Year ended 31 July 2006
43. Summary of significant differences between International Financial Reporting Standards and accounting principles generally accepted in the United States
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS"), which differ in certain significant respects from generally accepted accounting principles in the United States ("US GAAP"). Such differences involve methods for measuring the amounts shown in the financial statements, as well as additional disclosures required by US GAAP.
A summary of the principal differences applicable to the Group is set out below:
(i) Goodwill
On transition to IFRS, the amount of goodwill at 1 August 2004 is the previous carrying amount under UK GAAP. Under IFRS goodwill is no longer amortised but tested annually for impairment.
Prior to 1 August 1998, purchased goodwill was written off to reserves in the year of acquisition as permitted under UK GAAP. Since 1 August 1998, all acquired goodwill has been capitalised and amortised over a period not exceeding 20 years. If a subsidiary or a business is subsequently sold or closed, previously written off goodwill which was the result of the initial acquisition is taken into account in determining the profit or loss on sale or closure.
Under US GAAP prior to 1 August 2002, goodwill arising on acquisitions prior to 1 July 2001 was capitalised and amortised over its estimated useful life, not exceeding 40 years. Following implementation of SFAS 142, "Goodwill and Other Intangible Assets," goodwill is no longer amortised, but is reviewed at least annually for impairment.
The Group completed the required impairment tests under both IFRS and US GAAP during 2006, which indicated that no impairment charge was required under either set of accounting principles.
(ii) Intangible assets
Under IFRS, the accounting for business combinations prior to transition to IFRS has not been revisited. Therefore intangible assets arising in respect of acquisitions prior to the transition date of 1 August 2004, previously recognised under US GAAP, have not been recognised under IFRS and remain within goodwill.
(iii) Contingent purchase consideration
Under IFRS, contingent purchase consideration is recorded as part of the purchase cost at the date of acquisition if it is reliably measurable and probable. Under US GAAP, this cost is not recognised until the contingency is resolved and the amount determinable.
(iv) Pensions
Under IFRS, pension costs are accounted for in accordance with IAS 19 (revised 2004). Under US GAAP, pension costs comprise the estimated cost of benefits accruing in the period as determined in accordance with SFAS 87, "Employers' Accounting for Pensions" and SFAS 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits."
Under IFRS, actuarial gains and losses, which represent differences between the expected and actual returns on the plan assets and the effect of changes in actuarial assumptions, are recognised in full in the statement of recognised income and expense in the period in which they occur. The defined benefit liability or asset recognised in the balance sheet comprises the net total for each plan of the present value of the benefit obligation at the balance sheet date, less any past service costs not yet recognised, less the fair value of the plan assets, if any, at the balance sheet date. Where a plan is in surplus, the asset recognised is limited to the amount of any unrecognised past service costs and the present value of any amount which the Group expects to recover by way of refunds or a reduction in future contributions.
Under US GAAP, the annual pension cost comprises the estimated cost of benefits accruing in the period as determined in accordance with SFAS 87, "Employers' Accounting for Pensions." SFAS 87 requires the use of the projected unit credit actuarial method for determining defined benefit pension costs and provides for the deferral of actuarial gains and losses (in excess of a specified corridor) that result from changes in assumptions or actual experience.
(v) Deferred taxation
Under IFRS and US GAAP, deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. There is a difference in the definition of tax basis between IFRS and US GAAP, which gives rise to an additional deferred tax liability under IFRS. Under IFRS, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss.
Under US GAAP, a valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of these will not be realised. Under IFRS it is recognised net.
Under IFRS the deferred tax asset in relation to share based payments is based upon the intrinsic value of the share option and is adjusted at every year end to reflect changes in the share price valuation, as well as pre-vesting forfeitures, changes in tax rate, relocation of employees, or changes in tax legislation. If the cumulative estimated tax deduction - either during vesting or on exercise - exceeds the "book expense" tax deduction, the difference is credited to equity.
Under US GAAP this asset is based upon the fair value expensed under SFAS 123R and only adjusted for pre-vesting forfeitures, changes in tax rate, relocation of employees, or changes in tax legislation. If the final tax deduction exceeds book expense ("windfall"), the difference is credited to additional paid-in capital. If the final tax deduction is less than book expense ("shortfall"), the difference is included in additional paid-in capital to the extent there have been previous windfalls credited; otherwise the difference is recorded in the income statement.
(vi) Share-based payments
Under the transition provisions of IFRS, the Group has elected to apply IFRS2 "Share-based Payment" retrospectively only to equity-settled awards that had not vested as at 1 August 2004 and were granted on or after 7 November 2002 and to cash-settled awards that had not vested as at 1 August 2004. Under US GAAP, the Group adopted SFAS 123 (Revised), "Share-Based Payments" with effect from 1 August 2005 using a modified prospective transition method and the Group's prior periods have not been restated to reflect and do not include the impact of, SFAS 123 (R). Under SFAS 123 (R) share based compensation expense is recognised during the period based on the portion of share based payments awards that is ultimately expected to vest during the period.
The Group operates a number of plans which are defined within note 29. The Executive Option Schemes are subject to a condition such that they may not be exercised unless the growth in earnings per share over a period of three consecutive fiscal years exceeds growth in the UK Retail Price Index over the same period by at least 9% (for options granted in and after December 1997). Under IFRS such options are treated as equity-settled.
For the year ended 31 July 2005 the Group was accounting for the Executive Option Schemes under SFAS 123, "Accounting for Stock Based Compensation." The condition described above was regarded as a performance condition and such options were also treated as equity-settled. On application of SFAS 123 (R), the condition is not regarded as a performance condition, as the performance target is set by reference to an index, rather than being fixed at the date of award. As the condition is not a service or market condition either, the options are accounted for as liabilities under US GAAP and revalued at every reporting date until the option has vested.
Under SFAS 123, the cumulative cost recorded up to 31 July 2005 in respect of executive options was £11 million. Under SFAS 123 (R), £18 million has been charged in the year ended 31 July 2006 in respect of the cumulative effect of a change in accounting principle. Under SFAS 123 (R), the charge in the year ended 31 July 2006 in respect of executive options is £12 million.
(vii) Sale and leaseback accounting
Under IFRS, in a sale and leaseback transaction where the leaseback is recognised as an operating lease and the sale price equals fair value, the profit or loss on the sale should be recognised immediately. Under US GAAP, in general, the gains or losses on disposal of the properties are deferred and amortised over the term of the operating lease.
(viii) Other adjustments
Restructuring costs
Under IFRS, a provision for restructuring costs is recognised only when a present obligation (legal or constructive) exists as a result of a past event; it is probable that a transfer of economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.
Under US GAAP, for restructuring plans initiated after 1 January 2003, a liability for a cost associated with an exit or disposal activity can only be recognised when the liability is incurred. An entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. The timing of recognition and related measurement of a liability for one-time termination benefits in relation to employees who are to be involuntarily terminated depends on whether the employees are required to render service until they are terminated in order to receive the termination benefits and, if so, whether employees will be retained to render service beyond the minimum retention period.
Capitalised interest
Under IFRS, the Group has chosen not to capitalise interest on specific or general borrowings to finance the construction of certain property, plant and equipment. Under US GAAP, this interest is capitalised. The amount of interest capitalised is based on a weighted average method considering the general borrowings outstanding during the period.
Employers' payroll taxes in respect of share-based payments
Under IFRS, employers' social security liability arising from share-based payment transactions is recognised over the same period or periods as the share-based payment charge. Under US GAAP, employers' payroll taxes due on the exercise of share options are recognised as an expense when the liability arises, which is generally at the option's exercise date.
