J Sainsbury plc: Annual Review 2003: Full financials - Notes to the financial statements

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1 Accounting policies

Basis of the financial statements

These financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain properties, in accordance with the Companies Act 1985 and applicable accounting standards. No profit and loss account is presented for the Company as permitted by Section 230(3) of the Companies Act 1985. The financial year represents the 52 weeks ended Saturday 29 March 2003 (prior year the 52 weeks ended Saturday 30 March 2002).

The Group has adopted the transitional disclosure requirements of FRS 17.

Consolidation

The Group’s financial statements combine the results of the Company and all its subsidiaries, associated undertakings and joint ventures, to the extent of group ownership.

The results of subsidiaries and associated undertakings are included in the Group profit and loss account from the date of acquisition, or in the case of disposals, up to the effective date of disposal.

The Group’s interests in its joint ventures are accounted for using the gross equity method. The Group’s interests in its associated undertakings are accounted for using the equity method. In a joint arrangement that is not an entity, the Group accounts for its own assets, liabilities and cash flows measured according to the terms of the agreement governing the arrangement.

Goodwill

Goodwill is recognised as an asset on the Group’s balance sheet in the year in which it arises and, subject to impairment review, is amortised on a straight line basis over its finite life, a maximum of 20 years, and only under specific circumstances will it be assumed that goodwill has an indefinite economic life.

Goodwill arising on acquisitions prior to 8 March 1998 has been set off against reserves.

Turnover

Turnover consists of sales through retail outlets, sales of completed development properties and, in the case of Sainsbury’s Bank plc, interest receivable, fees and commissions.

Cost of sales

Cost of sales consists of all costs to the point of sale including warehouse and transportation costs, all the costs of operating retail outlets and, in the case of Sainsbury’s Bank plc, interest payable.

Deferred tax

Provision for deferred tax is made in respect of all timing differences that have originated, but not reversed, by the balance sheet date. The provision for deferred tax is not discounted. Deferred tax assets are only recognised to the extent that it is regarded that they will be recovered. Deferred tax is not provided on unremitted earnings of subsidiaries, where no commitment to remit these earnings had been made.

Intangible fixed assets

Pharmacy licences are included in intangible assets and amortised on a straight line basis over their useful economic life of 15 years. Other licences are amortised over three years.

Tangible fixed assets

Depreciation is provided on a straight line basis over the anticipated useful economic lives of the assets using the following rates:

Freehold buildings and leasehold properties – 50 years, or the lease term if shorter

Fixtures, equipment (including computer software) and vehicles – 3 to 15 years

Freehold land is not depreciated.

Capitalisation of interest

Interest incurred on borrowings for the financing of specific property developments is capitalised gross of tax relief.

Leased assets

Assets funded through finance leases are capitalised and the resulting lease obligations are included in creditors net of finance charges. Interest costs on finance leases are charged direct to the profit and loss account. Rentals under operating leases are charged on a straight line basis up to the date of the next rental review. Operating lease income consists of rentals from properties held for disposal or subtenant agreements.

Pension costs

The costs of providing pensions for employees are charged in the profit and loss account in accordance with the recommendations of independent qualified actuaries. Any funding surpluses or deficits that may arise from time to time are amortised over the average service life of members of the relevant scheme using the projected unit cost method.

Stock

Stocks are valued at the lower of cost and net realisable value. Stocks at warehouses are valued on a first in first out basis. Those at retail outlets are valued at calculated average cost prices.

Foreign currencies

On consolidation, assets and liabilities of foreign undertakings are translated into sterling at year-end exchange rates. The results of foreign undertakings are translated into sterling at average rates of exchange for the year.

Exchange differences arising from the retranslation at year-end exchange rates of the net investment in foreign undertakings, less exchange differences on foreign currency borrowings or forward contracts which finance or hedge those undertakings, are taken to reserves and are reported in the statement of total recognised gains and losses.

Trading transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction.

Financial instruments

The derivative financial instruments used by the Group to manage its interest rate and currency risks are interest rate swaps and swap options, cross currency swaps, forward rate contracts and currency options.

Interest payments or receipts arising from derivative instruments are recognised within net interest payable over the period of the contract. Any premia or discounts arising are amortised over the life of the instruments.

Forward currency contracts entered into with respect to trading transactions are accounted for as hedges, with the instrument’s impact on profit not recognised until the underlying transaction is recognised in the profit and loss account.

Termination payments made or received in respect of derivatives are spread over the life of the underlying exposure in cases where the underlying exposure continues to exist and taken to the profit and loss account where the underlying exposure ceases to exist.

2 Segmental analysis of turnover, profit and net assets

2003	Turnover¹ £m	Before exceptional items £m	Exceptional items £m	Group total £m	Net assets² £m
		Profit on ordinary activities before tax



Food retailing and financial services – UK	14,441	594	(55)	539	5,753
Property development – UK	145	19	–	19	195
Food retailing – US	2,844	139	(10)	129	923

Total	17,430	752	(65)	687	6,871
Joint ventures		3	–	3	9
Loss on sale of properties
– Food retailing UK			(7)	(7)
– Food retailing US			(4)	(4)
Profit on disposal of operations
– DIY retailing UK			61	61
Net interest payable		(60)	–	(60)

Underlying profit before tax		695	(15)	680
Amortisation of goodwill – US		(13)	–	(13)

Group profit before tax		682	(15)	667

Non-operating assets and liabilities (not allocated)³					(404)
Net borrowings (not allocated)⁴					(1,404)

Group net assets					5,072


All of the above amounts relate to continuing operations.

Profit on ordinary activities before tax

2002

Turnover¹
£m

Before
exceptional
items
£m

Exceptional
items
£m

Group
total
£m

Net
assets²
£m

Food retailing and financial services – UK

14,006

527

(30)

497

5,274

Property development – UK

112

–

174

Food retailing – US

3,036

137

(8)

129

960

Continuing operations

17,154

679

(38)

641

6,408

Discontinued operations – Food retailing Egypt

(2)

–

(2)

–

Total

17,162

677

(38)

639

6,408

Joint ventures

(1)

–

(1)

(Loss)/profit on sale of properties

– Food retailing UK

(5)

– Food retailing US

Net interest payable

(49)

–

(49)

Underlying profit before tax

627

(42)

585

Amortisation of goodwill – US

(14)

–

(14)

Group profit before tax

613

(42)

571

Non-operating assets and liabilities (not allocated)³

(387)

Net borrowings (not allocated)⁴

(1,156)

Group net assets

4,909

1	Excludes VAT at Sainsbury’s Supermarkets and sales tax at Shaw’s Supermarkets.
2	Excludes borrowings and intercompany assets and liabilities.
3	Non-operating assets and liabilities (not allocated) comprise proposed dividends, current and deferred taxation, own shares at cost and unallocated unlisted investments.
4	Net borrowings include cash and current asset investments, excluding those of financial services.

Turnover is disclosed by origin. There is no material difference in turnover by destination. Sales between the Group’s business segments are not material.

3 Analysis of operating profit

	2003	2002

	Continuing operations £m	Continuing operations £m	Discontinued operations £m	Total £m


Turnover	17,430	17,154	8	17,162
Cost of sales	(15,988)	(15,867)	(10)	(15,877)
Exceptional cost of sales	(51)	(28)	–	(28)

Gross profit	1,391	1,259	(2)	1,257
Administrative expenses	(690)	(608)	–	(608)
Exceptional administrative expenses	(14)	(10)	–	(10)
Amortisation of goodwill	(13)	(14)	–	(14)
Group administrative expenses	(717)	(632)	–	(632)

Operating profit	674	627	(2)	625

The exceptional operating costs comprise the following:

	2003 £m	2002 £m


Sainsbury’s Supermarkets	51	20
Shaw’s Supermarkets	–	8

Exceptional cost of sales	51	28

Sainsbury’s Supermarkets	4	10
Shaw’s Supermarkets	10	–

Exceptional administrative expenses	14	10

Total exceptional operating costs	65	38

The costs in Sainsbury’s Supermarkets relate to the Business Transformation Programme which involves upgrading its IT systems, supply chain and store portfolio. These costs are exceptional operating costs due to the scale, scope and pace of the transformation programme. These costs primarily relate to asset write offs and reorganisation costs. The cost of closure of the Taste joint venture of £5 million in 2002 is also included in Sainsbury’s Supermarkets’ exceptional administrative expenses for that year.

At Shaw’s Supermarkets, the exceptional costs relate to costs associated with the acquisition of stores from the liquidator of Ames during the year. Exceptional cost of sales for Shaw’s Supermarkets in 2002 relates to the closure of a depot.

4 Loss on sale of properties

	2003 £m	2002 £m


Loss on disposal of Sainsbury’s Supermarkets’ properties	(7)	(5)
(Loss)/profit on disposal of Shaw’s Supermarkets’ properties	(4)	1

	(11)	(4)

5 Disposal of operations – discontinued

	2003 £m	2002 £m


Disposal of investment in Homebase	61	–

The Group sold its remaining investment in Homebase Limited and redeemed the outstanding loan notes in the year for a total consideration of £184 million. The profit on sale of the investment, after making provision for further liabilities arising from sites associated with the sale in 2001, amounted to £61 million.

6 Net interest payable and similar items

	2003 £m	2002 £m


Interest receivable	45	79

Interest payable and similar charges:
Bank loans and overdrafts	2	3
Other loans	97	120
Finance leases	28	21

	127	144
Interest capitalised
– tangible fixed assets (note 14)	(20)	(12)
– land held for and in the course of development (note 18)	(2)	(4)

	105	128

Net interest payable and similar items	60	49

Total interest receivable amounted to £171 million (2002: £202 million), including interest receivable attributable to Sainsbury’s Bank of £126 million (2002: £123 million) included in sales. Total interest payable amounted to £199 million (2002: £224 million) including interest payable attributable to Sainsbury’s Bank of £72 million (2002: £80 million) included in cost of sales. Interest is capitalised at the weighted average cost of related borrowings.

7 Profit on ordinary activities before tax

	2003 £m	2002 £m


Profit on ordinary activities before tax is stated after charging/(crediting):
Depreciation of tangible fixed assets
– owned assets	348	350
– assets under finance leases	45	8
Amortisation of intangible assets	18	18
Employee costs	1,913	1,910
Pension costs (note 33)	73	71
Operating lease rentals
– properties	275	252
– fixtures, equipment and vehicles	6	7
– receivable	(29)	(26)

The Auditors’ remuneration for audit services amounted to £0.6 million (2002: £0.5 million) for the Group including £0.1 million (2002: £0.1 million) for the Company. The Auditors also received £1.4 million (2002: £2.2 million) for non-audit services relating to consultancy fees for strategic (£0.6 million), regulatory (£0.1 million) and taxation (£0.7 million) advice.

8 Employees

	2003 £m	2002 £m


Employees’ and Executive Directors’ remuneration and related costs during the year amounted to:
Wages and salaries	1,739	1,735
Social security costs	101	104
Other pension costs	73	71

	1,913	1,910

	2003 Number 000's	2002 Number 000's


The average numbers of employees during the year were:
Full-time	54.2	53.4
Part-time	120.3	121.3

	174.5	174.7

Full-time equivalent	108.7	108.5


	2003 Number 000's	2002 Number 000's


The average number of employees (full-time equivalent) during the year were employed in the following countries:
United Kingdom	88.1	87.4
United States of America	20.6	21.1

	108.7	108.5

9 Advances to Directors and connected persons

As at 29 March 2003, authorisations, arrangements and agreements entered into by Directors and connected persons in the normal course of business with Sainsbury’s Bank amounted to £30,000 (2002: £36,000) (number of persons: 5 (2002: 5)).

The details of Directors’ emoluments and interests are set out in the Remuneration Report.

10 Tax on profit on ordinary activities

	2003 £m	2002 £m


The tax charge based on the profit for the year is:
UK Corporation tax at 30 per cent (2002: 30 per cent)	173	151
Over provision in prior periods – UK	(9)	(1)

	164	150
Deferred tax	23	26
Overseas tax
– current	43	38
– deferred	(4)	(4)
Taxation on exceptional items
– current	(11)	(7)
– deferred	(9)	(3)

Tax on profit on ordinary activities	206	200

The taxation credit on exceptional items comprises £20 million (2002: £10 million) on exceptional operating costs.

A reconciliation of the standard tax rate to the current tax charge is as follows:

	2003 %	2002 %


Tax on profit at UK standard rate of 30 per cent (2002: 30 per cent)	30.0	30.0
Effects of:
Higher tax rate on US profits	0.8	0.7
Disallowed depreciation on UK properties	2.4	3.6
Amortisation of goodwill	0.6	0.8
Capital allowances in excess of depreciation and other timing items	(1.3)	(3.3)
Disposal of investment in Homebase	(2.8)	–
Prior year items	(1.4)	(0.3)
Other items	0.9	0.2

Current tax charge	29.2	31.7

The rate of tax payable in future periods will be affected by the effects of the higher tax rate on US profits, disallowed depreciation on UK properties and amortisation of goodwill.

11 Dividends

	2003 pence per share	2002 pence per share	2003 £m	2002 £m


Interim	4.22	4.02	81	78
Final proposed	11.36	10.82	217	207

	15.58	14.84	298	285

12 Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held by the Employee Share Ownership Trusts (note 15) which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the year.

	2003 million	2002 million


Weighted average number of shares in issue	1,911.9	1,907.5
Weighted average number of dilutive share options	7.4	16.0

Total number of shares for calculating diluted earnings per share	1,919.3	1,923.5

The alternative measure of earnings per share is provided because it reflects the Group’s underlying trading performance by excluding the effect of exceptional items and amortisation of goodwill.

	2003		2002

	Earnings £m	Per share amount pence	Earnings £m	Per share amount pence


Basic earnings	454	23.7	364	19.1
Exceptional items net of tax:
Included in operating profit	45	2.4	28	1.5
Loss on sale of properties	11	0.6	4	0.2
Disposal of operations	(61)	(3.2)	–	–
Amortisation of goodwill	13	0.7	14	0.7

Underlying earnings before exceptional items and amortisation of goodwill	462	24.2	410	21.5

Diluted earnings	454	23.7	364	18.9

Underlying diluted earnings before exceptional items and amortisation of goodwill	462	24.1	410	21.3

13 Intangible fixed assets – Group

	Goodwill £m	Pharmacy and other licences £m	Total £m


Cost
At 31 March 2002	272	35	307
Additions	–	3	3
Exchange adjustments	(24)	–	(24)

At 29 March 2003	248	38	286

Amortisation
At 31 March 2002	37	7	44
Charge for the year	13	5	18
Exchange adjustments	(2)	–	(2)

At 29 March 2003	48	12	60

Net book value
At 29 March 2003	200	26	226
At 30 March 2002	235	28	263

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