For the short period 1 April 2006 to 3 March 2007
Previously, Home Retail Group (then ARG) prepared its financial information for the financial year for the 12 months to 31 March except for the results of Homebase Limited which were included for the 12 months to 28 or 29 February each year, with adjustments to reflect the balance sheet movements in cash to the end of March. This was done to facilitate comparability of the income statement by avoiding the distortions that would arise relating to changes in the timing of Easter. In order to align the year-end across the Group, the Board of Directors have decided to amend the Group’s financial year to a 52-week period ending on the Saturday closest to the end of February. Therefore, following the change of accounting reference date, the audited accounts have been prepared for the short-period ended 3 March 2007 with comparatives for the 12 months to 31 March 2006. Unless otherwise stated, references to 2007 within the notes to the financial statements are for the short period 1 April 2006 to 3 March 2007, in the case of balance sheet notes, as at 3 March 2007 with comparatives at 31 March 2006.
The Group consolidated financial statements are presented in sterling, rounded to the nearest hundred thousand. They are prepared on the historic cost basis modified for the revaluation of certain financial instruments.
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated, and are in line with the listing particulars.
Group reorganisation
Home Retail Group demerged from its parent company, GUS plc, with effect from
10 October 2006. Shares in Home Retail Group were admitted to the Official
List of the Financial Services Authority and to trading on the London Stock
Exchange’s main market for listed securities on 11 October 2006. All
Home Retail Group companies which were owned by GUS plc prior to demerger
were transferred under the new ultimate parent company, Home Retail Group
plc, prior to 11 October 2006. The introduction of this new ultimate holding
company constitutes a group reconstruction and has been accounted for using
merger accounting principles. Therefore, although the Group reorganisation
did not become effective until 10 October 2006, these consolidated financial
statements of Home Retail Group are presented as if the current Group structure
had always been in place.
In the prospectus, funding balances between the Group and GUS plc which were interest bearing and had the characteristics of debt, were presented as debt in the balance sheet, with the interest taken to the income statement. Prior to demerger, the net funding balances were reduced by £240.0m by means of a capitalisation and the financial statements reflect this capitalisation as having taken place just prior to 31 March 2005.
The Group financial statements consist of the financial statements of the ultimate parent company (Home Retail Group plc), entities controlled by the Company (its subsidiaries) and the Group’s share of its interests in joint ventures and associates. The accounting policies of subsidiaries are consistent with the policies adopted by the Group for the purposes of the Group’s consolidation.
Subsidiaries
A subsidiary is an entity whose operating and financing policies are controlled
by Home Retail Group plc. Subsidiaries are consolidated from the date on which
control was transferred to Home Retail Group. Subsidiaries cease to be consolidated
from the date that Home Retail Group no longer has control.
Intercompany transactions, balances and unrealised gains on transactions between Home Retail Group companies have been eliminated on consolidation.
Joint ventures and associates
Joint ventures are entities in which the Group holds an interest on a long
term basis and which are jointly controlled by the Group and one or more other
interested parties under a contractual agreement.
Associates are entities over which Home Retail Group has significant influence but not control.
The equity method is used to account for investments in joint ventures and associates and investments are initially recognised at cost.
Home Retail Group’s share of net assets of its joint ventures and associates are included on the Group balance sheet. Home Retail Group’s share of its joint ventures and associates post acquisition profits or losses are recognised in its income statement. The cumulative post acquisition movements are adjusted against the carrying value of the investment. The carrying amount of an investment in a joint venture or associate is tested for impairment by comparing its recoverable amount to its carrying amount whenever there is an indication that the investment may be impaired.
Under the requirements of IFRS 3, all business combinations are accounted for using the purchase method. The cost of business acquisitions is the aggregate of fair values, at the date of exchange, of assets given, liabilities incurred or assumed, equity instruments issued by the acquirer and any costs directly attributable to the business combination. The cost of a business combination is allocated at the acquisition date by recognising the acquiree’s identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria at their fair values at that date. The acquisition date is the date on which the acquirer effectively obtains control of the acquiree. Intangible assets are recognised if they meet the definition of an intangible asset contained in IAS 38 and its fair value can be measured reliably. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recognised as goodwill.
A number of new standards, amendments and interpretations are effective for the short period ended 3 March 2007, but have had no material impact on the results or the financial position of the Group.
The impact of IFRIC 4 ‘Determining whether an arrangement contains a lease’, has been reflected through both the current period and prior year within Notes 8 and 31.
At the balance sheet date a number of IFRSs and IFRIC interpretations were in issue but not yet effective. The Group has not early-adopted IFRS 7 ‘Financial instruments: Disclosures’ and the ‘Capital disclosure amendment’ to IAS 1 ‘Presentation of financial statements’, which are applicable for accounting periods commencing on or after 1 January 2007. The Group has not early-adopted IFRS 8 ‘Operating Segments’ which is effective for accounting periods beginning on or after 1 January 2009. These standards will be fully considered in due course.
The preparation of Financial Statements requires management to make estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities. The resulting accounting estimates, which are based on management’s best judgement at the date of the financial statements, will, by definition, seldom equal the related actual results. The estimates and underlying assumptions are reviewed on an ongoing basis, with revisions recognised in the period in which the estimates are revised and future periods where appropriate. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:
Taxes
The Group is subject to taxes in a number of jurisdictions. Significant judgement
is required in determining the provision for income taxes as there are many
transactions and calculations for which the ultimate tax determination is
uncertain during the ordinary course of business. The Group recognises liabilities
based on estimates of whether additional taxes will be due.Where the final
tax outcome of these matters is different from the amounts that were initially
recorded, such differences will impact the results for the year and the respective
income tax and deferred tax provisions in the year in which such determination
is made.
Pension benefits
The present value of the defined benefit obligations depends on a number of
factors that are determined on an actuarial basis using a number of assumptions.
The assumptions used in determining the defined benefit obligations and net
pension costs include the expected long-term rate of return on the relevant
plan assets and the discount rate. Any changes in these assumptions may impact
the amounts disclosed in the Group’s balance sheet and income statement.
The expected return on plan assets is calculated by reference to the plan investments at the year-end and is a weighted average of the expected returns on each main asset type (based on market yields available on these asset types at the year-end).
The Group determines the appropriate discount rate at the end of each year. This is the interest rate used to determine the present value of estimated future cash outflows expected to be required to settle the defined benefit obligations. In determining the appropriate discount rate, the Group considers the market yields of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity consistent with the estimated average term of the related pension liability. Other key assumptions for defined benefit obligations and pension costs are based in part on market conditions at the relevant year ends and additional information is disclosed in Note 25.
Goodwill
Goodwill is allocated to cash generating units (‘’CGUs’’)
at the level of each business segment. The recoverable amount of each of the
business segments is determined based on value-in-use calculations. The key
assumptions for the value-in-use calculation are those regarding discount
rates, growth rates as well as expected changes to costs and selling prices
in the period. Management have estimated the discount rate taking account
of the specific risks inherent within the Group’s retail businesses.
Changes in selling prices and direct costs are based on past experience and
expectations of future change in the markets. These calculations use cash
flow projections based on financial budgets approved by management looking
forward up to five years. Cash flows are extrapolated using estimated growth
rates beyond the budget period. The key assumptions for the value-in-use calculations
are:
Provisions
Provisions have been estimated for onerous leases, self insurance and other
liabilities. These provisions represent the best estimate of the liability
at the balance sheet date, the actual liability being dependent on future
events such as trading conditions at a particular store or the incidence of
insurance claims against the Group. Expectations will be revised each period
until the actual liability arises, with any difference accounted for in the
period in which the revision is made.
Impairment of assets
Assets are subject to impairment reviews whenever changes in events or circumstances
indicate that an impairment may have occurred. Assets are written down to
the higher of fair value less costs to sell and value-in-use. Value-in-use
is calculated by discounting the expected cash flows from the asset at an
appropriate discount rate for the risks associated with that asset. This includes
estimates of both the expected cash flows and an appropriate discount rate
which use management’s assumptions and estimates of the future performance
of the asset. Differences between expectations and the actual cash flows will
result in differences in the level of impairment required.
Inventory provisions
Inventory is carried at the lower of cost and net realisable value which requires
the estimation of the eventual sales price of goods to customers in the future.
Any difference between the expected and the actual sales price achieved will
be accounted for in the period in which the sale is made.