JD Sports Regulatory News (JD.)

5 Oct 2005 07:01

John David Group (The) PLC05 October 2005 The John David Group Plc5th October 2005 Adoption Of International Financial Reporting Standards Summary The John David Group Plc (the "Group") has today reported on its unauditedfinancial results for the 52 weeks to 29 January 2005 and six months to 31 July2004 (1) under International Financial Reporting Standards ("IFRS"). For the year to 29 January 2005, primary differences under IFRS relative topreviously reported financial results under UK GAAP are highlighted below: • Turnover and gross profit unchanged. • Headline PBT (2) under IFRS of £12.9 million compared to £13.7 million under UK GAAP. The £0.8 million adjustment relates to a reduction in the amount released for rent free periods. Under IFRS, the release is spread over the life of the lease whereas under UK GAAP it was spread over the period to the first rent review. • Statutory PBT under IFRS of £3.6 million compared to £2.6 million under UK GAAP. Although the headline PBT has reduced by £0.8 million this has been offset by write backs of: a) £0.8 million for goodwill amortisation (no longer applicable under IFRS). b) £1.0 million for exceptional rent free credits released on store disposals. • Goodwill amortisation is no longer applicable. • Exceptional items as defined in UK GAAP under FRS 3 are no longer applicable. As a result, the costs previously recognised as "Loss On Disposal" have now been reclassified within Operating Profit. However, to aid understanding of the performance, the Operating Profit Before Financing has been separately analysed on the face of the Consolidated Income Statement into "Before Exceptional Items" and "Exceptional Items". • Effective tax rate of 37.2% compared to 37.6% reported under UK GAAP (calculated on profit before taxation excluding goodwill amortisation). • Diluted EPS of 4.81p under IFRS compared to diluted EPS of 2.85p reported under UK GAAP. • Shareholders' funds at 29 January 2005 of £53.6 million under IFRS compared to £55.7 million reported under UK GAAP, due to balance sheet remeasurements under IFRS, including the reversal of £2.1 million provided for the proposed final dividend payment under UK GAAP. • No impact on cashflows. International Financial Reporting Standards are subject to ongoing amendments bythe International Accounting Standards board and some standards have yet to beendorsed by the European Commission. Further development of the interpretationof these standards could result in changes in the basis in accounting orpresentation of certain items and accordingly this financial information issubject to possible change. Consolidated Income Statement For The 52 Weeks To 29 January 2005 - Unaudited UK GAAP IFRS Adjustments IFRS £000 £000 £000 REVENUE 471,656 - 471,656Cost of sales (256,504) (256,504) ------------ ------------ ---------- GROSS PROFIT 215,152 - 215,152 Net operating expenses (206,796) (597) (207,393) ------------ ------------ ---------- OPERATING PROFIT 8,356 (597) 7,759----------------------- ------------ ------------- ----------Before exceptional items 17,891 (793) 17,098Exceptional items (8,723) (616) (9,339)Goodwill amortisation (812) 812 ------------------------ ------------ ------------- ---------- OPERATING PROFIT 8,356 (597) 7,759Loss on disposal of fixed assets (1,569) 1,569 - ------------ ------------- ---------- OPERATING PROFIT BEFORE FINANCING 6,787 972 7,759 Financial income 304 - 304Financial expenses (4,461) - (4,461) ------------ ------------- ---------- PROFIT BEFORE TAX 2,630 972 3,602 Income tax expense (1,293) (48) (1,341) ------------ ------------- ---------- PROFIT FOR THE PERIOD 1,337 924 2,261 ------------ ------------- ---------- DIVIDENDS (3) (3,119) 1,303 (1,816) ------------ ------------- ---------- Notes:(1) During the year to 29 January 2005, the Group moved its financial calendarfrom an annual basis to 4,5,4 weekly accounting periods in common with othermajor retailers, with the year end being the nearest Saturday to 31 January.(2) Headline PBT represents profit before tax excluding exceptional items andgoodwill amortisation (NB: no longer applicable under IFRS).(3) Dividends recognised as distributions to equity holders during the period. Enquiries: The John David Group Plc Tel: 0870 873 0333Peter Cowgill, Executive ChairmanBarry Bown, Chief ExecutiveBrian Small, Group Finance Director Hogarth Partnership Limited Tel: 020 7357 9477Andrew JaquesEdward Westropp The John David Group Plc Adoption Of International Financial Reporting Standards Contents 1. Introduction 2. Explanation Of Adjustments Under IFRS 3. Restated IFRS Consolidated Financial Information • Consolidated Income Statement For The 52 weeks To 29 January 2005 • Consolidated Balance Sheet As At 29 January 2005 • Consolidated Income Statement For The Six Months To 31 July 2004 • Consolidated Balance Sheet As At 31 July 2004 • Consolidated Balance Sheet As At 31 January 2004 4. IFRS Accounting Policies 1 INTRODUCTION For all periods up to and including the year to 29 January 2005, The John DavidGroup Plc has prepared its financial statements in accordance with UK GenerallyAccepted Accounting Practice (UK GAAP). For the year to 28 January 2006, TheJohn David Group Plc is required to prepare consolidated financial statements inaccordance with International Financial Reporting Standards (IFRS) as endorsedby the European Commission. The Group's transition date to IFRS is 1 February 2004. This has been determinedin accordance with IFRS 1 "First Time Adoption of International FinancialReporting Standards", being the start of the earliest period of comparativeinformation. To explain the transition to IFRS, the unaudited financial performance andposition of the Group has been converted from UK GAAP to IFRS for the year to 29January 2005. An explanation of the principle adjustments required by The JohnDavid Group Plc on conversion to IFRS is set out in section 2, with summaryfinancial information presented in section 3. The financial informationpresented includes: • The Group's Consolidated Income Statements for the 52 weeks to 29 January 2005 and six months to 31 July 2004• The Group's Consolidated Balance Sheets at 29 January 2005, 31 July 2004 and 31 January 2004. This document explains all material accounting policy changes from theaccounting policies adopted in the UK GAAP financial statements for the year to29 January 2005. A full set of IFRS accounting policies is included in Section4. The financial information presented in this document is unaudited. Transitional Arrangements In IFRS 1 ("First Time Adoption Of InternationalFinancial Reporting Standards") In implementing the transition to IFRS, the Group has followed the requirementsof IFRS1, which in general requires IFRS accounting policies to be applied fullyretrospectively in deriving the opening balance sheet at the date of transition(1 February 2004). However, IFRS1 contains certain mandatory exemptions and some optionalexemptions to this principle of retrospective application. Set out below is adescription of the significant first time adoption choices made by the Group: a) IAS 32 ("Financial Instruments: Disclosure And Presentation" / IAS 39: "Financial Instruments: Recognition And Measurement") The Group has taken the option to defer the implementation of IAS 32 and IAS 39to the financial year ending 28 January 2006. Therefore, financial instrumentswill continue to be accounted for and presented in accordance with UK GAAP forthe year ended 29 January 2005. To the extent that any adjustment is required,this would be in order to reflect the movements from UK GAAP carrying values toIAS 39 values. It is the Group's intention to apply hedge accounting where therequirements of IAS 39 are met. b) IFRS 3 ("Business Combinations") The Group has elected not to apply IFRS 3 retrospectively to businesscombinations that took place before the date of transition. The goodwill arising on the acquisition of the First Sport group of companieswas reviewed at the transition date and no impairment was found necessary. As aresult, goodwill arising from the First Sport business combination at transitionremains as stated under UK GAAP at 1 February 2004 (£14,976k). 2 EXPLANATION OF ADJUSTMENTS UNDER IFRS The format of the IFRS primary financial information contained within thisdocument is prepared in accordance with IAS 1 "Presentation of FinancialStatements", which differs from the UK GAAP format. Under IFRS, exceptionalitems are not defined and therefore are included within Net Operating Expenses.However, The John David Group Plc will separately analyse the Operating ProfitBefore Financing on the face of the Consolidated Income Statement and provideadjusted earnings per share to assist shareholders. The IFRS changes set out below have no effect on cash flows. The significant adjustments between UK GAAP and IFRS which affect the Group areas follows: 2.1 IAS 1 "Presentation Of Financial Statements" In the year to 29 January 2005, exceptional costs of £8.7 million wererecognised within Operating Profit principally relating to the impairment oftangible fixed assets on loss making stores. In addition, a further £1.6 millionof costs were separately analysed after Operating Profit for Loss on Disposal ofFixed Assets as permitted under UK GAAP. The total exceptional costs now presented under IFRS on the face of theConsolidated Income Statement have been reduced by £1.0 million compared to thetotal of all exceptional costs under UK GAAP to reflect the release of leaseincentives on the disposal of properties where under UK GAAP the incentive hadbeen fully amortised (See Section 2.2). 2.2 IAS 17 "Leases" / SIC-15 "Operating Leases - Incentives" IAS 17 "Leases" requires that the building element of leases on land andbuildings is considered separately for the purposes of determining whether thelease is finance or operating in nature. In response to this requirement, a review has been undertaken of the Group'sleased property portfolio to assess whether the building element of these leasescould be categorised as finance in nature. Based on this review and theassessment of the expected useful economic life of the properties at the pointof inception of the lease, it is considered that the respective buildingelements are operating in nature. Legal fees and other costs associated with the acquisition of a leaseholdinterest have been reclassified as Other Receivables within non-current assets. Under UK GAAP, lease incentives were recognised over the period to the firstmarket rent review. However, under SIC-15 "Operating Leases - Incentives", leaseincentives are required to be recognised over the entire lease term. As a result, the Group's IFRS opening balance sheet at 1 February 2004 includesadditional deferred income of £7.2 million (before a deferred tax asset of £2.2million). There is also a reduction in operating profit for the 52 weeks ended29 January 2005 of £0.8 million. However, this reduction has been offset by aone off credit of £1.0 million through exceptional items for the release ofdeferred income balances on the disposal of properties where the incentive hadbeen fully amortised under UK GAAP but a portion had to be reinstated on 1February 2004 under IFRS. 2.3 IFRS 3 "Business Combinations" / IAS 36 "Impairment of Assets" Under UK GAAP, goodwill was capitalised and amortised over its estimated usefuleconomic life and a charge of £0.8 million for amortisation was recorded in the52 weeks to 29 January 2005. Under IFRS 3 "Business Combinations", goodwill has been assigned an indefinitelife as at the date of transition and it is no longer amortised. The John DavidGroup Plc has elected to apply the exemption relating to Business Combinationsand has frozen its goodwill on the acquisition of the First Sport group ofcompanies at its carrying value as at 1 February 2004 (£15.0 million). Allaccumulated amortisation at this point in time has been reclassified against thecost of the goodwill. On 15th December 2004, the Group purchased the entire share capital of RD ScottLimited for a total consideration of £4.5 million. Goodwill with a value of £4.2million was capitalised on this transaction. Under UK GAAP, a very small chargewas recorded in the period from acquisition to 29th January 2005. This chargehas been reversed and the goodwill restated at the acquisition level. Under IAS 36 "Impairment of Assets", impairment reviews will be carried out ongoodwill on an annual basis and any impairment will be charged to theConsolidated Income Statement and, if material, reported separately. 2.4 IAS 12 "Income Taxes" Under UK GAAP, deferred tax was recognised for all timing differences (being thedifference between an entities taxable profits and its statutory results) whichare expected to reverse. Deferred tax under IAS 12 "Income Taxes" is recognised on all taxable temporarydifferences, all deductible temporary differences and unused tax losses to theextent that it is probable there are sufficient taxable profits available infuture periods. Temporary differences are the difference between the tax base ofan asset/liability and its carrying amount in the financial statements. As a result, the Group's opening IFRS balance sheet at 1 February 2004 includesan additional deferred tax asset of £2.2 million in relation to the additionaldeferred income on rent free releases (see "Leases" above). At 29 January 2005,the additional deferred tax asset in relation to this was £2.1 million. HM Revenue and Customs have now confirmed that the adjustment in respect of therent free releases is allowable as a deduction in the Corporation Taxcomputations for the accounting period to 28 January 2006. Accordingly, thedeferred tax asset arising on this adjustment has been transferred to currenttax in the current period. The effective tax rate for the 52 weeks to 29 January 2005 is now 37.2% comparedto 37.6% under UK GAAP (adjusted for goodwill amortisation). 2.5 IAS 10 "Events After The Balance Sheet Date" Under UK GAAP, proposed dividends are recorded as a liability at the balancesheet date. Under IAS 10 "Events After The Balance Sheet Date", dividendsproposed at the balance sheet date are only recorded as a liability when theshareholders have approved their distribution. The final dividend proposed as at 31 January 2004 of £0.8 million (excluding theScrip Dividend) has been reversed in the opening balance sheet and charged inthe year to 29 January 2005. The final dividend proposed as at 29 January 2005of £2.1 million has been reversed in the Statement of Changes in Equity and willbe charged in the year to 28 January 2006. The recognition of the charge in the Statement of Changes in Equity in relationto dividends does not affect the timing of dividend payments or the Group'sdividend policy. 2.6 IAS 33 "Earnings Per Share" The calculation of basic earnings per share is based on attributable profit forthe period divided by the weighted average number of Ordinary Shares in issueduring the period. Diluted earnings per share is based on the weighted average number of OrdinaryShares in issue during the period. In addition, account is taken of any awardswhich will have dilutive effects when exercised (full vesting of all outstandingawards is assumed). An adjusted earnings per share to exclude exceptional items will continue to bepresented in the notes to the financial statements. 3 RESTATED IFRS CONSOLIDATED FINANCIAL INFORMATION Consolidated Income Statement 52 Weeks Ended 29 January 2005 - unaudited Loss UK On Disposal Leases & Goodwill GAAP Reclassification Incentives Amortisation Dividends IFRS £'000 £'000 £'000 £'000 £'000 £'000 REVENUE 471,656 - - - - 471,656 Cost of sales (256,504) - - - - (256,504) GROSS PROFIT 215,152 - - - - 215,152 Net operating expenses (206,796) (1,569) 160 812 - (207,393) OPERATING PROFIT 8,356 (1,569) 160 812 - 7,759 Before exceptional items 17,891 - (793) - - 17,098 Exceptional items (8,723) (1,569) 953 - - (9,339) Goodwill amortisation (812) - - 812 - - OPERATING PROFIT 8,356 (1,569) 160 812 - 7,759 Loss on disposal of fixed (1,569) 1,569 - - - - assets OPERATING PROFIT BEFORE 6,787 - 160 812 - 7,759 FINANCING Financial income 304 - - - - 304 Financial expenses (4,461) - - - - (4,461) PROFIT BEFORE TAX 2,630 - 160 812 - 3,602 Income tax expense (1,293) - (48) - - (1,341) PROFIT FOR THE PERIOD 1,337 - 112 812 - 2,261 DIVIDENDS (1) (3,119) - - - 1,303 (1,816) (1) Dividends recognised as distributions to equity holders during the period. Consolidated Balance Sheet As at 29 January 2005 - unaudited UK Leases & Goodwill Onerous GAAP Incentives Amortisation Dividends Leases IFRS £'000 £'000 £'000 £'000 £'000 £'000 ASSETS Non-current assets Intangible assets 18,318 - 812 - - 19,130 Property, plant and equipment 56,789 (2,715) - - - 54,074 Other receivables - 2,715 - - - 2,715 TOTAL NON-CURRENT ASSETS 75,107 - 812 - - 75,919 Current assets Inventories 53,857 - - - - 53,857 Income tax receivable - - - - - - Trade and other receivables 11,707 - - - - 11,707 Cash and cash equivalents 6,531 - - - - 6,531 TOTAL CURRENT ASSETS 72,095 - - - - 72,095 TOTAL ASSETS 147,202 - 812 - - 148,014 LIABILITIES Current Liabilities Bank overdraft (1,800) - - - - (1,800) Interest bearing loans and borrowings (9,000) - - - - (9,000) Trade and other payables (46,740) 614 - 2,085 - (44,041) Provisions - - - - (674) (674) Income tax liabilities (1,417) - - - - (1,417) TOTAL CURRENT LIABILITIES (58,957) 614 - 2,085 (674) (56,932) Non-current liabilities Interest bearing loans and borrowings (25,500) - - - - (25,500) Other payables (3,153) (7,699) - - - (10,852) Provisions (1,614) - - - 674 (940) Deferred tax liabilities (2,315) 2,125 - - - (190) TOTAL NON-CURRENT LIABILITIES (32,582) (5,574) - - 674 (37,482) TOTAL LIABILITIES (91,539) (4,960) - 2,085 - (94,414) TOTAL ASSETS LESS TOTAL LIABILITIES 55,663 (4,960) 812 2,085 - 53,600 EQUITY Issued ordinary share capital 2,364 - - - - 2,364 Share premium account 9,042 - - - - 9,042 Retained earnings 44,257 (4,960) 812 2,085 - 42,194 TOTAL EQUITY ATTRIBUTABLE TO EQUITY 55,663 (4,960) 812 2,085 - 53,600 SHAREHOLDERS Consolidated Income Statement For The Six Months Ended 31 July 2004 - unaudited Loss UK On Disposal Leases & Goodwill GAAP Reclassification Incentives Amortisation Dividends IFRS £'000 £'000 £'000 £'000 £'000 £'000 REVENUE 212,079 - - - - 212,079 Cost of sales (114,530) - - - - (114,530) GROSS PROFIT 97,549 - - - - 97,549 Net operating expenses (100,489) (1,314) (242) 393 - (101,652) OPERATING LOSS (2,940) (1,314) (242) 393 - (4,103) Before exceptional items 2,170 - (317) - - 1,853 Exceptional items (4,717) (1,314) 75 - - (5,956) Goodwill amortisation (393) - - 393 - - OPERATING LOSS (2,940) (1,314) (242) 393 - (4,103) Loss on disposal of fixed (1,314) 1,314 - - - - assets OPERATING LOSS BEFORE (4,254) - (242) 393 - (4,103) FINANCING Financial income 170 - - - - 170 Financial expenses (2,285) - - - - (2,285) LOSS BEFORE TAX (6,369) - (242) 393 - (6,218) Income tax credit 2,654 - 73 - - 2,727 LOSS FOR THE PERIOD (3,715) - (169) 393 - (3,491) DIVIDENDS (1) (1,063) - - - 281 (782) (1) Dividends recognised as distributions to equity holders during the period. Consolidated Balance Sheet As at 31 July 2004 - unaudited UK Leases & Goodwill Onerous GAAP Incentives Amortisation Dividends Leases IFRS £'000 £'000 £'000 £'000 £'000 £'000 ASSETS Non-current assets Intangible assets 14,583 - 393 - - 14,976 Property, plant and equipment 61,669 (3,231) - - - 58,438 Other receivables - 3,231 - - - 3,231 TOTAL NON-CURRENT ASSETS 76,252 - 393 - - 76,645 Current assets Inventories 72,113 - - - - 72,113 Income tax receivable 3,561 - - - - 3,561 Trade and other receivables 10,623 - - - - 10,623 Cash and cash equivalents 24,583 - - - - 24,583 TOTAL CURRENT ASSETS 110,880 - - - - 110,880 TOTAL ASSETS 187,132 - 393 - - 187,525 LIABILITIES Current Liabilities Bank overdraft - - - - - - Interest bearing loans and (8,000) - - - - (8,000) borrowings Trade and other payables (56,438) 718 - 1,063 - (54,657) Provisions - - - - (845) (845) Income tax liabilities - - - - - - TOTAL CURRENT LIABILITIES (64,438) 718 - 1,063 (845) (63,502) Non-current liabilities Interest bearing loans and (62,000) - - - - (62,000) borrowings Other payables (2,991) (8,205) - - - (11,196) Provisions (1,012) - - - 845 (167) Deferred tax liabilities (4,175) 2,246 - - - (1,929) TOTAL NON-CURRENT LIABILITIES (70,178) (5,959) - - 845 (75,292) TOTAL LIABILITIES (134,616) (5,241) - 1,063 - (138,794) TOTAL ASSETS LESS TOTAL LIABILITIES 52,516 (5,241) 393 1,063 - 48,731 EQUITY Issued ordinary share capital 2,338 - - - - 2,338 Share premium account 8,917 - - - - 8,917 Retained earnings 41,261 (5,241) 393 1,063 - 37,476 TOTAL EQUITY ATTRIBUTABLE TO EQUITY 52,516 (5,241) 393 1,063 - 48,731 SHAREHOLDERS Consolidated Balance Sheet As at 31 January 2004 - unaudited UK Leases & Goodwill GAAP Incentives Amortisation Dividends IFRS £'000 £'000 £'000 £'000 £'000 ASSETS Non-current assets Intangible assets 14,976 - - - 14,976 Property, plant and equipment 68,183 (3,284) - - 64,899 Other receivables - 3,284 - - 3,284 TOTAL NON-CURRENT ASSETS 83,159 - - - 83,159 Current assets Inventories 65,727 - - - 65,727 Income tax receivable 611 - - - 611 Trade and other receivables 14,452 - - - 14,452 Cash and cash equivalents 4,934 - - - 4,934 TOTAL CURRENT ASSETS 85,724 - - - 85,724 TOTAL ASSETS 168,883 - - - 168,883 LIABILITIES Current Liabilities Bank overdraft - - - - - Interest bearing loans and borrowings (8,000) - - - (8,000) Trade and other payables (48,278) 964 - 782 (46,532) Provisions - - - - - Income tax liabilities - - - - - TOTAL CURRENT LIABILITIES (56,278) 964 - 782 (54,532) Non-current liabilities Interest bearing loans and borrowings (48,000) - - - (48,000) Other payables (3,555) (8,209) - - (11,764) Provisions - - - - - Deferred tax liabilities (3,756) 2,173 - - (1,583) TOTAL NON-CURRENT LIABILITIES (55,311) (6,036) - - (61,347) TOTAL LIABILITIES (111,589) (5,072) - 782 (115,879) TOTAL ASSETS LESS TOTAL LIABILITIES 57,294 (5,072) - 782 53,004 EQUITY Issued ordinary share capital 2,338 - - - 2,338 Share premium account 8,917 - - - 8,917 Retained earnings 46,039 (5,072) - 782 41,749 TOTAL EQUITY ATTRIBUTABLE TO EQUITY 57,294 (5,072) - 782 53,004 SHAREHOLDERS 4 IFRS ACCOUNTING POLICIES Basis Of Preparation European Union ("EU") law (IAS Regulation EC 1606/2002) requires that the nextannual consolidated financial statements of The John David Group Plc ("TheGroup"), those covering the 52 weeks ending 28 January 2006, are prepared inaccordance with International Financial Reporting Standards ("IFRS") adopted foruse in the E.U.. The Group has adopted IFRS with effect from 30 January 2005. The transition dateis 1 February 2004, being the start date of the earliest period for which fullcomparative information in the 2006 Annual Report and Accounts will bepresented. The financial information presented in this conversion statement which isunaudited has been prepared on the basis of the recognition and measurementrequirements of IFRS in issue that either are endorsed by the EU and effective(or available for early adoption) at 28 January 2006 or are expected to beendorsed and effective (or available for early adoption) at 28 January 2006, theGroup's first annual reporting date at which it is required to use endorsedIFRS. Based on these endorsed IFRS, the directors have made assumptions aboutthe accounting policies expected to be applied when the first annual IFRSfinancial statements are prepared for the 52 weeks ending 28 January 2006. Furthermore, the adopted IFRS that will be effective (or available for earlyadoption) in the annual financial statements for the 52 weeks ending 28 January2006 are still subject to change and to additional interpretations and thereforecannot be determined with certainty. Accordingly, the accounting policies forthat annual period will be determined finally only when the annual financialstatements are prepared for the 52 weeks ending 28 January 2006. The comparative figures for the 52 weeks ended 29 January 2005 do not constitutethe Group's statutory accounts for that financial period. Those accounts, whichwere prepared under UK GAAP, have been reported on by the Group's auditor anddelivered to the Registrar of Companies. The report of the auditors wasunqualified and did not contain statements under section 237 (2) or (3) of theCompanies Act 1985. The financial statements are presented in pounds sterling, rounded to thenearest thousand. The preparation of financial statements in conformity with IFRS requiresmanagement to make judgments, estimates and assumptions that affect theapplication of policies and reported amounts of assets and liabilities, incomeand expenses. The estimates and associated assumptions are based on historicalexperience and various other factors that are believed to be reasonable underthe circumstances, the results of which form the basis of making the judgmentsabout carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period, or in the periodof the revision and future periods if the revision affects both current andfuture periods. The accounting policies set out below have been applied consistently to allperiods presented in this consolidated financial report and in preparing anopening IFRS balance sheet at 1 February 2004 for the purposes of the transitionto IFRS. The accounting policies have been applied consistently by all Group entities. Basis Of Consolidation I. Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when theCompany has the power, directly or indirectly, to govern the financial andoperating policies of an entity so as to obtain benefits from its activities. Inassessing control, potential voting rights that presently are exercisable aretaken into account. The financial statements of subsidiaries are included in theconsolidated financial statements from the date that control commences until thedate that control ceases. II. Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expensesarising from intragroup transactions, are eliminated in preparing theconsolidated financial statements. Property, Plant And Equipment I. Owned assets Items of property, plant and equipment are stated at cost or deemed cost lessaccumulated depreciation and impairment losses. Where parts of an item of property, plant and equipment have different usefullives, they are accounted for as separate items. II. Leased assets Assets funded through finance leases are capitalised as property, plant andequipment. The resulting lease obligations are included in liabilities net offinance charges. Interest costs on finance leases are charged to theConsolidated Income Statement. All other leases are accounted for as operating leases and the rental chargesare charged to the Consolidated Income Statement on a straight line basis overthe life of the lease. Legal fees and other costs associated with the acquisition of a leaseholdinterest are capitalised as Other Receivables within non-current assets. Thesecosts are amortised over the life of the lease. Lease incentives are credited to the Consolidated Income Statement on a straightline basis over the life of the lease. III. Depreciation Depreciation is charged to the Consolidated Income Statement over the estimateduseful lives of each part of an item of property, plant and equipment. Theestimated useful lives are as follows: • Plant and equipment 3 - 6 years on a straight line basis • Fixtures and fittings 10 years, or length of lease if shorter, on a straight line basis Intangible Assets All business combinations are accounted for by applying the purchase method.Goodwill represents the difference between the cost of the acquisition and thefair value of the net identifiable assets acquired, or the deemed cost ontransition to IFRS. Goodwill is tested annually for impairment and carried at cost less accumulatedimpairment losses. Inventories Inventories are stated at the lower of cost and net realisable value. Provisionsare made for obsolescence, mark downs and shrinkage. Trade Receivables Trade receivables are recognised initially at their nominal value. A provisionfor the impairment of trade receivables is established when there is objectiveevidence that the Group will not be able to collect all amounts due according tothe original terms. The movement in the provision is recognised in theConsolidated Income Statement. Cash And Cash Equivalents / Net Debt Cash and cash equivalents comprise cash balances and call deposits with anoriginal maturity of three months or less. Bank overdrafts that are repayable ondemand are included as a component of cash and cash equivalents for the purposeof the Consolidated Statement of Cash Flows. Net debt consists of cash and cash equivalents together with other netborrowings from loan notes and finance leases. Trade And Other Payables Trade and other payables are stated at cost. Provisions A provision is recognised in the balance sheet when the Group has a presentlegal or constructive obligation as a result of a past event and it is probablethat an outflow of economic benefits will be required to settle the obligation. Revenue Revenue represents the amounts receivable by the Group for goods supplied tocustomers net of discounts, returns and VAT. Exceptional Items Items that are both material in size, unusual and infrequent in nature arepresented as exceptional items in the Consolidated Income Statement. Thedirectors are of the opinion that the separate recording of exceptional items provides helpful information about the Group's underlying business performance. Financial Income Financial Income comprises interest receivable on funds invested. FinancialIncome is recognised in the Consolidated Income Statement. Financial Expenses Financial expenses comprise interest payable on borrowings. Financial Expensesare recognised in the Consolidated Income Statement. Income Tax I. Current income tax Current income tax expense is recognised based on management's best estimates ofthe average income tax rate expected for the full financial year. II. Deferred taxation Provision is made for deferred taxation using the liability method on temporarydifferences between the tax bases of assets and liabilities and their carryingamounts in the consolidated financial statements. The deferred income tax isdetermined using tax rates that have been enacted by the balance sheet date andare expected to apply when the deferred income tax asset or liabilitycrystallises. Impairment The carrying amounts of the Group's assets are reviewed annually to determinewhether there is any indication of impairment. If any such impairment existsthen the asset's recoverable amount is estimated. Impairment losses arerecognised in the Consolidated Income Statement. The goodwill was tested for impairment at 29 January 2005. An impairment loss is reversed if there has been a change in the estimates usedto determine the recoverable amount. An impairment loss is reversed only to theextent that the asset's carrying amount does not exceed the carrying amount thatwould have been determined, net of depreciation or amortisation, if noimpairment loss had been recognised. Employee Benefits The Group only operates defined contribution pension schemes, the assets ofwhich are held separately from those of the Group in independently administeredfunds. Obligations for contributions to the defined contribution schemes arerecognised as an expense in the Consolidated Income Statement as incurred. This information is provided by RNS The company news service from the London Stock Exchange