Notes to the accounts
30. Summary of differences between IFRS and US GAAP
The Group’s consolidated accounts are prepared in accordance with IFRS, which differs in certain respects from US GAAP. Differences which have a significant effect on the consolidated net profit and shareholders’ funds of the Group are set out below. While this is not a comprehensive summary of all differences between IFRS and US GAAP, other differences would not have a significant effect on the consolidated net profit or funds attributable to equity holders of the Company.
The differences have been shown gross of tax with the related taxation shown separately.
(a) Goodwill
Under IFRS, goodwill is carried at cost with impairment reviews carried out annually, or when a triggering event occurs, in lieu of amortisation. Previously, the Group applied UK GAAP Financial Reporting Standards 10 ‘Goodwill and intangible assets’ (“FRS 10”) in respect of acquisitions post 1 February 1998; that required the capitalisation and amortisation of goodwill. Prior to the adoption of FRS 10, the Group wrote off goodwill directly to reserves.
Under US GAAP, prior to the adoption of Statement of Financial Accounting Standards (“SFAS”) 142, ‘Goodwill and Other Intangible Assets’, goodwill was capitalised and amortised through the income statement over its estimated useful life (not to exceed 40 years). SFAS 142, effective for the Group from 3 February 2002, requires that goodwill be tested annually for impairment in lieu of amortisation.
(b) Sale and leaseback transactions
Under IFRS, sale and leaseback transactions of freehold and long leasehold properties that result in an operating lease are established at fair value and accounted for by including in profit before taxation the full gain arising in the financial year in which the transaction took place. Under US GAAP, the gain arising is credited to the income statement in equal instalments over the life of the lease.
(c) Pensions
As at 3 February 2007, the Group adopted SFAS 158 ‘Employers’ accounting for defined benefit and other post-retirement pension plans’, which requires the Group to fully recognise the Group Scheme’s funded status on the balance sheet. Changes in the funded status are recognised through other comprehensive income in the year they occur, other than the net periodic benefit cost pursuant to SFAS 87 ‘Employers accounting for pensions’, which is reported within the income statement. The Group Scheme asset or liability on the balance sheet is therefore the same under IFRS and US GAAP. However, the following differences remain between IFRS and US GAAP:
– under US GAAP, actuarial gains and losses outside a 10% ‘corridor’ are recycled from other comprehensive income to operating profit over the average service lives of employees, in accordance with SFAS 87;
– expected returns on pension assets and interest charges are reported in operating profit under US GAAP but included within finance income and expense under IFRS.
Prior to the adoption of SFAS 158, the Group complied with SFAS 87, SFAS 88 ‘Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits’ and SFAS 106 ‘Employers Accounting for Postretirement Benefits other than Pensions, as amended by SFAS 132(R) ‘Employers’ disclosure about pensions and other post-retirement benefits’. The Group therefore recognised a pension liability in the financial statements when the accumulated benefit obligation exceeded the fair value of the plan assets to the extent this liability had not already been recognised. The Group Scheme had such a liability under US GAAP at 28 January 2006 but did not have such a liability at 3 February 2007. Consequently, the additional minimum liability above the intangible asset at 28 January 2006 was released through other comprehensive income during the 53 week period ended 3 February 2007.
The pension asset at 3 February 2007, prior to adoption of SFAS 158, was $51.0 million. Following adoption of SFAS 158, the Group recorded a pension asset as at 3 February 2007 of $3.7 million, being the funded status of the Group Scheme. To achieve this, SFAS 158 required a one-time adjustment at 3 February 2007 to accumulated other comprehensive income of $47.3 million (before tax effect).
(d) Share-based payment
For the year ended 28 January 2006, the Group accounted for the recognition of share options expenses based on APB 25 ‘Accounting for stock issued to employees’ (“APB 25”) as amended by SFAS 148 ‘Accounting for stock-based compensation – transition and disclosure’ based on the intrinsic value of awards in the period. From 29 January 2006 the Group adopted SFAS 123(R) ‘Share-based payment’ using the ‘modified prospective application method’, recognising the fair value of option awards over the service period.
The Group operates a number of employee share schemes, set out in note 27. All grants under the LTIP and grants under the Executive Scheme made prior to 2007/08 are subject to a condition that they may not vest unless the growth in related performance conditions exceeds the scheme target growth adjusted by movements in the relevant UK or US Retail Price Index over the same period. For Executive Scheme grants made in 2007/08 and thereafter, performance conditions only apply to executive directors.
Under IFRS 2 ‘Share-based payment’ these awards are treated as equity awards, and for the 52 weeks ended 28 January 2006 under APB 25 and SFAS 123 ‘Accounting for stock-based compensation’ were also treated as equity awards under US GAAP. These equity awards are measured at fair value at the date of grant and are not remeasured. On the application of SFAS 123(R), the condition above 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 the award. As the condition is not a service or market condition, the options are accounted for as liabilities under US GAAP from 29 January 2006. The Group measures the share based payment for these awards at fair value, which is revalued at each reporting date until the criteria have been satisfied and the amounts are reclassified to equity. These movements in fair value result in the reconciling item between IFRS and US GAAP.
(e) Employers’ payroll taxes in respect of share-based payment
Under IFRS the 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 the option exercise date.
(f) Returns provision
Under UK GAAP the Group did not record a reserve for sales returns as the financial statement impact was not material. The Group revised this policy on the adoption of IFRS, and now recognises such a provision. For the purposes of US GAAP reporting the impact on net assets of this change in policy was charged as an expense in the US GAAP income statement for 2005/06. The Group does not believe the impact of the change is material quantitatively or qualitatively to the financial statements.
(g) Asset retirement obligations
Where quantifiable, the discounted cost of decommissioning assets installed in leasehold premises is included in the cost of the asset and appropriate decommissioning provisions are recognised. Prior to 2005/06 a provision for decommissioning assets was not material quantitatively or qualitatively to the financial statements. As of 29 January 2006, this is consistent under both IFRS and US GAAP.
(h) Revaluation of properties
Under IFRS, properties may be restated on the basis of appraised values in consolidated accounts prepared in all other respects in accordance with the historical cost convention. Increases in value are credited directly to the revaluation reserve. When revalued properties are sold the gain or loss on sale is calculated based on revalued carrying amounts. Under US GAAP, properties are only revalued if an impairment is deemed to have occurred. Upward revaluations are not permitted.
(i) Depreciation of properties
Prior to the adoption of FRS 15 ‘Tangible fixed assets’ (“FRS 15”) effective 29 January 2000, the buildings element of certain freehold and long leasehold properties was not depreciated under UK GAAP. Subsequent to that date, under UK GAAP and IFRS such property is depreciated, consistent with the requirements of US GAAP. The net difference arising between IFRS and US GAAP therefore represents the impact of depreciation charges applied under US GAAP prior to the adoption of FRS 15.
(j) Derivatives
Under IFRS the fair value of a cash flow hedge on inventory purchases is recorded as a reduction to the inventory. Under US GAAP, the fair value of cash flow hedges is recorded in accumulated other comprehensive income and released to cost of sales when the associated inventory is sold. Prior to 2007/08 the impact of this adjustment was not material quantitatively or qualitatively to the financial statements.
Effect on profit for the financial period of differences between IFRS and US GAAP
| 52 weeks ended 2 February 2008 $m |
53 weeks ended 3 February 2007 $m |
52 weeks ended 28 January 2006 $m |
Note reference |
|
|---|---|---|---|---|
| Profit for the financial period in accordance with IFRS | 215.2 | 266.0 | 235.4 | |
| Sale and leaseback transactions | 1.5 | 1.5 | 1.5 | b |
| Pensions | (2.8) | (4.5) | (3.2) | c |
| Share-based payment | 3.8 | (4.5) | 7.9 | d |
| Depreciation of revalued properties | 0.2 | – | – | i |
| Returns provisions | – | – | (10.8) | f |
| Asset retirement obligations | – | – | (1.8) | g |
| Taxation on reconciling items | 1.9 | 0.2 | 9.0 | |
| US GAAP adjustments before change in accounting principle | 4.6 | (7.3) | 2.6 | |
| Cumulative effect of change in accounting principle | – | (6.0) | – | |
| Profit attributable to equity holders of the Company in accordance with US GAAP | 219.8 | 252.7 | 238.0 | |
| Basic earnings per share in accordance with US GAAP: | 12.9c | 14.6c | 13.7c | |
| Diluted earnings per share in accordance with US GAAP: | 12.8c | 14.3c | 13.7c | |
| Weighted average number of shares outstanding (million) – basic | 1,703.8 | 1,727.6 | 1,736.6 | |
| Weighted average number of shares outstanding (million) – diluted | 1,721.4 | 1,765.1 | 1,739.9 |
Effect on funds attributable to equity holders of the Company of differences between IFRS and US GAAP
| 2 February 2008 $m |
3 February 2007 $m |
Note reference |
|
|---|---|---|---|
| Funds attributable to equity holders of the Company in accordance with IFRS | 1,806.1 | 1,746.0 | |
| Goodwill in respect of acquisitions (gross) | 876.1 | 876.1 | a |
| Accumulated goodwill amortisation | (350.7) | (350.7) | a |
| Sale and leaseback transactions | (10.7) | (12.2) | b |
| Pensions | – | – | c |
| Depreciation of properties | (4.7) | (4.9) | h, i |
| Revaluation of properties | (8.5) | (8.5) | h |
| Share-based payment | (1.5) | (21.3) | d |
| Derivatives | 8.1 | – | j |
| Taxation on reconciling items | 7.0 | 3.4 | |
| US GAAP adjustments | 515.1 | 481.9 | |
| Funds attributable to equity holders of the Company in accordance with US GAAP | 2,321.2 | 2,227.9 |
Reconciliation of funds attributable to equity holders of the Company in accordance with US GAAP
| Funds attributable to equity holders of the Company at beginning of period | 2,227.9 | 2,062.9 |
|---|---|---|
| Adoption of SFAS 123(R) | – | (5.3) |
| 2,227.9 | 2,057.6 | |
| Retained profit attributable to equity holders of the Company | 219.8 | 252.7 |
| Purchase/issue of shares (net) | (23.5) | (55.7) |
| Increase in additional paid-in capital | 18.5 | 2.3 |
| Dividends paid | (123.9) | (108.7) |
| Other comprehensive income | 2.6 | 39.3 |
| Translation differences | (0.2) | 71.9 |
| 2,321.2 | 2,259.4 | |
| Adoption of SFAS 158 | – | (31.5) |
| Funds attributable to equity holders of the Company at end of period | 2,321.2 | 2,227.9 |
Supplemental discussion of presentational differences
Income statement
Cost of sales
Under IFRS, selling costs have been included in cost of sales. Under US GAAP, gross profit is determined before deducting selling costs, as they are not included in cost of sales. Selling costs which have been included under IFRS for the 52 weeks ended 2 February 2008 were $850.2 million (53 weeks ended 3 February 2007: $826.1 million; 52 weeks ended 28 January 2006: $750.1 million).
Pension accounting
The IFRS defined benefit pension charge includes net finance credits of $4.8 million for the 52 weeks ended 2 February 2008 (53 weeks ended 3 February 2007: $2.1 million; 52 weeks ended 28 January 2006; $2.2 million) that would be recognised as a credit to operating profit under US GAAP.
Balance sheet
Deferred taxes
Under IFRS, the Group must disclose the gross deferred tax assets and liabilities as non-current. Under US GAAP, deferred tax assets and liabilities are classified between current and non-current, depending on the items to which they relate, disclosed separately and presented on a net basis, by tax jurisdiction.
Goodwill
US GAAP requires goodwill to be shown separately on the face of the balance sheet.
Trade and other receivables
Trade and other receivables are shown separately on the face of the balance sheet under Article 5 of Regulation S-X of the Securities and Exchange Commission (“SEC”).
Trade and other payables
Trade and other payables are shown separately on the face of the balance sheet under Article 5 of Regulation S-X of the SEC.
Securitised customer receivables
At 28 January 2006, under IFRS, securitised US receivables of $251.0 million were included within trade debtors and bank loans, as the related financing was of a revolving nature and therefore not considered to be an outright sale of such accounts receivable.
Under US GAAP these amounts qualified for off-balance sheet treatment. This was because the receivables were first sold to a special purpose entity, Sterling Jewellers Receivables Corporation, which then sold on the receivables to a qualifying special purpose unconsolidated trust, Sterling Jewellers Receivables Master Note Trust. The trust was legally isolated from the Group; the majority of the interest in the US receivables portfolio held by the trust were principally sold on to institutional investors in the form of fixed-rate investor certificates; and the Group did not maintain control over the receivables portfolio transferred to the trust.
This securitisation of US customer receivables ended on 6 November 2006 and as at 2 February 2008 all US customer receivables are included within trade debtors under IFRS and US GAAP. The Group received servicing fees of $nil (2007; $4.9 million; 2006: $5.6 million) which offset its costs of fulfilling its servicing responsibilities to the trust.
Earnings per share
For US GAAP purposes, the calculation of fully diluted EPS for the 52 weeks ended 2 February 2008 excludes options to purchase 33,793,507 shares (2007: 17,846,848 shares; 2006: 26,826,235 shares), on the basis that their effect on basic EPS was anti-dilutive.
Goodwill and other intangible assets, net
At 2 February 2008 the Group has goodwill on its balance sheet under US GAAP of $408.0 million relating to the US and $148.0 million relating to the UK. The reporting units for the purpose of goodwill impairment testing are the US and UK operating segments. In 2007/08, 2006/07 and 2005/06, the Group performed the required impairment tests of goodwill and determined that there was no impairment.
Employee share schemes
The following tables summarise the information used to calculate the fair value charge for share options accounted for as liability awards under SFAS 123(R) as at 2 February 2008 and 3 February 2007:
| Executive schemes(1) | LTIPs(1) | ||||
|---|---|---|---|---|---|
| As at 2 February 2008 |
As at 3 February 2007 |
As at 2 February 2008 |
As at 3 February 2007 |
||
| Share price | 107p | 122p | 75p | 122p | |
| Exercise price | 95p | 106p | nil | nil | |
| Risk free interest rate | 3.97% | 5.07% | 3.41% | 4.88% | |
| Expected life of options | 2.9 years | 2.1 years | 2.0 years | 2.1 years | |
| Expected volatility | 28% | 28% | 28% | 28% | |
| Dividend yield | 3.4% | 3.0% | 3.6% | 3.0% | |
| Fair value | 40c | 69c | 143c | 229c | |
- Weighted Average
Employee share schemes
Upon adoption of FAS 123(R), the liabilities were recognised at fair value. This resulted in the recognition of a cumulative effect of change in accounting principle by $6.0 million at 29 January 2006. The Group recognised a total share–based payment credit of $3.4 million in the financial period ended 2 February 2008 (2007: $17.2 million charge; 2006: $0.2 million charge).
The following table shows the comparision of compensation expense recognised under APB 25 against fair value for the 52 weeks ended 28 January 2006:
| 2006 $m |
|
|---|---|
| Net income in accordance with US GAAP: As reported |
238.0 |
| Add: stock-based employee compensation expense | 0.7 |
| Deduct: stock-based employee compensation expense determined under fair value method for all awards – net of tax | (4.5) |
| 234.2 |
Post employment benefits
The following tables show information concerning the Group Scheme:
| 2008 $m |
2007 $m |
|
|---|---|---|
| Change in Scheme assets: | ||
| Fair value at beginning of the year | 261.6 | 223.6 |
| Actual return on Scheme assets | (11.8) | 12.7 |
| Employer contributions | 7.2 | 6.8 |
| Members' contributions | 0.9 | 0.9 |
| Benefits paid | (9.9) | (8.1) |
| Foreign currency changes | 0.1 | 25.7 |
| Fair value of Scheme assets at end of year | 248.1 | 261.6 |
| Change in benefit obligation: | ||
| Benefit obligation at beginning of the year | 257.9 | 251.0 |
| Service cost | 8.0 | 7.5 |
| Past service cost | – | 0.2 |
| Interest cost | 13.4 | 12.5 |
| Members' contributions | 0.9 | 0.9 |
| Actuarial gain | (16.6) | (33.4) |
| Benefits paid | (9.9) | (8.1) |
| Foreign currency changes | – | 27.3 |
| Benefit obligation at end of year | 253.7 | 257.9 |
| Funded status – at end of year: | ||
| Amounts recognised in the statement of financial position | ||
| Non current assets | – | 3.7 |
| Non current liabilities | (5.6) | – |
| Net amount recognised in the statement of financial position | (5.6) | 3.7 |
| Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income | ||
| Prior service cost | 8.2 | 9.4 |
| Accumulated loss | 51.2 | 37.9 |
| Accumulated other comprehensive loss | 59.4 | 47.3 |
The components of net periodic pension cost and other amounts recognised in other comprehensive income for the Group Scheme are as follows:
| 2008 $m |
2007 $m |
2006 $m |
|
|---|---|---|---|
| Components of net periodic benefits cost: | |||
| Service cost | 8.0 | 7.5 | 6.5 |
| Interest cost | 13.4 | 12.5 | 10.1 |
| Expected return on Group Scheme assets | (19.1) | (15.4) | (13.1) |
| Amortisation of unrecognised prior service cost | 1.2 | 1.1 | 1.1 |
| Amortisation of unrecognised actuarial loss | 0.9 | 3.3 | 1.6 |
| Net periodic benefit cost | 4.4 | 9.0 | 6.2 |
| Other changes in scheme assets and benefit obligations recognised in other comprehensive income | 12.3 | (53.0) | 50.8 |
| Total recognised in net periodic benefit cost and other comprehensive income | 16.7 | (44.0) | 57.0 |
Amount recognised in the statement of financial position upon application of SFAS 158:
| 2007 before adoption of FAS 158 $m |
Incremental effect of FAS 158 $m |
2007 after adoption of FAS 158 $m |
|
|---|---|---|---|
| Prepaid benefit cost | 51.0 | (51.0) | – |
| Pension asset - funded status | – | 3.7 | 3.7 |
| 51.0 | (47.3) | 3.7 | |
| Deferred income taxes | (15.3) | 14.2 | (1.1) |
| 35.7 | (33.1) | 2.6 |
| 2008 | 2007 | |
|---|---|---|
| Assumptions used to determine benefit obligations (at the end of the year): | ||
| Discount rate | 5.90% | 5.20% |
| Salary increases | 5.00% | 4.60% |
| Assumptions used to determine net periodic pension costs (at the start of the year): | ||
| Discount rate | 5.20% | 4.75% |
| Expected return on scheme assets | 7.20% | 6.50% |
| Salary increases | 4.60% | 4.30% |
| The composition of the assets in the Group Scheme was as follows: | ||
|---|---|---|
| 2008 | 2007 | |
| Equities | 65% | 74% |
| Bonds | 29% | 24% |
| Property | 5% | – |
| Cash | 1% | 2% |
| Total | 100% | 100% |
The long term target allocation for the Group Scheme’s assets is equities 68%, bonds 27% and property 5%.
See note 21 for further information on the Group’s pension plans.
New US accounting standards adopted
FIN 48
On 3 February 2007 the Group adopted FIN 48, ‘Accounting for uncertainty in income taxes – an interpretation of FASB statement no. 109’. The interpretation establishes a two-step approach for recognising and measuring tax benefits, with tax positions only being recognised when considered to be more likely than not sustained upon examination by the taxing authority. The provisions of FIN 48 have been applied to all tax positions on adoption of this interpretation. There was no cumulative effect adjustment to the opening balance of retained earnings arising as a result of the adoption of FIN 48 and no adjustments have been made to the other components of equity or net assets in the statement of financial position.
New accounting standards to be adopted in future periods
SFAS 157
In September 2006 the FASB issued SFAS 157, ‘Fair Value Measurements’ (“SFAS 157”), which provides a single definition of fair value, establishes a framework for the measurement of fair value and expands disclosure about the use of fair value to measure assets and liabilities. SFAS 157 is effective for fiscal years beginning after 15 November 2007, and for interim periods within those fiscal years; SFAS 157 will therefore be applicable for the Group’s fiscal year commencing 3 February 2008. In November 2007, the FASB agreed to defer the effective date of Statement 157 for all non financial assets and liabilities by one year. The Group is currently reviewing the impact of the adoption of SFAS 157 on its financial statements.
SFAS 159
On 15 February 2007 the FASB issued SFAS 159, ‘The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115’ (“SFAS 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The unrealised gains and losses on items for which the fair value option has been elected will be reported in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for fiscal years beginning after 15 November 2007 and for interim periods within those fiscal years. The Group is currently reviewing the impact of the adoption of SFAS 159 on its financial statements.
SFAS 160
In December 2007, the FASB issued SFAS 160, ‘Non controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51’ (‘‘SFAS 160’’). SFAS 160 establishes new accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the non controlling interest will be included in consolidated net income on the face of the income statement. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its non controlling interest. SFAS 160 is effective for fiscal years, and interim periods, beginning on or after 15 December 2008. The Group is currently reviewing the impact of the adoption of SFAS 160 on its financial statements.
SFAS 141(R)
In December 2007, the FASB issued SFAS 141 (Revised 2007),’ Business Combinations’ (‘‘SFAS 141(R)’’). Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non controlling minority interests and includes new disclosure requirements. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after 15 December 2008. The Group is currently reviewing the impact of the adoption of SFAS 141(R) on its financial statements.
SFAS 161
In March 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, which amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement requires companies with derivative instruments to disclose information that should enable financial statements users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. The required disclosures include the fair value of derivative instruments and their gains or losses in tabular format, information about credit risk related contingent features in derivative agreements, counterparty credit risk and a company’s strategies and objectives for using derivative instruments. The Statement expands the current disclosure framework in Statement 133. Statement 161 is effective prospectively for periods beginning on or after November 15, 2008.