Report & Accounts 2005

40. Explanation of transition to IFRS

In 2004, Cadbury Schweppes prepared its consolidated financial statements under UK generally accepted accounting principles ("UK GAAP"). With effect from 3 January 2005, Cadbury Schweppes is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS"). One year of comparative IFRS financial information is required to be provided for the year ended 2 January 2005 ("2004") and consequently, the date of transition to IFRS for the Group is 29 December 2003 being the first day of the comparative period ("the transition date").

An explanation of the effect that the adoption of IFRS has had on the Group's results is provided in Part (a).

Part (b) includes reconciliations of the UK GAAP financial information for the year ended 2 January 2005.

The change in reporting principally impacts the following areas: goodwill amortisation; share awards; pensions and deferred tax. Under IFRS, the 2004 underlying profit from operations (excluding brand intangible/goodwill amortisation/impairment, restructuring costs and non-trading items) is 4% lower and the underlying earnings are 6% lower than under UK GAAP. Under IFRS, the 2004 net assets are £788 million lower than under UK GAAP. This is due to full inclusion of the pension fund deficit and the provision of deferred tax in relation to brand intangibles arising from past acquisitions.

(a) Significant differences between UK GAAP and IFRS

The significant differences between UK GAAP and IFRS impacting the results and net assets of Cadbury Schweppes are described below. These differences affect the 2004 comparative information and, unless otherwise stated, have been applied retrospectively in arriving at the transition balance sheet under IFRS.

• Share-based payments

  
  Cadbury Schweppes uses share awards to provide incentives to employees and encourage a strong ownership culture within management. Details of the share awards used by the Group can be found in Note 26. Under UK GAAP, Cadbury Schweppes recorded a charge for employee share incentive awards based on the intrinsic value of the award being the difference, if any, between the option price of the conditional award and the share price on the date of grant. Cadbury Schweppes utilised the exemption available within UITF Abstract 17 from reporting a charge to profits for UK Inland Revenue approved SAYE schemes and equivalent overseas schemes. As the Group's share options have an option price equal to the market price on the date of grant no charge was required to be recorded under UK GAAP. Consequently, the Group charge in respect of share awards under UK GAAP was relatively small and reflected the cash cost of providing share awards to its employees.

  IFRS 2 "Share based payments" requires the Group to record a charge for all share-based payments equivalent to the fair value of the award as at the date of grant. An expense is recognised to spread the fair value of each award over its vesting period on a straight-line basis, after allowing for an estimate of the share awards that will eventually vest. As permitted by the standard, the Group has applied IFRS 2 to all unvested share awards as at the transition date.

  The Group has calculated fair values for each of its employee incentive share awards. The calculation of fair values requires Management to select the option valuation model which they consider to be the most appropriate for the valuation of each type of award. The key variables in arriving at the share option charge are the expected future volatility in the Cadbury Schweppes share price, the expected period of time between grant and exercise for an award and the expected level of forfeiture that will occur between award grant and vesting.

  The application of IFRS 2 instead of UK GAAP has resulted in an incremental charge to profits in 2004 of £29 million.

• Post Employment Benefits

  
  Under UK GAAP, Cadbury Schweppes accounted for post employment benefits under SSAP 24 "Accounting for Pension costs". This standard seeks to spread the cost of providing defined benefit pensions and post retirement benefits over the estimated average remaining service life of the scheme members based upon a triennial valuation.

  Under IFRS, the Group is required to calculate the pension cost for defined benefit pension schemes and other post employment benefits using a Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. The Group has applied the option within the Amendment to IAS 19 that allows for immediate recognition of all actuarial gains and losses in the period in which they occur, outside of profit and loss and presented in the Statement of Recognised Income and Expense ("SORIE"). This approach is very similar to the current UK GAAP standard FRS 17 "Retirement Benefits".

  Accounting for defined contribution pension schemes under IFRS is consistent with the previous accounting applied under UK GAAP.

  The Group intends to present the current and past service pension costs as a charge to Profit from Operations. The unwinding of the discount on pension liabilities and the expected return on pension assets will be presented as a financing item.

  The immediate recognition of the Group's pension liabilities on the balance sheet results in the recognition of a liability of £410 million in the balance sheet at the date of transition. This is an incremental liability of £337 million compared with that recorded under SSAP 24. As at 2 January 2005 this deficit had increased to £485 million primarily due to changes in actuarial assumptions.

  The application of IAS 19 to the Group's results for 2004 reduces profit from operations by £15 million and reduces the net financing charge by £9 million resulting in an increase in the underlying incremental charge of £6 million.

• Goodwill/brand intangibles amortisation

  
  Under UK GAAP, goodwill is amortised over its estimated life, which is normally 20 years. Brand intangibles are amortised over their estimated useful life. Under UK GAAP, the significant majority of the Group's brands were deemed to have an indefinite life and were not amortised, instead being subject to an annual impairment review. The goodwill and brand intangibles amortisation charge in 2004 was £139 million.

  Under IFRS 3 "Business Combinations", goodwill is considered to have an indefinite life and hence is not subject to amortisation. Instead it is reviewed for impairment annually. Intangible assets continue to be amortised over their estimated useful economic life. Under IFRS, the significant majority of the Group's brands continue to be deemed to have an indefinite life and are not amortised. These will continue to be subject to an annual impairment review.

  The application of IFRS 3 to the results of the Group for 2004 increases reported earnings by £132 million. As goodwill amortisation is excluded from the Group's underlying performance measures, there is no impact on underlying profit from operations or earnings. The residual amortisation charge reflects amortisation of certain brands which consistent with UK GAAP are deemed to have a definite life.

• Deferred tax

  
  Under UK GAAP, the Group recognised deferred tax on temporary differences that arose from the inclusion of gains and losses in tax assessments in periods different from those in which they were recognised in the financial statements (an income statement approach).

  Under IAS 12 "Deferred tax", deferred tax is recognised in respect of nearly all taxable temporary timing differences arising between the tax base and the accounting book value of balance sheet items (a balance sheet approach). This results in deferred tax being recognised on certain temporary differences that would not have given rise to deferred tax under UK GAAP.

  Under IFRS, a deferred tax balance is recognised in a business combination for any difference between the fair value of an acquired asset and its equivalent tax basis. Over the last ten years Cadbury Schweppes has acquired a number of brand businesses and consequently recognised brand intangibles of over £3 billion. A number of these acquisitions were structured as a purchase of shares and therefore the brand intangible that was recognised for accounting purposes has no equivalent tax basis. The Group has therefore recognised an incremental deferred tax liability of £711 million. As a business combination does not directly affect profits, no equivalent adjustment is required under the income statement approach required by UK GAAP.

  Normally, the recognition of such a deferred tax liability in a business combination would result in a corresponding increase in goodwill. However, under the exemption applied within IFRS 1 relating to the restatement of business combinations, the Group is not permitted to adjust the carrying value of goodwill prior to the transition date. Consequently, the recognition of the liability has resulted in an equivalent reduction in reserves. This deferred tax liability will only crystallise on any subsequent disposal, amortisation or impairment of the brands. As the majority of the Group's brands are not amortised, the crystallisation of the deferred tax liability is not expected in the near future.

  In addition, deferred taxation has been provided, where appropriate as a result of other IFRS transition adjustments, principally recoverable deferred tax assets in respect of the full recognition of pension deficits.

• Restructuring costs

  
  The Group classifies the costs of expenses associated with the implementation of its four year Fuel for Growth programme as Restructuring costs, outside of the Group's underlying results. In 2004, certain Fuel for Growth related redundancies resulted in the crystallisation of a pension liability of £4 million that was not fully provided for under SSAP 24. The full recognition of all pension deficits under IFRS at the transition date has led to the reversal of this charge.
  
  

• Associates and Joint Ventures

  
  Under UK GAAP, associates were accounted for under the equity method with the Group's share of associates' interest and tax included within the headings of interest and tax in the profit and loss account.

  Under IFRS, the Group will continue to account for associates and joint ventures using the equity method and no significant differences have arisen in the accounting policies of the Group's associates or joint ventures as a result of the adoption of IFRS. However, the presentation of the results from these entities will change, as the net result from associates and joint ventures after interest and tax is presented as a single line within the Group's profit before taxation.

  This presentational change has no impact on earnings but in 2004 has resulted in a reduction in profit before financing and taxation of £23 million with an offsetting reduction in the financing charge of £12 million and in the taxation charge of £11 million.

• Dividends payable

  
  Under UK GAAP, the Group recognised a liability for dividends that were proposed in respect of a prior accounting period, even if the formal authorisation of the dividend did not take place until after the year-end.

  In accordance with IAS 10 "Events after the Balance Sheet Date", dividends declared after the balance sheet date are not recognised as a liability in the financial statements, as there is no present obligation at the balance sheet date.

  Accordingly, no accrual is required for the final dividend declared for 2003 of £168 million and for 2004 of £177 million.

• Development costs

  
  Under UK GAAP, the Group elected to expense all development costs as incurred.

  Under IAS 38, the Group is required to assess whether any development costs meet the criteria for capitalisation. If the criteria are met, capitalisation is mandatory and the capitalised amounts are amortised to profit over their expected useful lives.

  Cadbury Schweppes has undertaken a review of its research and development costs and concluded that the amount of its development costs that fall to be capitalised under IAS 38 is insignificant, as the majority of such costs are incurred prior to the point at which the Group has a technologically viable product from which economic benefits are probable to occur.

• Financial Instruments including commodity contracts

  
  Under the transitional requirements of IFRS the Group is permitted to continue to apply the hedging requirements of UK GAAP in the preparation of its 2004 comparative IFRS financial statements. The Group has elected to apply this exemption and hence the adoption of IFRS has no impact on accounting for financial instruments, including commodity contracts, for 2004.

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(b) Reconciliation of income statement and equity from UK GAAP

Consolidated Income Statement

	For the 53 weeks ended 2 January 2005
	UK GAAP IFRS format £m	Goodwill £m	Share based payments £m	Pensions £m	Associates £m	Other £m	Restated IFRS £m
Revenue	6,738	-	-	-	-	-	6,738
Trading costs	(5,623)	-	(29)	(15)	-	(1)	(5,668)
Restructuring costs	(171)	-	-	4	-	1	(166)
Amortisation and impairment of intangibles	(139)	132	-	-	-	-	(7)
Non-trading items	19	-	-	-	-	-	19
Profit from Operations	824	132	(29)	(11)	-	-	916
Share of result in associates	44	-	-	-	(23)	-	21
Profit before Financing and Taxation	868	132	(29)	(11)	(23)	-	937
Investment revenue	39	-	-	9	-	-	48
Finance costs	(265)	-	-	-	12	-	(253)
Profit before Taxation	642	132	(29)	(2)	(11)	-	732
Taxation	(189)	(4)	-	(2)	11	(1)	(185)
Attributable Profit for the Period	453	128	(29)	(4)	-	(1)	547

Consolidated Balance Sheet

	As at 2 January 2005
	UK GAAP IFRS format £m	Goodwill/ Intangibles £m	Software	Pensions £m	Deferred tax £m	Dividends £m	Other £m	Restated IFRS £m
Assets
Non-current assets
Goodwill	2,224	128	-	-	-	-	-	2,352
Brand intangibles	3,261	-	-	-	-	-	-	3,261
Software intangibles	-	-	144	-	-	-	-	144
Property, plant and equipment	1,608	-	(144)	-	-	-	-	1,464
Investment in associates	324	-	-	-	(2)	-	2	324
Deferred tax assets	17	-	-	-	-	-	-	17
Trade and other receivables	67	-	-	-	-	-	-	67
Other investments	11	-	-	-	-	-	-	11
	7,512	128	-	-	(2)	-	2	7,640
Current assets
Inventories	708	-	-	-	-	-	1	709
Short-term investments	21	-	-	-	-	-	-	21
Trade and other receivables	1,152	-	-	-	-	-	(2)	1,150
Tax recoverable	30	-	-	-	-	-	-	30
Cash and cash equivalents	325	-	-	-	-	-	-	325
	2,236	-	-	-	-	-	(4)	2,235
Assets held for sale	5	-	-	-	-	-	-	5
Total Assets	9,753	128	-	-	(2)	-	1	9,880
Liabilities
Current liabilities
Trade and other payables	(1,731)	-	-	-	-	177	8	(1,546)
Tax payable	(150)	-	-	-	-	-	-	(150)
Short-term borrowings and overdrafts	(610)	-	-	-	-	-	-	(610)
Short-term provisions	(69)	-	-	-	-	-	2	(67)
Obligations under finance leases	(20)	-	-	-	-	-	-	(20)
	(2,580)	-	-	-	-	177	10	(2,393)
Non-current liabilities
Trade and other payables	(27)	-	-	-	-	-	-	(27)
Borrowings	(3,520)	-	-	-	-	-	-	(3,520)
Retirement benefit obligation	(65)	-	-	(420)	-	-	-	(485)
Tax payable	(184)	-	-	-	-	-	-	(184)
Deferred tax liabilities	(213)	(4)	-	39	(717)	-	-	(895)
Long-term provisions	(10)	-	-	-	-	-	-	(10)
Obligations under finance leases	(66)	-	-	-	-	-	-	(66)
	(4,085)	(4)	-	(381)	(717)	-	-	(5,187)
Total Liabilities	(6,665)	(4)	-	(381)	(717)	177	10	(7,580)
Net Assets	3,088	124	-	(381)	(719)	177	11	2,300

Consolidated Balance Sheet

	As at 29 December 2003
	UK GAAP IFRS format £m	Goodwill/ Intangibles £m	Software	Pensions £m	Deferred tax £m	Dividends £m	Other £m	Restated IFRS £m
Assets
Non-current assets
Goodwill	2,384	-	-	-	-	-	-	2,384
Brand intangibles	3,443	-	-	-	-	-	-	3,443
Software intangibles	-	-	177	-	-	-	-	177
Property, plant and equipment	1,624	-	(177)	-	-	-	-	1,447
Investment in associates	313	-	-	-	(2)	-	3	314
Deferred tax assets	20	-	-	-	-	-	-	20
Trade and other receivables	81	-	-	-	-	-	-	81
Other investments	15	-	-	-	-	-	-	15
	7,880	-	-	-	(2)	-	3	7,881
Current assets
Inventories	672	-	-	-	-	-	1	673
Short-term investments	127	-	-	-	-	-	-	127
Trade and other receivables	1,189	-	-	-	-	-	(5)	1,184
Tax recoverable	32	-	-	-	-	-	-	32
Cash and cash equivalents	306	-	-	-	-	-	-	306
	2,326	-	-	-	-	-	(4)	2,322
Assets held for sale	9	-	-	-	-	-	-	9
Total Assets	10,215	-	-	-	(2)	-	(1)	10,212
Liabilities
Current liabilities
Trade and other payables	(1,796)	-	-	-	-	168	7	(1,621)
Tax payable	(181)	-	-	-	-	-	-	(181)
Short-term borrowings and overdrafts	(1,065)	-	-	-	-	-	-	(1,065)
Short-term provisions	(117)	-	-	-	-	-	-	(117)
Obligations under finance leases	(4)	-	-	-	-	-	-	(4)
	(3,163)	-	-	-	-	168	7	(2,988)
Non-current liabilities
Other liabilities	(15)	-	-	-	-	-	-	(15)
Borrowings	(3,564)	-	-	-	-	-	-	(3,564)
Retirement benefit obligation	(73)	-	-	(337)	-	-	-	(410)
Tax payable	(108)	-	-	-	-	-	-	(108)
Deferred tax liabilities	(244)	-	-	40	(749)	-	-	(953)
Long-term provisions	(14)	-	-	-	-	-	-	(14)
Obligations under finance leases	(11)	-	-	-	-	-	-	(11)
	(4,029)	-	-	(297)	(749)	-	-	(5,075)
Total Liabilities	(7,192)	-	-	(297)	(749)	168	7	(8,063)
Net Assets	3,023	-	-	(297)	(751)	168	6	2,149

The adoption of IFRS required a re-presentation of the Cash Flow statement but did not affect the cash flows of the Group.