Reported results - 2003
Differences between UK and US generally accepted accounting principles - Interim

Differences between UK and US generally accepted accounting principles

As at 30 June 2003

The Group prepares its financial statements in accordance with generally accepted accounting principles in the United Kingdom ("UK GAAP") which differ from those generally accepted in the United States ("US GAAP"). The following statements summarise the adjustments reconciling profit on ordinary activities after taxation and equity shareholders' deficit under UK GAAP to the amounts reported had US GAAP been applied in respect of the six months ended 30 June 2003.

Profit for the six months ended 30 June 2003

	Notes	2003 US$m*		2003 £m
Profit for the six months ended 30 June 2003 as reported in the Group profit and loss account under UK GAAP		168		102
Pension costs	(a)	(12)		(7)
Capitalised interest	(b)	-		-
Long-term incentive plan	(c)	(2)		(1)
Savings-related share option scheme	(d)	(2)		(1)
Mark to market adjustments on derivatives	(e)	(5)		(3)
Debt facility arrangement fees	(f)	(8)		(5)
Business combination - goodwill	(g)	60		36
Intangible asset amortisation	(g)	(13)		(8)
European operations restructuring	(h)	41		25
Deferred tax on adjustments		-		-
Net income under US GAAP		227		138

Equity shareholders' deficit

	Notes	2003 US$m*		2003 £m
Equity shareholders' deficit as reported in the restated Group balance sheet under UK GAAP		(530)		(321)
Pension costs	(a)	17		10
Capitalised interest	(b)	7		4
Shares held by the employee benefit trust	(c)	(5)		(3)
Mark to market adjustments on derivatives	(e)	(7)		(4)
Debt facility arrangement fees	(f)	-		-
Business combination - goodwill	(g)	172		104
Intangible asset amortisation	(g)	(36)		(22)
European operations restructuring	(h)	41		25
Deferred taxation on adjustments		13		8
Proposed dividend	(i)	102		62
Equity shareholders' deficit under US GAAP		(226)		(137)

*  US dollar equivalents are provided for reader convenience at the 30 June 2003 exchange rate of £1:US$1.650.

Notes

1. Pension costs
   Under UK GAAP, pension costs are determined in accordance with the UK Financial Reporting Standard FRS 17. The pension asset or liability in the balance sheet represents the difference between the market value of the pension scheme assets at the balance sheet date and the present value of the pension scheme liabilities at that date, net of deferred tax. Actuarial gains and losses of the plan are recognised immediately in the statement of total recognised gains and losses and prior service costs are recognised in full in the period they become vested.
   
   Under US GAAP, pension costs are determined in accordance with the requirements of the Statements of Financial Accounting Standards (FAS) 87 and 88. US GAAP requires valuation of plan assets to be based on their fair value at the date of the financial statements and plan obligations to be based on assumed discount rates in accordance with plan objectives at that date. The effect of changes in experience on actuarial calculations is not recognised immediately as in the UK but rather, when they exceed a 10% corridor and are amortised over the remaining expected service lives of employees. In addition, any prior service costs are amortised over the remaining service lives of applicable employees.
2. Capitalised interest
   Under US GAAP, interest incurred as part of the cost of constructing fixed assets is capitalised and amortised over the lives of the qualifying assets in accordance with FAS 34. In accordance with common UK practice, Gallaher does not capitalise such interest in its financial statements.
3. Long-term incentive plan / shares held by the employee benefit trust ("EBT")
   Under UK GAAP, shares of the Company held by the EBT to satisfy rights to shares arising from Gallaher's long-term share incentive plans are recorded at cost as fixed asset investments and amortised over a period of three years, after which the share awards are expected to vest. Under US GAAP, these shares are recorded at cost and reflected as a deduction from shareholders' funds. In addition, under US GAAP, the estimated intrinsic value of the benefits accruing to individuals during the period from share awards is charged to the income statement.
4. Savings-related share option scheme
   Under UK GAAP, the Company is not required to charge to the profit and loss account any benefits accruing to individuals under its savings-related share option scheme. Under US GAAP, the difference between the share price at the date of the option grant and the option exercise price, must be charged to the income statement over the option period, being three, five or seven years.
5. Derivative financial instruments
   Under UK GAAP, derivative financial instruments that reduce exposures on anticipated future transactions may be accounted for using hedge accounting. Under US GAAP, FAS 133 requires that all derivatives be recorded on the balance sheet at fair value and changes in the fair values be recognised immediately in earnings where specific hedge accounting criteria are not met. The Group has decided not to satisfy the FAS 133 requirements to achieve hedge accounting, where permitted and as such all changes in fair value are recognised immediately in earnings.
6. Debt facility arrangement fees
   Under UK GAAP, debt facility arrangement fees are expensed as incurred when the expected timing and quantum of drawdown is uncertain. Under US GAAP these fees are capitalised and amortised over the facility term, regardless of expectation of drawdown.
7. Business combinations - goodwill and intangible asset amortisation
   Both UK and US GAAP require purchase consideration to be allocated to the net assets acquired at their fair value on the date of acquisition. Under UK GAAP, goodwill arising, and separately identifiable and separable intangible assets acquired on acquisition are capitalised and amortised over their estimated useful lives.
   
   Under US GAAP goodwill arising and identifiable intangible assets have been capitalised in accordance with FAS 141. The identifiable intangible assets are being amortised over their estimated useful lives. In accordance with FAS 142 goodwill is no longer amortised but is tested annually for impairment.
8. Accounting for costs associated with European operations restructuring
   In July 2002, the FASB issued FAS 146, 'Accounting for costs associated with exit or disposal activities'. This standard requires the Company to recognise certain costs associated with disposal activities when they are incurred, rather than at the date of a commitment to a disposal plan. FRS 12 the equivalent UK standard requires that similar costs are provided for on a commitment basis. As a result of the recently announced European operations restructuring we have provided for certain costs which are not yet eligible under FAS 146. This results in an adjustment to US net income of a £23m credit.
9. Ordinary dividends
   Under UK GAAP, ordinary dividends are provided in the financial statements in the period in which they are proposed by the board for approval by the shareholders. Under US GAAP, dividends are not provided for until declared.

Source: Gallaher Group Plc interim report 2003