Accounts

Notes 1 - 10

1 General information

Kingfisher plc (‘the Company’), its subsidiaries, joint ventures and associates (together ‘the Group’) supply home improvement products and services through a network of retail stores and other channels, located mainly in the United Kingdom, continental Europe and China.

Kingfisher plc is a Company incorporated in the United Kingdom. The nature of the Group’s operations and its principal activities are set out in the Business review.

The address of its registered office is 3 Sheldon Square, Paddington, London W2 6PX.

The Company is listed on the London Stock Exchange.

These consolidated financial statements have been approved for issue by the Board of Directors on 23 March 2011.

2 Principal accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated.

a. Basis of preparation

The consolidated financial statements of the Company, its subsidiaries, joint ventures and associates are made up to the nearest Saturday to 31 January each year, except as disclosed in note 17 and in note 4 of the Company’s separate financial statements. The current financial year is the 52 weeks ended 29 January 2011 (‘the year’). The comparative financial year is the 52 weeks ended 30 January 2010 (‘the prior year’).

The directors of Kingfisher plc, having made appropriate enquiries, consider that adequate resources exist for the Group to continue in operational existence for the foreseeable future and that, therefore, it is appropriate to adopt the going concern basis in preparing the consolidated financial statements for the year ended 29 January 2011. Refer to the Directors’ statement of responsibility.

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union, IFRIC interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The following new standards and amendments, which are mandatory for the first time for the financial year ended 29 January 2011, are relevant for the Group:

IAS 27
(amendment)

Consolidated and separate financial statements – Non-controlling interests
(effective from 1 July 2009)

Requires the effects of all transactions with non-controlling (minority) interests to be recorded in equity if there is no change in control. They will no longer result in goodwill or gains and losses. The amended standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value and a gain or loss is recognised in profit or loss. The impact of this on the results presented has not been significant.

IFRS 3
(amendment)

Business combinations
(effective from 1 July 2009)

Harmonises business combination accounting with US GAAP. The amended standard will continue to apply the acquisition method to business combinations, but with certain significant changes. All payments to purchase a business will be recorded at fair value at the acquisition date, with some contingent payments subsequently remeasured at fair value through income. Goodwill and non-controlling (minority) interests may be calculated on a gross or net basis. All transaction costs will be expensed. The impact of this on the results presented has not been significant.

The following amendments to standards and interpretations, which are mandatory for the first time for the financial year ended 29 January 2011, are either not currently relevant or material for the Group:

  • IAS 39 (amendment), ‘Financial instruments: Recognition and measurement - Eligible hedged items’;
  • Improvements to IFRSs 2009;
  • IFRS 1 (revised November 2008), ‘First-time adoption of IFRS’;
  • IFRS 2 (amendment), ‘Share based payments - Group cash-settled payment transactions’;
  • IFRIC 17, ‘Distributions of non-cash assets to owners’; and
  • IFRIC 18, ‘Transfers of assets from customers’.

At the date of authorisation of these financial statements, the following new standard, which is expected to be relevant to the Group’s results, was issued but not yet effective:

IFRS 9

Financial instruments
(effective from 1 January 2013)

Introduces new requirements for classifying and measuring financial assets. This includes the removal of available-for-sale financial assets and held-to-maturity investments, and the introduction of a new category of financial assets at fair value through other comprehensive income. For certain liabilities held at fair value, gains recognised on reduction in the fair value of these liabilities are to be recognised through other comprehensive income rather than in profit and loss. This is still subject to endorsement by the European Union, but is currently expected to be applied in the Group’s 2013/14 financial statements.

The consolidated financial statements have been prepared under the historical cost convention, as modified by the use of valuations for certain financial instruments, share-based payments and post employment benefits. A summary of the Group’s principal accounting policies is set out below.

The preparation of financial statements in conformity with IFRS requires the use of certain accounting estimates and assumptions. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving critical accounting estimates and judgements, which are significant to the consolidated financial statements, are disclosed in note 3.

Use of non-GAAP measures

Kingfisher believes that retail profit, adjusted pre-tax profit, effective tax rate, adjusted post-tax profit and adjusted earnings per share provide additional useful information on underlying trends to shareholders. These and other non-GAAP measures such as net debt/cash are used by Kingfisher for internal performance analysis and incentive compensation arrangements for employees. The terms ‘retail profit’, ‘exceptional items’, ‘adjusted’, ‘effective tax rate’ and ‘net debt/cash’ are not defined terms under IFRS and may therefore not be comparable with similarly titled measures reported by other companies. They are not intended to be a substitute for, or superior to, GAAP measures.

Retail profit is defined as continuing operating profit before central costs (principally the costs of the Group's head office), exceptional items, amortisation of acquisition intangibles and the Group's share of interest and tax of joint ventures and associates.

The separate reporting of non-recurring exceptional items, which are presented as exceptional within their relevant income statement category, helps provide an indication of the Group’s underlying business performance. The principal items which are included as exceptional items are:

  • non trading items included in operating profit such as profits and losses on the disposal, closure or impairment of subsidiaries, joint ventures, associates and investments which do not form part of the Group’s trading activities;
  • profits and losses on the disposal of properties; and
  • the costs of significant restructuring and incremental acquisition integration costs.

The term ‘adjusted’ refers to the relevant measure being reported for continuing operations excluding exceptional items, financing fair value remeasurements, amortisation of acquisition intangibles, related tax items and prior year tax items. Financing fair value remeasurements represent changes in the fair value of financing derivatives, excluding interest accruals, offset by fair value adjustments to the carrying amount of borrowings and other hedged items under fair value hedge relationships. Financing derivatives are those that relate to underlying items of a financing nature.

The effective tax rate represents the effective income tax expense as a percentage of continuing profit before taxation excluding exceptional items. Effective income tax expense is the continuing income tax expense excluding tax on exceptional items and tax adjustments in respect of prior years and changes in tax rates.

Net debt/cash comprises borrowings and financing derivatives (excluding accrued interest), less cash and cash equivalents and current other investments.

b. Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company, its subsidiaries, joint ventures and associates.

(i) Subsidiaries

Subsidiary undertakings are all entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. Subsidiary undertakings acquired during the period are recorded under the acquisition method of accounting and their results included from the date of acquisition. The results of subsidiaries which have been disposed of during the period are included up to the effective date of disposal.

The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance.

The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the income statement.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of acquired subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

(ii) Joint ventures and associates

Joint ventures are entities over which the Group has joint control, with a third party, to govern the financial and operating activities of that entity. The equity method is used to account for the Group’s investments in joint ventures.

Associates are entities over which the Group has the ability to exercise significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. The equity method is used to account for the Group’s investments in associates.

Under the equity method investments are initially recognised at cost. The Group’s investments in joint ventures and associates include goodwill (net of any accumulated impairment losses) identified on acquisition.

The Group’s share of post-acquisition profits or losses is recognised in the income statement within operating profit, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses equals or exceeds its interest, including any other long term receivables, the Group does not recognise any further losses, unless it has incurred obligations or made payments on behalf of the joint venture or associate.

Unrealised gains on transactions between the Group and its joint ventures and associates are eliminated to the extent of the Group’s interest. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of joint ventures and associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

c. Foreign currencies

(i) Presentation and functional currencies

The consolidated financial statements are presented in Sterling, which is the Group’s presentation currency. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (i.e. its functional currency).

(ii) Transactions and balances

Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the date of the transaction or, for practical reasons, at average monthly rates where exchange rates do not fluctuate significantly.

Monetary assets and liabilities denominated in foreign currencies are translated into Sterling at the rates of exchange at the balance sheet date. Exchange differences on monetary items are taken to the income statement. Exceptions to this are where the monetary items form part of the net investment in a foreign operation or are designated and effective net investment or cash flow hedges. Such exchange differences are initially deferred in equity.

(iii) Group companies

The balance sheets of overseas subsidiary undertakings are expressed in Sterling at the rates of exchange at the balance sheet date. Profits and losses of overseas subsidiary undertakings are expressed in Sterling at average exchange rates for the period. Exchange differences arising on the retranslation of foreign operations are recognised in a separate component of equity.

On consolidation, exchange differences arising from the retranslation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on disposal.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the rates of exchange at the balance sheet date.

Principal rates of exchange against Sterling:

  2010/11   2009/10
  Average rate Year end rate   Average rate Year end rate
Euro 1.17 1.16   1.13 1.15
US Dollar 1.54 1.59   1.58 1.61
Polish Zloty 4.65 4.52   4.86 4.69
Chinese Renminbi 10.41 10.45   10.79 11.01

d. Revenue recognition

Sales represent the supply of home improvement products and services. Sales exclude transactions made between companies within the Group, Value Added Tax, other sales-related taxes and are net of returns, trade and staff discounts.

Sales of in-store products are generally recognised at the point of cash receipt. Where award credits such as vouchers or loyalty points are provided as part of the sales transaction, the amount allocated to the credits is deferred and recognised when the credits are redeemed and the Group fulfils its obligations to supply the awards.

Sales are also recognised when the product has been delivered or, for installation income, when the service has been performed. Sales from delivered products and services represent only a small component of the Group’s sales as the majority relates to in-store purchases of products.

Other income is generally composed primarily of external rental income and profits and losses on disposal of assets. Rental income from operating leases is recognised on a straight line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight line basis over the lease term.

e. Rebates

Rebates received from suppliers mainly comprise volume related rebates on the purchase of inventories.

Volume related rebates are recognised based on actual purchases in the period as a proportion of total purchases forecast over the rebate period where it is probable the rebates will be received and the amounts can be estimated reliably.

Rebates relating to inventories purchased but still held at the balance sheet date are deducted from the carrying value so that the cost of inventories is recorded net of applicable rebates. Such rebates are credited to the income statement when the goods are sold.

f. Dividends

Interim dividends are recognised when they are paid to the Company’s shareholders. Final dividends are recognised when they are approved by the Company’s shareholders.

g. Intangible assets

(i) Goodwill

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognised. Such benefits include future synergies expected from the combination and intangible assets not meeting the criteria for separate recognition.

Goodwill is carried at cost less accumulated impairment losses. Goodwill is not amortised and is tested annually for impairment by assessing the recoverable amount of each cash generating unit or groups of cash generating units to which the goodwill relates. The recoverable amount is assessed by reference to the net present value of expected future pre-tax cash flows (‘value-in-use’) or fair value less costs to sell if higher. The discount rate applied is based upon the Group’s weighted average cost of capital with appropriate adjustments for the risks associated with the relevant cash generating unit or groups of cash generating units. When the recoverable amount of the goodwill is less than its carrying amount, an impairment loss is recognised immediately in the income statement which cannot subsequently be reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

(ii) Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives of two to seven years.

Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, which are expected to generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include software development, employee and consultancy costs and an appropriate portion of relevant overheads. Costs associated with identifying, sourcing, evaluating or maintaining computer software are recognised as an expense as incurred.

h. Property, plant and equipment

(i) Cost

Property, plant and equipment held for use in the business are carried at cost less accumulated depreciation and any provisions for impairment.

(ii) Depreciation

Depreciation is provided to reflect a straight line reduction from cost to estimated residual value over the estimated useful life of the asset as follows:

Freehold land

-

not depreciated

Freehold and long leasehold buildings

-

over remaining useful life down to residual value

Short leasehold land and buildings

-

over remaining period of the lease

Fixtures and fittings

-

between 4 and 20 years

Computers and electronic equipment

-

between 2 and 5 years

Motor cars

-

4 years

Commercial vehicles

-

between 3 and 10 years

Long leaseholds are defined as those having remaining lease terms of more than 50 years. Asset lives and residual values are reviewed at each balance sheet date.

(iii) Impairment

Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is assessed by reference to the net present value of expected future pre-tax cash flows (‘value-in-use’) of the relevant cash generating unit or fair value less costs to sell if higher. The discount rate applied is based upon the Group’s weighted average cost of capital with appropriate adjustments for the risks associated with the relevant cash generating unit. Any impairment in value is charged to the income statement in the period in which it occurs.

(iv) Disposal

The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. Sales of land and buildings are accounted for when there is an unconditional exchange of contracts.

(v) Subsequent costs

Subsequent costs are included in the related asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement in the period in which they are incurred.

i. Leased assets

Where assets are financed by leasing agreements which give rights approximating to ownership, the assets are treated as if they had been purchased outright. The amount capitalised is the lower of the fair value or the present value of the minimum lease payments during the lease term at the inception of the lease. The assets are depreciated over the shorter of the lease term or their useful life. Obligations relating to finance leases, net of finance charges in respect of future periods, are included, as appropriate, under borrowings due within or after one year. The finance charge element of rentals is charged to finance costs in the income statement over the lease term.

All other leases are operating leases and the rental payments are generally charged to the income statement in the period to which the payments relate, except for those leases which incorporate fixed minimum rental uplift clauses. Leases which contain fixed minimum rental uplifts are charged to the income statement on a straight line basis over the lease term.

Where a lease is taken out for land and buildings combined, the buildings element of the lease may be capitalised as a finance lease if it meets the criteria for a finance lease, but the land element will in most cases be classified as an operating lease. If the contracted lease payments are not split between land and buildings in the lease contract, the split is made based on the market values of the land and buildings at the inception of the lease.

Incentives received or paid to enter into lease agreements are released to the income statement on a straight line basis over the lease term.

j. Investment property

Investment property is property held by the Group to earn rental income or for capital appreciation. The Group’s investment properties are carried at cost less depreciation and provision for impairment. Depreciation is provided on a consistent basis with that applied to property, plant and equipment.

k. Capitalisation of borrowing costs

Interest on borrowings to finance the construction of properties held as non-current assets is capitalised from the date work starts on the property to the date when substantially all the activities which are necessary to get the property ready for use are complete. Where construction is completed in parts, each part is considered separately when capitalising interest. Interest is capitalised before any allowance for tax relief.

l. Inventories

Inventories are carried at the lower of cost and net realisable value, on a weighted average cost basis.

Cost includes appropriate attributable overheads and direct expenditure incurred in the normal course of business in bringing goods to their present location and condition. Costs of inventories include the transfer from equity of any gains or losses on qualifying cash flow hedges relating to purchases.

Net realisable value represents the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. Write downs to net realisable value are made for slow moving, damaged or obsolete items and other events or conditions resulting in expected selling prices being lower than cost. The carrying value of inventories reflects known and expected losses of product in the ordinary course of business.

m. Employee benefits

(i) Post employment benefits

The Group operates various defined benefit and defined contribution pension schemes for its employees, some of which are required by local legislation. A defined benefit scheme is a pension scheme which defines an amount of pension benefit which an employee will receive on retirement. A defined contribution scheme is a pension scheme under which the Group usually pays fixed contributions into a separate entity. In all cases other than some of the legally required schemes, a separate fund is being accumulated to meet the accruing liabilities. The assets of each of these funds are either held under trusts or managed by insurance companies and are entirely separate from the Group’s assets.

The asset or liability recognised in the balance sheet in respect of defined benefit pension schemes is the fair value of scheme assets less the present value of the defined benefit obligation at the balance sheet date, together with an adjustment for any past service costs not yet recognised. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds which are denominated in the currency in which the benefits will be paid and which have terms to maturity approximating to the terms of the related pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are credited or charged to the statement of comprehensive income as they arise.

Past service costs are recognised immediately in the income statement, unless the changes to the pension scheme are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight line basis over the vesting period.

For defined contribution schemes, the Group pays contributions to privately administered pension schemes on a contractual basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due.

(ii) Share-based compensation

The Group operates several equity-settled, share-based compensation schemes. The fair value of the employee services received in exchange for the grant of options or deferred shares is recognised as an expense and is calculated using Black-Scholes and stochastic models. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options or deferred shares granted, excluding the impact of any non-market vesting conditions. The value of the charge is adjusted to reflect expected and actual levels of options vesting due to non-market vesting conditions.

n. Taxation

The income tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before taxation as reported in the income statement because it excludes items of income or expense which are taxable or deductible in other years or which are never taxable or deductible.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method.

Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences or unused tax losses can be utilised. Deferred tax liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill in a business combination. Deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction which affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, joint ventures and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Current and deferred tax are calculated using tax rates which have been enacted or substantively enacted by the balance sheet date and are expected to apply in the period when the liability is settled or the asset is realised.

Current and deferred tax are charged or credited to the income statement, except when they relate to items charged or credited directly to equity, in which case the current or deferred tax is also recognised directly in equity.

Current and deferred tax assets and liabilities are offset against each other when they relate to income taxes levied by the same tax jurisdiction and when the Group intends to settle its current tax assets and liabilities on a net basis.

o. Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses.

If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate which reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

p. Financial instruments

Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire or the Group has substantially transferred the risks and rewards of ownership. Financial liabilities (or a part of a financial liability) are derecognised when the obligation specified in the contract is discharged or cancelled or expires.

(i) Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held on call with banks and other short term highly liquid investments with original maturities of three months or less.

(ii) Borrowings

Interest bearing borrowings are recorded at the proceeds received, net of direct issue costs and subsequently measured at amortised cost. Where borrowings are in designated and effective fair value hedge relationships, adjustments are made to their carrying amounts to reflect the hedged risks. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are amortised to the income statement using the effective interest method.

(iii) Other investments

Other investments include bank deposits, government bonds and other short term investments with an original maturity of more than three months.

(iv) Trade receivables

Trade receivables are initially recognised at fair value and are subsequently measured at amortised cost less any provision for bad and doubtful debts.

(v) Trade payables

Trade payables are initially recognised at fair value and are subsequently measured at amortised cost.

(vi) Derivatives and hedge accounting

Where hedge accounting is not applied, or to the extent to which it is not effective, changes in the fair value of derivatives are recognised in the income statement as they arise. Changes in the fair value of derivatives transacted as hedges of operating items and financing items are recognised in operating profit and net finance costs respectively.

Derivatives are initially recorded at fair value on the date a derivative contract is entered into and are subsequently carried at fair value. The accounting treatment of derivatives and other financial instruments classified as hedges depends on their designation, which occurs at the start of the hedge relationship. The Group designates certain financial instruments as:

  • a hedge of the fair value of an asset or liability or unrecognised firm commitment (‘fair value hedge’);
  • a hedge of a highly probable forecast transaction or firm commitment (‘cash flow hedge’); or
  • a hedge of a net investment in a foreign operation (‘net investment hedge’).
Fair value hedges

For an effective hedge of an exposure to changes in fair value, the hedged item is adjusted for changes in fair value attributable to the risk being hedged with the corresponding entry being recorded in the income statement. Gains or losses from remeasuring the corresponding hedging instrument are recognised in the same line of the income statement.

Cash flow hedges

Changes in the effective portion of the fair value of derivatives that are designated as hedges of future cash flows are recognised directly in equity, and the ineffective portion is recognised immediately in the income statement where relevant. If the cash flow hedge of a firm commitment or forecast transaction results in the recognition of a non-financial asset or liability, then, at the time it is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the non-financial asset or liability. For hedges that result in the recognition of a financial asset or liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss.

Net investment hedges

Where the Group hedges net investments in foreign operations through foreign currency borrowings, the gains or losses on the retranslation of the borrowings are recognised in equity. If the Group uses derivatives as the hedging instrument, the effective portion of the hedge is recognised in equity, with any ineffective portion being recognised in the income statement. Gains and losses accumulated in equity are recycled through the income statement on disposal of the foreign operation.

In order to qualify for hedge accounting, the Group documents in advance the relationship between the item being hedged and the hedging instrument. The Group also documents and demonstrates an assessment of the relationship between the hedged item and the hedging instrument, which shows that the hedge has been and will be highly effective on an ongoing basis. The effectiveness testing is re-performed at each period end to ensure that the hedge remains highly effective.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the highly probable forecast transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement.

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts, and the host contracts are not carried at fair value with unrealised gains or losses reported in the income statement.

3 Critical accounting estimates and judgements

The preparation of consolidated financial statements under IFRS requires the Group to make estimates and assumptions that affect the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below.

Impairment of goodwill and other assets

As required, the Group applies procedures to ensure that its assets are carried at no more than their recoverable amount. The procedures, by their nature, require estimates and assumptions to be made. The most significant are set out below.

The Group is required, on at least an annual basis, to test whether goodwill has suffered any impairment. As part of this testing the recoverable amounts of cash generating units have been determined based on value-in-use calculations. The use of this method requires the estimation of future cash flows expected to arise from the continuing operation of the cash generating unit and the choice of a suitable discount rate in order to calculate the present value of the forecast cash flows. Actual outcomes could vary significantly from these estimates. Further information on the impairment tests undertaken, including the key assumptions, is given in note 12.

Property, plant and equipment are reviewed for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount of an asset or a cash generating unit is determined as the higher of fair value less costs to sell and value-in-use, calculated on the basis of management’s assumptions and estimates.

At each reporting date the Group is required to assess whether there is objective evidence that its investments in associates and joint ventures may be impaired. This requires estimates of the investments’ recoverable amounts, including present values of the Group’s share of future cash flows.

Inventories

As inventories are carried at the lower of cost and net realisable value this requires the estimation of the eventual sales price of goods to customers in the future. A high degree of judgement is applied when estimating the impact on the carrying value of inventories of factors such as slow moving items, shrinkage, damage and obsolescence. The quantity, age and condition of inventories are regularly measured and assessed as part of range reviews and inventory counts undertaken throughout the year and across the Group. Refer to note 18 for further information.

Income taxes

The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the provision for income taxes in each territory. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final outcome of these matters is different from the amounts which were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Refer to notes 9 and 25 for further information.

Restructuring provisions

The Group carries a number of provisions in relation to historical and ongoing restructuring programmes. The most significant part of the provisions is the cost to exit stores and property contracts. The ultimate costs and timing of cash flows are dependent on exiting the property lease contracts on the closed stores and subletting surplus space. Refer to note 26 for further information.

Post employment benefits

The present value of the defined benefit liabilities recognised on the balance sheet is dependent on a number of assumptions including interest rates of high quality corporate bonds, inflation and mortality rates. The net interest charge or return is dependent on both the interest rates of high quality corporate bonds and the assumed investment returns on scheme assets. The assumptions are based on the conditions at the time and changes in these assumptions can lead to significant movements in the estimated obligations. The key assumptions, including a sensitivity analysis, are given in note 27.

4 Segmental analysis

Income statement

£ millions 2010/11
UK & Ireland France Other International Total
Poland Other
Sales 4,333 4,204 1,062 851 10,450
Retail profit 243 348 134 37 762
Exceptional items   (6)
Central costs   (41)
Share of interest and tax of joint ventures and associates   (17)
Operating profit   698
Net finance costs   (27)
Profit before taxation   671
£ millions 2009/10
UK & Ireland France Other International Total
Poland Other
Sales 4,442 4,242 1,012 807 10,503
Retail profit 217 322 125 - 664
Exceptional items   17
Central costs   (41)
Share of interest and tax of joint ventures and associates   (17)
Operating profit   623
Net finance costs   (57)
Profit before taxation   566

Balance sheet

£ millions 2010/11
UK & Ireland France Other International Total
Poland Other
Segment assets 1,172 1,233 512 560 3,477
Central liabilities   (426)
Goodwill   2,395
Net cash   14
Net assets   5,460
£ millions 2009/10
UK & Ireland France Other International Total
Poland Other
Segment assets 997 1,187 463 562 3,209
Central liabilities   (399)
Goodwill   2,395
Net debt   (250)
Net assets   4,955

Other segmental information

£ millions 2010/11
UK & Ireland France Other International Central Total
Poland Other
Capital expenditure 149 93 32 34 2 310
Depreciation and amortisation 124 75 11 26 2 238
Impairment losses - 5 1 8 - 14
Non-current assets 1 3,252 1,925 527 425 16 6,145
£ millions 2009/10
UK & Ireland France Other International Central Total
Poland Other
  1. Non-current assets exclude investments in joint ventures and associates, deferred tax assets, derivatives and other receivables.
Capital expenditure 97 85 28 44 2 256
Depreciation and amortisation 142 80 11 25 2 260
Impairment losses - 2 - - 2 4
Non-current assets 1 3,248 1,927 489 425 12 6,101

The operating segments disclosed above are based on the information reported internally to the Board of Directors and Group Executive. This information is predominantly based on the geographical areas in which the Group operates and which are managed separately. The Group only has one business segment being the supply of home improvement products and services.

The ‘Other International’ segment consists of Poland, China, Spain, Russia, the joint venture Koçtaş in Turkey and the associate Hornbach which has operations in Germany and other European countries. Poland has been shown separately due to its significance.

Central costs principally comprise the costs of the Group’s head office. Central liabilities comprise unallocated head office and other central items including pensions, interest and tax.

5 Exceptional items

£ millions 2010/11 2009/10
Included within selling and distribution expenses    
UK restructuring (9) -
  (9) -
Included within other income  
Profit on disposal of properties 3 17
  3 17
Exceptional items before tax (6) 17
Tax on exceptional items 3 (7)
Exceptional items (3) 10

The UK restructuring charge of £9m reflects plans announced by the Group to consolidate its distribution network in the UK through the construction of a new regional distribution centre in the south of England and the closure of other sites. The provision covers primarily future costs of redundancies and dilapidations on the sites to be exited.

The Group has recorded an exceptional profit of £3m on the disposal of properties (2009/10: £17m profit).

6 Net finance costs

£ millions 2010/11 2009/10
Bank overdrafts and bank loans (18) (25)
Medium Term Notes and other fixed term debt (21) (43)
Financing fair value remeasurements 7 2
Finance leases (5) (5)
Unwinding of discount on provisions (3) (4)
Expected net interest charge on defined benefit pension schemes (7) (4)
Capitalised interest 1 3
Finance costs (46) (76)
 
Cash and cash equivalents and current other investments 19 19
Finance income 19 19
 
Net finance costs (27) (57)

Medium Term Notes and other fixed term debt interest includes net interest income accrued on derivatives of £31m (2009/10: £38m income) and amortisation of issue costs of borrowings of £2m (2009/10: £3m).

Capitalised interest relates to the centrally held borrowing pool and is calculated by applying a capitalisation rate of 1.8% (2009/10: 2.6%) to expenditure on qualifying assets.

Financing fair value remeasurements comprise a net gain on derivatives, excluding accrued interest, of £41m (2009/10: £28m loss), offset by a net loss from fair value adjustments to the carrying value of borrowings and cash of £34m (2009/10: £30m gain).

7 Profit before taxation

The following items of revenue have been credited in arriving at profit before taxation:

£ millions 2010/11 2009/10
Sales 10,450 10,503
Other income 37 48
Finance income 19 19
Revenue 10,506 10,570

The following items of expense/(income) have been charged/(credited) in arriving at profit before taxation:

£ millions 2010/11 2009/10
  1. Of the operating lease rental charge, £27m relates to plant and equipment (2009/10: £31m).
  2. Of the amortisation of other intangible assets charge, £4m (2009/10: £6m) and £22m (2009/10: £28m) are included in selling and distribution expenses and administrative expenses respectively.
  3. There have been no reversals of write downs of inventories in the year (2009/10: £nil).
Operating lease rentals 1  
Minimum lease payments 436 419
Sublease income (24) (17)
  412 402
Rental income received on investment property (4) (4)
Repairs and maintenance 96 93
Amortisation of other intangible assets 2 26 34
Depreciation of property, plant and equipment and investment property  
Owned assets 201 216
Under finance leases 11 10
Impairment of property, plant and equipment and investment property 14 4
(Profit)/loss on disposal  
Land and buildings and investment property (3) (17)
Fixtures, fittings and equipment 7 13
Other intangible assets - 3
Inventories: write down to net realisable value 3 10 99
Trade and other receivables: write down of bad and doubtful debts 8 6

Auditors’ remuneration

  2010/11     2009/10
£ millions Deloitte   Deloitte PwC
Fees payable for the audit of the Company and consolidated financial statements 0.3   0.3 -
Fees payable for the audit of the Company’s subsidiaries pursuant to legislation 1.1   1.0 -
Audit fees 1.4   1.3 -
Other services supplied pursuant to legislation 0.1   - 0.1
Tax advisory services 0.1   - 0.2
All other services 0.1   - 0.1
Auditors’ remuneration 1.7   1.3 0.4

In the prior year, Deloitte succeeded PwC to become the Group’s auditors. The auditors’ remuneration given above relates to the respective periods that each firm acted as auditors of the Group. The remuneration earned by Deloitte during 2009/10 but prior to their appointment as auditors totalled £0.3m, which primarily related to tax advisory services, litigation support and pensions advice.

8 Employees and directors

£ millions 2010/11 2009/10
Wages and salaries 1,208 1,178
Social security costs 238 229
Post employment benefits  
Defined contribution 6 4
Defined benefit 27 22
Share-based compensation 21 20
Employee benefit expenses 1,500 1,453
Number thousands 2010/11 2009/10
Stores 74 76
Administration 4 4
Average number of persons employed 78 80

The average number of persons employed excludes employees in the Group’s joint ventures and associates.

Remuneration of key management personnel

£ millions 2010/11 2009/10
Short term employee benefits 7.9 8.1
Post employment benefits 0.8 0.9
Share-based compensation 5.4 4.1
  14.1 13.1

Key management consists of the Kingfisher plc Board and the Chief Executives of Kingfisher UK, Kingfisher France and Kingfisher International.

Further detail with respect to the Directors' remuneration is set out in the Directors' remuneration report. Other than as set out in the Directors' remuneration report, there have been no transactions with key management during the year (2009/10: £nil).

9 Income tax expense

£ millions 2010/11 2009/10
UK corporation tax  
Current tax on profits for the year 73 66
Adjustments in respect of prior years (10) (7)
  63 59
Overseas tax  
Current tax on profits for the year 118 104
Adjustments in respect of prior years (5) (1)
  113 103
Deferred tax  
Current year - 4
Adjustments in respect of prior years 5 15
Adjustments in respect of changes in tax rates (1) -
  4 19
Income tax expense 180 181

Factors affecting tax charge for the year

The tax charge for the year differs from the standard rate of corporation tax in the UK of 28%. The differences are explained below:

£ millions 2010/11 2009/10
Profit before taxation 671 566
Profit multiplied by the standard rate of corporation tax in the UK of 28% (2009/10: 28%) 188 158
Share of post-tax results of joint ventures and associates (9) (7)
Expenses not deductible for tax purposes 10 17
Temporary differences:  
- Net gains on property (6) (5)
- Losses not recognised 5 7
Foreign tax rate differences 3 4
Adjustments in respect of prior years and changes in tax rates (11) 7
Income tax expense 180 181

The effective rate of tax on profit before exceptional items and excluding tax adjustments in respect of prior years and changes in tax rates is 29% (2009/10: 30%). Tax on exceptional items for the year is a credit of £3m, all of which relates to current year items. In 2009/10 tax on exceptional items was a charge of £7m, all of which related to current year items. The effective tax rate calculation is set out in the Financial review.

In addition to the amounts charged to the income statement, tax of £33m has been charged directly to equity (2009/10: £55m credit), of which a £5m credit (2009/10: £12m credit) is included in current tax and a £38m charge (2009/10: £43m credit) is included in deferred tax.

The revised comparatives in the income tax expense table above reflect a reassessment of balances expected to be settled on behalf of UK and overseas operating companies.

Kingfisher paid €138m tax to the French tax authorities in the year ended 31 January 2004 as a consequence of the Kesa Electricals demerger and recorded this as an exceptional tax charge. Kingfisher appealed against this tax liability and the tribunal found in favour of Kingfisher in June 2009. As a result, on 7 September 2009 the Group received €169m (£148m) from the French tax authorities, representing a refund of the €138m and €31m of repayment supplement. The French tax authorities have appealed against this decision and the appeal court hearing date is awaited. No income has therefore been recognised in respect of this receipt.

10 Earnings per share

  2010/11   2009/10
  Earnings
£ millions
Weighted average number of shares
millions
Earnings per share
pence
  Earnings
£ millions
Weighted average number of shares
millions
Earnings per share
pence
Basic earnings per share 494 2,349 21.0   388 2,347 16.5
Dilutive share options   38 (0.3)     22 (0.1)
Diluted earnings per share 494 2,387 20.7   388 2,369 16.4
 
Basic earnings per share 494 2,349 21.0   388 2,347 16.5
Exceptional items 6   0.3   (17)   (0.7)
Tax on exceptional and prior year items (14)   (0.6)   14   0.7
Financing fair value remeasurements (7)   (0.3)   (2)   (0.1)
Tax on financing fair value remeasurements 2   0.1   1   -
Adjusted basic earnings per share 481 2,349 20.5   384 2,347 16.4
 
Diluted earnings per share 494 2,387 20.7   388 2,369 16.4
Exceptional items 6   0.3   (17)   (0.7)
Tax on exceptional and prior year items (14)   (0.6)   14   0.7
Financing fair value remeasurements (7)   (0.3)   (2)   (0.1)
Tax on financing fair value remeasurements 2   0.1   1   -
Adjusted diluted earnings per share 481 2,387 20.2   384 2,369 16.3

Basic earnings per share is calculated by dividing the profit for the year attributable to equity shareholders of the Company by the weighted average number of shares in issue during the year, excluding those held in the Employee Share Ownership Plan Trust (‘ESOP’) which for the purpose of this calculation are treated as cancelled.

For diluted earnings per share, the weighted average number of shares is adjusted to assume conversion of all dilutive potential ordinary shares. These represent share options granted to employees where both the exercise price is less than the average market price of the Company’s shares during the year and any related performance conditions have been met.