Carphone Warehouse 2006 Annual Report Download - page 69

29 Reconciliation of profit and net assets under UK GAAP to IFRS continued
Explanation of adjustments:
a) Share-based payments
IFRS requires that the fair value of share options granted after the prescribed date of 7 November 2002 is charged to the income statement over the vesting period.
The charge is based on the fair value, measured using a Binomial model for share-based payments with internal performance criteria and a Monte Carlo model for
share-based payments with external performance criteria, of the shares that are expected to vest (see note 6). Under UK GAAP, a charge was only made to the
income statement for share options granted at an exercise price below market value.
As a result, an additional charge of £1.2m arose in the 53 weeks ended 2 April 2005, principally in respect of the Executive Share Option Scheme.
The cost of the options is accrued in reserves and therefore has no impact on shareholders’ equity.
The additional IFRS charge is partially offset in the income statement by a deferred tax credit of £0.3m in the 53 weeks ended 2 April 2005.
b) Goodwill and other intangible assets
Under UK GAAP, capitalised goodwill was amortised over its useful economic life. Under IFRS, goodwill is not amortised but is tested at least annually for
impairment. Goodwill amortisation of £33.2m charged under UK GAAP in the 53 weeks ended 2 April 2005 has therefore been reversed under IFRS.
IFRS also requires that, on acquisition, specific intangible assets are identified and recognised and then amortised over their useful economic lives. Such acquisition
intangibles include customer bases and customer lists, to which value is first attributed at the time of acquisition. In the 53 weeks ended 2 April 2005, amortisation
on these acquisition intangibles is £7.5m. These assets were previously included in goodwill and amortised over a period of up to 20 years.
Under IFRS, deferred subscriber acquisition costs, software and licenses and key money are reclassified as intangible assets.
Under UK GAAP, the value of acquired tax losses was only recognised in determining goodwill to the extent that their utilisation could be foreseen at the time
of acquisition, whereas under IFRS goodwill is adjusted for the value of acquired tax losses as they are utilised, even if this utilisation could not be foreseen at
the time of acquisition.
A goodwill expense of £1.0m has been recognised in the 53 weeks ended 2 April 2005 in relation to acquired tax losses.
c) Other adjustments
Other adjustments relate principally to property lease incentives and holiday pay.
Under IFRS, property lease incentives are recognised over the full length of the lease, rather than the period to the first rent review. This results in an additional
charge of £0.5m in the 53 weeks ended 2 April 2005 and a reduction in net assets of £2.3m at 2 April 2005 and £1.7m at 28 March 2004.
An accrual for holiday pay has also been recognised under IFRS, the value of which is £2.5m at 2 April 2005 and 28 March 2004.
d) Deferred tax on IFRS adjustments
Deferred tax on these adjustments relates largely to share-based payments and acquisition intangibles.
Deferred tax on share-based payments results in a tax credit of £0.3m in the 53 weeks ended 2 April 2005 and a cumulative tax credit of £7.1m and £4.9m
in reserves at 2 April 2005 and 28 March 2004 respectively. Deferred tax on share-based payments is calculated on the difference between the market price at the
date of the financial statements and the option exercise price; as a result the tax effect will not correlate exactly to the share-based payment charge.
IFRS also requires the creation of a deferred tax liability in respect of acquisition intangibles which have no tax base, resulting in a corresponding increase in
acquisition intangibles and goodwill. Deferred tax is credited to the income statement over the period as amortisation is charged, resulting in a credit to the
tax charge of £1.4m in the 53 weeks ended 2 April 2005.
Other deferred tax adjustments relate principally to lease incentives.
e) Translation differences
IFRS requires goodwill to be held in the currency of the operations to which it relates; as a result, a translation difference to increase reserves by £4.9m was
recognised for the period ended 2 April 2005. In addition, the Group has taken advantage of the exemption allowed in IFRS1 not to apply IAS21 ‘The Effects
of Changes in Foreign Exchange Rates’ retrospectively to fair value adjustments and goodwill arising in business combinations that occurred before the
date of transition to IFRS.
f) Proposed dividends
Under IFRS, dividends proposed but not yet authorised are not accrued in the financial statements.
Dividend accruals have therefore been reversed, resulting in an increase in total equity of £11.0m at 2 April 2005 and £7.9m at 28 March 2004.
Notes to the Financial Statements continued www.cpwplc.com 65
Financial Statements