The consolidated accounts of Signet Group plc (''the Company'') and its subsidiary companies ("the Group") are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The consolidated accounts also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. These principles differ in certain significant respects from generally accepted accounting principles in the US ("US GAAP"). Application of US GAAP would have affected shareholders' equity and results of operations at and for the 52 weeks ended 2 February 2008, the 53 weeks ended 3 February 2007 and the 52 weeks ended 28 January 2006 to the extent summarised here.
Judgements made by the directors in the application of these accounting policies, assumptions that may have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year, are discussed in Critical accounting policies in the Group financial review and in Risk and other factors. Actual results will differ from these estimates.
The Company has elected to prepare its parent company financial statements in accordance with United Kingdom generally accepted accounting principles ("UK GAAP"). These are presented in Company information.
In relation to the accounts of the Group, the following accounting policies have, unless otherwise stated, been applied consistently in dealing with items which are considered material:
The Group is a speciality jewellery retailer in both the UK and the US.
The consolidated accounts have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union and applicable United Kingdom law. The consolidated accounts have been prepared under the historical cost basis except for the revaluation of derivative financial instruments assets and liabilities to their fair value.
These results are presented in US dollars following a change in the Group's presentational currency from UK pounds to US dollars with effect from 5 February 2007. As the majority of the Group's assets and operations are in the US this change better reflects the underlying performance of the Group. In addition, on 5 February 2007 the Company redenominated its share capital into US dollars and will retain distributable reserves and declare dividends in US dollars. As a result the functional currency of the Company has changed from UK pounds to US dollars. Financial information for prior periods has been restated from UK pounds to the new presentational currency, US dollars, in accordance with IAS 21.
The Group accounts include the accounts of the Company and its subsidiary undertakings made up for the 52 week period ended 2 February 2008 (the comparatives are for the 53 week period ended 3 February 2007 and the 52 week period ended 28 January 2006).
Subsidiary undertakings are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiary undertakings are included in the consolidated financial statements using the acquisition method of accounting. Under this method the results of subsidiary undertakings acquired or disposed of in the year are included from the date that control commences until the date that control ceases.
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.
The results of subsidiary undertakings with functional currencies other than US dollars are translated at rates approximating to the exchange rate ruling on the date of transaction by using the weighted average rate of exchange during the period and their balance sheets and attributable goodwill are translated at the rates ruling at the balance sheet date. Exchange differences arising from the translation of the net assets of those subsidiary undertakings and matched currency borrowings are charged or credited to reserves.
Monetary assets and liabilities denominated in currencies other than US dollars at the balance sheet date are translated at the exchange rate ruling at that date. Exchange differences arising from transactions in currencies other than US dollars are included in profit before tax.
Revenue is recognised only when all significant risks and rewards of ownership of goods have been transferred to the purchaser.
Repair revenues are recognised when the service is complete and the merchandise is delivered to the customer.
Where the contractual obligation is borne by the Group, revenue from the sale of extended service agreements is deferred and recognised, net of incremental costs arising from the initial sale, in proportion to anticipated claims arising. This period's income is based on the historical claims experience of the business, which has been consistent since these products were launched. The Group reviews the pattern of claims at the end of each year to determine any significant trends that may require changes to revenue recognition rates.
Where the Group acts as an agent for warranty sales the commission element only is recognised as revenue.
Interest receivable from the US in-house credit programme is classified as other operating income.
When vouchers issued on a purchase give a discount against a future purchase, to the extent that these represent an incentive to enter into a future purchase, the estimated fair value of those vouchers to the customer is treated as deferred revenue. The proportion of revenue deferred and the recognition of income as these vouchers are redeemed over the period until their expiry is based on prior years' experience.
Provision is made for future sales returns expected within the stated return period, based on previous return rates experienced.
Cost of sales includes all costs incurred in the purchase, processing and distribution of the merchandise and all costs directly incurred in the operation and support of the retail outlets including advertising and promotional costs. This includes inbound freight charges, purchasing and receiving costs, inspection and internal transfer costs. Administrative expenses include all costs not directly incurred in the purchase, processing and distribution of merchandise or support of the retail outlets. This includes administration, finance and management expenses.
Advertising costs are expensed within cost of sales. Production costs are expensed at the first communication of the advertisements, whilst communication expenses are incurred each time the advertisement is communicated. For catalogues and circulars, costs are all expensed at the first date they can be viewed by the consumer. Point of sale promotional material is expensed when first displayed in the stores.
Goodwill represents the excess of the cost on acquisition over the Group's interest in the fair value of the identifiable assets and liabilities of a subsidiary at the date of acquisition. Goodwill is stated at cost less any accumulated impairment losses.
In accordance with IFRS 3 'Business combinations', on transition to IFRS, goodwill is held at deemed cost on 31 January 2004, subject to exchange movements, and impairment reviews are carried out annually or more frequently when there are indications that the carrying value may not be recoverable. Any impairment write downs identified are charged to the income statement. An impairment loss in respect of goodwill is not reversed.
For impairment testing, goodwill is allocated to the relevant cash generating units. The Group calculates its fair values through discounting future cash flow forecasts, derived from the most recent financial results and budgets approved by management. The key assumptions for the value in the calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management estimate discount rates using pre-tax rates that reflect assessments of the time value of money and the risks specific to the Group.
Computer software that is not an integral part of the related hardware is classified as an intangible asset and is stated at cost less accumulated amortisation. Amortisation is charged on a straight line basis over periods from three to five years.
Property, plant and equipment are stated at cost or deemed cost less accumulated depreciation and impairment losses. Certain items of property, which had been revalued to fair value on or prior to 31 January 2004, the date of transition to IFRS, are measured on the basis of deemed cost, being the revalued amount at the date of that revaluation.
Maintenance and repair costs are expensed as incurred while major renewal and improvement costs are capitalised.
Depreciation is provided on freehold and long leasehold retail premises over an estimated useful life not exceeding 50 years. Long leaseholds relate to leases that have an original and unexpired lease term of greater than 25 years. Freehold land is not depreciated.
Depreciation on other fixed assets is provided on a straight line basis at the following annual rates:
Plant, machinery and vehicles – 10%, 20%, 33⅓% ,
Shopfronts, fixtures and fittings – rates up to 33⅓%.
Short leasehold – over the life of the lease.
Where the renewal of a lease is reasonably assured, the depreciation period for shopfronts, fixtures and fittings may exceed the remaining lease term.
Where appropriate, provision is made on assets that have a recoverable amount less than book value. Potentially impaired assets are identified by reviewing the cash contribution of individual stores where trading since the initial opening of the store has reached a mature stage. Where such stores deliver a low or negative cash contribution, the related store assets are considered for impairment by reference to the higher of net realisable value and value in use. Additionally, provision is made against property, plant and equipment relating to stores planned for closure. Where quantifiable, the discounted cost of decommissioning assets installed in leasehold premises is included in the cost of the assets and appropriate decommissioning provisions are recognised.
Inventories represent raw materials and goods held for resale and are valued at the lower of cost and net realisable value. Cost is determined using average cost and includes overheads directly related to bringing inventory to its present location and condition. These include relevant warehousing, distribution and certain buying, security and data processing costs. Net realisable value represents estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Provision is made for obsolete, slow moving or defective items.
Where vendor contributions are received in respect of identifiable promotional events, these are matched against the costs of these promotions. Vendor contributions which are received as general contributions and not against specific promotional events are allocated against inventories.
Trade and other receivables are stated at their nominal amount less an allowance for potential losses, which equates to their fair value.
Assets held under finance leases are leases where substantially all the risks and rewards of the asset have passed to the Group. All other leases are defined as operating leases.
Where operating leases include clauses in respect of predetermined rent increases, those rents are charged to the income statement on a straight line basis over the lease term, including any construction period or other rental holiday. Other rentals paid under operating leases are charged to the income statement as incurred. Premiums paid to acquire short leasehold properties and inducements to enter into a lease are recognised over the lease term. Amounts payable in respect of contingent rents are recognised in the period to which the sales relate.
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case the related tax impact is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Accruals for tax contingencies are made based on judgements and estimates in relation to tax audit issues and exposures. Amounts accrued are based on management's interpretation of country-specific tax law and the likelihood of settlement. Tax benefits are not recognised unless the tax positions are probable of being sustained. Once considered to be probable, each material tax benefit is reviewed to assess whether a provision should be taken against full recognition of the benefit on the basis of potential settlement through negotiation and/or litigation. All such provisions are included in creditors due within one year, although there is uncertainty regarding the exact timing of the agreement and settlement of outstanding positions. Any recorded exposure to interest and penalties on tax liabilities is provided for in the tax charge.
Deferred taxation is provided on all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which temporary differences can be utilised. Tax rates enacted or substantively enacted at the balance sheet date are used to determine deferred tax.
No temporary differences are recognised in respect of:
deferred tax in respect of the initial recognition of goodwill;
additional tax which would arise if profits of overseas subsidiaries were distributed to the extent that they would probably not reverse in the foreseeable future; and
the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination.
The Group operates a defined contribution pension scheme in the UK and sponsors a defined contribution 401(k) retirement savings plan in the US. Contributions made by the Group to these pension arrangements are charged to the income statement as incurred.
The Group also operates a defined benefit pension scheme (the "Group Scheme") in the UK which ceased to admit new employees from April 2004.
The Group Scheme, covering two of the executive directors and participating eligible employees in the UK, provides benefits based on members' salaries at retirement. The Group Scheme's assets are held by the trustees and are completely separate from those of the Group. The pension cost is assessed in accordance with the advice of independent qualified actuaries.
Actuarial gains or losses are accounted for in the statement of recognised income and expense in the period in which they arise.
The full service cost of pension provisions relating to the period is charged to administrative expenses in the income statement. The net of the expected return on the Group Scheme's assets and the interest element of the increase in the present value of the Group Scheme's liabilities is credited to finance income in the income statement.
The difference between the market value of the assets of the Group Scheme and the present value of accrued pension liabilities is shown as an asset or liability on the balance sheet. The difference between the expected return on assets and that actually achieved is recognised in the statement of recognised income and expense along with any differences that may arise from experience or assumption changes.
Where appropriate, supplementary pensions and life assurance benefits for UK directors and senior executives were until 5 April 2006 provided through the Signet Group Funded Unapproved Retirement Benefits Scheme (''FURBS'') and were charged to the income statement as incurred. No further contributions are paid into the FURBS and in substitution a supplement is paid directly to the members.
Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends upon the nature of the item being hedged.
Changes in the fair value of financial instruments that are designated and are effective as hedges of future cash flows are recognised directly in equity through the statement of recognised income and expense. Any ineffective portion of the gain or loss is recognised immediately in the income statement. For cash flow hedges that result in the recognition of a non-financial asset or liability, amounts previously deferred in equity are included in the measurement of the asset or liability. For cash flow hedges that result in the recognition of a financial asset or liability, amounts previously recognised in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss. The Group applies the hedge accounting provisions of IAS 39 as they relate to forward currency and commodity contracts in order to minimise future volatility.
The Group took the exemption not to restate the 29 January 2005 closing position for IAS 32 'Financial instruments: disclosure and presentation' and IAS 39 'Financial instruments: recognition and measurement'. As a result, the 29 January 2005 closing position is presented on the previously existing UK GAAP basis.
In that comparative period, other than the following exceptions, all financial assets and financial liabilities were carried at cost (amortised as appropriate) less, in the case of financial assets, provision for any permanent diminution in value. Gains and losses on forward foreign exchange contracts treated as hedging instruments were not recognised in the income statement. On recognition of the hedged transaction the unrecognised gains and losses arising on the instrument were recognised, either in the income statement or combined into the carrying value of the associated asset or liability.
In the 52 week period to 29 January 2005 closing position, hedging instruments were not recognised. From 30 January 2005 the hedging instruments are brought on to the balance sheet in accordance with the current period policy. In subsequent periods, hedging instruments are accounted for separately in the balance sheet. Gains and losses are included in profit for the period when the hedged transaction occurs having first recorded the hedging instrument in equity (to the extent effective). The cash flow statement is unaffected by this change in accounting policy.
The following adjustments were therefore made as at the beginning of the period ended 28 January 2006 with the net adjustment to net assets, after tax, taken through the statement of recognised income and expense:
|Liabilities – Current liabilities|
|Commodity contract classified within trade and other payables||1.1|
|Equity – Capital and reserves attributable to equity shareholders|
|Cash flow hedging reserve||1.1|
Cash and cash equivalents comprise money market deposits and amounts placed with external fund managers with an original maturity of three months or less, and are carried at cost which approximates to fair value.
Borrowings comprise interest bearing bank loans, private placement loan notes, and bank overdrafts and are recorded at the proceeds received net of any transaction costs incurred. Interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis.
A charge to income is recognised in respect of the fair values of outstanding employee share options, measured at grant level. For the LTIP, options granted are valued using a Black-Scholes option pricing model. The fair values of all other options have been calculated using a Black-Scholes model up to 29 January 2005 and a binomial valuation model thereafter. These are charged to the income statement over the relevant option vesting periods, the expense recognised being adjusted to reflect the Group's estimate of the number of shares that will eventually vest. The optional transitional arrangements, which allow companies to apply IFRS 2 fully retrospectively to all options granted but not fully vested at the relevant reporting date, have been used.
For equity-settled transactions, the charge to the income statement is credited back to total equity.
The cost of the cash and share award elements of the LTIP is charged to the income statement evenly over the period from the award date to vesting, based on the level of award that is expected to be achieved. A liability equal to the portion of goods or services received is recognised at the current fair value determined at each balance sheet date for cash settled schemes.
A provision is 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. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Provision is made for future net lease obligations in respect of onerous leases of vacant, partially vacant or sublet properties.
When new shares are issued, they are recorded in share capital at their par value. The excess of the issue price over the par value is recorded in the share premium reserve.
The cost of own shares purchased to satisfy the exercise of employee share options is deducted from total equity and the proceeds of their onward transfer are credited to total equity.
Dividends are provided for in the period in which they are formally approved.
At the date of preparation of the financial statements, the following Standards and Interpretations, which have not been applied in the financial statements, were in issue but not yet effective:
IFRS 8 'Operating Segments' was issued in November 2006. It requires the identification of operating segments based on internal reporting to the chief operating decision maker and extends the scope and disclosure requirements of IAS 14 'Segmental Reporting'. It is effective for annual periods beginning on or after 1 January 2009. The Group is currently reviewing the impact that the adoption of IFRS 8 would have on its financial statements.
A revised IAS 23 'Borrowing costs' was issued in March 2007. It requires entities to capitalise any borrowing costs relating to assets that take a substantial period of time to prepare for use, rather than immediately recognising such costs as an expense. The revised Standard is effective for annual periods beginning on or after 1 January 2009 and will be applied prospectively from that date. The adoption of these amendments is not expected to have a significant effect upon the net results or net assets of the Group.
A revised IAS 1 'Presentation of Financial Statements' was issued in September 2007. It revises the presentation of non-owner changes in equity and introduces a statement of comprehensive income. It is effective for annual periods beginning on or after 1 January 2009. The adoption of these amendments will not have a significant impact upon the net results, net assets or disclosures of the Group.
IFRS 8 'Operating Segments' was endorsed by the EU during 2007. The revised IAS 23 'Borrowing Costs' and IAS 1 'Presentation of Financial Statements' have not yet been endorsed by the EU.
The following IFRIC interpretations have been issued but have not yet been adopted by the Group IFRIC 12 'Service Concession Arrangements', IFRIC 13 'Customer Loyalty Programmes' and IFRIC 14 'IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding requirements and their interaction. None of these interpretations have been endorsed by the EU and none are expected to have a significant impact upon adoption.