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Notes to the financial statements

For the 52 weeks ended 1 March 2008

2. Basis of preparation

Previously, Home Retail Group (then part of GUS plc) prepared its financial information for the financial year for the 12 months to 31 March except for the results of Homebase 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 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 in the prior period,the audited accounts have been prepared for the 52 weeks ended 1 March 2008 with comparatives for the short period ended 3 March 2007. 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.

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 in note 3. Unless otherwise stated, these policies have been consistently applied to all the periods presented.

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 constituted a group reconstruction and was accounted for using merger accounting principles. Therefore, although the Group reorganisation did not become effective until 10 October 2006, the comparative figures in the consolidated financial statements of Home Retail Group are presented as if the current Group structure had always been in place.

Basis of consolidation

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.

Business combinations

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.

Changes in accounting standards

A number of new standards, amendments and interpretations are effective for the 52 weeks ended 1 March 2008, but have had no material impact on the results or the financial position of the Group.

IFRS 7 – ‘Financial instruments: Disclosures’ and the complementary amendment to IAS 1 – ‘Presentation of financial statements – Capital disclosures’, introduces new disclosures relating to financial instruments and does not have any impact on the classification and valuation of the Group or Company’s financial instruments or the disclosures relating to trade and other payables.

IFRIC 8 – ‘Scope of IFRS 2’ and IFRIC 11 – ‘IFRS 2 – Group and Treasury Share Transactions’ have not had any impact on the recognition of share-based payments in the Group.

IFRIC 9 – ‘Reassessment of embedded derivatives’ and IFRIC 10 – ‘Interim Financial Reporting and Impairment’ have not had any impact on the Group.

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 8 – ‘Operating Segments’ which is effective for accounting periods beginning on or after 1 January 2009. It is not anticipated that the adoption of this standard will have a material impact on the financial statements of the Group, but this standard will be fully considered in due course.

The Group has not early-adopted the revision to IAS 23 – ‘Borrowing Costs’ which is effective for accounting periods beginning on or after 1 January 2009. It is not anticipated that the adoption of this standard will have a material impact on the financial statements of the Group, but this standard will be fully considered in due course.

The Group has not early-adopted IFRS 2 Amendment – ‘Share-Based Payments’ – amendment relating to vesting conditions and cancellations, which is effective for accounting periods beginning on or after 1 January 2009, as the amendment has yet to be endorsed by the EU. Application of this amendment in the current period would not have had a material impact on the financial statements of the Group, but the materiality of its impact in future years is uncertain, as it is dependent on the level of cancellations of options by participants in each period. The amendment to this standard will be fully considered in due course.

Amendments to IFRS 3 – ‘Business Combinations’ are effective for periods beginning on or after 1 July 2009. It is not anticipated that the adoption of this standard will have a material impact on the financial statements of the Group, but this standard will be fully considered in due course.

A revision to IAS 1 – ‘Presentation of Financial Statements’ is effective for periods beginning on or after 1 January 2009. It is not anticipated that the adoption of this standard will have a material impact on the financial statements of the Group, but this standard will be fully considered in due course.

IFRIC 12 – ‘Service Concession Arrangements’ is effective for periods beginning on or after 1 January 2008 but will not have any impact on the Group.

IFRIC 13 – ‘Customer Loyalty Programmes’ and IFRIC 14 – ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’ are effective for periods beginning on or after 1 July 2008 and 1 January 2008 respectively. It is not anticipated that the adoption of these interpretations will have a material impact on the financial statements of the Group, however, these will be fully considered in due course.

Critical accounting estimates and assumptions

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 plans approved by management looking forward up to five years. Cash flows are extrapolated using estimated growth rates beyond the plan period. The key assumptions for the value-in-use calculations, which management believes are appropriate for both retail businesses, are:

  • a real growth rate of 2.25% (2007: 2.25%) has been used to extrapolate cash flows beyond the plan period; and
  • a post-tax discount rate of 7% (2007: 7%) applied to the cash flow projections which equates to a pre-tax rate of approximately 10% (2007: 10%).

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.

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.

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.