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US GAAP reconciliation
31. Summary of differences between Adopted IFRS and US GAAP
The Group's consolidated accounts are prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("Adopted IFRS"), which differs in certain respects from generally accepted accounting principles in the United States ("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 Adopted IFRS and US GAAP, other differences would not have a significant effect on the consolidated net profit or shareholders' funds of the Group.
The differences have been shown as gross of tax with the related taxation shown separately.
Cost of sales
Under Adopted 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 Adopted IFRS for the 53 weeks ended 3 February 2007 were £439.4 million (52 weeks ended 28 January 2006: £416.7 million).
Goodwill
Prior to the adoption of Adopted IFRS,the Group applied UK GAAP FRS 10 'Goodwill and intangible assets' in respect of acquisitions since 1 February 1998, amortising goodwill by equal annual instalments over its estimated useful life, normally 20 years. Under Adopted IFRS, goodwill is required to be carried at cost with impairment reviews carried out annually for impairment in lieu of amortisation.
Under US GAAP, prior to the issue of Statement of Financial Standards ("FAS") 142, goodwill was capitalised and amortised through the consolidated income statement over its estimated useful life (not to exceed 40 years). FAS 142, effective for the Group from 3 February 2002, requires that goodwill be tested annually for impairment in lieu of amortisation.
A historical difference therefore remains between Adopted IFRS and US GAAP representing the unamortised balance of goodwill that was capitalised under US GAAP and arose on acquisitions made prior to 1 February 1998.
Impairment reviews are carried out annually at the reporting unit and cash generating unit levels using the two-step impairment test described in FAS 142 to ensure goodwill is not carried at above its recoverable level. Discounted cash flows are used in the determination of the fair value of the reporting unit, derived from the most recent financial results and plans approved by management.
At 3 February 2007, the Group had goodwill on its balance sheet of £15.5 million under Adopted IFRS and £282.3 million under US GAAP.
Sale and leaseback transactions
In the Group's consolidated accounts prepared under Adopted IFRS, sale and leaseback transactions of freehold and long leasehold properties result in an operating lease established at fair value, and are 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 Consolidated income statement in equal instalments over the life of the lease.
Pensions
As at 3 February 2007, the Group adopted FAS 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 in the year they occur through other comprehensive income, other than the net periodic benefit cost pursuant to FAS 87 'Employers accounting for pensions' which is reported within the income statement. This results in the Group Scheme asset on the balance sheet being equivalent between Adopted IFRS and US GAAP. However, differences remain within operating profit as US GAAP recycles actuarial gains and losses, outside the 10% corridor, from other comprehensive income to the income statement using the FAS 87 amortisation policy, which amortises these through operating profit over the average service lives of the employees. Additionally, US GAAP expected return on pension asset and interest charges are reported in operating profit but are included in finance income and expense under Adopted IFRS.
In 2005/06 prior to the adoption of FAS 158, the Group complied with FAS 87, 88 and 106 as amended by FAS 132(R) 'Employers' disclosure about pensions and other post-retirement benefits'. The Group 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 does not have such a liability at 3 February 2007. Consequently, the additional minimum liability above the intangible asset at 28 January 2006 is released through other comprehensive income during 2006 prior to application of FAS 158.
The pension asset at 3 February 2007 prior to application of FAS 158 is therefore £25.9 million (2006: £27.1 million), being the cumulative employer contributions in excess of net periodic benefit cost. Following application of FAS 158, the Group must record a pension asset as at 3 February 2007 of £1.9 million, being the funded status of the Group Scheme. To achieve this, FAS 158 requires a one-time adjustment at 3 February 2007 to accumulated other comprehensive income (AOCI) in shareholders' equity (£24.0 million before tax effect).
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 FAS 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 FAS 123(R) "Share-based payment" ("FAS 123(R)") using the 'modified prospective application method', recognising the fair value of option awards over the award vesting period.
The Group operates a number of employee share schemes, set in note 28. The Executive and LTIP share schemes 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. 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 FAS 123 'Accounting for stock-based compensation' were also treated as equity awards under US GAAP. On the application of FAS 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 and revalued at every reporting date until the option has been settled or until equity-classified.
Employers' payroll taxes in respect of share-based payment
Under Adopted IFRS, 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.
Earnings per share
Under IAS 33 'Earnings per share' and FAS 128 'Earnings per share', the computation of the weighted average number of shares and adjusted weighted average number of shares outstanding is generally consistent. The calculation of fully diluted EPS for the 53 weeks ended 3 February 2007 excludes options to purchase 17,846,848 shares (2006: 26,826,235 shares; 2005: 16,263,700 shares), on the basis that their effect on basic EPS was anti-dilutive. Each ADS represents ten ordinary shares.
Returns provision
The Group had not historically made provision for sales returns as the impact on profit and the impact on net assets was not material. The Group revised its policy on the adoption of Adopted IFRS and now recognises such a provision.
For the purposes of US GAAP reporting, the impact on net assets of this change in policy has been 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 individually to any financial statement period presented. As a result, GAAP differences arise on the 2005/06 reconciliation of Adopted IFRS to US GAAP profit for the financial period, and in the reconciliation of net assets at 29 January 2005, representing the net asset impact of establishing returns provisions. The charge to US GAAP profit in 2005/06 for establishing returns provisions was £4.0 million net of tax.
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. As of 29 January 2006, this is consistent under both Adopted IFRS and US GAAP.
Revaluation of properties
Under Adopted 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.
Depreciation of properties
Prior to the adoption of FRS 15 'Tangible fixed assets' from 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 Adopted IFRS such property is depreciated, consistent with the requirements of US GAAP. The net difference arising between Adopted IFRS and US GAAP therefore represents depreciation charges applied under US GAAP prior to the adoption of FRS 15.
Securitised customer receivables
In 2006, under Adopted IFRS, securitised US receivables of £141.8 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 ("the Transferor"), 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 3 February 2007 all US customer receivables are included within trade debtors under Adopted IFRS and US GAAP.
The Group received servicing fees of £2.6 million (2006; £3.1 million; 2005: £2.9 million) which offset its costs of fulfilling its servicing responsibilities to the trust.
Consolidation
Except for the US securitised customer receivables qualifying for off-balance sheet treatment in 2005/06, there were no other differ ences in the consolidation treatment of Group assets and liabilities due to differences in Adopted IFRS and US GAAP consolidation standards.
Effect on profit for the financial period of differences between Adopted IFRS and US GAAP
| 53 weeks ended 3 February 2007 £m |
52 weeks ended 28 January 2006 £m |
52 weeks ended 29 January 2005 £m |
|
|---|---|---|---|
| Profit for the financial period in accordance with Adopted IFRS | 141.5 | 130.8 | 134.8 |
| Pensions | (2.4) | (1.8) | (0.9) |
| Sale and leaseback transactions | 0.8 | 0.8 | 1.0 |
| Returns provisions | – | (6.0) | – |
| Share-based payment | (2.4) | 4.4 | – |
| Asset retirement obligations | – | (1.0) | – |
| Taxation | 0.1 | 5.0 | 2.6 |
| US GAAP adjustments before change in accounting principle | (3.9) | 1.4 | 2.7 |
| Cumulative effect of change in accounting principle | (3.2) | – | – |
| Retained profit attributable to shareholders in accordance with US GAAP | 134.4 | 132.2 | 137.5 |
| Basic earnings per ADS in accordance with US GAAP: | |||
| – Before change in accounting principle | 79.7p | 76.1p | 79.4p |
| – Cumulative effect of change in accounting principle | (1.9)p | – | – |
| – After change in accounting principle 77.8p 76.1p 79.4p Diluted earnings per ADS in accordance with US GAAP: | 77.8p | 76.1p | 79.4p |
| – Before change in accounting principle | 78.0p | 76.0p | 79.1p |
| – Cumulative effect of change in accounting principle | (1.9)p | – | – |
| – After change in accounting principle | 76.1p | 76.0p | 79.1p |
| Weighted average number of ADSs outstanding (million) – basic | 172.8 | 173.7 | 173.2 |
| Weighted average number of ADSs outstanding (million) – diluted | 176.5 | 174.0 | 173.8 |
Effect on shareholders' funds of differences between Adopted IFRS and US GAAP
| 3 February 2007 £m |
28 January 2006 £m |
|
|---|---|---|
| Shareholders' funds in accordance with Adopted IFRS | 886.3 | 878.9 |
| Goodwill in respect of acquisitions (gross) | 462.4 | 501.0 |
| Adjustment to goodwill | (53.7) | (59.7) |
| Accumulated goodwill amortisation | (142.0) | (153.0) |
| Sale and leaseback transactions | (6.2) | (7.1) |
| Pensions | – | 14.4 |
| Depreciation of properties | (2.5) | (2.5) |
| Revaluation of properties | (4.3) | (4.3) |
| Share-based payment | (10.8) | – |
| Taxation | 1.7 | (2.2) |
| US GAAP adjustments | 244.6 | 286.6 |
| Shareholders' funds in accordance with US GAAP | 1,130.9 | 1,165.5 |
| Reconciliation of shareholders' funds in accordance with US GAAP | ||
| Shareholders' funds at beginning of period | 1,165.5 | 1,056.0 |
| Adoption of FAS 123(R) | (2.8) | - |
| 1,162.7 | 1,056.0 | |
| Retained profit attributable to shareholders | 134.4 | 132.2 |
| (Purchase)/issue of shares (net) | (29.6) | 1.9 |
| Increase/(decrease) in additional paid-in capital | 1.2 | (0.3) |
| Dividends paid | (57.8) | (52.7) |
| Other comprehensive income/(expense) | 21.8 | (18.1) |
| Translation differences | (85.0) | 46.5 |
| 1,147.7 | 1,165.5 | |
| Adoption of FAS 158 | (16.8) | – |
| Shareholders' funds at end of period | 1,130.9 | 1,165.5 |
Employee share schemes
The following tables summarise the information used to calculate the fair value charge for share options accounted for as liability awards on adoption of FAS 123(R) on 29 January 2006 and as at 3 February 2007, and the comparison of compensation expense recognised in prior years under APB 25 against fair value:
| Executive schemes(1) | LTIPs(1) | ||||
|---|---|---|---|---|---|
| As at 3 February 2007 |
As at 29 January 2006 |
As at 3 February 2007 |
As at 29 January 2006 |
||
| Share price | 122p | 104p | 122p | 104p | |
| Exercise price | 106p | 103p | nil | nil | |
| Risk free interest rate | 5.07% | 4.42% | 4.88% | 4.44% | |
| Expected life of options | 2.1 years | 3.2 years | 2.1 years | 1.6 years | |
| Expected volatility | 28% | 36% | 28% | 36% | |
| Dividend yield | 3.0% | 2.7% | 3.0% | 2.7% | |
| Fair value | 35p | 27p | 116p | 100p | |
| (1) Weighted average (2) The fair value of fixed share option schemes is that determined at grant date. |
|||||
| 2006 £m |
2005 £m |
|
|---|---|---|
| Net income in accordance with US GAAP: | ||
| As reported | 132.2 | 137.5 |
| Add: stock-based employee compensation expense | 0.4 | 3.2 |
| Deduct: stock-based employee compensation expense determined under fair value method for all awards – net of tax | (2.5) | (2.6) |
| 130.1 | 138.1 | |
Under FAS 123(R) £3.2 million has been charged in the income statement for the 53 weeks ended 3 February 2007 in respect of the cumulative effect of a change in accounting principle related to changes in classification of awards on adoption. Additionally, the charge for the 53 weeks ended 3 February 2007 in respect of option awards under FAS 123(R) was £6.0 million.
Post employment benefits
The following table shows a reconciliation of the opening and closing balances of the projected benefit obligation under the Group Scheme.
| 2007 £m |
2006 £m |
|
|---|---|---|
| At beginning of period | 141.8 | 108.4 |
| Service cost | 4.0 | 3.6 |
| Past service cost | 0.1 | – |
| Interest cost | 6.6 | 5.6 |
| Members' contributions | 0.5 | 0.5 |
| Actuarial gain | (17.8) | 28.1 |
| Benefits paid | (4.3) | (4.4) |
| At end of period | 130.9 | 141.8 |
The following table shows the change in Group Scheme assets: |
||
|---|---|---|
| 2007 £m |
2006 £m |
|
| At beginning of period | 126.3 | 106.5 |
| Actual return on assets | 6.7 | 19.4 |
| Employer contributions | 3.6 | 4.3 |
| Members' contributions | 0.5 | 0.5 |
| Benefits paid | (4.3) | (4.4) |
| At end of period | 132.8 | 126.3 |
Funded status prior to application of FAS 158: |
||
|---|---|---|
| 2007 – before adoption of FAS 158 £m |
2006 £m |
|
| Funded status | 1.9 | (15.5) |
| Unrecognised prior service cost | 4.8 | 5.3 |
| Unrecognised net actuarial loss | 19.2 | 37.3 |
| Net amount recognised | 25.9 | 27.1 |
Amounts reflected in statement of financial position prior to application of FAS 158: |
||
|---|---|---|
| 2007 – before adoption of FAS 158 £m |
2006 £m |
|
| Prepaid benefit cost | 25.9 | – |
| Accrued pension liability | – | (6.4) |
| Intangible asset | – | 5.3 |
| Accumulated other comprehensive income | – | 28.2 |
| 25.9 | 27.1 | |
Amount recognised in the statement of financial position after application of FAS 158: |
||||
|---|---|---|---|---|
| 2007 – before adoption of FAS 158 £m |
Incremental effect of FAS 158 £m |
2007 after adoption of FAS 158 £m |
||
| Prepaid benefit cost | 25.9 | – | 25.9 | |
| Accumulated other comprehensive income | – | (24.0) | (24.0) | |
| 25.9 | (24.0) | 1.9 | ||
| Deferred tax liability | (7.8) | 7.2 | (0.6) | |
| 18.1 | (16.8) | 1.3 | ||
The components of pension expense which arise under FAS 87 for the Group’s pension plans are estimated to be as follows: |
|||
|---|---|---|---|
| 2007 £m |
2006 £m |
2005 £m |
|
| Service cost | 4.0 | 3.6 | 3.1 |
| Interest cost | 6.6 | 5.6 | 5.3 |
| Expected return on Group Scheme assets | (8.2) | (7.2) | (6.9) |
| Amortisation of prior service cost | 0.6 | 0.6 | 0.6 |
| Recognised actuarial loss | 1.8 | 0.9 | 0.5 |
| Net periodic cost | 4.8 | 3.5 | 2.6 |
| 2007 £m |
2006 £m |
|
|---|---|---|
| Additional minimum liability (released)/included in other comprehensive income | (28.2) | 28.2 |
Assumptions used to determine benefit obligations (at the end of the year): |
|||
|---|---|---|---|
| 2007 £m |
2006 £m |
||
| Discount rate | 5.20% | 4.75% | |
| Long term rate of return | 7.20% | 6.50% | |
| Salary increases | 4.60% | 4.30% | |
Assumptions used to determine net periodic pension costs (at the start of the year): |
|||
|---|---|---|---|
| 2007 £m |
2006 £m |
||
| Discount rate | 4.75% | 5.30% | |
| Long term rate of return | 6.50% | 6.80% | |
| Salary increases | 4.30% | 4.30% | |
The composition of the assets in the Group Scheme was as follows: |
|||
|---|---|---|---|
| 2007 £m |
2006 £m |
||
| Equities | 74% | 71% | |
| Bonds | 24% | 25% | |
| Cash | 2% | 4% | |
| Total | 100% | 100% | |
The long term target allocation for the Group Scheme's assets is: equities 70% and bonds 30%.
See note 21 for further information on the Group's pension plans. For US GAAP purposes, the pension fund asset included in the Group's consolidated balance sheet would be classified as a non-current asset.
New US accounting standards adopted
FAS 123 (revised 2004) 'Share-based payment' requires the compensation cost relating to share-based payment transactions be recognised in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued. Details are given here.
FAS 151 'Inventory costs - an amendment to ARB No. 43' clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material requiring those items to be expensed in the current period and the allocation of fixed production overheads to the cost of conversion to be based on normal capacity of the production facility. There has been no impact on the results or net assets of Signet Group plc on adoption of this standard.
FAS 154 'Accounting changes and error correction - a replacement of APB Opinion No. 20 and FASB Statement No. 3' requires retrospective application of prior periods' financial statements for changes in accounting principle. There has been no impact on the results or net assets of the Group on adoption of this standard.
FAS 158 'Employer's accounting for defined benefit pension and other post-retirement plans - an amendment to FASB statements No. 87, 88, 106, and 132(R)' requires employers to recognise the overfunded or underfunded status of a defined benefit pension and other post-retirement plans as an asset or liability in its statement of financial position and to recognise changes in that funded status in the year in which the changes occur through comprehensive income other than the net periodic benefit cost which is recognised in the income statement. Details are given here.
New US accounting standards not adopted
FAS 155 'Accounting for certain hybrid financial instruments - an amendment of FASB Statements No. 133 and 140' was issued in February 2006 to amend certain aspects of FAS 133 'Accounting for derivative instruments and hedging activities' and FAS 140 'Accounting for transfers and servicing of financial assets and extinguishments of liabilities'. This statement is effective for years beginning after 15 September 2006. The Group believes that the adoption of FAS 155 will not have a significant effect on its consolidated financial statements.
FAS 156 'Accounting for servicing of financial assets - an amendment of FASB Statement No. 140' was issued in March 2006. This statement amends FASB Statement No. 140, 'Accounting for transfers and servicing of financial assets and extinguishment of liabilities', with respect to the accounting for separately recognised servicing assets and servicing liabilities. This statement is effective for fiscal years beginning after 15 September 2006. The Group believes that the adoption of FAS 156 will not have a significant effect on its consolidated financial statements.
FAS 157 'Fair value measurements' was issued in September 2006. This standard defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for fiscal years beginning after 15 November 2007. The Group believes that the adoption of FAS 157 will not have a significant effect on its consolidated financial statements.
FAS 159 'The fair value option for financial assets and financial liabilities - Including an amendment of FASB Statement No. 115 was issued in February 2007 and permits entities to measure many financial instruments and certain other items at fair value. This statement is effective for fiscal years beginning after 15 November 2007. The Group believes that the adoption of FAS 159 will not have a significant effect on its consolidated financial statements.
FIN 48 'Accounting for uncertainty in income taxes - an interpretation of FASB statement no. 109' was issued in June 2006. The interpretation establishes a two-step approach for recognising and measuring tax benefits, with tax positions only to be recognised when considered to be more likely than not sustained upon examination by the taxing authority. Disclosures are required at the end of each reporting period about uncertainties in the Group's tax position. The Group is currently in the process of quantifying the effect of adoption of FIN 48 on its results and net assets. The Group believes that the adoption of FIN 48 will not have a significant effect on its consolidated financial statements.