent free
periods and capital contributions) in the profit and loss account over the
period to the first rent review. In accordance with IAS 17 as interpreted by SIC
15, lease incentives will be recognised in the income statement over the full
lease term. The adjustment made on IFRS adoption is therefore a timing
difference, which will reverse over the lease terms.
The adoption of IAS 17 will lead to a £6m reduction to net assets at the date of
transition.
The impact on profit before tax for the year ended 31 August 2005 is not
significant. The net assets at 31 August 2005 have been reduced by £5m.
4.2.2 Finance leases
The Group currently recognises finance leases under the recognition criteria
detailed in UK GAAP SSAP 21 'Accounting for leases and hire purchase contracts'.
IAS 17 introduces new tests in determining the classification of leases between
operating and finance leases. Under these new tests, a number of computer leases
will be reclassified as finance leases on IFRS adoption. The change in
accounting policy has no impact on the net assets of the Group, however, at 1
September 2004 plant, property and equipment will increase by £11m and trade and
other payables will increase by a similar amount.
4.3 Recognition of dividends (IAS 10 - Events after the balance sheet date)
Dividends declared after the balance sheet date will not be recognised under IAS
10 as a liability at that balance sheet date. The final dividends for the
financial year ended 31 August 2004 (£14m) and 31 August 2005 (£16m) have not
been recognised in the Group's IFRS restated balance sheets at 1 September 2004
and 31 August 2005 respectively. The dividend for the year ended 31 August 2004
has been charged directly to equity in the Group's IFRS balance sheet as at 31
August 2005, following its approval by shareholders on 27 January 2005.
4.4 Goodwill arising on business combinations (IFRS 3)
Under IFRS 3, goodwill is no longer amortised, but is subject to an annual
impairment assessment. The Group has reviewed the goodwill balances for
impairment as at 1 September 2004 and 31 August 2005, and no impairment was
identified at either date.
During the year ended 31 August 2005, a £1m amortisation charge was made to the
profit and loss account under UK GAAP. This charge will be reversed out of the
income statement
to comply with IFRS 3, which results in an increase in the Group's profit before
tax for £1m for the year ended 31 August 2005. There is no significant
associated tax impact.
4.5 Employee benefits (IAS 19)
4.5.1 Retirement Obligations
Under UK GAAP, the Group applies the measurement and recognition policies of FRS
17 'Retirement benefits'. IAS 19 'Employee benefits' takes a similar approach to
accounting for defined benefit pension schemes as FRS 17 with the following
principal differences;
1) The assets of the defined benefit pension schemes are measured on
a bid-price basis rather than mid-price basis. This has resulted in a downward
adjustment to the valuation of the pension schemes at 1 September 2004 and 31
August 2005 of £2m.
2) IAS 19 permits a number of alternative methods of accounting for
the actuarial gains and losses of the defined benefit scheme. The Group has
elected to recognise in full all actuarial gains and losses to equity when they
occur. This approach is consistent with that used under FRS 17.
Additionally under IAS 12, the deferred tax asset relating to the defined
benefit pension scheme deficit is required to be separately presented on the
balance sheet and the defined benefit pension deficit is presented on a gross
basis. Under UK GAAP the defined benefit pension scheme deficit is shown net of
deferred tax.
4.5.2 Short term benefits
IAS 19 requires the expected cost of compensated short-term absences such as
holidays to be accrued for when the corresponding services have been received
from employees. The impact on the results for the year ended 31 August 2005 and
on transition to IFRS is not material. The charge (net of tax) to the income
statement for the 6 months to 28 February 2005 was £1m - this was effectively
reversed in the second half of that year.
4.6 Deferred and current taxes (IAS 12)
IFRS accounting adjustments have been tax effected where appropriate.
Under IAS 12, deferred tax is provided on all temporary differences between the
carrying value of assets and liabilities and their tax base. This differs from
UK GAAP where deferred tax is calculated based on timing differences arising in
the income statement. However the effect of this change in the calculation
method on the Group's balance sheets is not significant.
The impact of IFRS adoption is to reduce the tax charge for the year ended 31
August 2005 by £2m.
4.7 Impairment of assets (IAS 36)
Under IAS 36, individual assets should be reviewed for impairment when an
impairment indicator exists. Where individual assets do not generate cash flows
independently from one another, the impairment review should be carried out at
the 'cash generating unit' (CGU) level, which represents the lowest level at
which cash flows are independently generated. The IASB has indicated that for
retailers this is at the individual store level.
An impairment review was performed at the opening balance sheet date, which
identified that a small number of stores were impaired, and a provision of £2m
was recorded as at 1 September 2004. No significant impairment charges were
identified in the year ending 31 August 2005.
4.8 Intangible assets (IAS 38)
Under UK GAAP, capitalised software costs are included within tangible fixed
assets on the balance sheet. Under IAS 38 such items, where they are not an
integral part of the related hardware should be disclosed separately on the face
of the balance sheet.
This has resulted in a reclassification of £23m in the balance sheet at 1
September 2004 and £18m in the balance sheet at 31 August 2005. There is no
related impact on the income statement.
4.9 Financial instruments (IAS 32 and IAS 39) - adopted from 1 September 2005
As the Group has taken the option to defer the implementation of IAS 32 and IAS
39 to the financial year ending 31 August 2006, the comparatives for the year
ended 31 August 2005 will be not restated. The effective date of adoption of IAS
32 and 39 will therefore be 1 September 2005. At this date, the effect on the
Group balance sheet will be to reduce net assets by £7m in respect of non-equity
share capital, derivative and other financial instruments.
The Group has designated the majority of its foreign exchange derivatives as
cash flow hedges at 1 September 2005. There is expected to be a low level of
volatility in the income statement as a result of fair valuing the Group's
financial instruments.
5. IFRS ACCOUNTING POLICIES
The accounting policies used in the preparation of the restatement of the
Group's results from UK GAAP to IFRS are detailed below. These IFRS accounting
policies will be adopted by the Group for use in the preparation of all future
consolidated financial statements.
(a) Basis of preparation
This financial information has been prepared in accordance with IFRS accounting
policies disclosed in this document. The disclosures required by IFRS 1
concerning the transition from UK GAAP to IFRSs are given in the appendices to
this report.
The financial information has been prepared on the historical cost basis, except
for the revaluation of certain properties and financial instruments. The
principal accounting policies adopted are set out below.
(b) Basis of consolidation
This financial information consolidates the accounts of the Company, its
subsidiary undertakings and its associated undertakings for the 12 months to 31
August each year. The results of subsidiaries and associated undertakings are
included in the Group income statement from the date of acquisition, or in the
case of disposals, up to the effective date of disposal.
The Group's interests in its associated undertakings are accounted for using the
equity method.
All intra-group transactions, balances, income and expenses are eliminated on
consolidation.
(c) Revenue
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.
(d) Retirement benefit costs
Payments to the Company's defined contribution pension scheme, WHSmith
Pensionbuilder, are recognised as an expense in the income statement as they
fall due.
The cost of providing benefits for the main defined benefit scheme, WHSmith
Pension Trust, is determined by the Projected Unit Credit Method, with actuarial
calculations 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 the income statement in the Consolidated 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 the calculation is limited to past service cost, plus the present
value of available refunds and reductions in future contributions to the plan.
WH Smith PLC provides medical benefits to certain pensioners. The present value
of estimated future benefit payments is included in the balance sheet under
pension liabilities. Any differences arising from changes in assumptions in
respect of the estimation of this liability are recognised in the Consolidated
Statement of Recognised Income and Expense.
(e) 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.
Assets held under finance leases are recognised as assets of the Group at their
fair value determined at the inception of the lease or, if lower, at the present
value of the minimum lease payments. The corresponding liability to the lessor
is included in the balance sheet as a finance lease obligation. Lease payments
are apportioned between finance charges and a reduction of the lease obligations
so as to achieve a constant rate of interest on the remaining balance of the
liability. Finance charges are recognised directly in the income statement.
Rentals payable and receivable under operating leases are charged to the income
statement 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.
(f) Intangible assets
Goodwill
Goodwill represents the excess of the fair value of purchase consideration over
the net fair value of identifiable assets and liabilities acquired.
Goodwill is recognised as an asset at cost and subsequently measured at cost
less accumulated impairment. For the purposes of impairment testing, goodwill is
allocated to those cash generating units that have benefited from the
acquisition. The carrying value of goodwill is reviewed for impairment at least
annually or where there is an indication that goodwill may be impaired. If the
recoverable amount of the cash generating unit is less than its carrying amount,
then the impairment loss is allocated first to reduce the carrying amount of the
goodwill allocated to the unit and then to the other assets of the unit on a pro
rata basis. Any impairment is recognised immediately in the income statement and
is not subsequently reversed.
On disposal of a subsidiary, the attributable amount of goodwill is included in
the determination of the profit and loss on disposal.
Goodwill arising on acquisitions before the date of transition to IFRS 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 1 June
1997 has not been reinstated and is not included in determining any subsequent
profit or loss on disposal.
Other intangible assets
The costs of acquiring and developing software that is not integral to the
related hardware is capitalised separately as an intangible asset. These
intangibles are stated at cost less accumulated amortisation and impairment
losses.
Amortisation is charged so as to write off the costs of assets over their
estimated useful lives, using the straight-line method. The estimated lives are
usually a period of up to 5 years. Assets held under finance leases are
depreciated over their expected useful lives on the same basis as owned assets
or, where shorter, over the term of the relevant lease.
All such intangible assets are reviewed for impairment in accordance with IAS 36
'Impairment of Assets', when there are indications that the carrying value may
not be recoverable.
(g) Property, plant and equipment
Property, plant and equipment assets are carried at cost less accumulated
depreciation and any recognised impairment in value. The carrying values of
tangible fixed assets previously revalued have been retained at their book
amount.
Depreciation is charged so as to write off the costs of assets, other than land,
over their estimated useful lives, using the straight-line method, with the
annual rates applicable to the principal categories being:
Freehold and long leasehold properties - over 20 years
Short leasehold properties - shorter of the lease period and the
estimated remaining economic life
Instore fixtures and fittings - 10 years
Equipment - 8 to 10 years
Computer equipment - up to 5 years
Assets held under finance leases are depreciated over their expected useful
lives on the same basis as owned assets or, where shorter, over the term of the
relevant lease.
All tangible fixed assets are reviewed for impairment in accordance with IAS 36
'Impairment of Assets', when there are indications that the carrying value may
not be recoverable.
(h) Non current assets held for resale
Non current assets and disposal groups are classified as held for sale if their
carrying amount will be recovered through a sale transaction rather than through
continuing use. This condition is regarded as met only when the sale is highly
probable and the asset (or disposal group) is available for immediate sale in
its present condition. Management must be committed to the sale, which should be
expected to qualify for recognition as a completed sale within one year from the
date of classification.
Non-current assets (and disposal groups) classified as held for sale are
measured at the lower of the assets' previous carrying amount and fair value
less costs to sell.
(i) Inventories
Inventories comprise goods held for resale and are stated at the lower of cost
or net realisable value. Inventories are valued using a weighted average cost
method.
(j) Provisions
Provisions are recognised in the balance sheet when the Group has a present
legal or constructive obligation as a result of a past event and it is probable
that an outflow of economic benefits will be required to settle the obligation.
Provisions are measured at the Directors' best estimate of the expenditure
required to settle the obligation at the balance sheet date. Where the effect is
material, the provision is determined by discounting the expected future cash
flows at the Group's weighted average cost of capital.
Onerous contracts - property provisions
The Group's property provisions represent the present value of future net lease
obligations and related costs of leasehold property (net of estimated sublease
income and adjusted for certain risk factors) where the space is vacant or
currently not planned to be used for ongoing operations. The periodic unwinding
of the discount is treated as an imputed interest charge and is disclosed in the
income statement as 'unwinding of discount on provisions'.
(k) Foreign currencies
Transactions denominated in foreign currencies are recorded at the rates of
exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary items denominated in foreign currencies are retranslated at the
rates prevailing on the balance sheet date. Exchange differences arising on the
settlement of monetary items, and on the retranslation of monetary items, are
included in the income statement for the period.
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 into Sterling at exchange rates prevailing on the balance sheet
date. Income and expense items are translated into Sterling at the average
exchange rates for the period. Exchange differences arising, if any, are
classified as equity and transferred to the Group's translation reserve.
(l) Taxation
The tax expense included in the income statement comprises current and deferred
tax.
Current tax is the expected tax payable based on the taxable profit for the
period, using tax rates that have been enacted or substantively enacted by the
balance sheet date.
Deferred tax is recognised on differences between the carrying amounts of assets
and liabilities in the accounts 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 business combination) of other assets and
liabilities in a transaction that affects neither tax profit nor the accounting
profit.
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.
(m) Financial instruments
UK GAAP - to 31 August 2005
The Group uses certain derivative financial instruments to reduce exposure to
foreign exchange and interest rate movements. The Group does not hold or use
derivative financial instruments for speculative purposes.
The financial instruments used by the Group to manage its currency risks are
forward rate contracts and currency options. Interest payments arising from
financial instruments are recognised within net interest payable over the period
of the contract. Any premiums or discounts arising are amortised over the lives
of the instruments.
Forward currency contracts entered into with respect to trading transactions are
accounted for as hedges, with the instrument's impact on profit deferred until
the underlying transaction is recognised in the profit and loss account.
IFRS - from 1 September 2005
Trade receivables
Trade receivables are measured at initial recognition, do not carry any interest
and are stated at their fair value and are subsequently measured at amortised
costs using the effective interest rate method. Appropriate allowances for
estimated irrecoverable amounts are recognised in the income statement when
there is evidence that the asset is impaired.
Cash and cash equivalents
Cash and cash equivalents in the balance sheet comprise cash at bank and in hand
and short term deposits with an original maturity of three months or less.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to 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.
Bank borrowings
Interest bearing bank loans and overdrafts are initially measured at fair value
(being proceeds received, net of direct issue costs), and are subsequently
measured at amortised cost, using the effective interest rate method recorded as
the proceeds received, net of direct issue costs. Finance charges, including
premiums payable on settlement or redemptions and direct issue costs are
accounted for on an accruals basis and taken to the income statement using the
effective interest rate method and are added to the carrying value of the
instrument to the extent that they are not settled in the period in which they
arise.
Trade payables
Trade payables are initially measured at fair value, and are subsequently
measured at amortised cost, using the effective interest rate method.
Equity instruments
Equity instruments issued by the Company are recorded at the proceeds received,
net of direct issues costs.
Derivative financial instruments and hedge accounting
The Group uses certain derivative financial instruments to reduce its exposure
to foreign exchange and interest rate movements. The Group does not hold or use
derivative financial instruments for speculative purposes.
Changes in the fair value of derivative financial instruments that are
designated and effective as hedges of future cash flows are recognised directly
in equity and any ineffective portion is recognised immediately in the income
statement. If the cash flow hedge of a firm commitment or forecasted transaction
results in the recognition of an asset or liability, then, at the time the asset
or liability is recognised, the associated gains or losses on the derivative
that had previously been recognised in equity are included in the initial
measurement of the asset or liability. For hedges that do not result in the
recognition of an asset or a liability, amounts deferred in equity are
recognised in the income statement in the same period in which the hedged item
affects net income statement.
For an effective hedge of an exposure to changes in the fair value, the hedged
item is adjusted for changes in fair value attributable to the risk being hedged
with the corresponding entry in profit or loss. Gains or losses from
re-measuring the derivative, or for non-derivatives the foreign currency
component of its carrying amount, are recognised in the income statement.
Changes in the fair value of derivative financial instruments that do not
qualify for hedge accounting are recognised in the income statement as they
arise.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated, or exercised, or no longer qualifies for hedge accounting. At that
time, any cumulative gain or loss on the hedging instrument recognised in equity
is retained in equity until the forecasted transaction occurs. If a hedged
transaction is no longer expected to occur, the net cumulative gain or loss
recognised in equity is transferred to the net profit or loss for the period.
Derivatives embedded in other financial instruments or other host contracts are
treated as separate derivatives when their risks and characteristics are not
closely related to those of host contracts and the host contracts are not
carried at fair value with unrealised gains or losses reported in the income
statement.
(n) Share schemes
W H Smith Employees' Share Trust 1999
The shares held by the W H Smith Employees' Share Trust 1999 are valued at the
historic cost of the shares acquired. They are deducted in arriving at
shareholders' funds and are presented as an other reserve in line with IAS 32
'Financial Instruments: Disclosure and Presentation'.
Share based payments
Employees of the Group receive part of their remuneration in the form of share
based payment transactions, whereby employees render services in exchange for
shares or rights over shares (equity settled transactions).
Equity settled share-based payments are measured at fair value at the date of
grant. The fair value is calculated using an appropriate options pricing model.
The fair value is expensed to the income statement on a straight-line basis over
the vesting period, based on the Group's estimate of shares that will eventually
vest.
-ENDS-
Enquiries
WH Smith PLC
Mark Boyle Investor Relations 020 7851 8820
6. INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS OF WH SMITH PLC ON THE
PRELIMINARY COMPARATIVE IFRS FINANCIAL INFORMATION
We have audited the preliminary comparative IFRS financial information of
WH Smith PLC for the year ended 31 August 2005, which comprises the consolidated
balance sheet, the consolidated income statement, the basis of preparation
(section 3), the IFRS accounting policies (section 5) and the appendices 1 and
2.
This report is made solely to the Board of Directors, in accordance with our
engagement letter dated 2 September 2005 and solely for the purpose of assisting
with the transition to IFRS. Our audit work will be 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 Company and the
Group maintains proper accounting records and for the preparation of the
preliminary comparative IFRS financial information on the basis set out in
section 3, which describes how IFRS will be applied under IFRS 1, including the
assumptions the directors have made about the standards and interpretations
expected to be effective, and the policies expected to be adopted, when the
company prepares its first complete set of IFRS financial statements as at 31
August 2006. Our responsibility is to audit the preliminary comparative
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 section 3.
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 considered 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 section 3
explains why there is a possibility that the accompanying preliminary IFRS
comparative financial information may require adjustment before constituting the
final comparative IFRS financial information. Moreover, we draw attention to the
fact that, under IFRSs, only a complete set of financial statements comprising a
balance sheet, income statement, statement of changes in equity, cash flow
statement, together with comparative financial information and explanatory
notes, can provide a fair presentation of the company's financial position,
results of operations and cash flows in accordance with IFRSs.
Opinion
In our opinion the preliminary comparative IFRS financial information is
prepared, in all material respects, on the basis set out in section 3 which
describes how IFRS will be applied under IFRS 1, including the assumptions the
directors have made about the standards and interpretations expected to be
effective, and the policies expected to be adopted, when the company prepares
its first complete set of IFRS financial statements as at 31 August 2006.
Deloitte & Touche LLP
Chartered Accountants
London
29 November 2005
7. RESTATED FINANCIAL INFORMATION
WH Smith PLC
Consolidated Income Statement
Year ended 31 August 2005
£m As reported IFRS As restated
UK GAAP Adjustments IFRS
------------------ ------------ ------------ ------------
Continuing operations
Revenue 2,508 (11) 2,497
------------------ ------------ ------------ ------------
Operating profit 80 - 80
Investment income 3 - 3
Finance costs (11) (1) (12)
------------------ ------------ ------------ ------------
Profit before tax 72 (1) 71
Income tax expense (18) 2 (16)
------------------ ------------ ------------ ------------
Profit after tax from
continuing operations 54 1 55
Loss for the period from
discontinued operations (8) - (8)
------------------ ------------ ------------ ------------
Profit for the period 46 1 47
------------------ ------------ ------------ ------------
Continuing earnings per share
Basic earnings per share 30.5p 31.1p
Diluted earnings per share 30.2p 30.7p
Earnings per share
Basic earnings per share 26.0p 26.6p
Diluted earnings per share 25.7p 26.3p
Headline earnings per share
Basic earnings per share 31.6p 31.6p
Diluted earnings per share 31.3p 31.3p
WH Smith PLC
Consolidated Balance Sheet
As at 31 August 2005
£m As reported IFRS As restated
UK GAAP Adjustments IFRS
----------------- ------------- ------------- -------------
Non-current assets
Intangible assets 14 19 33
Property, plant and equipment 231 (12) 219
Deferred tax assets 20 37 57
----------------- ------------- ------------- -------------
265 44 309
----------------- ------------- ------------- -------------
Current assets
Inventories 162 - 162
Trade and other receivables 112 (1) 111
Cash and cash equivalents 46 - 46
----------------- ------------- ------------- -------------
320 (1) 319
----------------- ------------- ------------- -------------
Total assets 585 43 628
----------------- ------------- ------------- -------------
Current Liabilities
Trade and other payables (319) 16 (303)
Current tax liabilities (27) - (27)
Obligations under finance
leases (3) (3) (6)
Bank overdrafts and loans (45) - (45)
Short-term provisions - (5) (5)
----------------- ------------- ------------- -------------
(394) 8 (386)
----------------- ------------- ------------- -------------
Net current assets /
(liabilities) (74) 7 (67)
----------------- ------------- ------------- -------------
Non-current liabilities
Bank loans (37) - (37)
Retirement benefit obligation (71) (32) (103)
Deferred tax liabilities - (16) (16)
Long-term provisions (31) 19 (12)
Obligations under finance
leases (9) (5) (14)
Other non-current liabilities (1) (7) (8)
----------------- ------------- ------------- -------------
(149) (41) (190)
----------------- ------------- ------------- -------------
Total liabilities (543) (33) (576)
----------------- ------------- ------------- -------------
Total net assets 42 10 52
----------------- ------------- ------------- -------------
Shareholders' equity
Called up share capital (equity
and non equity) 157 - 157
Share premium account 17 - 17
Other reserves 187 - 187
Retained earnings (319) 10 (309)
----------------- ------------- ------------- -------------
Total equity 42 10 52
----------------- ------------- ------------- -------------
WH Smith PLC
Consolidated Balance Sheet
As at 1 September 2004 (date of transition)
£m As reported IFRS As restated
UK GAAP Adjustments IFRS
----------------- ------------- ------------- -------------
Non-current assets
Intangible assets 164 (126) 38
Property, plant and equipment 237 (21) 216
Deferred tax assets - 68 68
----------------- ------------- ------------- -------------
401 (79) 322
----------------- ------------- ------------- -------------
Current assets
Inventories 184 (17) 167
Trade and other receivables 212 (75) 137
Cash and cash equivalents 64 - 64
----------------- ------------- ------------- -------------
460 (92) 368
Assets held for sale - 247 247
----------------- ------------- ------------- -------------
460 155 615
----------------- ------------- ------------- -------------
Total assets 861 76 937
----------------- ------------- ------------- -------------
Current Liabilities
Trade and other payables (367) 51 (316)
Current tax liabilities (30) - (30)
Obligations under finance
leases - (4) (4)
Bank overdrafts and loans (17) - (17)
Short-term provisions - (10) (10)
----------------- ------------- ------------- -------------
(414) 37 (377)
----------------- ------------- ------------- -------------
Net current assets /
(liabilities) 46 192 238
----------------- ------------- ------------- -------------
Non-current liabilities
Bank loans (2) - (2)
Retirement benefit obligation (149) (65) (214)
Deferred tax liabilities - (17) (17)
Long-term provisions (38) 25 (13)
Obligations under finance
leases - (6) (6)
Other non-current liabilities (2) (8) (10)
----------------- ------------- ------------- -------------
(191) (71) (262)
Non-current liabilities held
for resale - (37) (37)
----------------- ------------- ------------- -------------
Total liabilities (605) (71) (676)
----------------- ------------- ------------- -------------
Total net assets 256 5 261
----------------- ------------- ------------- -------------
Shareholders' equity
Called up share capital (equity
and non equity) 141 - 141
Share premium account 93 - 93
Other reserves 132 - 132
Retained earnings (110) 5 (105)
----------------- ------------- ------------- -------------
Total equity 256 5 261
----------------- ------------- ------------- -------------
Appendix 1
Reconciliation of Profit for the year ended 31 August 2005
Disclosure Effect of Changes to Accounting Policies
£m As reported Discontinued Share based Leasing Dividends Other IFRS As restated
UK GAAP operations payments Adjustments IFRS
------------- ------- ------ ----- ------ ------ ------ -------- --------
Continuing
operations
Revenue 2,508 (11) - - - - (11) 2,497
------------- ------- ------ ----- ------ ------ ------ -------- --------
Operating
profit 80 - (2) 1 - 1 - 80
Investment
income 3 - - - - - - 3
Finance costs (11) - - (1) - - (1) (12)
------------- ------- ------ ----- ------ ------ ------ -------- --------
Profit
before tax 72 - (2) - - 1 (1) 71
Income tax
expense (18) - 2 - - - 2 (16)
------------- ------- ------ ----- ------ ------ ------ -------- --------
Profit after tax
for continuing
operations 54 - - - - 1 1 55
Loss for the
period from
discontinued
operations (8) - - - - - - (8)
------------- ------- ------ ----- ------ ------ ------ -------- --------
Profit for
the period 46 - - - - 1 1 47
------------- ------- ------ ----- ------ ------ ------ -------- --------
Appendix 2
Reconciliation of Net Assets as at 31 August 2005
Disclosure
£m As reported Discontinued Pensions Intangible Provisions
UK GAAP operations assets
----------------------- -------- --------- --------- -------- --------
Non-current assets
Intangible assets 14 - - 18 -
Property, plant and
equipment 231 - - (18) -
Deferred tax assets 20 - 30 - 2
----------------------- -------- --------- --------- -------- --------
265 - 30 - 2
----------------------- -------- --------- --------- -------- --------
Current assets
Inventories 162 - - - -
Trade and other
receivables 112 - - - -
Cash and cash
equivalents 46 - - - -
----------------------- -------- --------- --------- -------- --------
320 - - - -
----------------------- -------- --------- --------- -------- --------
Total assets 585 - 30 - 2
----------------------- -------- --------- --------- -------- --------
Current Liabilities
Trade and other payables (319) - - - -
Current tax liabilities (27) - - - -
Obligations under
finance leases (3) - - - -
Bank overdrafts and loans (45) - - - -
Short-term provisions - - - - (5)
----------------------- -------- --------- --------- -------- --------
(394) - - - (5)
----------------------- -------- --------- --------- -------- --------
Net current assets /
(liabilities) (74) - - - (5)
----------------------- -------- --------- --------- -------- --------
Non-current liabilities
Bank loans (37) - - - -
Retirement benefit
obligation (71) - (30) - -
Deferred tax liabilities - - - - (16)
Long-term provisions (31) - - - 19
Obligations under
finance leases (9) - - - -
Other non-current
liabilities (1) - - - -
----------------------- -------- --------- --------- -------- --------
(149) - (30) - 3
----------------------- -------- --------- --------- -------- --------
Total liabilities (543) - (30) - (2)
----------------------- -------- --------- --------- -------- --------
Total net assets 42 - - - -
----------------------- -------- --------- --------- -------- --------
Shareholders' equity
Called up share capital
(equity and non equity) 157 - - - -
Share premium account 17 - - - -
Other reserves 187 - - - -
Retained earnings (319) - - - -
----------------------- -------- --------- --------- -------- --------
Total equity 42 - - - -
----------------------- -------- --------- --------- -------- --------
Effect of Changes in Accounting Policies
£m Share Leasing Dividends Other IFRS As restated
based payments Adjustments IFRS
------------------------ ------- ------- ------ ----- ---------- --------
Non-current assets
Intangible assets - - 1 19 33
Property, plant and
equipment - 8 - (2) (12) 219
Deferred tax assets 2 2 - 1 37 57
------------------------ ------- ------- ------ ----- ---------- --------
2 10 - - 44 309
------------------------ ------- ------- ------ ----- ---------- --------
Current assets
Inventories - - - - - 162
Trade and other
receivables - (1) - - (1) 111
Cash and cash
equivalents - - - - - 46
------------------------ ------- ------- ------ ----- ---------- --------
- (1) - - (1) 319
------------------------ ------- ------- ------ ----- ---------- --------
Total assets 2 9 - - 43 628
------------------------ ------- ------- ------ ----- ---------- --------
Current Liabilities -
Trade and other payables - - 16 - 16 (303)
Current tax liabilities - - - - - (27)
Obligations under
finance leases - (3) - - (3) (6)
Bank overdrafts and
loans - - - - - (45)
Short-term provisions - - - - (5) (5)
------------------------ ------- ------- ------ ----- ---------- --------
- (3) 16 - 8 (386)
------------------------ ------- ------- ------ ----- ---------- --------
Net current assets /
(liabilities) - (4) 16 - 7 (67)
------------------------ ------- ------- ------ ----- ---------- --------
Non-current liabilities
Bank loans - - - - - (37)
Retirement benefit
obligation - - - (2) (32) (103)
Deferred tax liabilities - - - - (16) (16)
Long-term provisions - - - - 19 (12)
Obligations under
finance leases - (5) - - (5) (14)
Other non-current
liabilities - (7) - - (7) (8)
------------------------ ------- ------- ------ ----- ---------- --------
- (12) - (2) (41) (190)
------------------------ ------- ------- ------ ----- ---------- --------
Total liabilities - (15) 16 (2) (33) (576)
------------------------ ------- ------- ------ ----- ---------- --------
Total net assets 2 (6) 16 (2) 10 52
------------------------ ------- ------- ------ ----- ---------- --------
Shareholders' equity
Called up share capital
(equity and non equity) - - - - - 157
Share premium account - - - - - 17
Other reserves - - - - - 187
Retained earnings 2 (6) 16 (2) 10 (309)
------------------------ ------- ------- ------ ----- ---------- --------
Total equity 2 (6) 16 (2) 10 52
------------------------ ------- ------- ------ ----- ---------- --------
Appendix 3
Reconciliation of Net Assets as at transition (1 September 2004)
Disclosure
£m As reported Discontinued Pensions Intangible Provisions
UK GAAP operations assets
------------------------ --------- -------- ------- ------- -------
Non-current assets
Intangible assets 164 (149) - 23 -
Property, plant and
equipment 237 (7) - (23) -
Deferred tax assets - - 63 - 2
------------------------ --------- -------- ------- ------- -------
401 (156) 63 - 2
------------------------ --------- -------- ------- ------- -------
Current assets
Inventories 184 (17) - - -
Trade and other
receivables 212 (74) - - -
Cash and cash
equivalents 64 - - - -
------------------------ --------- -------- ------- ------- -------
460 (91) - - -
Assets held for sale - 247 - - -
------------------------ --------- -------- ------- ------- -------
460 156 - - -
------------------------ --------- -------- ------- ------- -------
Total assets 861 - 63 - 2
------------------------ --------- -------- ------- ------- -------
Current Liabilities
Trade and
other payables (367) 37 - - -
Current tax
liabilities (30) - - - -
Obligations under finance - - - - -
leases
Bank
overdrafts and loans (17) - - - -
Short-term provisions - - - - (10)
------------------------ --------- -------- ------- ------- -------
(414) 37 - - (10)
------------------------ --------- -------- ------- ------- -------
Net current
assets /
(liabilities) 46 193 - - (10)
------------------------ --------- -------- ------- ------- -------
Non-current liabilities
Bank loans (2) - - - -
Retirement benefit
obligation (149) - (63) - -
Deferred tax
liabilities - - - - (17)
Long-term provisions (38) - - - 25
Obligations under finance - - - - -
leases
Other non-current
liabilities (2) - - - -
------------------------ --------- -------- ------- ------- -------
(191) - (63) - 8
------------------------ --------- -------- ------- ------- -------
Non-current
liabilities
held for sale - (37) - - -
Total liabilities (605) - (63) - (2)
Total net assets 256 - - - -
------------------------ --------- -------- ------- ------- -------
Shareholders' equity
Called up
share capital (equity
and non equity) 141 - - - -
Share premium account 93 - - - -
Other reserves 132 - - - -
Retained earnings (110) - - - -
------------------------ --------- -------- ------- ------- -------
Total equity 256 - - - -
------------------------ --------- -------- ------- ------- -------
Effect of Changes in Accounting Policies
£m Share based Leasing Dividends Other IFRS As
payments Adjustments restated
IFRS
------------------------ ---------- ------- ------ ----- -------- -------
Non-current assets
Intangible assets - - - - (126) 38
Property, plant and
equipment - 11 - (2) (21) 216
Deferred tax assets - 2 - 1 68 68
------------------------ ---------- ------- ------ ----- -------- -------
- 13 - (1) (79) 322
------------------------ ---------- ------- ------ ----- -------- -------
Current assets
Inventories - - - - (17) 167
Trade and
other receivables - (1) - - (75) 137
Cash and cash equivalents - - - - - 64
------------------------ ---------- ------- ------ ----- -------- -------
- (1) - - (92) 368
Assets held for sale - - - - 247 247
------------------------ ---------- ------- ------ ----- -------- -------
- (1) - - 155 615
------------------------ ---------- ------- ------ ----- -------- -------
Total assets - 12 - (1) 76 937
------------------------ ---------- ------- ------ ----- -------- -------
Current Liabilities
Trade and other payables - - 14 - 51 (316)
Current tax liabilities - - - - - (30)
Obligations under finance
leases - (4) - - (4) (4)
Bank overdrafts and loans - - - - - (17)
Short-term provisions - - - - (10) (10)
------------------------ ---------- ------- ------ ----- -------- -------
- (4) 14 - 37 (377)
Net current assets /
(liabilities) - (5) 14 - 192 238
------------------------ ---------- ------- ------ ----- -------- -------
Non-current liabilities
Bank loans - - - - - (2)
Retirement benefit
obligation - - - (2) (65) (214)
Deferred tax liabilities - - - - (17) (17)
Long-term provisions - - - - 25 (13)
Obligations under finance
leases - (6) - - (6) (6)
Other non-current
liabilities - (8) - - (8) (10)
------------------------ ---------- ------- ------ ----- -------- -------
- (14) - (2) (71) (262)
------------------------ ---------- ------- ------ ----- -------- -------
Non-current
liabilities
held for sale - - - - (37) (37)
------------------------ ---------- ------- ------ ----- -------- -------
Total liabilities - (18) 14 (2) (71) (676)
------------------------ ---------- ------- ------ ----- -------- -------
Total net assets - (6) 14 (3) 5 261
------------------------ ---------- ------- ------ ----- -------- -------
Shareholders' equity
Called up share capital
(equity and
non equity) - - - - - 141
Share premium account - - - - - 93
Other reserves - - - - - 132
Retained earnings - (6) 14 (3) 5 (105)
------------------------ ---------- ------- ------ ----- -------- -------
Total equity - (6) 14 (3) 5 261
------------------------ ---------- ------- ------ ----- -------- -------
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