The Group prepares its financial statements in accordance with international financial reporting standards as adopted by the EU ('IFRS') which differ from those generally accepted in the United States of America ('US GAAP'). The following statements summarise the adjustments reconciling profit for the period attributable to equity shareholders and equity shareholders' funds under IFRS to the amounts reported had US GAAP been applied in respect of the period ended 30 June 2006.
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Pension costs
Under IFRS, pension and other post-retirement benefits costs and net liabilities are determined in accordance with the international accounting standard IAS 19 'employee benefits' ('IAS 19'), whereas under US GAAP these costs and liabilities are determined primarily in accordance with the requirements of financial accounting standards board ('FASB') statement of financial accounting standards ('FAS') no. 87 'employers' accounting for pensions', 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'.
Actuarial gains and losses are recognised under IAS 19 (amended), in full in the period in which they occur. They are recognised outside of the income statement in retained earnings and presented in the statement of recognised income and expense in equity.
Under US GAAP, the Group applies the 'corridor approach' whereby variations from expected costs are recognised in the income statement and balance sheet over the expected service lives of the employees.
Under IFRS, pension scheme 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.
Under IAS 19, the expected costs of providing retirement benefits are charged to the income statement over the period benefiting from the employee's service based upon actuarial methodologies that are similar to those applied under US GAAP.
Under IFRS, the valuation of the plan assets and the underlying assumptions are updated at the half year in accordance with IAS 19. US GAAP does not require half year valuations and therefore there may be some timing differences used in the assumptions under both methods.
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Financial instruments
Under IFRS, the carrying value of non-derivative financial liabilities has been adjusted for changes in their fair value, with the change recognised in earnings, where subject to effective fair value hedges. Changes in the fair value of foreign exchange derivatives are recognised immediately in earnings except where they are an effective hedge of a net investment in foreign operations in which case the changes are taken direct to equity.
Under US GAAP FAS no. 133 'accounting for derivative instruments and hedging activities' ('FAS no. 133'), the requirements for determining whether a fair value or net investment hedge is effective differ from the rules provided by relevant standards under IFRS and the Group has decided not to satisfy the FAS no. 133 requirements to hedge account for any derivative financial instrument and accordingly, changes in the fair values of these instruments have been recognised in earnings. In addition to this, no changes in the fair values of non-derivative financial liabilities have been recognised under US GAAP.
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Intangible assets
Under UK generally accepted accounting principles ('UK GAAP'), prior to transition to IFRS, intangible assets acquired in business combinations, such as brands, were regarded as indistinguishable from goodwill and were subsumed within the goodwill balance. On transition to IFRS, such UK GAAP amounts remain within goodwill.
US GAAP requires that the cost of investment is allocated to the acquired entity's assets and liabilities based on fair values to the acquirer at the date of acquisition. FAS no. 141 'business combinations' provides specific criteria for the initial recognition and measurement of intangible assets separately from goodwill.
On transition to IFRS, goodwill is no longer amortised and its transition value is, as under US GAAP, tested annually for impairment and whenever events or circumstances occur that would more likely than not reduce the recoverable amount of the cash-generating unit to which goodwill is allocated to below its carrying value.
Under US GAAP, an impairment loss is indicated only when the carrying value of a long lived asset is not recoverable from its discounted cash flows.
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Restructuring costs
Under IFRS, a provision for restructuring costs is recognised when an entity meets a number of specific criteria indicating: a present obligation existing as a result of a past event; it being probable that an outflow of resources will be required to settle the obligation; and, that a reliable estimate can be made of the amount of the obligation, in accordance with IAS 37 'provisions, contingent liabilities and contingent assets'.
Under US GAAP, FAS no. 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, or in the case of redundancies, rateably over any future service period required in order to receive termination benefits for the employees rather than at the date of commitment to a restructuring plan.
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Negative goodwill on acquisition
Where the net fair value of the assets acquired and liabilities assumed exceeds the purchase price, under IFRS the measurement of the purchase consideration and all identifiable assets and liabilities should be reassessed. If negative goodwill remains after this reassessment of cost and fair values, the balance is credited to the income statement in the year of acquisition.
Under US GAAP FAS no. 141, negative goodwill should proportionally reduce the fair values assigned, on a pro-rata basis, to all non-current assets acquired, except for: (1) financial assets other than investments accounted for by the equity method; (2) assets to be disposed of by sale; (3) deferred taxes; and, (4) pre-paid assets relating to pension and other post-retirement benefit plans. As such, the Group has allocated £3m of negative goodwill arising on the acquisition of CITA on a pro-rata basis across its eligible assets.
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Deferred taxation
Deferred tax is provided on the US GAAP adjustments and on items for which there can be a timing difference in recognition under US GAAP from IFRS.
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Capitalised interest
Under IFRS, the Group has chosen not to capitalise interest incurred as part of the cost of constructing fixed assets. Under US GAAP, the interest incurred is required to be capitalised and amortised over the useful economic lives of the qualifying assets in accordance with FAS no. 34, 'capitalisation of interest costs'.
