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45. Reconciliation of net assets and profit under UK GAAP to IFRS

This is the first year that the Group has presented its financial statements under IFRS. In the year ended 31 July 2005, Wolseley plc reported under UK GAAP.

IFRS 1, "First-time Adoption of International Financial Reporting Standards" sets out the procedures that the Group must follow when it adopts IFRS for the first time as the basis for preparing its consolidated financial statements. The Group is required to establish its IFRS accounting policies as at 31 July 2006 and, in general, apply these retrospectively to determine the IFRS opening balance sheet at its date of transition, 1 August 2004.

Certain optional exemptions to this general principle are available under IFRS 1 and the significant first-time adoption choices made by the Group are as follows:

Business combinations before 1 August 2004 (IFRS 3, "Business Combinations")

The Group has elected not to apply IFRS 3 retrospectively to business combinations that took place before 1 August 2004. As a result, in the IFRS opening balance sheet, goodwill arising from past business combinations (£665.9 million) remains as stated under UK GAAP at that date.

Employee Benefits - actuarial gains and losses (IAS 19, "Employee Benefits")

The Group has elected to recognise all cumulative actuarial gains and losses in relation to employee benefit schemes at the date of transition. In addition, the Group has elected to recognise actuarial gains and losses in full in the period in which they occur in a statement of recognised income and expense.

Share-based Payments (IFRS 2, "Share-based Payment")

The Group has elected to apply IFRS 2 only to equity-settled awards that had not vested as at 1 August 2004 and were granted on or after 7 November 2002 and cash-settled awards that had not vested as at 1 August 2004.

Foreign Currency Translation Reserve (IAS 21, "The Effects of Changes in Foreign Exchange Rates")

The Group has elected to reset the foreign currency translation reserve to zero at 1 August 2004. Going forward, IFRS requires amounts taken to reserves on the retranslation of foreign subsidiaries to be recorded in a separate foreign currency translation reserve and be included in the future calculation of profit or loss on sale of the subsidiary.

Financial Instruments (IAS 39, "Financial Instruments: Recognition and Measurement" and IAS 32, "Financial Instruments: Disclosure and Presentation")

The Group has elected to implement IAS 32 and IAS 39 at its date of transition, 1 August 2004 and apply hedge accounting where the requirements of IAS 39 are met.

The Group is also required to provide reconciliations of equity at the transition date, equity at 31 July 2005 and profit for the year ended 31 July 2005 under UK GAAP and IFRS and to provide explanations of the effect of the transition on its financial position, financial performance and cash flows. These are presented in the following tables.

Restatement of profit and loss account

Year ended 31 July 2005	Notes	UK GAAP £m	Effect of transition £m	IFRS £m
Revenue	(ix)	11,257	(1)	11,256
Cost of sales	(ix)	(8,175)	1	(8,174)
Gross profit		3,082	-	3,082
Distribution costs		(1,930)	-	(1,930)
Administrative expenses: amortisation of acquired intangibles	(i)	(43)	37	(6)
Administrative expenses: other	(i)-(v), (viii), (ix)	(455)	(13)	(468)
Administrative expenses: total		(498)	24	(474)
Other operating income		24	-	24
Operating profit		678	24	702
Finance revenue		27	-	27
Finance costs	(ii), (iii), (v), (ix)	(57)	(7)	(64)
Profit before tax		648	17	665
Tax expense	(vii)	(187)	1	(186)
Profit for the period		461	18	479

Restatement of reconciliation of shareholders' funds

Year ended 31 July 2005	Notes	UK GAAP £m	Effect of transition £m	IFRS £m
Profit for the financial year		461	18	479
Net exchange adjustments offset in reserves	(viii)	60	(3)	57
Cash flow hedges
- net fair value gains	(v)	-	(11)	(11)
Actuarial loss on retirement benefits	(iii)	-	(4)	(4)
Tax credit recognised directly in equity	(vii)	25	9	34
Net gains not recognised in the income statement		85	(9)	76
Total recognised income for the year attributable to shareholders		546	9	555
New share capital subscribed		33	-	33
Purchase of own shares		(19)	-	(19)
Credit to equity for share-based payments	(iv)	-	23	23
Dividends	(vi)	(155)	10	(145)
Net additions to shareholders' funds		405	42	447
Opening shareholders' funds		1,902	(48)	1,854
Closing shareholders' funds		2,307	(6)	2,301

Restatement of balance sheet

At 31 July 2005	Notes	UK GAAP £m	Effect of transition £m	IFRS £m
Assets
Non-current assets
Intangible assets: goodwill	(i)	866	(51)	815
Intangible assets: other	(i)	-	133	133
Property, plant and equipment	(i), (ii), (ix)	916	(33)	883
Deferred tax asset	(vii)	26	29	55
Trade and other receivables		37	-	37
Financial assets: available for sale investments	(ix)	4	2	6
		1,849	80	1,929
Current assets
Inventories	(ix)	1,705	1	1,706
Trade and other receivables	(iii), (ix)	2,213	(8)	2,205
Financial assets: trading investments		5	-	5
Derivative financial assets	(v)	-	3	3
Financial receivables: construction loans (secured)	(ix)	264	(2)	262
Cash and cash equivalents		381	-	381
		4,568	(6)	4,562
Assets held for sale	(ix)	-	8	8
Total assets		6,417	82	6,499
Liabilities
Current liabilities
Trade and other payables	(ii)-(iv), (vi), (ix)	2,029	(86)	1,943
Current tax payable		70	-	70
Borrowings: construction loans (unsecured)	(ix)	264	(2)	262
Bank loans and overdrafts	(ix)	437	2	439
Obligations under finance leases	(ii)	4	-	4
Derivative financial liabilities	(v)	-	14	14
Provisions		22	-	22
Retirement benefit obligations		17	-	17
		2,843	(72)	2,771
Non-current liabilities
Trade and other payables		18	-	18
Bank loans		1,045	-	1,045
Obligations under finance leases	(ii)	44	14	58
Deferred tax liabilities	(vii)	71	(9)	62
Provisions	(ii), (ix)	57	6	63
Retirement benefit obligations	(iii)	32	149	181
		1,267	160	1,427
Total liabilities		4,110	88	4,198
Net assets		2,307	(6)	2,301
Shareholders' equity
Called up share capital		148	-	148
Share premium account		241	-	241
Foreign currency translation reserve		-	82	82
Retained earnings		1,918	(88)	1,830
Shareholders' funds		2,307	(6)	2,301

As at 1 August 2004	Notes	UK GAAP £m	Effect of transition £m	IFRS £m
Assets
Non-current assets
Intangible assets: goodwill		666	-	666
Intangible assets: other	(i)	-	13	13
Property, plant and equipment	(i), (ii), (ix)	716	3	719
Deferred tax asset	(vii)	34	25	59
Trade and other receivables		34	-	34
Financial assets: available-for-sale investments	(ix)	2	-	2
		1,452	41	1,493
Current assets
Inventories		1,502	-	1,502
Trade and other receivables	(ix)	1,897	(5)	1,892
Financial assets: trading investments		6	-	6
Financial receivables: construction loans (secured)	(ix)	188	(3)	185
Cash and cash equivalents		291	-	291
		3,884	(8)	3,876
Assets held for sale	(ix)	-	7	7
Total assets		5,336	40	5,376
Liabilities
Current liabilities
Trade and other payables	(ii)-(vi), (ix)	1,701	(77)	1,624
Current tax payable		152	-	152
Borrowings: construction loans (unsecured)	(ix)	188	(3)	185
Bank loans and overdrafts	(ix)	379	3	382
Obligations under finance leases	(ii)	5	3	8
Derivative financial liabilities	(v)	-	1	1
Provisions		26	-	26
Retirement benefit obligations		26	-	26
		2,477	(73)	2,404
Non-current liabilities
Bank loans		832	-	832
Obligations under finance leases	(ii)	22	22	44
Deferred tax liabilities	(vii)	31	(15)	16
Provisions	(ii), (iii)	51	6	57
Retirement benefit obligations	(iii)	21	148	169
		957	161	1,118
Total liabilities		3,434	88	3,522
Net assets		1,902	(48)	1,854
Shareholders' equity
Called up share capital		146	-	146
Share premium account		200	-	200
Foreign currency translation reserve		-	-	-
Retained earnings		1,556	(48)	1,508
Shareholders' funds		1,902	(48)	1,854

Restatement of cash flow statement

Year ended 31 July 2005	UK GAAP £m	Effect of transition £m	IFRS £m
Cash flows from operating activities
Cash generated from operations	764	1	765
Interest received	26	-	26
Interest paid	(56)	(1)	(57)
Tax paid	(151)	-	(151)
Net cash generated from operating activities	583	-	583
Cash flows from investing activities
Acquisition of businesses (net of cash acquired)	(406)	-	(406)
Disposals of businesses (net of cash disposed of)	5	-	5
Purchases of property, plant and equipment	(239)	21	(218)
Proceeds from sale of property, plant and equipment	74	-	74
Purchase of intangible assets	-	(21)	(21)
Proceeds from disposal of current asset investments	1	-	1
Net cash used in investing activities	(565)	-	(565)
Cash flows from financing activities
Proceeds from the issue of shares to shareholders	33	-	33
Purchase of shares by Employee Benefit Trusts	(19)	-	(19)
Proceeds from new borrowings	410	-	410
Repayment of borrowings and derivatives	(234)	-	(234)
Finance lease capital payments	(5)	-	(5)
Dividends paid to shareholders	(145)	-	(145)
Net cash generated from financing activities	40	-	40
Net increase in cash, cash equivalents and overdrafts	58	-	58
Effects of exchange rate changes	(26)	-	(26)
Cash, cash equivalents and overdrafts at the beginning of the year	(88)	-	(88)
Cash, cash equivalents and overdrafts at the end of the year	(56)	-	(56)

Year ended 31 July 2005	UK GAAP £m	Effect of transition £m	IFRS £m
Profit for the year	461	18	479
Tax expense	187	(1)	186
Depreciation of property, plant and equipment and amortisation of non-acquired intangibles	114	3	117
Profit on disposal of property, plant and equipment	(11)	-	(11)
Amortisation of acquired intangibles	43	(37)	6
Net finance costs	30	7	37
Increase in inventories	(55)	(1)	(56)
Decrease in trade and other receivables	(181)	1	(180)
Decrease in trade and other payables	169	(1)	168
Decrease in provisions and other liabilities	7	(7)	-
Share-based payments and other non-cash items	-	19	19
Net cash flow from operating activities	764	1	765

(i) Intangible assets

Arising on business combinations

Under UK GAAP, goodwill was amortised over its useful economic life, tested for impairment and provided against as necessary. Under IFRS, goodwill is no longer amortised but must be tested for impairment as at 1 August 2004 (the transition date) and at least annually thereafter. Goodwill amortisation charged under UK GAAP during the year ended 31 July 2005 has been credited back to the income statement under IFRS.

In addition IFRS requires identifiable intangible assets to be recognised separately on the balance sheet and consequently certain intangible assets, such as contractual customer relationships and trade names, which were previously recorded as part of goodwill under UK GAAP, have been separately recognised as intangible assets under IFRS and amortised over their expected useful lives.

Software

Under UK GAAP software was included in plant and equipment and the allocation of its cost over its estimated useful life was charged as depreciation. Under IFRS, only software which is necessary to operate hardware is included in plant and equipment. Other expenditure on software is included in intangible assets and the allocation of its cost over its estimated useful life is charged as amortisation.

Increase/(decrease) in income statement headings	Year ended 31 July 2005 £m
Administrative expenses: amortisation of acquired intangibles	37
Administrative expenses: other	-
Profit for the year	37

 

Increase/(decrease) in balance sheet headings	At 31 July 2005 £m	At 31 July 2004 £m
Intangible assets: goodwill	(51)	-
Intangible assets: other	133	13
Property, plant and equipment	(31)	(12)
Equity	51	1

(ii) Leases

IAS 17, "Leases" requires that the land and buildings elements of property leases are considered separately for the purposes of determining whether the lease is a finance or operating lease. The majority of the Group's leased buildings are on short-term leases and, consistent with UK GAAP, are classified as operating leases under IFRS. There are, however, a small number of leases where the building element of the lease has been reclassified as a finance lease based on the criteria set out in IAS 17.

Under UK GAAP, committed rental increases, which could be considered in the same way as inflationary increases and increases due to market comparables, were generally recognised as they arose and property lease incentives were generally recognised over the period to the first market rent review. Under IFRS, committed rental increases and lease incentives are required to be spread over the entire lease term.

Increase/(decrease) in income statement headings	Year ended 31 July 2005 £m
Administrative expenses: other	-
Finance costs	(1)
Profit for the year	(1)

 

Increase/(decrease) in balance sheet headings	At 31 July 2005 £m	At 31 July 2004 £m
Property, plant and equipment	11	24
Trade and other payables (included in current liabilities)	(1)	(1)
Obligations under finance leases: due in less than one year	-	(3)
Obligations under finance leases: due in more than one year	(14)	(22)
Provisions (included in non-current liabilities)	(4)	(4)
Equity	(8)	(6)

(iii) Post-employment benefits

Under UK GAAP, the Group accounted for post-employment benefits under SSAP 24, "Accounting for pension costs", whereby the cost of providing defined benefit pensions and post-retirement healthcare benefits was charged against operating profit on a systematic basis with surpluses and deficits arising recognised over the expected average remaining service lives of participating employees. The Group has adopted the amendment to IAS 19, "Employee Benefits" which allows actuarial gains and losses to be charged to equity and as a result, the net deficit on the Group's defined benefit pension schemes is carried in full in the Group's IFRS balance sheet.

Increase/(decrease) in income statement headings	Year ended 31 July 2005 £m
Administrative expenses: other	8
Finance costs	(7)
Profit for the year	1

 

Increase/(decrease) in statement of recognised income and expense headings	Year ended 31 July 2005 £m
Actuarial loss on retirement benefits	(4)
Net gains not recognised in the income statement	(4)

 

Increase/(decrease) in balance sheet headings	At 31 July 2005 £m	At 31 July 2004 £m
Trade and other receivables	(3)	-
Trade and other payables	-	2
Provisions (included in non-current liabilities)	-	(2)
Retirement benefit obligations (included in non-current liabilities)	(149)	(148)
Equity	(152)	(148)

(iv) Share-based payments

Under UK GAAP, the cost of awards made under the Group's employee share schemes was based on the intrinsic value of the awards, with the exception of SAYE schemes for which no cost was recognised. Under IFRS 2, "Share-based Payment", the cost of employee share schemes, including SAYE schemes, is based on the fair value of the awards, which must be assessed using an option-pricing model. The Group has principally used a binomial model for this purpose.

Generally, for an equity-settled award, the fair value of the award at the grant date is expensed on a straight-line basis over the vesting period, with adjustments being made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions or achieve non-market performance conditions, such as EPS growth targets. For a cash-settled award, the fair value of the award at each balance sheet date is used to calculate the probable liability of the Group; changes in this liability from the opening to closing balance sheet are charged or credited to the income statement.

Increase/(decrease) in income statement headings	Year ended 31 July 2005 £m
Administrative expenses: other	(21)
Profit for the year	(21)

 

Increase/(decrease) in statement of changes in shareholder's equity headings	Year ended 31 July 2005 £m
Credit to equity for share-based payments	23
Net additions to shareholders' funds	23

 

Increase/(decrease) in balance sheet headings	At 31 July 2005 £m	At 31 July 2004 £m
Trade and other payables	(12)	(14)
Equity	(12)	(14)

(v) Derivatives and hedge accounting

The Group uses derivative contracts to manage its economic exposure to movements in interest rates and currency exchange rates. Under UK GAAP, such derivative contracts were not recognised as assets and liabilities on the balance sheet and gains or losses arising on them were not recognised until the hedged item had itself been recognised in the financial statements.

Under IFRS all derivative financial instruments are accounted for at fair market value whilst other financial instruments are accounted for either at amortised cost or at fair value depending on their classification. Subject to stringent criteria, derivative financial instruments, financial assets and financial liabilities may be designated as forming hedge relationships as a result of which fair value changes are offset in the income statement or charged/credited to equity depending on the nature of the hedge relationship. Hedge accounting has been applied to the Group's interest rate swaps (which are hedging floating rate debt) and foreign currency financial instruments (which are hedging the net assets of the Group's foreign operations).

Increase/(decrease) in income statement headings	Year ended 31 July 2005 £m
Administrative expenses: other	(1)
Finance costs	1
Profit for the year	-

 

Increase/(decrease) in statement of recognised income and expense headings	Year ended 31 July 2005 £m
Cash flow hedges: net fair value losses	(11)
Net gains not recognised in the income statement	(11)

 

Increase/(decrease) in balance sheet headings	At 31 July 2005 £m	At 31 July 2004 £m
Derivative financial assets	3	-
Derivative financial liabilities	(14)	(1)
Equity	(11)	(1)

(vi) Post balance sheet events

Under UK GAAP dividends were recognised in the period to which they related. IAS 10, "Events after the Balance Sheet Date" requires that dividends declared or approved after the balance sheet date should not be recognised as a liability at that balance sheet date as the liability does not represent a present obligation as defined by IAS 37, "Provisions, Contingent Liabilities and Contingent Assets".

Increase/(decrease) in balance sheet headings	At 31 July 2005 £m	At 31 July 2004 £m
Trade and other payables	104	94
Equity	104	94

 

Increase/(decrease) in statement of changes in shareholders' equity headings	Year ended 31 July 2005 £m
Dividends	10
Net additions to shareholders' funds	10

(vii) Taxation

Under UK GAAP, deferred tax was provided on timing differences between the accounting and taxable profit (an income statement approach). Under IFRS, deferred tax is provided on temporary differences between the book carrying value and tax base of assets and liabilities (a balance sheet approach). As a result, the Group's IFRS balance sheet includes an additional deferred tax liability in respect of fair value property revaluations on acquisitions and property roll-over gains.

In addition, deferred tax has been recognised on the adjustments between UK GAAP and IFRS with the majority of the net deferred tax asset relating to the adjustments for share options and post-employment benefits (reflecting the substantially increased defined benefit liability under IFRS).

Increase/(decrease) in income statement headings	Year ended 31 July 2005 £m
Income tax expense	1
Profit for the year	1

 

Increase/(decrease) in balance sheet headings	At 31 July 2005 £m	At 31 July 2004 £m
Deferred tax assets	29	25
Deferred tax liabilities	9	15
Equity	38	40

 

Increase/(decrease) in statement of recognised income and expense headings	Year ended 31 July 2005 £m
Tax credit recognised directly in equity	9
Net gains not recognised in the income statement	9

(viii) Foreign exchange gains and losses

A small number of the Group's subsidiary companies have changed their functional currency in order to comply with the more stringent functional currency requirements of IAS 21, "The Effects of Changes in Foreign Exchange Rates" which requires companies that are acting on behalf of the parent company to have the same functional currency as the parent company. As a result, some foreign exchange differences arising in these companies have been recorded in the Group's income statement under IFRS rather than in equity, under UK GAAP.

Increase/(decrease) in income statement headings	Year ended 31 July 2005 £m
Administrative expenses: other	3
Profit for the year	3

 

Increase/(decrease) in statement of recognised income and expense headings	Year ended 31 July 2005 £m
Net exchange adjustments offset in reserves	(3)
Net gains not recognised in the income statement	(3)

(ix) Other adjustments

• The Group holds invoiced products on its premises for customer call-off: under UK GAAP such products are generally treated as sold, while under IFRS they are held in inventory.
• Available-for-sale financial assets are stated at historical cost under UK GAAP, but at fair value under IFRS.
• Assets held-for-sale are shown in a single balance sheet caption under IFRS, but under UK GAAP are included in property, plant and equipment, trade and other receivables or, where they arise out of foreclosed loans, in construction loans receivable.
• Under IFRS holiday pay is accrued over the period when employees render the service that increases their entitlement to paid leave. Under UK GAAP, there is no requirement to adjust salary costs to reflect the timing when such benefits are taken.

Increase/(decrease) in income statement headings	Year ended 31 July 2005 £m
Revenue	(1)
Cost of sales	1
Administrative expenses: other	(2)
Finance costs	-
Profit for the year	(2)

 

Increase/(decrease) in balance sheet headings	At 31 July 2005 £m	At 31 July 2004 £m
Property, plant and equipment	(13)	(9)
Financial assets: available-for-sale investments (included in non-current assets)	2	-
Inventories	1	-
Trade and other receivables	(5)	(5)
Construction loans receivable (secured)	(2)	(3)
Assets held for sale	8	7
Trade and other payables	(5)	(4)
Borrowings: construction loans (unsecured)	2	3
Bank loans and overdrafts	(2)	(3)
Provisions (included in non-current liabilities)	(2)	-
Equity	(16)	(14)