Reported results - 2004
Differences between UK and US generally accepted accounting principles - Final

Notes

1. Pension costs

   Under UK GAAP, pension and post-retirement healthcare costs and liabilities are determined in accordance with the UK Financial Reporting Standard FRS 17, Retirement Benefits, whereas under US GAAP these costs and liabilities are determined primarily in accordance with the requirements of FAS No. 87, Employers' Accounting for Pension, FAS No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and FAS No. 106, Employers' Accounting for Post Retirement Benefits other than Pensions.

   Under FRS 17, the expected costs of providing retirement benefits are charged to the profit and loss account over the period benefiting from the employee's service based upon actuarial methodologies that are similar to those applied under US GAAP. Variations from the expected costs are recognised as they occur in the statement of total recognised gains and losses, with pension plan assets and liabilities included in the Group balance sheet at fair value. Under UK GAAP pension assets in the balance sheet are recognised at their market value at the balance sheet date, whereas under US GAAP the valuation is based on a market-related value.

   A significant difference between UK and US GAAP can result from the application of the 'corridor approach' under US GAAP, whereby variations from expected costs are recognised in the profit and loss account and balance sheet over the expected service lives of the 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 US GAAP, the estimated intrinsic value of the benefits accruing to individuals during the period from share awards held by the EBT to satisfy rights to shares arising from Gallaher's long-term share incentive plans, is remeasured each reporting period and charged to the income statement over the remaining vesting period of the share awards. Under UK GAAP the intrinsic value charged to the income statement over the vesting period is measured at the date of grant.

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. Business combinations - goodwill and intangible asset amortisation

   In connection with a business combination, both UK and US GAAP require purchase consideration to be allocated to net assets acquired at their fair value on the date of acquisition, although the criteria for allocating amounts to intangible assets differs. For US GAAP purposes, Gallaher allocated a portion of its consideration to amortising intangible assets as required by FAS No.141, Business Combinations, whereas for UK GAAP, such amounts were included in goodwill, as they did not meet the criteria for separable allocation.

   Furthermore, for UK GAAP Gallaher amortises the balance of goodwill over its useful economic life, whereas for US GAAP purposes Gallaher does not amortise goodwill, but rather as required by FAS No.142, Goodwill and Other Intangible Assets, test it annually, and whenever events or circumstances occur that would more likely than not reduce the fair value of the reporting unit to below its carrying value, Gallaher writes down the goodwill to its fair value.

7. Accounting for costs associated with European operations restructuring

   FAS 146, 'Accounting for Costs Associated with Exit or Disposal Activities', requires the Company to recognise certain costs associated with restructuring activities when they are incurred, rather than at the date of a commitment to a restructuring plan. FRS 12, the equivalent UK standard, requires that similar costs are provided for on a commitment basis. As a result of the European operations and administrative restructuring Gallaher has provided for certain costs under UK GAAP, which are not yet eligible under FAS 146.

8. 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.