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The Group's consolidated accounts are prepared in accordance with generally accepted accounting principles in the United Kingdom ("UK GAAP"), which differ in certain respects from generally accepted accounting principles in the United States (''US GAAP''). Differences which have a significant effect on the consolidated net profit and shareholders' funds of the Group are set out below. While this is not a comprehensive summary of all differences between UK and US GAAP, other differences would not have a significant effect on the consolidated net profit or shareholders' funds of the Group. In accordance with best practice the differences have been shown as gross of tax with the related taxation shown separately. Cost of sales Under UK GAAP selling costs have been included in cost of sales. Under US GAAP, gross profit is determined before deducting selling costs, as they are not included in cost of sales. Selling costs which have been included under UK GAAP for the 52 weeks ended 29 January 2000 were £260.6 million, for the 52 weeks ended 27 January 2001 were £323.9 million and for the 53 weeks ended 2 February 2002 were £371.8 million. Goodwill Under UK GAAP the Group has implemented FRS 10 in respect of acquisitions since 1 February 1998, amortising goodwill by equal annual instalments over its estimated useful life. Pre FRS 10, in the Group's consolidated accounts prepared under UK GAAP, goodwill arising on the acquisition of a subsidiary was written off against reserves in the consolidated balance sheet in the year in which the acquisition was made. Under US GAAP, prior to the issue of Statement of Financial Accounting Standards ("SFAS") 142, such goodwill was capitalised and amortised through the consolidated profit and loss account over its estimated useful life (not to exceed 40 years). SFAS 142, effective for the Group from 3 February 2002, requires that goodwill be tested annually for impairment in lieu of amortisation. Additionally, UK GAAP requires that on subsequent disposal or closure of a previously acquired subsidiary, any goodwill previously taken directly to shareholders' funds is then charged to the profit and loss account as part of profit or loss on disposal or closure. Under US GAAP the appropriate balance to be written off on the disposal of the business is the remaining unamortised balance for goodwill. For the purposes of calculating the effect of capitalising the goodwill on the consolidated balance sheet and its amortisation through the consolidated profit and loss account, a life of 40 years has been assumed. However, the value of the goodwill is reviewed periodically by comparing the undiscounted cash flows from operating activities with the carrying value of goodwill. An additional charge to the consolidated profit and loss account is made where a permanent diminution in net book value is identified. The adjustment to goodwill of £7.1 million in 2000 represents the benefit of acquired tax losses utilised in that year credited to income under UK GAAP, and credited to goodwill for US GAAP purposes. From 3 February 2002 the provisions of SFAS 142 will be applied. In the Group's consolidated balance sheet, goodwill written off on the acquisition of Sterling Jewelers has been calculated based upon consideration valued at $17.00 per share of the US convertible preference shares issued to the shareholders of Sterling Jewelers. Under US GAAP, as the fair value of the consideration received by the shareholders is more clearly evident than the fair value of the consideration given, the former is used for determining fair value. The fair value of the US convertible preference shares for the purposes of US GAAP has been taken as the initial trading price of the convertible shares upon issuance of $11.125. In the years ended 2 February 2002 and 27 January 2001, the goodwill arising on the acquisition of Marks & Morgan has been capitalised in line with UK GAAP and is amortised through the consolidated profit and loss account over a life of 20 years. Sale and leaseback transactions In the Group's consolidated accounts prepared under UK GAAP, sale and leaseback transactions of freehold and long leasehold properties are accounted for by including US GAAP the gain arising is credited to the consolidated profit and loss account in equal instalments over the life of the lease. Adjustments to the amortisation are reflected in periods when the leases are disposed of. Extended service plan Under UK GAAP revenue from the sales of extended service plans is recognised at the date of sale and provision is made for the estimated costs of future claims. Under US GAAP, revenues from such sales are deferred and recognised in profit over the expected claim period. Pensions Under UK GAAP a prepayment representing the surplus of pension fund assets over projected accrued benefit obligations, has been recognised in shareholders' funds. Under US GAAP the benefit of such prepayment is spread evenly over the remaining service lives of relevant employees. Under UK and US GAAP pension costs are determined on a systematic basis over the length of service of employees. US GAAP is more prescriptive in the application of the actuarial method and assumptions to be applied in the calculation of pension costs. As a result, the calculations under US GAAP are more liable to amendment from year to year, giving rise to adjustments by comparison with UK GAAP. FRS 17 - 'Retirement Benefits', which has to be fully adopted by the Group by 2004, will require pension scheme surpluses and deficits to be reflected through the Group's profit and loss account, bringing UK GAAP broadly in line with US GAAP, although averaging of market values allowed under FAS 87 is not allowed under FRS 17. Stock compensation Under UK GAAP options granted to employees by the Group to subscribe for the Group's shares, where the exercise price of the option is linked to performance, do not result in any compensation costs being recorded by the Group if the stated exercise price is equal to, or in excess of, the fair value of the underlying ordinary shares at the date of grant. Under US GAAP a Group can account for employee stock options in accordance with Accounting Principles Bulletin No. 25 ("APB No. 25") "Accounting for Stock Issued to Employees" or SFAS No. 123, "Accounting for Stock-Based Compensation". Under APB No. 25 there are two types of stock option schemes, fixed plans or variable plans. Fixed plans have terms which fix and provide means for determining, at the date of grant or award, both the number of shares of stock that may be acquired by or awarded to an employee and the cash, if any, to be paid by the employee. Variable plans have characteristics which prevent the determination of either the number of shares of stock that may be acquired by or awarded to an employee and the cash, if any, to be paid by the employee, or both. For fixed plans, compensation cost must be recognised at the grant date to the extent that the fair value is greater than the exercise price. Compensation expense in the amount by which the fair value exceeds the exercise price for variable plan awards shall be measured using terms the employee is most likely to receive based upon the facts available each period over the vesting period. At 2 February 2002 the Company had three share option plans which are described in note 27. The Group recognises compensation cost for US GAAP purposes in accordance with the requirements of APB No. 25. Revaluation of properties Under UK GAAP properties may be restated on the basis of appraised values in consolidated accounts prepared in all other respects in accordance with the historical cost convention. Increases in value are credited directly to the revaluation reserve. When revalued properties are sold the gain or loss on sale is calculated based on revalued carrying amounts. Under US GAAP properties are only revalued if a permanent impairment is deemed to have occurred. Depreciation of properties Following the adoption of FRS 15 in the year ended 29 January 2000, under UK GAAP depreciation is charged on freehold buildings and long leasehold properties based on the revalued amounts. Under US GAAP depreciation is calculated based on the historic cost of the assets. Securitised customer receivables Under UK GAAP securitised US customer receivables of £176.8 million (2001: £105.3 million, 2000: £118.2 million) are included within trade debtors and bank loans, as the related financing is of a revolving nature and does not represent an outright sale of such accounts receivable. Under US GAAP these amounts would qualify for off balance sheet treatment. Deferred taxes FRS 19 - 'Deferred Tax', which the Group has adopted this year, requires that a deferred tax liability should be provided or an asset recognised in respect of all timing differences, regardless of whether it is considered that there is a reasonable probability that such timing differences will reverse. UK and US GAAP now both require full provision for deferred tax. Dividends Under UK GAAP, dividends are provided for in the year in respect of which they are declared or proposed. Under US GAAP dividends are given effect only in the period in which they are formally declared. Cash flows Under UK GAAP the Group complies with "Financial Reporting Standard (Revised 1996) Cash Flow Statements" (FRS 1 (Revised)). Its objective and principles are similar to those set out in SFAS No. 95 Statement of Cash Flows. The principal difference between the standards is in respect of classification. Under FRS 1 (Revised), the Group presents its cash flows for (a) operating activities; (b) returns on investments and servicing of finance; (c) taxation; (d) capital expenditure and financial investment; (e) management of liquid resources; and (f ) financing activities. SFAS No. 95 requires only three categories of cash flow activity (a) operating; (b) investing; and (c) financing. Cash flows arising from taxation and returns on investments and servicing of finance under FRS 1 (Revised) would be included as operating activities and cash flows arising from management of liquid resources would be included as cash and cash equivalents under SFAS No. 95. In addition, under FRS 1 (Revised) cash includes only cash in hand plus deposits repayable on demand, less overdrafts repayable on demand. Under SFAS No. 95 cash and cash equivalents include all highly liquid short term investments with original maturities of three months or less. Earnings per share/ADS ("EPS") Following the adoption of FRS 14 in the UK and SFAS 128 in the US, the computation of the weighted average number of shares and adjusted weighted average number of shares outstanding is generally consistent. The calculation of fully diluted EPS for the year ended 2 February 2002 does not exclude any shares (2001: 9,257,223 excluded, 2000: 347,000 excluded) under share options on the basis that their effect on basic EPS was anti-dilutive.
Estimated effect on profit for the financial period of differences between UK and US GAAP
Estimated effect on shareholders’ funds of differences between UK and US GAAP
Employee share schemes A description of the terms of the Company's employee share schemes is set out in note 27. For the period ended 2 February 2002, in compliance with the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation, the fair value of options granted during the year has been computed. SFAS No. 123 sets out an alternative methodology for recognising the compensation expense based on the fair value at grant date. Had the Company adopted this methodology, earnings per ordinary ADS under US GAAP would have been increased to the pro forma amounts indicated below for the financial periods ended 2 February 2002 and 27 January 2001:
These pro forma amounts may not be representative of future results as they are subjective in nature and involve uncertainties and matters of judgement, and therefore cannot be determined precisely. Changes in assumptions could affect the estimates. The fair value of options granted which, in determining the pro forma impact, is assumed to be amortised in the profit and loss account over the option vesting period, is estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted average assumptions for the financial periods ended 2 February 2002, 27 January 2001 and 29 January 2000.
The following table shows a reconciliation of the opening and closing balances of the projected benefit obligation under the Signet Group Pension Scheme:
The components of pension expense which arise under SFAS 87 for the Group’s pension plans are estimated to be as follows:
The following table presents the estimated funded status of the Group’s pension plans under SFAS 87:
The weighted average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 5.6% (2001: 6.0%) and 3.9% (2001: 4.25%) respectively. The expected long term rate of return on plan assets was 6.7% (2000: 7.5%). The excess of plan assets over the projected benefit obligation at the transition date is recognised as a reduction of pension expense on a prospective basis over 13 years. See note 22 for further information on the Group's pension plans. For US GAAP purposes, the pension fund liability included in the Group's consolidated balance sheet would be classified as a non-current liability. New US accounting standards not yet adopted SFAS 142, Goodwill and Other Intangible Assets, has become effective for the Group from 3 February 2002 and requires that goodwill be tested for impairment annually, in lieu of amortisation. Goodwill has been identified by reporting unit and tested for impairment. It is not envisaged that any impairment losses will need to be recognised under US GAAP at the start of the 2002/03 financial year. For acquisitions made since 1 February 1998, amortisation of goodwill will continue under UK GAAP. Under US GAAP the net book value at 2 February 2002 will remain on the balance sheet, subject to the results of annual impairment tests. At 2 February 2002 the Group had goodwill on its balance sheet of £24.2 million under UK GAAP and £362.7 million under US GAAP. Net income for the year ended 2 February 2002 includes a charge for goodwill amortisation of £1.3 million under UK GAAP and £14.7 million under US GAAP. SFAS 143, Accounting for Asset Retirement Obligations, will become effective for the Group from 2 February 2003. This standard addresses the accounting and reporting obligations associated with the retirement of long-lived assets and the associated asset retirement costs. The impact of the standard is considered unlikely to be significant. SFAS 144, Accounting for Impairment or Disposal of Long-Lived Assets, has become effective for the Group from 3 February 2002. This standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets, retaining many of the fundamental provisions of SFAS 121, as well as the requirement in Accounting Principles Board Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that has either been disposed of or is classified as held for sale. The impact of the standard is considered unlikely to be significant.
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